Small Business Strategies

Imitation with a Twist

Chapter 07
McGraw-Hill/Irwin Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Learning Objectives
LO1 Learn the decisions needed to establish a foundation for strategic planning LO2 Learn the forms of imitative and innovative businesses LO3 Articulate the benefits that win over customers LO4 Discover how industry changes affect strategy

7-2

Learning Objectives
LO5 Understand the major strategies of business-differentiation, cost, and focus LO6 Use SWOT analysis to identify strategic options. LO7 Learn how to sustain competitive advantage through attracting customers and discouraging competition

7-3

Strategy in the Small Business

Strategy
the ideas and actions that explain how a firm will make its profit

7-4

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

7-5

The Small Business Strategy Process

Figure 7.1
7-6

Pre-strategy: Five initial key decisions

1. 2. 3. 4. What do you expect out of the business? What is your product or service idea How innovative or imitative will you be? Who will you serve everyone or targeted markets only? (SCALE = mass or niche?) 5. Where do you plan to sell -- locally, regionally, nationally, globally? (SCOPE)

7-7

Product/Service Idea
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

7-8

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
7-9

Attractiveness of Selected Industries and Lines of Business

Figure 7.2
7-10

Imitation and Innovation

Imitative strategy Innovative strategy An overall strategic
approach in which the entrepreneur does more or less what others are already doing. An overall strategic approach in which a firm seeks to do something that is very different from what others in the industry are doing.

7-11

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.

7-12

Imitation and Innovation

Pure innovation
The process of creating new products or services, which results in a previously unseen product or service.

7-13

Markets
Market
business term for the population of customers for your product or service

Scope
geographic range covered by the market Local to Global

7-14

Markets
Scale
size of the market Mass market large portions of the population Niche market narrowly defined segment of the population that is likely to share interests or concerns

7-15

Scope: Local to Global

Scope is important for two reasons:
Knowing your 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

7-16

Customers and Benefits

Some types of customers often seen as particularly attractive Corporate customers Loyal customers Local customers Passionate customers

7-17

Value and Cost Benefits

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

7-18

Industry Dynamics and Analysis

Competitor
Any other business in the same industry as yours.

Industry dynamics
Changes in competitors, sales and profits in an industry over time.

7-19

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.

7-20

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.

7-21

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.

7-22

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.

7-23

The Industry Life Cycle

7-24

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.

7-25

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.

7-26

Strategy Selection and Implementation

Generic strategies
Three widely applicable classic strategies for businesses of all typesdifferentiation, cost, and focus.

Differentiation strategy
A type of generic strategy aimed at clarifying how one product is unlike another in a mass market.

7-27

Strategy Selection and Implementation

Cost 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 .

7-28

Typical Strategies for Small Business Start-Ups

Table 7.2

7-29

Tool: SWOT Analysis

Strengths
characteristics of the business or team that give it an advantage over others in the industry.

Weaknesses
characteristics that place the firm at a disadvantage relative to others

7-30

Tool: SWOT Analysis

Opportunities
chances to make greater sales or profits in the environment

Threats
elements in the environment that could cause trouble for the business.

7-31

Tool: SWOT Analysis

7-32

SWOT Analysis Combinations

Strategic direction
The conceptualization of how a business might best move in response to the findings of a SWOT analysisFlaunt, Fix, Fight, Flee, Find, or Fire-up.

Figure 7.4

7-33

Post Start-Up Strategy

Competitive advantage
The particular way a firm implements customer benefits that keeps the firm ahead of other firms in the industry or market.

7-34

Post Start-Up Strategy

Resources
Any asset, capability, organizational process, information, or knowledge that contributes to the firms performance Tangible, Intangible

7-35

Organizational Capabilities
Organizational capabilities
abilities, skills, and competencies used by the firm to make profits from tangible and intangible resources

Transformational competencies
firm can make its product or service better in value

Combinational competencies
combining tangible and intangible resources

7-36

Organizational Capabilities
Valuable resource An asset, capability, organizational process, information, or knowledge that lets a firm take advantage of opportunities or lock out competitors. Rare resource An asset, capability, organizational process, information, or knowledge that is not generally available to competitors.
7-37