As a business owner, how you manage your company is the key to its success. Managing a small business can include everything from securing that loan you need to buy new equipment to training new employees. Most small business owners are so busy that it’s sometimes hard to think past the next month or next quarter. But if growth is what you want, strategic management is what you have to do.
TL;DR (Too Long; Didn't Read)
The functions of strategic management are to provide a plan and goals for your business’s growth and see that plan through to meet those goals.
Functions of Strategic Management
Since the function of strategic management is to provide a road map for the achievement of goals, the process starts with strategic analysis and planning. It doesn't end, ever. Like all of the other types of managing you do, strategic management is ongoing. However, it does have a distinct process.
If you have no strategic plan in place, the process starts with strategic analysis. It continues with planning, operations, monitoring, assessing and adapting. You might come up with the best strategic plan ever but if internal or external factors change, and you can be sure they will, you’ll need to make adjustments. If you become overly committed to your strategic plan as it was originally laid out, you could find your business in a lot of trouble.
Upper management is usually responsible for strategic management but you’d be overlooking your most valuable resource if you discount boots on the ground. Some of the best information that can lead to designing a great strategic plan comes from employees. And what better way to get buy-in than to include them in the process.
Understanding Strategic Analysis
It can be tempting to jump right into strategic planning. After all, it’s exciting to set goals for your business’s long-term success and lay out a road map for how you plan to get there. But without first taking a hard look at where your business is now, the goals you set and road map you draw may prove useless.
This is where strategic analysis comes in. You’ll be examining and evaluating operational and financial data as well as the internal and external factors that affect your business as it stands now. The main reason for doing this is to determine how effectively you’re currently operating, or not. It will help you focus on the areas that can be improved and further strengthen the ones that are doing well.
The analysis should also help you identify opportunities you may have overlooked or underestimated. A strategic analysis should be done before and at regular intervals after you’ve developed your strategic plan. Several tools and methods are available to help you carry out a professional strategic analysis that will provide a solid base for planning your business’s future. Two popular ones are the SWOT and PESTEL.
SWOT Strategic Analysis
SWOT analysis dates back to the 1960s. It was developed by Albert Humphrey, a Harvard- and MIT-educated American business management consultant. That his method is still used today is a testament to its durability and usefulness.
The SWOT model provides a practical framework for your strategic analysis. SWOT stands for strengths, weaknesses, opportunities and threats. You’ll start by listing the following:
- Strengths: Internal factors that give your company an edge over others.
- Weaknesses: Internal factors that give your competitors an edge over you.
- Opportunities: External factors that can help you strategize to grow and increase profits.
- Threats: External factors that could affect your ability to grow and increase profits.
The idea is to make you fully aware of everything that could have a bearing on any strategic decisions you make. When doing a SWOT analysis, it’s best to involve others who know your business and its market. A SWOT analysis is not unlike self-analysis — it’s sometimes hard to see our own weaknesses.
PESTEL Strategic Analysis
PESTEL analysis is also known as PESTLE or PEST analysis. Another Harvard man, Francis Aguilar, is credited with developing it, also in the 1960s. PESTEL stands for political, economic, social, technological, environmental and legal. Sometimes the last two factors are skipped and it’s referred to simply as a PEST analysis.
Like a SWOT analysis, the idea is to thoroughly analyze each factor’s potential impact on your business.
- Political factors would include government policies or changes that could affect your industry. It includes IRS and state tax policies. Depending on the type of business you have, it could also include political impacts on importing and exporting.
- Economic factors are aspects of the economy like unemployment and interest rates, as well as the cost of your goods or raw materials. Again, depending on your business, economic factors might also include foreign exchange rates.
- Social factors focus on current and emerging trends in your market. Elements like your market’s demographics and changes to it come into play here.
- Technology factors affect every business these days, some more than others. But any good strategic analysis should look at what’s going on in the world of technology and specifically e-commerce that might affect their business.
- Environmental factors consider your business’s physical environment and its operations in relation to the environment. Examples include waste management and recycling procedures, as well as compliance with local laws on environmental sustainability.
- Legal factors affect some businesses more than others. For example, if you’re in the restaurant business, in addition to laws that apply to any business, you’ll also have to comply with health department regulations. If you’re in the securities industry, you’ll be dealing with Securities and Exchange Commission requirements.
As you may have noticed, some PESTEL factors overlap. Environmental factors may rely heavily on laws in your state. Political factors can morph into legal factors if new laws are enacted. The shorter version, PEST analysis, does not include environmental or legal factors, but since most businesses are or have the potential to be affected by them, it’s best to include them.
Look at the Big Picture
After you’ve conducted your analysis of the finer details, it’s time to back up a bit and look at the big picture. The functions of strategic planning include taking what you’ve learned from your analysis to answer these questions:
- Where is my business now?
- Where do I want it to be?
- How am I going to get it there?
Planning should take internal factors into consideration like your finances, potential for securing additional funds and your employees’ strengths and weaknesses. It should also consider external factors like the market, competition, resources, the economy and politics.
The internal and external factors will act as a reality check. For example, let’s say we want to double sales over the next couple of years. To accomplish that, we’d like to find a less expensive source for our materials. A company in China would be a great source but a quick glance at the political scene tells us that U.S.-China relations are currently unstable at best.
Operational Policies and Procedures
Once you’ve decided where you want to be and how you’re going to get there, it’s time to apply your goals and methods to your business’s operations. This often involves developing and implementing policies and procedures for employees to follow so that you can achieve the goals you’ve set. You’ll want to include accountability measures for both employees and managers.
If cost-cutting is one way you’re going to get to where you want to be, you might start by examining each step of your production process to identify where you can reduce waste. You may find that you can cut back on the amount of materials being used. You might even find a way to repurpose remnants from your production process.
After you have new policies and procedures in place, employees may need retraining, new equipment may have to be purchased and finding buyers for the repurposed remnants will have to be done. Managing all of this is what strategic operations is about.
Monitoring Your Progress
Strategic monitoring begins by confirming that everyone is aware of the operational changes you’re making. Communication is of utmost importance. You want everyone from every department to know what’s coming and how it’s going to play out.
Once everyone is on board, the only way to know if your strategic plan has been implemented correctly and is being followed is to proactively and regularly monitor it. This means regularly checking up on each process you changed to confirm that it’s being done and done correctly. You don’t want to wait until something goes wrong and have to jump in to try to fix it.
Monitoring is not just about internal operations. It’s also about keeping your eye on external factors that can affect your business. Examples include changes in the political climate, laws and regulations affecting your industry and new tactics put to use by your competitors.
Understanding Strategic Assessment
The term strategic assessment is often used interchangeably with strategic analysis. However, here we’re using “assessment” to describe what you do with the results of your strategic monitoring and how to respond to significant changes affecting your business.
As discussed, monitoring is proactive and ongoing. Information you glean from monitoring should be assessed or analyzed to decide whether strategic operations or even your strategic plan needs tweaking. Any major internal or external event may necessitate changes. A strategic assessment should always be done in the following scenarios:
- Financial developments such as investors pulling out or winning a big new contract.
- New laws and/or regulations that affect your industry go into effect.
- Competition developments like a major competitor going out of business or a new competitor emerging on the scene.
- Executive leadership changes such as the retirement of your CEO.
Although, like monitoring, a strategic assessment is best done proactively, not everything can be planned for in advance. Assessing does not have to mean going back to square one. You’ll just want to examine your strategic plan in light of the new developments and adjust it accordingly.
The Strategic Management Process
The most important thing to remember about the functions of strategic management is that they are not linear or static. Good strategic management is more of a circular, continuous process. It’s flexible and it adapts when things change. For example, if monitoring reveals unanticipated operational issues, strategic operations may need to be modified if you still want to meet the goals you’ve set.
If you’re going to use a SWOT or PESTEL algorithm for your analysis, it’s recommended that you do it at least every six months. The most successful organizations have adaptable strategic plans based on thorough and accurate analyses. Their plans are implemented through experienced operations management and they’re regularly monitored and assessed.
Many times a strategic plan is a three-year plan or a five-year plan. That’s fine. It can be very helpful to put a deadline on when you want to achieve your goals. Just don’t wait until the end of that time period to ask yourself if the plan still makes sense.
- Corporate Finance Institute: Strategic Analysis
- ECRA Group: Strategic Monitoring White Paper
- Investopedia: Strategic Management
- Nibusiness Info: Measure performance and set targets
- Oxford College of Marketing: What is a PESTEL Analysis?
- Pestle Analysis: Who Invented PESTLE Analysis And Why It Matters
- The Bridgespan Group: When is it time to update your strategic plan?
- University of Notre Dame, Mendoza College of Business: What Is a SWOT Analysis?
LeDona Withaar has over 20 years’ experience as a securities industry professional and finance manager. She was an auditor for the National Association of Securities Dealers, a compliance manager for UNX, Inc. and a securities compliance specialist at Capital Group. She has an MBA from Simmons College in Boston, Massachusetts and a BA from Mills College in Oakland, California. She has done volunteer work in corporate development for nonprofit organizations such as the Boston Symphony Orchestra. She currently owns and operates her own small business. In addition to writing for PocketSense, she writes for Bizfluent, Budgeting the Nest, Legal Beagle, PocketSense and Zacks.