1. Small Business Strategies: Imitation with a Twist
Chapter 7
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2. Learning Objectives
LO1 Describe the decisions needed to establish a foundation for strategic planning.
LO2 Identify the forms of imitative and innovative businesses.
LO3 Articulate the benefits that win over customers.
LO4 Assess how have industry changes affect strategy.
LO5 Explain the major strategies of business—differentiation, cost, and focus.
LO6 Determine how to sustain competitive advantage through attracting customers and discouraging competition.
LO1 Describe the decisions needed to establish a foundation for strategic planning.
LO2 Identify the forms of imitative and innovative businesses.
LO3 Articulate the benefits that win over customers.
LO4 Assess how industry changes affect strategy.
LO5 Explain the major strategies of business—differentiation, cost, and focus.
LO6 Determine how to sustain competitive advantage through attracting customers and
discouraging competition.
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3. Strategy in the Small Business
the ideas and actions that explain how a firm will make its profit
Think about strategy in terms of football. The plays you run depend on the down, yards to go, strength and skills of your players, current score, time left in the game, and how you think the competing team will react. A strategy which works for one team will not necessarily work for another. However, a strategy is important.
No good coach would show up to a game without his playbook.
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4. Strategy in the Small Business
Good strategy leads to greater chances for survival and higher profits for small businesses
What makes a strategy good is its fit to the particulars of your business and the resources you can bring to it
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 innovative.
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5. The Small Business Strategy Process
Figure 7.1
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.
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6. Goals: The First Step of Strategic Planning
There are five initial key decisions:
As owner, what do you expect out of the business?
What is your product or service idea (and its industry)?
For your product or service, how innovative or imitative will you be?
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?
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7. Goals: The First Step of Strategic Planning
Who do you plan to sell to—everyone or targeted markets?
Where do you plan to sell—locally, regionally, nationally, globally?
4. Who do you plan to sell to—everyone or targeted markets?
5. Where do you plan to sell—locally, regionally, nationally, globally?
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8. Owner Rewards Magic number
The post-tax income the entrepreneur personally seeks from the business.
Your magic number 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.
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9. Industry
Industry
The general name for the line of product or service being sold, or the firms in that line of business
Key is selecting an industry that offers good potential for making a profit
Also needs to offer attractive opportunities to work with a minimum of risk and competition
Trade associations often have magazines, conventions, websites, and other resources available to help businesses in their industry. Sometimes companies may band together to perform functions.
For example: In the sporting goods industry it is not uncommon for stores to band together to purchase items in larger quantities to be able to purchase from the manufacturer. Contacts are used in this process and store do not normally compete in the same geographic region. The Dairy Farmers of America band together for the “Got Milk” campaign which promotes the product but not a specific brand.
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10. Attractiveness of Selected Industries and Lines of Business
Figure 7.2
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.
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11. Imitation and Innovation
Imitative strategy
An overall strategic approach in which the entrepreneur does more or less what others are already doing.
Innovative strategy
An overall strategic approach in which a firm seeks to do something that is very different from what others in the industry are doing.
The choice between imitation and innovation is truly important and often overlooked. Businesses, 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.
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12. Imitation and Innovation
Degree of similarity
The extent to which a product or service is like another.
Parallel competition
An imitative business that competes locally with others in the same industry.
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.
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 .
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13. Imitation and Innovation
Incremental innovation
An overall strategic approach in which a firm patterns itself on other firms, with the exception of one or two key areas.
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 parallel competition in frequency.
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14. Imitation and Innovation
Pure innovation
The process of creating new products or services, which results in a previously unseen product or service.
Also called blue ocean strategy
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.
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15. Markets
Market
business term for the population of customers for your product or service
Scope
geographic range covered by the market
Local to Global
Your potential market is anyone who could have a use for your product but who has not yet purchased. Your market is made up of those who purchase that type of product. Your target market is the subgroup you choose to focus on. Mass markets are everyone in the population. Coca-Cola mass markets to the entire US.
Niche markets are small often underserved markets of people with a similar need and who act or purchase in similar ways. The scope of your market merely refers to how geographically large your market is and is outlined on the next two slide.
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16. Markets Scale Mass market Niche market size of the market
large portions of the population
Niche market
narrowly defined segment of the population that is likely to share interests or concerns
When you think about the market for your product or service, you typically have two choices. A mass market is a market that involves large portions of the population—all men, all women, all teens, all elderly, all families, all manufacturers, all restaurants. Mass markets are broad, and a mass-market approach targets the entire market. A niche market is a narrowly defined segment of the population that is likely to share interests or concerns—25–34-year-old women, families with twins, Boy Scouts, Italian restaurants, 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.
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17. Scope: Local to Global Scope is important for two reasons:
Knowing your market scope helps deciding where to focus sales and advertising efforts
Knowing your target market gives you a way to know which competitors to worry about most, namely those within your market scope
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.
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18. Customers and Benefits
Corporate customers
Loyal customers
Local customers
Passionate customers
● 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 satisfaction 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.
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19. Value and Cost Benefits
characteristics of a product or service that the target customer would consider worthwhile
value benefit, cost benefit
The best way to identify desirable benefits is through potential customers
A key to succeeding in business is knowing what your customer wants and how to provide it to him or her at a profit. Some benefits may be possible to add but may also lower your profits. Add the benefits that customers will be willing to pay more for. For example, people pay more for leather seats in their car, or a DVD player.
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20. Value and Cost Benefits
Perceptual map
A graphic display which positions products, services, brands, or companies according to their scores of important strategic dimensions.
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.
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21. Industry Dynamics and Analysis
Competitor
all the firms also selling that product or service.
Industry dynamics
Changes in competitors, sales and profits in an industry over time.
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 profits in your industry—what are called the industry dynamics —to make sure it is a good time to enter it.
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22. Industry Dynamics and Analysis
Introduction stage
The life cycle stage in which the product or service is being invented and initially developed.
Growth stage
An industry life cycle stage in which customer purchases increase at a dramatic rate.
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. 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 number of firms more or less meets customer demand.
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23. Industry Dynamics and Analysis
Boom
A type of life cycle growth stage marked by a very rapid increase in sales in a relatively short time.
Shake-out
A type of life cycle stage following a boom in which there is a rapid decrease in the number of firms in an industry.
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. 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.
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24. Industry Dynamics and Analysis
Maturity stage
The third life cycle stage, marked by a stabilization of demand, with firms in the industry moving to stabilize or improve profits through cost strategies.
Decline stage
A life cycle stage in which sales and profits of the firm begin a falling trend.
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
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25. Industry Dynamics and Analysis
Retrenchment
An organizational life cycle stage in which established firms must find new approaches to improve the business and its chances for survival.
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.
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26. The Industry Life Cycle
Figure 7.3
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
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27. Tool: Industry Analysis
Industry analysis (IA)
A research process that provides the entrepreneur with key information about the industry, such as its current situation and trends.
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.
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28. Tool: Industry Analysis
Gross profit
Funds left over after deducting the cost of goods sold.
Net profit
The amount of money left after operating expenses are deducted from the business.
Profit before taxes
The amount of profit earned by a business before calculating the amount of income tax owed.
Gross profit is what is left after deducting the cost of goods sold. Net profit is what is left after deducting the operating expenses of the business. Profit
before taxes represents the amount of money the owner or owners take out of the firm annually and on which they pay taxes. When the business can sustain it, owners tend to put their salaries in the operating expense category. However, if the firm cannot afford the owner’s salary, the only income is the profit before taxes.
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29. Strategy Selection Generic strategies Differentiation strategy
Three widely applicable classic strategies for businesses of all types—differentiation, cost, and focus.
Differentiation strategy
A type of generic strategy aimed at clarifying how one product is unlike another in a mass market.
There are three classic strategies for businesses of all types—differentiation, cost, and focus. 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.
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30. Strategy Selection Cost strategy Focus strategy
A generic strategy aimed at mass markets in which a firm offers a combination of cost benefits that appeals to the customer.
Focus strategy
A generic strategy that targets a portion of the market, called a segment or niche .
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 variety of industries make use of mass-market cost strategies. 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.
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31. Strategy Selection Supra-strategies
classic benefit combinations which are designed to work where there are many small businesses in an industry, along with a few larger firms
Building from this, strategy researchers such as Dean Shepherd and Mark Shanley as well as Michael Porter have identified classic benefit combinations which they call supra-strategies 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.
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32. Cutting out the intermediary
Supra-Strategies
Craftsmanship
Customization
Supersupport
Elite
Single-mindedness
Formula facilities
Bare bones
Cutting out the intermediary
Decentralization
Craftsmanship: Specialized product, localized business operations, high levels of craftsmanship (vs. competitors with scale economies).
Customization: Short delivery times, custom features, short production runs, high quality (vs. products that are mass produced).
Supersupport: Extensive, intensive, and personalized after-sales service.
Serving the underserved/interstices: Targeting markets forgotten by larger competitors.
Elite: High-quality products with high prices, backed up by high expenditures for advertising and R&D (vs. mass-market products).
Single-mindedness: Developing and demonstrating exceptional expertise in one product or service (vs. competitors with broad approaches or product lines).
Comprehensiveness: Offering one-stop shopping with complete inventory, immediate delivery, knowledgeable staff, and the major supporting services in one location.
Formula facilities: Use a prepackaged business (like a McDonald’s franchise or a preconfigured restaurant package from Sysco) to offer a better or more consistent product or service.
Bare bones or no-frills: Keep prices super low by cutting back on décor (think warehouse stores), hours (think weekends only or flea markets), or employees.
Cutting out the intermediary: Today farmers at their roadside stands and bands selling their own tracks online are able to sell at lower prices and still make more money by eliminating wholesalers’ and retailers’ mark-ups.
Tightly manage decentralization: Once you know how to efficiently run one type of business, it often becomes easier to open related firms. This is especially common for Internet businesses.
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33. Typical Strategies for Small Business Start-Ups
Table 7.2
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, generic strategies, imitation/innovation choice, and supra-strategies discussed above.
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34. Strategy Selection Entry wedge
An opportunity that makes it possible for a new business to gain a foothold in a market.
Supply shortages, Unutilized resources, Customer contracting, Second sourcing, Market relinquishment, Favored purchasing, Government rules
This ability to quickly pivot is one of the classic strengths of the entrepreneur. Retired entrepreneurship professor Karl Vesper named these opportunities entry wedges, and he identified seven that come-up again and again: Supply shortages, Unutilized resources, Customer contracting, Second sourcing, Market relinquishment, Favored purchasing, Government rules
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35. Post Start-Up Tactics Competitive advantage
The particular way a firm implements customer benefits that keeps the firm ahead of other firms in the industry.
To secure success, 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. Competitive
advantage is your firm’s edge in meeting and beating the competition.
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36. Post Start-Up Tactics Strategic actions Tactical actions
Competitive responses requiring a major commitment of resources.
Tactical actions
Competitive responses with low resource requirements.
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 combination of strategic actions and tactical actions .
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37. Porter’s Five-Forces Model of Industry Competition
Figure 7.4
In part because most small businesses face a lot more forms of competition than they initially realize. Strategy guru Porter identifies five different threats of
competition for any business, see Figure 7.4 .
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