With 80 Percent of Startups Failing, It’s Time to Re-Examine The Strategic Planning Process
“He who fails to plan is planning to fail.”
“The best laid schemes o' mice an' men gang aft a-gley, [often go awry].”
Most current commentaries on leadership focus on interpersonal skills associated with social influence and persuasion, the value of which cannot be understated. Also crucial however, are the skills that define effective strategic planning. And in increasingly competitive and rapidly changing business environments, adaptation, growth, and prosperity will depend more and more upon these skills.
A recent article in Forbes magazine cited a rather disturbing reality: Eight out of 10 entrepreneurs fail within 18 months after starting a business. Although this statistic seems as though it would be something born of the economic downturn that started in 2008, that’s not the case. Failure rates approximating and even exceeding this figure have been a staple in our economy for decades. Even in good times, businesses fail at an alarmingly high rate.
Root causes for failure
The most obvious and visible factors in such failures are profit margins that cannot offset operating costs— in simple terms, running out of cash. But going broke is just a symptom. The real causes for failure are less visible and not detectable through casual observation. And in my 40 plus years of involvement with business systems of various kinds, I long ago learned to search out the underlying “root causes” responsible for the more obvious problems.
As numerous and diverse as these causes can be, many of them can be traced to deficiencies in strategic planning. Many entrepreneurs fail because they haven’t thought out and taken into account all of the complexities that they’ll have to deal with. As a result, they end up being “blindsided” by problems they simply don’t anticipate. Still others don’t research their target markets adequately and end up offering things no one wants to buy.
All gainful activity is driven by strategy
All business involves minimizing risks and maximizing rewards. The fact that 80 percent of new businesses fail within two years tells us that the poor planning is the rule rather than the exception.
Many of these failures overlook the mundane commonsense considerations, relying on a misguided belief that “if you build it they will come.” Another name for this is wishful thinking.
Positive thinking alone isn’t enough
We’re living in an age in which any consideration of failure is deemed unhealthy and that our biggest problem is negative thinking. Unfortunately, this view flows out of the same misguided pop psychology that tells us that the more highly we think of ourselves, the better off we’ll be. That’s way too simple. False confidence and underestimating risks are just as responsible for failure as is negative thinking.
What is needed is a balance between optimism and realism. Optimism motivates us to try things, and realism keeps us from overlooking hidden pitfalls. The world of business is too complex to negotiate on positive thinking alone. “Murphy’s Law” can rear its ugly head at any time, and those that keep that possibility in mind will be those who are the most prepared to deal with its manifestations when it does.
Asking the right questions
When done properly, a sound strategic planning process forces one to ask a lot of questions related to both possibilities and pitfalls. In a media driven culture in which pop psychology is running amok would have us believe that “reality” is something that one arranges according to one’s personal specifications. The results of this kind of thinking have been an overabundance of dysfunctional systems and failing businesses.
In contrast, a sound strategic planning process can offset the impetus to follow “the culture” and consider the good, the bad, and the ugly of every situation. This isn’t pessimism— pessimism can be just as unrealistic as unbridled optimism, and equally destructive. Entrepreneurs who simply dedicate themselves to seeking the truth may not be as “with it” as the purely positive thinkers, but they are much more likely to end up in 20 percent of businesses that succeed.
Asking lots of questions gives us our best chances of asking the right ones. Ask no questions and you’ll get no answers. Ask the right ones, and you’ve opened the door into the domain of positive solutions. Engaging in a serious strategic planning process is a formalized means of accomplishing this.
Strategic planning essentials
Few successful leaders do their strategic planning in isolation. All of us have the potential for error in our judgment, so even for businesses in which the proprietor is also the lone employee, collaboration with trusted others is always a good idea.
Besides collaboration, the strategic planning process needs to address as many issues related to the success of a given business as possible. Although every business is unique, there are some minimal specifications to which plans should conform. Perhaps the most crucial one is that it be written.
Put it in writing and consult it frequently
We’re in an age in which people’s ability to communicate in writing has been degraded by their use of social media with its focus on the immediate. Texting and tweeting have fostered brevity, shallowness, and self-centeredness in both thought and expression, which seem to have become defining characteristics of our culture (e.g., OMG, LOL, etc.). Even the idea of spelling things correctly has become passé.
The kind of writing required for the development of a functional strategic plan forces one to be disciplined, serious, systematic, and proactive in one’s thinking. It’s not about being cute or cool— it’s about developing an approach to business that is realistic and can be translated into meaningful goals and action plans for achieving them. This cannot be done by thinking and writing at the levels that are currently common.
The daily operations of any business should be clear reflections of its written plan— yet only in rare cases does this occur. All too often, business leaders fly by the seat of their pants, reacting to unanticipated twists and turns— a style of management often referred to as “putting out fires.” Adhering to a well thought out plan will minimize the number of crises and drastically reduce operating costs.
Data driven management
Strategic planning is never a “one and done” phenomenon. Continuous review of progress toward goals is essential, as well as an openness to change as data related to goal attainment come in. Anyone who is serious about success will be finicky about where their business stands relative to its stated goals, and continuously asking questions regarding how things are coming along.
If you don’t like math, you’d better figure on hiring someone who does. Accounting is as crucial a function in business as any other— it’s the only way you’ll ever know where you stand. It also provides the information you need to make ongoing decisions. Every enterprise that succeeds to the level it’s capable of is driven by information. Shoddy accounting has destroyed many an organization.
Frequent review and revision
In an economic environment characterized by rapid change and volatility, the strategic planning process becomes the means by which you keep your business model in line with the demands of the marketplace. Far too many entrepreneurs stick to ways of thinking and doing things that are not as profitable as they once were.
Case in point: Large scale retailers, such as Neiman Marcus and J.C. Penney are finding their entire business sector in crisis, particularly after the disappointments of a particularly dismal 2013 Christmas season. They’re simply being forced to reconsider their entire business philosophies, and their future success will depend on dealing with their problems realistically and systematically— meaning of course, through sound strategic planning.
Examples of great strategic planning abound
Since it’s now common for businesses to post their strategic plans on their websites, there is no reason why entrepreneurs should not take the time to examine those of particularly successful enterprises. While you certainly would not want to simply copy any particular one, reviewing those associated with profitable enterprises can be a great source of ideas and inspiration.
Having done innumerable case studies of both business successes and failures, I’ve personally found that the strategic plans associated with both outcomes to be useful. More often than not, I find two general characteristics of those that fail: (1) weakness in the strategic planning process (failure to acknowledge the complexities that must be confronted); and (2) a lack of correspondence between the plan and day to day operations.
Securing business loans
A great strategic plan can do more serve as a guide to profitability__ it can be a calling card that lenders can use to determine if you really know what you’re doing and are committed to your business.
They are acutely aware of this fact and appreciate it when loan applicants provide the kinds of evidence that establish themselves as knowledgeable and credible business leaders.
The success of any business enterprise depends upon the adequacy of its strategic plan, coupled with the ability to effectively execute that plan. With 80 percent of startups failing within two years after they open their doors, the more entrepreneurs that improve in both of these areas, the better the success rate is sure to be, and the more willing lenders will be to support them.
Dr. Richardson is the founder of Redwood Enterprises, a business consulting, training, and executive coaching firm that specializes in helping business owners make sure that what they do every day reflects sound strategic planning. He is available for speaking engagements on business related topics. Visit his company’s website at www.redwood-enterprises.com, or contact Redwood Enterprises by phone at 610.326.3670.