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Strategy in the Small Business

Strategy is the idea and actions that explain how a firm will make its profit. Whether you know it or not, all small businesses have a strategy. The strategy may be a blueprint for planning or a standard to compare actions against. Either way, strategy defines for you, your customers, and your competi- tion how your business operates.

Good strategy leads to greater chances for survival and higher profits for a small business. What makes a strategy good is its fit to the particulars of your business and the resources you can bring to it. In this chapter, we consider how strategy can be created and applied to help your business be its best.

Strategy in small business is special because most small businesses are more imitative than inno- vative. If you are opening a home day care center, a machine shop, an Italian restaurant, or an online collectible figurine store, these types of businesses already exist. You can find examples, books, and often even magazines to study, as well as trade and professional associations to join. There are special strategies that aim to help imitative businesses be successful.

Getting to the useful strategies for a small business is a four-step process. Figure 7.1 shows the strategic planning process for small businesses. The first step involves reviewing and confirming the goals that define your firm and knowing your magic number. The second step is where you consider your customers and the benefits you want to offer them and plot these out in a procedure called perceptual mapping. The third step is to study the dynamics and trends of your industry using a technique called industry analysis in order to identify the best way and time to enter busi- ness. The fourth step involves building on the prior three steps to determine the best strategic direc- tion and strategy for the firm. After this four-step process, there is a continuing effort called post start-up which aims to refine your firm’s strategies and tactics in order to maintain a competitive advantage.

As you can see in Figure 7.1, strategy builds on four key types of decisions you make about your firm. These may be made formally or informally in your opportunity analysis or feasibility analysis. These decisions are:

1.         The major goals you set for your firm. 2.       The types of customers you seek and what benefits you plan to offer them.

3.         The stage and trend of your chosen industry. 4.         The specific generic and supra strategies you choose to pursue.

Goals: The First Step of Strategic Planning

Before getting into industry analysis, you as the entrepreneur need to make some very basic deci- sions about your goals for your prospective business—you, your idea, and your firm. These goal decisions will set the stage for the kind of business you will have and are the foundation for further analyses. There are five initial key goal decisions:

1.         As owner, what do you expect out of the business? 2.           What is your product or service idea (and its industry)? 3. For your product or service, how innovative or imitative will you be? 4.           Who do you plan to sell to—everyone or targeted markets? 5.    Where do you plan to sell—locally, regionally, nationally, globally?

Owner Rewards

For a small business that is starting out, all strategy starts with the owner. As owner, what do you want out of your business? In Chapter 1 we introduced the rewards sought by entrepreneurs from their businesses. Some, like flexibility, personal growth, and a solid personal income, were pretty universal. Skill Module 7.1 looks at how you can determine your magic number, which is the income you personally seek from the business. Knowing that number from the start, you are better able to evaluate if your proposed business can deliver on that very basic need that everyone reports needing. Other rewards like great wealth and developing a new product or service was mentioned occasionally, while recognition, admiration, power, and family tradition get mentioned least often of all rewards. For EnableMart, the original reward was to generate the wealth necessary to bring Mindnautilus to market, and also provide a service that made it easier for America’s 54 million disabled to get the products they need to make their lives better.

Whatever the reward or rewards you seek—it is fine to want more than one—it should be central to your creating the business. In a very real sense, what you want from the business is the core of your and your firm’s strategy. It is the “why” which drives the process of entrepreneurship.

in Chapter 5. Either way, the idea gets made real as a product (something physical a customer buys) or a service (activities undertaken on a customer’s behalf). It is possible to combine products and services, like a GM auto that comes with the OnStar cell phone service. You can learn more about that in Chapter 9.

If you have in mind a product or service, you also have an industry. Industry is the general name for the line of product or service being sold. Examples include the restaurant industry, the computer consulting industry, and the collectible doll industry. In addition to a name, industries have numeric codes, called SIC or NAICS codes,3 which are discussed below. Industry is vitally important to your core strategy decisions because simply put, there are industries that are more profitable than others.

In fact, picking the right industry is key to the success of your small business. Stanley and Danko,4 in The Millionaire Next Door, point out that two-thirds of all millionaires are self-employed. They say that the key to being successful is selecting an industry that offers good potential for making a profit and attractive opportunities to work with a minimum of risk and competition. These industries are described as having high industry attractiveness. Stanley and Danko were surprised to discover that most millionaires who owned businesses are in industries like scrap metal, coal mining, and dry cleaning. It turns out that industries that are attractive from a profit-making sense may not be the industries thought of as attractive places to work. But choosing one of these attractive industries can do a lot to help your firm survive and you to be successful.

Industries which do well in good times and poor historically include financial firms tied to bank- ing, health-related firms, insurance firms (especially related to health), and business consulting.5 When talking about the small business myths in Chapter 1, other occupations that came up included bookkeeping, credit counseling, and tax preparers.6 Figure 7.2 gives information about a number of industry sectors and some popular individual businesses to help you get an idea of the relative attractiveness of industries (based on their profitability), and the expected level of sales.

If you know the industry’s code number (see Skill Module 7.2 to find out how to do this), you can find out a tremendous amount of information about the industry. This is because most informa- tion is coded using the industry number. From the work done by marketing researchers Stanley and Danko7 as well as BizMiner.com and others, we know there are between 15,000 to 30,000 different industries in the United States.

There are two major classification systems that code industries: the new NAICS (North Ameri- can industry classification system) and the better-known standard industrial classification system, or SIC. SIC codes have four digits; NAICS have six. NAICS covers more industries and more of the newer types of industries. Skill Module 7.2 gives you help in finding the NAICS and SIC codes for the industry for your business. The Skill Module is also on the Online Learning Center.

The key to finding information about industries is knowing how to check the information, and NAICS and SIC codes are essential to that. It is also important to know that there are no “safe” industries. In much the same way that families and societies are living things—things that are born, mature, and can die—industries can be considered living too. Ten years ago, coffee shops were a dead industry in most of the country. However, today, with Starbucks, Panera Bread, Seattle’s Best, and a host of independent coffee shops blanketing the country, the industry has been revived through franchises, company-owned stores, and innovative independents.

Imitation and Innovation

This chapter’s subtitle is “Imitation with a Twist.” The idea reflects the fact that for most small busi- nesses, the owner wants to be a lot like others in the industry, but not exactly like them. Owners who elect to imitate their competitors still want to have something that distinguishes them from the oth- ers—something that makes the owner’s firm special and better. That special and better element—that innovation amid a lot of imitation—gives us the kind of entrepreneurial thinking behind the chapter title.

The choice between imitation and innovation is truly important and often overlooked. Busi- nesses, especially new firms, can do more or less what others are already doing—an imitative strategy—or they can start doing something that is very different from what others do—an innovative strategy. Imitation is the classic small business strategy. We know from the PSED that almost two-thirds of people starting businesses today plan to use imitation as their approach.8

There are several advantages to using an imitative strategy.9 You benefit from being able to buy existing technologies, such as industrial grade washing machines for a laundromat, web servers for a hosting service, or calligraphy pens for greeting card publishing. Architects, builders, real estate

agents, zoning boards, equipment manufacturers, equipment servicing companies, and banks are more likely to understand the industry and what is expected. Because of this, they can give you firm estimates of costs and schedules. With imitative approaches, there is also the possibility to buy existing businesses.

Perhaps the key benefit of an imitative strategy comes from your customers. Chances are they already know about the kind of product or service you are offering. This means your marketing ef- forts can focus on the benefits you offer instead of explaining the product itself.

When you elect an innovative strategy, you have the benefit of making your business precisely fit your own ideas and preferences. Take the example of snowboards. When Dimitrije Milovich built the first modern snowboard in 1969, he not only had to have the product available for purchase, but he also had to inform the customers that such a product existed and how it could be used. With highly innovative businesses, there is often not much opportunity to sell the business, and the owner spends a lot of energy in creating the processes and markets as well as informing suppliers, resellers, and investors about the new product or service.

In practice, most firms use imitation plus or minus one degree of similarity. Imitation minus one degree of similarity would be the business equivalent of cloning. It is franchising, first dis- cussed in Chapter 6, in which you purchase a precise and complete copy of an existing busi- ness from the franchisor. Imitation itself involves patterning a business on existing firms and processes. Your imitation is not likely to match the precision or completeness of copying seen in franchising, since you are unlikely to have all the information about the model businesses or processes. You may also adapt your business to fit local situations or your current situation. You might pattern your new Italian restaurant after the Olive Garden, but you end up buying your equipment and food from different sources and add local favorites, such as toasted ravioli in St. Louis, barbeque pizza in Memphis, or deep-dish pizza in Chicago. This approach is called parallel competition.

Imitation plus one degree of similarity is where you look at existing businesses and pattern yourself after them, with the exception of one or two key areas in which you seek to do things in a

new, and hopefully better, way. This is called incremental innovation and is second only to par- allel competition in frequency. You have seen it in the fast-food business where Burger King told customers “have it your way.” This approach was bettered by Wendy’s, which offered custom-built hamburgers that were, in addition, “hot and juicy.” Hardees moved into the fray with supersized custom burgers. Each company makes custom-built hamburgers, but each added a small innovation to differentiate it from its competition. Small businesses do the same thing, whether they are offer- ing haircuts or golf clubs.

The last type is pure innovation, also called a blue ocean strategy, which results in a new product or service. These situations are rare. Typically with a new product or service, you also have a unique setting. For example, Philadelphia chef Joseph Poon was one of the early developers of a food style called Asian Fusion, which combined Asian food with contemporary American and nouvelle cuisine elements. His restaurant reflected the Asian Fusion theme with light woods, simple lines, and oriental details. Other Asian Fusion restaurants, such as Roy’s of Seattle or the E&O Trading Company in San Jose, California,10 added different wines, beers, and liquors, and even new types of mixed drinks developed to complement the food. After all this, the Asian Fusion chefs had to convince diners to try these new combinations of flavors.

These ideas lead to a simple set of strategic moves that can help you think about how to compete better as an imitator. Think of the case of the upstart Netflix, which became a major player in the video rental business, but was a relative latecomer.11

?

?

Parallel Innovation ? Use the standard-setter’s approach for lower start-up costs: Blockbuster set the standard, so

the software and basic inventory for video rental existed. ? Don’t make the mistakes the leader is making: Blockbuster customers complained about

lack of selection, and out-of-stock movies, so Netflix had a larger selection and arranged to

avoid stock-outs. Incremental Innovation ?   Take it to the next level: Pick one area important to customers to do much better than the

pioneer. You can be easier, cheaper, or offer higher quality. Netflix offered avid movie

renters a better financial deal and better selection. ? Borrow from Outside: If another industry has a solution that works (and people know about

and like), imitate that idea in your home industry. Netflix married the book clubs’ use of mail and the video rental model of Blockbuster.

Remember that a lot of research shows that imitators do better than pioneers in the long run.12 For example, we know Boeing, Microsoft, and Google, but these are all imitative companies. The pio- neers in their industries were companies like Wright or Curtis (airplanes), Digital Research (PC operating systems), Wandex (web searching), and Overture (keyword ad sales). When you do imita- tion well, it can do well by you.

Markets

A market is the business term for the population of customers for your product or service. If you know your market inside and out, you are likely to know much of the key information for how to be successful in your line of business. There are two market decisions you need to make early in the process of going into business. One of these is the scale of the market, which is the size of the market—whether you plan to aim for a mass market or a niche market. The other is the scope of the market, which defines the geographic range covered by the market—from local to global. manufacturers in your city. Niche markets are specific and narrow, and in a niche market approach, you try to target only customers in the niche.

Most industries have both mass and niche markets. For example, the greeting card industry has mass-market giants like Hallmark and American Greetings, which advertise nationally on TV (a sure sign of a mass marketer). However, the industry is also full of niche markets. For example, Maria Peevey and Lisa Bicker started SimplyShe with greeting cards targeting women going through try- ing life experiences such as breaking up, motherhood, or weddings. Having identified their niche and its needs, they market their cards through specialty fashion boutiques such as Henri Bendel, as well as online.13

Scope: Local to Global

Market scope is related to market scale. Market scope refers to the geography of your target market. It can be local (like a neighborhood or a city), regional (e.g., a metropolitan area or a state), national, international (usually meaning two to a few countries), or global (meaning everywhere). Owners of the businesses studied in the PSED14 were asked how much of their business they thought would come from each of the geographic categories. Overall, they estimated that 58 percent of sales would be local (within 20 miles), 30 percent would be regional (from 21–100 miles), 22 percent would be national (from 100 miles out to the rest of the United States), and only 4 percent would be interna- tional (outside the United States).

Market scope is important for two reasons. First, knowing your market scope helps you decide where to focus your sales and advertising efforts. The second benefit is that knowing your target market gives you a way to determine which potential competitors you need to worry about most, namely those also in your market scope.

In the Goal step, the key is to bring together the decisions that underlie the business you hope to own. This starts with you and the rewards you seek; the product or service you plan to offer for sale to achieve those rewards; and the industry and markets with which you and your firm will plan to deal. Armed with this basic understanding of your firm, you are ready to begin developing a strategy to achieve your goals. Very often, it starts with a closer consideration of your potential customers and what you can do with your product or service to best catch their attention.

Customers and Benefits: The Second Step of Strategic Planning

In this second step of the strategic planning process, the focus is on the kind of customer to whom you want to sell, and the benefits that will attract them. Just as there are industries that offer better and worse opportunities, there are customers that entrepreneurs prefer. Customers who offer the kinds of rewards you are seeking are generally those you are most likely to view positively. If you are interested in great wealth, having customers who are themselves wealthy and not very sensitive to price issues would be seen as rewarding. If growth is your goal, having customers from whom you can learn and who expect things to be constantly new and improved will help you meet your goal.

There are also some types of customers often seen as particularly attractive. These include:

?          Corporate customers: Look at Figure 7.2 and compare the B2B (wholesale) to B2C (retail) sales. Selling to other businesses may produce greater profits.

? Loyal customers: Loyal customers return and are already presold, making your life easier. They also refer friends, another source of revenue.

?          Local customers: This was originally true because as the owner you could keep tabs on the sat- isfaction of local customers more easily than distant ones; but in the digital age, it is less about geographic proximity than about you taking the time to stay in touch with your customers.

?          Passionate customers: People who are not just loyal but are likely to rave about your business are likely to generate more potential customers than any other type.

There are literally dozens of beliefs about the best customers. Most of them have at least a germ of truth about them. You can learn about the types of customers in your intended line of business by

talking to other entrepreneurs already in the business, and by researching the business in the trade press (to find these, refer back to Skill Module 3.1). Look for terms like “customer profile” and “preferred customers” as well as articles about “loyalty programs” and “repeat customers.” These articles are most likely to have information about the most prized customers in your proposed line of business.

The point is that thinking ahead about the kind of customer with whom you want to deal is the best way to orient your strategic planning process toward finding those customers when you get to picking a strategy. As you decide on the type of customer you want to encounter, your next step is thinking about the kind of benefits you can offer them to help meet their needs with your product or service.

Value and Cost Benefits

Benefits are characteristics of a product or service that the target customer would consider worthwhile, such as low cost or high quality. The best way to identify desirable benefits is through potential customers. You can do this directly through interviews, focus groups, or ques- tionnaires (see Chapter 12 for more details on how to do this), or indirectly through reviewing websites using the techniques given in Skill Module 7.3. Ratings and complaints for products

and companies can give you valuable information on what benefits people want, and might want more of. Usually the benefits focus on value added to the product or service or on the cost of the product or service.

Benefits are usually characterized as value benefits or cost benefits. A value benefit displays characteristics related to the nature of the product or service itself. Things like quality, fashion, and reputation are elements that give a product or service value in the eyes of the customer. A complete list is given in The Thoughtful Entrepreneur box on value and cost benefits.15 Value benefits are important because they are almost always what lead to higher prices and higher prof- its. For example, McDonald’s Big Mac often costs $2 more than their double cheeseburger. The difference between them are some sesame seeds, a third piece of bun between the top and bottom patty, the “special” Big Mac sauce, and some lettuce. Both have two all-beef patties, two buns, and cheese, which you would figure (correctly) are the major costs of the sandwiches. But people pay far more for the Big Mac and pay it far more often. Next time, ask your friends why they do that. The answers you will get will tell you a lot about value benefits, and how much people will pay for them.

While value benefits refer to what the customer senses in the product or service, cost benefits refer to the ways by which a firm can keep costs low for the customer. These include scale and scope savings, and a full list is given in the same Thoughtful Entrepreneur box. It is often important for customers to know one of these cost benefit reasons why a product or service has a low price so that they do not erroneously conclude that your firm has cut price by cutting quality.

Benefits are central to how you appeal to your target customer base. Picking benefits customers find attractive makes your firm attractive to them. Picking customer-desired benefits that your com- petitors do not offer is a powerful way to make your firm stand out from the competition. Benefits drive your firm’s offering to its customers and influence every part of the strategy process. As we will see later, benefits can be combined to offer themed strategic packages.

Offering the benefits your customers want opens up the possibility of your being able to charge a premium price and make higher profits, since people are willing to pay for value-based benefits they desire. Having cost-based benefits can also increase profits by lowering your cost of doing business, and thereby increasing your margin relative to your competition’s. Therefore, it is easy to see how benefits help you select a strategy that improves your firm’s profitability.

As you decide what benefits to offer, you open up the possibility of using a powerful strategic analysis tool called a perceptual map. Perceptual maps are a graphic display of products, services, brands, or companies evaluated in two or more ways at once. Very often one of these ways is cost or price or one of the cost-related ideas from the Cost Benefits list in the Thoughtful Entrepreneur box, since most consumers have ideas about what they are willing to pay. So price becomes one of the dimensions of your perceptual map.

The other dimension can be what you think you or your customer will think is most important. It could be the stylishness of an item of clothing, the speed of a cell phone app or car, any of the Value Benefit ideas mentioned in the Thoughtful Entrepreneur box. You are not limited to one idea. Entrepreneurs often make different perceptual maps to find a benefit that the competition is

not delivering on, but their own company could. That kind of opportunity is the goal of perceptual mapping—a combination of Value and Cost benefits your firm provides and makes your firm stand out from others in your industry or market. Skill Module 7.4 takes you through developing a perceptual map.

Industry Dynamics and Analysis: The Third Step of Strategic Planning

Industry refers not only to your product or service, but also to all the firms also selling that product or service, in other words, your competitors. In setting strategy you need to look at your competitors in order to best position your firm, but you also want to look at the changes in competitors, sales, and prof- its in your industry—what are called the industry dynamics—to make sure it is a good time to enter it.

It turns out the fortunes of industries move in a predictable way. Figure 7.3 shows the two ways the number of firms in an industry change.16 Most industries’ introduction stage starts with only a few firms. These firms elected to be innovative in their approach, making a new product or offering a new service. The number of firms typically grows slowly at first. Sales are probably small, and most customers are largely unaware of the offering. When enough customers have bought the product so that it begins to draw the attention of the general public, there are two possibilities for the growth stage. Most products and services tend to grow at a regular rate, one at which the growth in the num- ber of firms more or less meets customer demand. However, some products or services turn out to be extremely popular or “hot” and grow very rapidly. In these cases, the original firms are unable to keep up with consumer demand. Other firms jump in to take advantage of the growth; this stage is often called the boom. Firms begin to compete on features and price, and there may seem to be an explosion

of choices. Eventually, all such booms come to an end, and there is a stage called the shake-out in which many of the firms close down. This phase ends as the rapid die-off of firms stops.

Whether through slow and steady growth or a boom and shake-out cycle, the industry eventually reaches a relatively stable number of firms, with minor variations and a slow drop in numbers. This is called the maturity stage. Eventually mature industries begin a decline stage. Some industries face death, while others find new life in a process called retrenchment. We will look at those later stages later in this chapter.

Starting early is not always a guarantee of eventual success. Consider cars—the original car com- panies were small businesses. Charles and Frank Duryea, brothers who created a family business, made the first production car in the United States in 1893. Firms from the start-up stage included Duryea, Winton, and Studebaker as well as Olds, Cadillac, and Ford. The boom started in 1905 and went to 1915 with over 75 auto manufacturers, many of them still small businesses. In the shake-out during World War I, the number dropped into the teens, settling into the maturity phase of the Big 3 (GM, Ford, and Chrysler) who survived into the 21st century.

Industry dynamics are important in telling you and potential partners or investors about the pros- pects for the industry as a whole. Obviously it is easier to sell people on your business when the whole industry is growing. But if the industry is not growing there are still ways to be successful, but as a start-up you need to have worked these through ahead of time. As mentioned before, the market relinquishment in the declining airline industry after 9/11 opened up opportunities for new small airlines in the cities abandoned by the major airlines. Remember, there are small businesses started in every industry at every stage of the industry life cycle. Knowing where your industry is in the life cycle helps you to craft the best strategy for success.

Tool: Industry Analysis

Armed with the concepts and preliminary information about the product/service and the market, you are ready to do a preliminary industry analysis. Industry analysis (IA) is a research process

that provides the entrepreneur with key information about the industry, such as its current situation and trends. Most entrepreneurs initially do an IA to find out what the profits are in an industry in order to better estimate possible financial returns. Taking this one step further, finding out how those profits are generated often makes the difference between success and failure. Armed with this information, the entrepreneur can tell if the industry is growing, stable, or in decline and what the degree of competition is. Skill Module 7.5 provides a how-to description for gathering the key types of information needed to perform an industry analysis. It also explains how the information is use- ful. For a complete example of an industry analysis, see this chapter’s appendix.

What are you looking for in your industry analysis? You want a business that can help you meet the magic number you determined earlier in the chapter. In looking at the other numbers in the industry

analysis, you may see ways to cut costs, or leverage friends or expertise or other resources available to you to make your business more profitable than the average one. That can be a tremendously useful finding.

Knowing the stage and trend in the industry is important to thinking about how you will enter the industry. Going into an established industry means it is easy to find locations, equipment, and experienced people (think pizza parlors). Going into an industry early may mean you have to spend more time and money doing things for yourself. It is better to know these things early. If the analysis tells you that you are facing a lot of competition, you want to pay particular attention in building or rebuilding your perceptual map to find a set of benefits that will help your firm stand out. All in all, an industry analysis is central to your plotting of your firm’s strategy.

Table 7.1 provides a listing of many of the key databases used in assembling industry analy- ses. Some are online, while others are in book form and available in local libraries. Armed withthe information from your industry analysis, you are in a better position to decide if the industry meets your needs for income (which comes from profits and operating revenues), financial growth (depending on the trend of the industry as a whole), and competitive challenge (depending on the number and concentration of competitors). It can also help you determine if you have or can get the expertise needed to run a profitable business (comparing how profits are made to how you would run your business if you started now). If the IA outcomes do not look promising, there are thousands of other industries to try, and it is time to think about what you can offer to attract customers to your business.

Strategy Selection: The Fourth Step in Strategic Planning

There are three classic strategies for businesses of all types—differentiation, cost, and focus.17 Because they are so widely applicable, they are called generic strategies. Differentiation strategies are aimed at mass markets—situations in which nearly everyone might buy your product or service. With this strategy, you try to show how your firm offers some combina- tion of value benefits that is different from and better for the customer than those offered by competitors.

Relatively few small businesses use differentiation strategies, because it is hard for small busi- nesses to have the resources to pursue mass markets. It happens most often when a small business offers a mass-market product or service locally. For example, a gas station offers a mass-market service, but its sales are naturally limited to a particular location. This business reality sets boundar- ies for where the firm competes, which help target advertising and pricing.

Cost strategies are also aimed at mass markets. In a cost strategy, you try to show how your firm offers a combination of cost benefits that appeal to the customer. Small businesses in a va- riety of industries make use of mass-market cost strategies. Typically, this comes when the small business can pursue a very low cost operation. For example, one gravel supplier in Memphis, Tennessee, was the undisputed low-cost provider. His secret? A farmer by trade, he discovered gravel under one of his farm fields. He sold directly to the users, cutting out intermediaries and their costs.

Focus strategies target a portion of the market, called a segment or niche. Instead of selling mass-market gravel for everyone, a focus strategy might target people seeking decorative gravel. For example, Scott Stone Company in Mebane, North Carolina, offers eleven different types of gravel that differ in color, stone size, and durability. By ensuring the quality and consistency of the gravel and knowing which types work best in specialized settings, such as oriental gar- dens or waterscapes, Scott Stone offers customers products and expertise not readily available elsewhere.

Small businesses often use a combination strategy that can use aspects of differentiation or cost approaches that are reformulated for the niche market. You identify a focus or combination strat- egy by figuring out what benefits your market most wants. This can be done by asking customers outright, through surveys, or by looking at what is working among your competitors locally or in more advanced markets. Often you will find that your market seems to want several benefits at once.

Building from this, strategy researchers such as Dean Shepherd and Mark Shanley as well as Mi- chael Porter have identified classic benefit combinations which they call supra-strategies 18 which are given in Exhibit 7.1. All are designed to work where there are many small businesses in an industry, along with a few larger firms.

Tightly managed decentralization can also work in more conventional firms too. The Men- love family mastered the auto business in southern Utah with a Dodge dealership that started in 1962. Family members opened a Toyota dealership in 1986, and a Mitsubishi-Subaru dealership in 2002. Each one is highly rated in customer satisfaction and sales volume.19 Part of the un- derlying reason for their success is their ability to transplant the skills they mastered in the first dealership. Armed with these strategic choices, it is possible to profile the most typical strategies for new businesses. Table 7.2 shows four types of start-ups and outlines how they align with the scope, ge- neric strategies, imitiation/innovation choice, and supra-strategies discussed above.

It might help to think about how Table 7.2 applies in a particular industry. Let’s look at Italian restaurants (part of NAICS 72211). There are probably several Italian restaurants where you live or go to school. If you think about it, the vast majority offer the same sorts of dishes. They are funda- mentally imitators of one another. Most of them differentiate themselves based on one or two menu items (one has cannoli, another has Italian wedding cake, etc.). That is their craftsmanship. Another may differentiate on the basis of atmosphere (i.e., best place to take a date) or location (close enough to walk to from class). They probably have nearly identical kitchens and bought most of their furni- ture and serving ware from the same restaurant supply store. That is their formula facility. Together, these restaurants are classic imitators.

There is also probably another Italian restaurant known as the place to go toward the end of the month, when money is tight. The menu has the same sort of items, but the quality of the ingredients may be less (e.g., more like institutional food) or the de?cor may be nothing to look at, but the prices are always low. That restaurant is your classic cost leader.

Last, think about the Italian restaurant that has the most different menu. It may be hard to find a marinara sauce on the menu. The de?cor may look more at home in a Scandinavian restaurant, and the menu may change with the season and what looks good locally. Here you have a firm pursuingan innovator strategy. It may appeal only to a few individuals. Because the food varies so much, they are more willing to tweak recipes to fit the customer’s wishes. Some of the equipment in the kitchen or the seating area will probably be different from what the other local Italian restaurants have. That too is part of the innovator strategy. Innovators either grow enough to become mainstream, or they die out fairly quickly.

Innovators may also come along as drivers of the retrenchment of an industry. The growth of northern Italian cuisine (Italian without red sauce) revitalized the Italian restaurant industry by ex- panding the menu and reenergizing bored customers to come back and learn about new dishes. The growth of the wine industry in the United States also led to a revitalization of Italian eating. The Internet version of the Italian restaurant is the online ordering system pioneered by big chains like Pizza Hut, but is now available for small restaurants everywhere. The food is the same. The prices are the same, but the difference is the ability to order online. For some other businesses, the online inventory may be larger than the one at the store, because the entrepreneur can fill an online order through their supplier, without adding to their own inventory. So it is possible to be more comprehensive online than in the store.

Most of the time your preferences for a particular type of business or industry and the industry analysis you perform are closely tied together. But there are times when opportunities pop up unex- pectedly, and suddenly you can find yourself trying to decide if the opportunity is the right business and industry for you. This ability to quickly pivot is one of the classic strengths of the entrepreneur. Retired entrepreneurship professor Karl Vesper21 named these opportunities entry wedges, and he identified seven that come-up again and again:

? Supply shortages: Supply shortages occur when a new product is in demand. The target audience is leading-edge buyers who are willing to pay a premium to be the first to have the product. This is a short-term market and one that changes rapidly. The key benefits are deliv- ery, shopping ease, and style.

?          Unutilized resources: Unutilized resources can be a physical resource like gravel in a farm field or even entire inner cities (see Small Business Insight: Initiative for a Competitive Inner City). It can also be a human resource. Tax Resources, Inc. was started in 1988 by people ex- perienced in dealing with the IRS in order to advise taxpayers on legal strategies to minimize their taxes or handle audits.22 The key benefits are lower costs, scale savings, or organizational practices.

? Customer contracting: Customer contracting occurs when a customer, most often a busi- ness, is willing to sign a contract with a small business to ensure a product or service. Because big businesses frequently downsize, they have ongoing needs to outsource work. Former em- ployees are often the preferred source for independent subcontractors. The key benefits are quality, delivery, technology, shopping ease, brand/reputation, and assurance. Style and per- sonalization are often factors too.

?          Second sourcing: Second sourcing seeks out customers who are already being serviced by another firm. The strategy is to offer customers a second place to obtain goods or services. Often the advantage the small business offers is being locally based. Second sourcing pro- vides the customer with greater certainty of supplies or services, and at its best provides a competitive pressure to keep both suppliers providing the best service and prices. Like cus- tomer contracting, the key benefits are quality, delivery, technology, shopping ease, brand/ reputation, and assurance.

?          Market relinquishment: Market relinquishment occurs when business firms leave a market. Since the 9/11 terrorist attacks, the major American airlines have dramatically scaled back their service. For small commuter airlines, these market relinquishments have been opportuni- ties to expand and provide ongoing service to smaller airports. Key benefits are place, shop- ping ease, quality, delivery, and service.

?          Favored purchasing: Favored purchasing occurs because government agencies, government- sponsored commercial contracts, and many big businesses have policies that provide for set- asides or quotas for purchases from small businesses. You can find out more at the SBA’s online government contracting site. Key benefits are quality, delivery, service, assurance, place, and belonging.

?          Government rules: Rule changes by the government can help small firms compete. For ex- ample, when the Environmental Protection Agency let small construction firms out of some of the water pollution treatment requirements that large firms must face, it gave the small businesses a savings of $1.5 billion, which made them more competitive. The Regulatory Flexibility Act of 1980 drives many of these rule changes in government.23 Key benefits here are technology, service, personalization, lower costs, and organizational practices.

The industry analysis helps confirm that you have chosen the right industry, and also where your competitors are and the current industry stage. That and your own decisions earlier about the scope of your business and whether you plan to pursue an imitative or innovative strategy give you the fundamentals for deciding the type of small business strategy that makes the most sense for your start-up. With that information in mind, it is time to think about how you will set up your firm to implement the strategy.

Post Start-Up Tactics

The goal of strategy after the start-up stage is to maximize profits (or any other reward you specify as meeting your criteria for success) and protect your business from the competition. To secure suc- cess, there is a step you need to take past picking and implementing the right strategy. It is the step of securing competitive advantage. Competitive advantage is the particular way you implement your customer benefits that keeps your firm ahead of other firms in your industry or market. Com- petitive advantage is your firm’s edge in meeting and beating the competition.

It can be harder than it looks. Why? In part because most small businesses face a lot more forms of competition than they initially realize. Strategy guru Porter25 identifies five different threats of competition for any business, see Figure 7.4. Imagine you plan to start a web development firm in Pocatello, Idaho.

The first place to look at for competitive threats are existing firms in your industry. Pretty much all the other web developers in the Pocatello vicinity pose the threat of rivalry. Since web development is even being taught in high schools, another potential competitive threat will be potential entrants, other web development firms that open after yours. If you think about why people come to a web developer, you realize that there is a very broad threat of substitutes with which you compete. Prepackaged website templates are offered by many hosting services, com- panies like monstercommerce.com and Amazon.com sell whole e-commerce sites already laid out using templates, and people can buy their own templates from companies on the Internet like websitetemplates.com or even freewebsitetemplates.com. But customers can substitute whole other approaches, so you compete with free blogs from Blogger.com and Wordpress.com, and the growing possibility of running a company site from MySpace.com and other social network- ing sites.

Part of what will make your web development firm special might be the advanced services you offer. Perhaps you licensed one of the large archives of photos to include in your customers’ Websites. If your supplier of photos raises prices, your profits could take a hit. Similarly, if your customers have done their homework and checked out what other local developers offer and are charging,

These five—rivals, entrants, substitutes, suppliers, and customers—are aspects of your industry which can change your profitability and give an edge to any of the many types of competitors you face. The major ways you cope with these competitive pressures is by undertaking some combi- nation of strategic actions and tactical actions. Exhibit 7.2 shows some of the best-knownProduct/Service Idea and Industry

Along with this pursuit of rewards, there is often an idea for the business. Recall in Chapter 4 we saw that 37 percent of businesses start with an idea which energizes the entrepreneur to start a firm. For 42 percent the idea of starting their own business comes first, while for 21 percent the idea and the desire to start a business are simultaneous.2 EnableMart was one of those cases where the idea (Mindnautilus) came first. This is an example of a pivot, described in Chapter 1. The feasibility study Nick and Dennis did showed that it would take time to bring this product to market (and for customers to be able to use it easily). Then came the idea for a business to sup- port Mindnautilus, which became EnableMart. Whichever applies in your case, the fact is that the idea for a product or service and the idea to start a business to earn rewards make up the core of strategy—what you plan to do and why you are doing that. The process for evaluating ideas, called the feasibility study, was detailed in Chapter 4. For the purposes of this chapter, we will assume you know your idea is feasible.

Some entrepreneurs may start a firm to get the product or service out, while others may create the product or service and have agents find firms to use it, which is the consignment process described

Post Start-Up Tactics

The goal of strategy after the start-up stage is to maximize profits (or any other reward you specify as meeting your criteria for success) and protect your business from the competition. To secure suc- cess, there is a step you need to take past picking and implementing the right strategy. It is the step of securing competitive advantage. Competitive advantage is the particular way you implement your customer benefits that keeps your firm ahead of other firms in your industry or market. Com- petitive advantage is your firm’s edge in meeting and beating the competition.

It can be harder than it looks. Why? In part because most small businesses face a lot more forms of competition than they initially realize. Strategy guru Porter25 identifies five different threats of competition for any business, see Figure 7.4. Imagine you plan to start a web development firm in Pocatello, Idaho.

The first place to look at for competitive threats are existing firms in your industry. Pretty much all the other web developers in the Pocatello vicinity pose the threat of rivalry. Since web development is even being taught in high schools, another potential competitive threat will be potential entrants, other web development firms that open after yours. If you think about why people come to a web developer, you realize that there is a very broad threat of substitutes with which you compete. Prepackaged website templates are offered by many hosting services, com- panies like monstercommerce.com and Amazon.com sell whole e-commerce sites already laid out using templates, and people can buy their own templates from companies on the Internet like websitetemplates.com or even freewebsitetemplates.com. But customers can substitute whole other approaches, so you compete with free blogs from Blogger.com and Wordpress.com, and the growing possibility of running a company site from MySpace.com and other social network- ing sites.

Part of what will make your web development firm special might be the advanced services you offer. Perhaps you licensed one of the large archives of photos to include in your customers’ Websites. If your supplier of photos raises prices, your profits could take a hit. Similarly, if your customers have done their homework and checked out what other local developers offer and are charging,

These five—rivals, entrants, substitutes, suppliers, and customers—are aspects of your industry which can change your profitability and give an edge to any of the many types of competitors you face. The major ways you cope with these competitive pressures is by undertaking some combi- nation of strategic actions and tactical actions. Exhibit 7.2 shows some of the best-known

examples of each type. Generally strategic actions require more time, money, and specialized expertise (which collectively are known as your firm’s resources) than most tactical actions. That means a tactical response is most often your first response, with strategic actions building behind the scenes.

From all this, you can see that strategy represents the way by which an entrepreneur plots a path to success. For strategy to work, it needs to draw on most of the elements discussed in the chapter. When Nick and Dennis were putting together the idea for Mindnautilus.com, they were trying to strategize the right way. You know by now that they did an industry analysis that led them to see that Mindnautilus faced significant threats, and at that time, the partners lacked the strengths, especially financial strength, to overcome the threats. They kept thinking through what they could offer and eventually found an innovative option, creating EnableMart, which was ultimately a very successful firm.

Long term or short, every small business has a strategy, and successful small businesses have strategies that fit their industry, market, and resources. Strategy is one of those areas in which you can take charge and think through the options available to you and your firm. For all the ideas on which strategy touches, in the end there are some straightforward ways to help you decide on strategies, such as industry analyses and perceptual maps. These analysis techniques can help you narrow down your choices to a model of strategy that can help you succeed. For the vast majority of small businesses, the most powerful technique is to pursue an imitative strategy. By following the industry standard practices, with only one or two innovations to differentiate your firm from others, you can gain many of the benefits of established businesses and industries and still benefit from the power of innovation along smaller lines, which can make a real difference for your customers. For many owners, strategy is the grand game of business, but it is a game in which winning can make a major difference in the success of your firm and your life.

1. What are the three classic strategies for businesses of all types?

2. According to this chapter, what are the 7 entry wedges specific to small businesses pursuing an imitation strategy?

Answer 1

1. What are the three classic strategies for businesses of all types?

The strategy is an idea or action a business has to plan and execute to ensure survival in the market and making a profit. There is a need to identify the goals, the target customers, the competitors, and the profitability. Each business has to plan their strategy based on the following three parameters:

·        Goals: The First Step of Strategic Planning: Goal defines the basic decision you need to take regarding your business, target customers, product line, profit margins, and the scope of business national or international.

It will define your product and services, what are your expectations from the business; your product is a new idea or product or an innovation and the suitability and viability in the target markets. The product will be identified and will cater to the needs of the specified target market. The profits you plan to make from the business and the investments will map your cost-benefit analysis of starting the business.

·        Customers and Benefits: The Second Step of Strategic Planning:   The key to maximizing business strategy gets an accurate customer product matching.

The target customer can be a high profile of the market customer who is not price sensitive and open to spending on your specialized product, which adds to his social status and matches his needs.

You can also opt corporate sales, B2C (Retail) sales or B2B sales (wholesale). The product and target customer segmentation have to be clear and specific. The customer will value your product according to his need satisfaction. The customers are also further subdivided as local customers, corporate customers, and passionate customers.

The definition of your target customer will help define your product and services as the needs of different customer segment vary. There also a variety of product according to the area of sales like national or international sales as the consumer requirements will change.

·        Industry Dynamics and Analysis: The Third Step of Strategic Planning: This involves understanding the Industry trends and your competitors and planning your product and service according to the prevailing trends.

·        Strategy Selection: The Fourth Step in Strategic Planning: The strategic planning is based on differentiation, cost, and focus. Theses are also called generic strategies.

There are three classic strategies for businesses of all types:

·        Differentiation Strategy

·        Cost Strategy

·        Focus Strategy

·        Differentiation strategies are suitable for targeting mass markets. Your product and service are suitable for everyone who buys it. You can differentiate your product and services by giving benefit benefits, which make you, stand apart from your competitors. You can show how your product will give additional benefits to you over competitors products. This is suitable for big companies as a small business cannot target mass markets or will have to target a local mass market.

·        Cost strategies also target the mass markets. You will highlight how your product gives a cost-benefit over and above an existing product or service. The small business use this strategy to give similar product or service at a lower cost as their cost of operation is less and have negligible overheads

·        Focus strategies target a niche or a specialized segment of the market. For example, as cited in the text “Instead of selling mass-market gravel for everyone, a focus strategy might target people seeking decorative gravel.” The gravel can be distinguished by its size, color or durability which will make it stand apart from its competitors.

As stated in the text “small business uses a combination strategy where they use a mix of the differentiated and cost approach, which target a niche market.” Each business can formulate their own success model. This model will be defined by conducting a market study, customer profiling, surveys, competition data analysis etc.

2. According to this chapter, what are the 7 entry wedges specific to small businesses pursuing an imitation strategy?

The sudden appearance of a gap in the market or an opportunity which can be seen as a good business option for a new entrant which an entrepreneur can seize and maximize is called an entry wedge by Retired entrepreneurship professor Karl Vesper21. These are as follows:

• Supply shortages: The entrepreneur sees gaps in supplies and an apparent opportunity to supply. This is normally a short-term demand and would be due to demand-supply gaps.
• Unutilized resources: The physical resources from a farm, or a remote location, which, can be a future tourist spot, are all unutilized resources which entrepreneur can convert into profitable business.
• Customer contracting: A contract signed with a customer to ensure regular supply of a product or service. This ensures regular demand. Normally a supplier of component manufactured for a big automobile giant.
• Second sourcing: Second sourcing is acting a s a stand by product or service available in case primary product supplies fall short of demand.
• Market relinquishment: The companies leave an existing market due to sudden risks or fear in doing business in the market for example after 9/11 many airlines just stopped their growth plans giving ample opportunities for new entrants and small businesses to expand.
• Favored purchasing: This is done to encourage small business by having specifically fixed business quota allotted for small businesspersons.
• Government rules: The government may lay down rules and regulations, which support small business and help them to meet specific rules, which are waived for small businesses.