Importance of Strategic Management to Small and Medium-Sized Enterprises

Strategic management has long been used successfully by large organizations to manage uncertainties and for better positioning to generate long-term growth and profitability. Due to the current and predicted environmental uncertainties, the practice of strategic management will become a need for small and medium-sized enterprises (SMEs) to keep them in equilibrium with their external environments to survive and grow. SMEs normally operate in a fragmented industry structure–companies compete to capture a comparatively small share of the total market. Because of this highly competitive environment, the practice of strategic management is also equally important to these companies as it is for large established corporations. However, the degree of formality of the process will vary depending on the complexity, size, and requirements of businesses. Small firms normally lack the resources and time to perform this function and therefore should get help from outside strategy consultants to facilitate this process. Hundreds of thousands of businesses have failed since the economic crisis of 2008. The primary reason for failure is that these companies were not prepared to manage large turbulences in their external environments, as a result, they got exposed to severe economic uncertainty and were negatively affected by it. Strategic management is the only field of study that can help in minimizing uncertainties due to its heavy strategic focus on the external environment–the external forces over which a company or industry has no control. By using scenario planning (or scenario analysis) for example, a firm can take into account the uncertainties in making strategic decisions, and therefore, can minimize the effect of uncertainties caused by the external environmental conditions and enable the firm to respond swiftly in turbulent times. Economic turbulence can also create new opportunities for SMEs. Additionally, strategic management tools can be used to help SMEs in identifying new opportunities and provide an improved understanding of the firm’s capabilities, competition, competitive advantage, and customers. In a study conducted by Robinson (1982), it was found that small business firms that engaged in strategic planning with the help of outsiders (for example, small business consultants) achieved significant performance improvement in profits, sales growth, and productivity. However, many SMEs, formally or informally, still do not use the strategic planning (or strategic management) process. According to Small Business Administration, approximately 50% of all new businesses fail within five years. The cause of failure can be attributed to a lack of strategic management in place. Lack of strategic management can lead to failure due to many causes, ranging from poor accounting to lack of skills in strategic planning to inability to cope with growth and dysfunctional management. Strategic management can more effectively deal with the complex and changing environment by offering reactive solutions to problems and proactive approaches for growth and opportunities. Examples of successful small businesses: America Online, Apple Computers, Dell Computers, Microsoft Corporation. Examples of failed businesses: Blockbuster, Borders, Circuit City, Large Format Digital.