Week 4 Discussion - Business Plan
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cf_katz_ESB_6e_chap007_PPT.pptxChapter Seven Small Business Strategies: Imitation with a Twist
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Strategy in the Small Business
Strategy is the idea and actions that explain how a firm will make its profit – it defines how your business operates.
The strategic planning process for small businesses are taken in steps.
The first step involves reviewing and confirming the goals that define your firm and knowing your magic number.
The second step is finding your distinctive competence – plot your customers and the benefits you want to offer against competitors.
The third step is studying dynamics and trends of your industry using industry analysis to identify the best way and time to enter business.
The fourth step involves building on the prior three steps to determine the best strategic direction and strategy for the firm.
After this four-step process, there is a continuing effort called post start-up, refining your strategies/tactics to maintain a competitive advantage.
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Figure 7.1: The Small Business Strategy Process
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Goals: The First Step of Strategic Planning
Goal decisions set the stage for the kind of business you will have.
Goals are the foundation for further analyses.
There are five initial key goal decisions.
As owner, what do you expect out of the business?
What is your product or service idea (and its industry)?
For your product/service, how innovative or imitative will you be?
Scale: Whom do you plan to sell to – everyone or targeted markets?
Scope: Where do you plan to sell – locally, regionally, nationally, globally?
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Goals: Owner Rewards
Chapter 2 introduced the rewards sought by entrepreneurs.
Some were universal – flexibility, personal growth, personal income.
You need to find your “magic number” or how much you want to make.
Taxes account for roughly 29 percent.
If you wish to take home $24,000 a year, after taxes, you will need:
Pretax Income = $24,000/(1 – 0.29) = $33,802
If your costs are 75 percent of sales, not including your salary, then:
Company sales = $33,802/(1 – 0.75) = $135,208
This can be broken down to determine what would need to be accomplished each day to reach this sales level.
Knowing these numbers from the start, you are better able to evaluate if your proposed business can deliver on that very basic need, your pay.
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Goals: Product/Service Idea and Industry
The ‘idea’ gets made real as a product or a service.
If you have a product/service, you also have an industry.
The general name for your line of product/service being sold.
In addition, industries have numeric NAICS and SIC codes.
Industry is important as some industries are more profitable than others.
Industries with high profits and minimal risk have high industry attractiveness.
It is important to know there are no “safe” industries.
B2B sales has the highest average sales.
Professional services have the highest sales in B2C sales.
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Goals: Imitation and Innovation
Owners who imitate competitors still want something that distinguishes them from the others.
An imitative strategy is the classic small business strategy.
An innovative strategy means they do something very different.
Most firms use imitation plus or minus one degree of similarity.
Competing locally in the same industry is parallel competition.
Imitation plus one degree of similarity is incremental innovation.
When a new product or service is introduced, this is pure innovation, also called a blue ocean strategy.
Research shows that imitators do better than pioneers in the long run.
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Goals: To Whom Will You Sell?
There are two strategic decisions about your market in general you need to make early in the process of going into business.
One is the scale of the market, the size of the market – mass or niche.
The other is the scope of the market, the range – from local to global.
A mass market is broad, while a niche market is narrowly defined.
Most industries have both mass and niche markets.
Market scope is important.
Your scope focuses your sales and advertising efforts and identifies potential competitors.
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Figure 7.3: How Strategy and Marketing Relate
Marketing is the actions related to promoting and selling.
Marketing focuses on value proposition.
While strategy focuses on the firm’s competitive advantage.
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Customers and Benefits: The Second Step of Strategic Planning
The focus here is on the kinds of customers you want to sell to and the benefits that will attract them.
If you seek wealth, having wealthy customers may be rewarding.
If your goal is growth, having customers you can learn from is best.
Some types of customers are particularly attractive.
Corporate customers may produce greater profits.
Loyal customers return and are already presold, they also refer others.
Local customers are now less about geographic distance and more about social relationships.
Passionate customers are not just loyal, they rave about your product.
Thinking ahead about your customers is the best way to orient your strategic planning process.
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Customers and Benefits: Value and Cost Benefits
Benefits are characterized as value benefits or cost benefits.
Value benefits refer to what a customer senses in the product/service.
Cost benefits refer to ways a firm keeps costs low for the customer.
As you decide what benefits to offer, you can use a distinctive competence map.
Core competencies are skills all competitors have.
How your firm differs is your distinctive competence.
These benefits that differ represent your competitive advantage.
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Value Benefits and Cost Benefits
Quality and style.
Delivery and service.
Technology.
Shopping ease.
Personalization.
Assurance.
Place.
Credit.
Brand/reputation.
Belonging.
Altruism.
Lower costs.
Scale savings.
Scope savings.
Learning.
Organizational practices.
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Industry Dynamics and Analysis: The Third Step of Strategic Planning
Look at the changes in competitors sales and profits – the industry dynamics – to make sure it is a good time to enter into business.
Industries move in predictable ways.
Most industries’ introduction stage start with only a few firms.
When the general public becomes involved, it leads to either the growth stage, or other firms jump in for the boom.
All booms come to an end, and there is the shake-out stage and many firms close down.
The industry eventually reaches a stable number of firms in the maturity stage before entering the decline stage.
Some industries face death, others go through retrenchment to survive.
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Figure 7.4: The Industry Life Cycle
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Tool: Industry Analysis
Industry analysis (IA) allows an entrepreneur to see how profits are generated, which tells if an industry is growing, stable, or in decline.
A basic IA consists of seven pieces of information.
NAICS number and description.
Industry size over time.
Profitability – look for gross profit, net profit, and profit before taxes.
How profits are made – evaluate: sales growth potential, if a premium is possible, how to keep costs and operating expenses below average.
Target market competitor concentration.
Analysis and sources.
You want a business that can help you meet your magic number.
The timing of entry into an industry is a key to success.
If the IA outcomes are not promising, try another industry.
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Strategy Selection: The Fourth Step in Strategic Planning
There are three generic strategies.
Differentiation.
Aimed at mass markets but with value benefits.
Cost strategies.
Also aimed at mass markets but with an appealing cost benefit.
Focus strategies.
Target a segment or niche.
There are also classic benefit combinations called supra-strategies.
Craftsmanship.
Customization.
Super-support.
Serving the underserved/interstices.
Elite.
Single-mindedness.
Comprehensiveness.
Formula facilities.
Bare bones or no-frills.
Cutting out the intermediary.
Tightly manage decentralization.
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Strategy Selection: Entry Wedges
Most of the time your preferences for a type of business or industry and your industry analysis are closely tied together.
But there are times when an opportunity pops up and you must decide if the opportunity is right for you
These are entry wedges and seven types come up again and again.
Supply shortages.
Un-utilized resources.
Customer contracting.
Second sourcing.
Market relinquishment.
Favored purchasing.
Government rules.
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Post Start-Up Tactics
The goal of strategy after the start-up is to secure competitive advantage.
There are five sources of competition for any business.
One source is the supply chain you face.
Another is existing firms in your industry
These firms pose the threat of rivalry.
Another threat is the potential for new entrants.
There is a broad threat of substitutes.
The major ways you cope with these competitive pressures is by using some combination of strategic actions and tactical actions.
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Strategic and Tactical Competitive Actions
Strategic actions include:
Entering new markets.
New product introductions.
Changing production capacity.
Mergers/alliances.
Tactical actions include:
Price cutting (or increases).
Product/service enhancements.
Increased marketing efforts.
New distribution channels.
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Figure 7.5: Porter’s Five-Forces Model of Industry Competition
Access text alternative for this image.
Source: Adapted by the authors from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. (New York: Free Press, 1988).
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Accessibility Content: Text Alternatives for Images
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Figure 7.1: The Small Business Strategy Process – Text Alternative
The strategic process is depicted as moving from one step to the next.
The first step, goals, lists owner rewards, the product or service including industry and imitation or innovation, and markets including scale and scope. The tool used at this step is the Magic Number.
The second step, customers and benefits, includes value benefits and cost benefits. The tool used in this step is Distinctive Competence Mapping.
The third step, industry dynamics and analysis, includes the industry life cycle and industry trends. The tool used in this step in industry analysis.
The fourth and final step, strategy selection, includes choosing a generic strategy – differentiation, cost, focus, or combination – and supra-strategies as well as entry wedges.
A final “step” is the post start-up tactics showing that strategic and tactical actions are used to gain the competitive advantage.
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Figure 7.3: How Strategy and Marketing Relate – Text Alternative
The market is composed of the four Ps: product, price, promotion, and placement.
The industry’s components are: usual focus, innovation or imitation, supra-strategies, entry wedges, and four typical modes.
In the market, customers are offered value propositions reinforced by the marketing strategy and embodied in the goods or services.
In the industry, competition is approached with a competitive advantage, reinforced by the competitive strategy, also embodied in the goods or services.
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Figure 7.4: The Industry Life Cycle – Text Alternative
An industry is represented as a line on graph quadrant depicting the number of firms in the industry on the vertical axis, ranging from low to high. Time is depicted on the horizontal axis, increasing from left to right.
An industry’s introduction stage has only a few firms present. The growth stage finds one of two paths – a simple increasing path to the next stage or a nearly vertical climb for hot industries with many companies entering the industry. A shake-out stage follows where many firms leave the industry.
Either way, all firms enter a maturity stage where there is a stable number of firms in the industry. The decline stage is inevitable and more companies leave the industry. As firms leave, the industry either dies completely or enters a stage of retrenchment and continues.
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Figure 7.5: Porter’s Five-Forces Model of Industry Competition – Text Alternative
Your firm’s product or service lie in the middle of this model with supply chain sources of competition pressuring from one side and industry sources of completion pressuring from the other side.
The supply chain sources of competition include suppliers and buyers.
The industry sources of competition include: rivals in direct competition and substitutes and alternatives in indirect completion. In addition, there are new entrants who may enter the industry as either a rival, a substitute, an alternative, or simply as a new entrant.
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