Chapter 07

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

Small Business Strategies

Imitation with a Twist

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

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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

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Strategy in the Small Business

Strategy– the ideas and actions that explain how a

firm will make its profit

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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 fitto the particulars of your business and the resources you can bring to it

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The Small Business Strategy Process

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Figure 7.1

Prestrategy: The First Step ofStrategic Planning

There are five initial key 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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Prestrategy: The First Step ofStrategic Planning

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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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

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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

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Attractiveness of Selected Industries and Lines of Business

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Figure 7.2

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.

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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.

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Imitation and Innovation

Pure innovation– The process of creating new products or

services, which results in a previously unseen product or service.

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Question

The size of the market refers to:A.scaleB. market massC.scopeD.niche

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Markets

Market– business term for the population of

customers for your product or service

Scope– geographic range covered by the market– Local to Global

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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

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Scope: Local to Global

Scope is important for two reasons:Knowing your scope helps deciding where

to focus sales and advertising effortsKnowing your target market gives you a way

to know which competitors to worry about most, namely those within your market scope

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Customers and Benefits

Some types of customers often seen as particularly attractive

Corporate customersLoyal customersLocal customersPassionate customers

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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

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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.

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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.

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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.

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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.

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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.

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The Industry Life Cycle

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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.

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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.

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Strategy Selection and Implementation

Generic strategies– 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.

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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 .

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Typical Strategies for Small Business Start-Ups

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Table 7.2

Question

What are the components of a SWOT analysis?

A.small, working conditions, organization, timeB. social, weaknesses, opportunities, technologyC.strengths, weaknesses, opportunities, threatsD.segment, wealth, organization, technology

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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

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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.

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Tool: SWOT Analysis

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SWOT AnalysisCombinations

Strategic direction– The conceptualization

of how a business might best move in response to the findings of a SWOT analysis—Flaunt, Fix, Fight, Flee, Find, or Fire-up.

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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.

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Post Start-Up Strategy

Resources– Any asset, capability, organizational

process, information, or knowledge that contributes to the firm’s performance

– Tangible, Intangible

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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

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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.

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