Managing Small &

Medium Sized
Enterprises
Owning and Running a Small Business;
two approaches – is the business plan the right thing
to do?
Business case discussions; using our learning
Key Concepts - 1
• The reasons why the business plan is advocated by so
many people.
• The limitations of the business plan as an aid for many
start-ups which are, in effect, undertaking a process of
exploration.
• The relevance for many new ventures, including many
business start-ups, of an accept uncertainty approach
based on effectuation principles.
• Comparisons between an accept uncertainty, effectual
approach and a business plan-based, causal approach.
• The relevance of using and/or teaching the accept
uncertainty approach.
 Key Concepts - 2
• The view traditionally taken of established small businesses
and the problems they face.
• The way that official support tends to be based on a
business growth aim and/or a component-based
perspective.
• The perspective of many small business owners which is
usually a holistic one focused on day-to-day issues and not
necessarily on growth.
• The differences between these perspectives and the
consequent limitations of much official support for small
businesses.
Thinking about your assignment; really, at the beginning how
was the business conceived and developed? Was there a
business plan, what was the approach taken?
Plans & Planning

In preparing for battle, I have always

found that plans are useless, but
planning is indispensable.

Dwight D. Eisenhower
To plan, or not to plan . . . .
• Activity; 5 mins with partner
• What do you think?
• Before we get into the material, what are your pre-
conceptions about the need for a business plan or
not?
• Why do you have the thoughts you have? What has
influenced you to think in this way?
To plan, or not to plan . . . .
• Business teachers, advisors, banks and
development agencies all highlight the importance
of planning. Why?
o An analytical tool
o A communication tool
o Encourages commitment
o A guide to action

“If you don’t know

where you are going, any
road will get you there”
- Lewis Carroll
 Business Plan Advocacy
A business guide:
‘It is essential to have a realistic, working business plan
when you’re starting up a business.’
An entrepreneurship text book:
‘One of the most important steps in setting up any new
business is to develop a business plan’.
Banks and development agencies:
‘If you intend to start a business you need to write a
business plan.’
‘Developing a business plan is perhaps one of the most
important stages of starting your own business.’
 BUT
There are opposing
views
 Business Plan Scepticism
‘I am more than ever convinced that entrepreneurship cannot be planned to
any major extent in advance, and that planning even goes against the
entrepreneurial idea.’

(A professor of entrepreneurship who also owns a consulting business)

‘We have all heard the growing chorus of faculty debating the proper role, if
any, for teaching business plans. A valid criticism coming out of this debate is
that the way business plans have been traditionally taught results in well-
written “works of fiction”.’

(An entrepreneurship teacher)

An intense debate emerged recently ... on the value of business planning for
established small and especially new firms.

(An academic paper on the value of business planning)

 Advocates of Business Plans
Banks - because a business plan can provide the basis for
assessing loan requests.
Business trainers - because the business plan contents
offer a seemingly logical framework and approved
syllabus for start-up training.
Business support agencies - because a business plan
should provide all the key information about the business
and its prospects needed to justify their offers of help.
Business schools – because business plans provide an
exercise which brings together inputs from (almost) all
the main areas of business school teaching.
 Adviser Caution
Advisers and supporters are likely to be cautious.
Taken to extremes, that might mean that they could
prefer ventures not to start than have a significant
possibility of failure.
Consequently the business plan approach suits them
because it involves checks and assessments, because
it is based on the apparent reassurance of market
research, and because it is the approved and
accepted method.
 Why the preparation of
a good business plan can help
Preparation and feasibility. Preparing a business plan can help to see that all
relevant aspects of the potential business are addressed and allowed for. It can also
provide the basis for assessing the feasibility of the proposition (but there are
research limitations).

Communication and funding. A business plan can help to 'sell' the business by
communicating its merits and showing potential funders how it will deliver what
they want :
• Government agencies want a reliable and lasting contribution to the economy.
• Banks want interest on their capital, and eventually their capital repaid.
• Business angels and venture capitalists want to see that their investment in the
business will increase in value and can be realised.

Management and control. Once a business is planned, funded and launched a

business plan can help with its subsequent management and control.
Market Research
• At the core of most business and sales plans - Most
professionals would advocate Market Research

Activity; 5 mins with partner

• What do you think?
• What are your pre-conceptions/assumptions about
the need for Market Research?
• Why do you have the thoughts you have? What has
influenced you to think in this way?
 The Limitations of Market
Research
At the core of the business plan is the sales forecast. It is the
starting point for all the subsequent provisions and projections.
But:
‘There is good reason to be skeptical of data from personal
surveys. There is often a vast gulf between how people say they
behave and how they actually behave. (Levitt and Dubner)
‘The findings obtained from most market research are
completely unreliable.’ (GAP)
‘People use different stages of research so that if the initiative is
unsuccessful they can say, “Look how thorough I was. I did my
due diligence.’ (Dewey)
 So what’s the alternative?
• The future is unknown and unknowable
• Successful entrepreneurs use a way of thinking that helps
them succeed despite the uncertainty
• Effectuation theory tries to explain how successful
entrepreneurs behave to cope with uncertainty
Effectuation - Sarasvathy
• Expert entrepreneurs distrust market research
• Profound distrust of attempts to predict the future
• However if future is not predictable, it is not pre-
determined and so can potentially be shaped by
entrepreneurs' actions
• Entrepreneurs prefer effectuation approach
• Studied 27 expert entrepreneurs
• 63% preferred effectuation
• 74% of the times
• If you speak to your entrepreneur you can assess
whether they took more of this approach
 Effectuation and Causation
Traditionally entrepreneurs were thought to pursue a causal
approach in which they fix on a target and then try to cause it
to happen – like deciding what dish to cook, looking up a
recipe, assembling the listed ingredients and then following
the recipe to prepare the dish initially chosen.

Effectuation, on the other hand, would be to start, not by

selecting the target dish, but by considering the ingredients
available and then deciding how they might be put together
to create a dish, based on the abilities and ideas of the chef.
(Sarasvathy)
Causal vs effective Reasoning
 The Five Key Principles
of Effectuation
The bird-in-hand principle – Means-driven, rather than goal- driven.
Emphasis on creating something new with existing means rather than
on new ways to chosen goals.
The affordable loss principle –Don’t commit to a venture more than
you can afford to lose on it.
The crazy-quilt principle – Building connections, putting together
commitments from stakeholders, and determining goals based on who
comes on board.
The lemonade principle – If life gives you lemons, make lemonade.
The pilot-in-the-plane principle – The venture need not always stay on
a pre-determined path and the entrepreneur can, and should, create
opportunities and steer accordingly.
 Causation and Effectuation
• Causation is a planned systematic process that is
useful when the venture concept has been proven
and you want to replicate the idea, or scale the
concept.
• Effectuation is very useful for bringing people on
board and developing business ideas
• Causal reasoning is goal orientated
• Effectual reasoning is means orientated
 Causation and Effectuation
• Causation is a planned systematic process that is
useful when the venture concept has been proven
and you want to replicate the idea, or scale the
concept.
• Effectuation is very useful for bringing people on
board and developing business ideas
• Causal reasoning is goal orientated
• Effectual reasoning is means orientated

WHAT DO YOU THINK? Activity 5 mins – what

are your initial thoughts on this thinking?
 What Effectuation is Not
• Effectuation is not another name for ‘anything goes’ – It requires a disciplined
approach.
• Effectuation is not the easy way out – It still requires attention to business
essentials like costing and cash-flows.
• Effectuation is not irrational and intuitive – Effectuation may not deal largely in
rational analysis along business plan lines, but it has its own logic
• Effectuation is not passion before all – Effectuation requires the disciplined
application of effectual logic.
• Effectuation is not an absence of caution – Effectuation does not mean taking
more risks. The downside should not be to be neglected.
• Effectuation is not a bunch of traits – Effectuation requires the learning and
application of the effectuation method.
• Effectuation is not a sure recipe for success – It is not a Holy Grail method that will
guarantee success.

Has your business taken an effectuation approach?

 What Effectuation v Business
planning
Has your business taken an effectuation
approach?

Compare it with a business plan

approach…
 The Business Plan Approach
1. Identify a business idea (eg which is promising, trendy etc)
2. Investigate its market (will it sell, how much, what price?)
3. Determine what premises, equipment & staff are needed
4. Plan the sequencing of actions and spends
5. Prepare financial projections
6. Write it up in a business plan
7. Review analysis and decide whether to proceed
8. Raise the investment needed
9. Start
10. Follow the plan
Business Start-up: the Strategic
Planning Process
Opportunity
External encouragement
Outline of idea
Refine the idea using published sources

Revise idea and plan market research

Primary market research Sales forecast and feasibility

Outline business plan

Identify potential funders Develop plan and entry strategy

Secure funding - Launch the enterprise

Effectuation Approach

1. An enterprise is a goal-realisation device. Is it likely help you?

2. Don’t commit more than you can afford to lose.
3. Start from where you are and go in your desired direction.
4. Carry out some quick checks to see if your idea could work.
5. The only reliable test is a real one.
6. Get some momentum, then difficulties are less likely to stop
you.
7. Act on uncertainty and respond to the unforeseen.
8. Build, and use, relevant social capital.
9. Acquire the relevant skills, or find a partner with them.
10. Don’t produce a formal business plan unless / until you need
one.
 The Advantages of Each
Approach
Accept uncertainty-based
• It is natural (practical and
instinctive)
• It facilitates exploration
• It works - it’s what
experts do.
• It helps people to get
started.
• There is a logic to it.
• It is flexible.
• It is cheap(er).
Business plan-based
• It provides a
straightforward and
apparently logical way
forward.
• It helps to assess what to
do and to communicate
the plan.
• It is widely used by many
authorities.
• Supporters and/or
funders will ask for it.
 The Disadvantages of
Each Approach
Accept uncertainty-based Business plan-based
• It seems rather uncertain. • It isn’t (necessarily) the
• It does not conform to best way.
established practice. • Market research at this
• It does not provide the stage isn’t reliable. ??
information potential • Following a pre-
funders think they need. determined plan can
• It does not insist on the encourage people to be
discipline of thinking inflexible and less
through the responsive to new
requirements. developments.
Causation and Effectuation

WHAT DO YOU THINK? Activity – what are

your initial thoughts on this thinking?

Activity: 5 Mins with a partner – what are

your first impressions?
So how do we normally deal with
uncertainty?
 Three Options for
Dealing with Uncertainty
• Reconnoitre* and plan first. If the way forward is
uncertain then prior reconnaissance*, such as
prototype testing and trial offerings, can be carried out
to provide the basis for a proper risk assessment and a
plan of how the venture might then be implemented.
(But does that amount to starting on a trial basis?)
‘see how the land lies’*, inspect, investigate
• Accept uncertainty and proceed with caution. In some
situations there is uncertainty but nevertheless prior
reconnaissance is unlikely to help and the only way to
find a way through is to try.
• Do nothing. Doing nothing is the only zero-risk option
but also zero chance of success.
 Key Points so far
• Many people have advocated the business plan as an essential aid for
start-ups.
• There may be some good reasons for this advocacy but it reflects the
view that entrepreneurship is just a subset of business.
• There are significant limitations to the business plan as an aid for many
start-ups which are, in reality, undertaking a process of exploration.
• For many new ventures, including many business start-ups, an accept-
uncertainty approach based on effectuation principles will be more
helpful.
• Professional advisers can have somewhat different aims which are more
likely to be assisted by a business plan approach.
• Teaching, or advocating, only the specialised business plan approach
may not be helpful and may even reduce a venturer’s chances of
success.
Break
Running a small business; “its all
about growth….”
How an existing business has traditionally been
viewed by advisers and official sources of advice.
 The Seven Stages of Business

• Idea
• Preparation
• Inception
• Static (including early survival
and consolidation and, later,
comfort and maturity)
• Growth (and expansion)
• Decline
• Termination
 Yardsticks for Business Growth
Share value Net worth Market share

Turnover Profit Employment

Size of premises Profile/image Added value

Exports/imports Standard Innovations, patents,

substitution of service etc.

Return on investment Number of customers New products/services

 The role of Intention and
Motivation
It is suggested that it can be helpful to divide attitudes to growth
into separate categories:
• Proactive Growers - seen as more actively seeking out
opportunities. They explore different growth paths and view
the world through opportunistic lenses..
• Reactive Growers - willing to grow but do not seek out
opportunities. Thus growth requires an external trigger.
• Must Growers - those who have to grow the business (or go
out of business) because without growth the business is not
viable.
• Non-Growers - perhaps having reached a given size, they make
a positive decision nott to grow the business further.
(Hakkert and Kemp)
What type of Business was yours, is yours now?
 The Official Support View
Traditional view of business development held by many
business support agencies and business advisers appears
to be heavily biased towards the growth stage.
If official support is often offered with the aim of
securing growth, and if that desire for business growth is
also accompanied by a belief that businesses have some
form of growth imperative, then the official view of
businesses will often have a strong growth focus.
It will concentrate more or less exclusively on ‘growth’
businesses and offer advice which is specifically designed
to help them to grow.
 The Owners’ View
How the owner/managers of existing small
businesses often, in reality, view issues such as
business growth.

How does this fit with the business you will study?..
 Why business owners might not
want to grow their businesses
Studies have found that some owner/managers do not want
to grow their businesses. The reasons can include:
•While many believe that growth would have a neutral or
positive effect on their income, some think it would have a
negative effect.
•Some believe growth would have a negative effect on other
aspects of their business, including on its ‘atmosphere’, on their
control of the business, on their independence and on
workload and stability.
•In the majority of cases, even those who think that growth
would a positive effect on their income think that this is not the
important factor. They perceive that the negative consequences
of growth would outweigh the positive benefits.
Thinking about your business

What has it done to be successful?

What could it do?

What Can Business Owners Do to increase the chances of
success – did your business do any of these, could they?
It is suggested that the key obstacles to small business growth are a lack of
business skills, a lack of adequate information and a lack of money.
Acquiring skills. Owner-managers can:
•Acquire the skills themselves by learning them.
•Seek partners, advisors or mentors with the skills that are needed.
•Bring the skills in-house by hiring managers.
•Use the services of relevant consultants.
Finding information. Accessing relevant information can be a key benefit of
social capital but often, especially with formal sources, communicating can be a
problem. Keep asking!
Sourcing money. There is no right to funding and it will only be provided if the
funder also benefits from the transaction. Preparation can include:
•Locate the relevant sources of finance and what they are looking for.
•Become ‘investor ready’ and able to ‘sell’ the proposal.
What has your business done? What could it do?
 Implications of the
Difference in Views
• Official policy often includes the encouragement of more business
start-ups, and so support is provided.
• Less attention seems to be given to existing businesses. The
official policy for existing businesses is generally to encourage
them to grow. Thus for those business owners who do not aspire
to grow their businesses, little help is available to them.
• While a ‘professional’ approach to diagnosing business problems
might produce a correct diagnosis, it may not help to
communicate to a business owner what he or she should do.
• Such issues mean that there is often a lack of available and
relevant support for many businesses.

If those trying to offer help fail to share the owners’ perspective,

and if owners fail to accept the need to some longer-term
analysis and thinking, business potential may not be realized.
 Key Points
• Business can go through a number of different stages
between start-up and eventual closure, but most observers
focus on the growth stage.
• Official support tends to be growth-focused
• Often business owners are not aiming to grow their
businesses, especially if it involves extra effort and risk
without compensatory benefits.
• Small business owners tend to see their businesses
holistically, and not as a collection of functional
departments.
• Small business owners tend to learn by moving from
problem to conceptualization and not vice versa.

What did you find in your businesses?

Week 5 case study
Case Study - Irish Dancing
 Discussion
1. ‘The plan is nothing – planning is everything.’ Does this
mean that the standard business plan-based approach is
helpful, and if not why not?
2. ‘Luck Favors the bold unless you try something, despite
the uncertainty, you will never succeed in doing anything.’
To What Extent is this relevant consideration when
starting a business? Which is the greater danger: paralysis
by analysis or becoming extinct by instinct?
3. Getting it wrong can be part of getting it right. Failure can
lead to opportunity, experience, learning and
improvement. Is this true in business and, if so, how can
the downside of the failure be minimized?
4. Effectuation or the business plan – with which approach
are you comfortable?