Strategic Management Strategic Management ProcessProcess

Strategic planning is a Strategic planning is a continuous process that continuous process that consists of nine steps: consists of nine steps: Step 1: Develop a clear vision and translate it Step 1: Develop a clear vision and translate it

into a meaningful mission statement.into a meaningful mission statement. Step 2: Assess the company’s strengths and Step 2: Assess the company’s strengths and

weaknesses.weaknesses. Step 3: Scan the environment for significant Step 3: Scan the environment for significant

opportunities and threats facing the opportunities and threats facing the business.business.

Step 4: Identify the key factors for success in Step 4: Identify the key factors for success in the business.the business.

Step 5: Analyze the competition.Step 5: Analyze the competition. Step 6: Create company goals and objectives.Step 6: Create company goals and objectives. Step 7: Formulate strategic options and Step 7: Formulate strategic options and

select appropriate strategies.select appropriate strategies. Step 8: Translate strategic plans into Step 8: Translate strategic plans into

actions.actions. Step 9: Establish accurate controls.Step 9: Establish accurate controls.

Step 1: Develop a clear vision and Step 1: Develop a clear vision and translate it into a meaningful translate it into a meaningful mission statementmission statement

Vision.Vision. The purpose of any vision is the The purpose of any vision is the same: to focus everyone’s attention on same: to focus everyone’s attention on the same target and to inspire them to the same target and to inspire them to reach it. The vision touches everyone reach it. The vision touches everyone associated with the company – associated with the company – employees, investors, lenders, employees, investors, lenders, customers, and the community. It is an customers, and the community. It is an expression of what the owner believes in expression of what the owner believes in and stands for. and stands for.

A vision is the result of an entrepreneur’s A vision is the result of an entrepreneur’s dream of something that does not exist yet dream of something that does not exist yet and the ability to paint a compelling picture and the ability to paint a compelling picture of that dream for everyone to see. A clearly of that dream for everyone to see. A clearly defined vision helps a company in three ways:defined vision helps a company in three ways: Vision provides direction.Vision provides direction. Entrepreneurs Entrepreneurs

who spell out the vision for their company who spell out the vision for their company focus everyone’s attention on the future and focus everyone’s attention on the future and determine the path the business will take to determine the path the business will take to get there.get there.

Vision determines decisions.Vision determines decisions. The vision The vision influences the decisions, no matter how big influences the decisions, no matter how big or how small, that owners, managers, and or how small, that owners, managers, and employees make every day in business. This employees make every day in business. This influence can be negative or positive, influence can be negative or positive, depending on how well defined the business depending on how well defined the business is.is.

Vision motivates people.Vision motivates people. A clear vision A clear vision excites and ignites people to action. People excites and ignites people to action. People want to work for a company that set its want to work for a company that set its sights high.sights high.

Vision is based on an entrepreneur’s Vision is based on an entrepreneur’s values. Winning companies first values. Winning companies first emphasize values – the beliefs that the emphasize values – the beliefs that the business owner have about employees, business owner have about employees, customers, quality, ethics, integrity, customers, quality, ethics, integrity, social responsibility, growth, stability, social responsibility, growth, stability, innovation, and flexibility. Managing by innovation, and flexibility. Managing by values –not by profits- is a powerful values –not by profits- is a powerful process. Successful entrepreneurs build process. Successful entrepreneurs build their businesses around a set of three to their businesses around a set of three to six core values, which might range from six core values, which might range from respect for the individual and innovation respect for the individual and innovation to creating satisfied customers and to creating satisfied customers and making the worlds a better place. making the worlds a better place.

Mission.Mission. The mission statement The mission statement addresses the first question of any addresses the first question of any business venture: What business are we business venture: What business are we in? Establishing the purpose of the in? Establishing the purpose of the business in writing must come first in business in writing must come first in order to give the company a sense of order to give the company a sense of direction. direction. Without a concise, meaningful mission Without a concise, meaningful mission statement, a small business risks statement, a small business risks wandering aimlessly in the marketplace, wandering aimlessly in the marketplace, with no idea of where to go or how to get with no idea of where to go or how to get there. The mission statement sets the there. The mission statement sets the tone for the entire company and focuses tone for the entire company and focuses its attention on the right direction. its attention on the right direction.

Elements of a Mission Statement.Elements of a Mission Statement. A sound A sound mission statement needs not to be lengthy to mission statement needs not to be lengthy to be effective. Some of the key issues an be effective. Some of the key issues an entrepreneur and employees should address entrepreneur and employees should address as they develop a mission statement for the as they develop a mission statement for the company include:company include: What are the basic beliefs and values of the What are the basic beliefs and values of the organization? What do we stand for? organization? What do we stand for?

Who are the company’s target customers?Who are the company’s target customers? What are our basic products and services? What are our basic products and services?

What customer needs and wants they What customer needs and wants they satisfy?satisfy?

Why should customers do business with us Why should customers do business with us rather than the competitor down the street rather than the competitor down the street (or across town, on the other coast, on the (or across town, on the other coast, on the other side of the globe)? other side of the globe)?

What constitutes value to our customers? What constitutes value to our customers? How can we offer them better value?How can we offer them better value?

What is our competitive advantage? What is What is our competitive advantage? What is its source?its source?

In which markets (or market segments) will In which markets (or market segments) will we choose to compete? we choose to compete?

Who are the key stakeholders in our Who are the key stakeholders in our company and what effect do they have on it?company and what effect do they have on it?

A company’s mission statement may be A company’s mission statement may be the most essential and basic the most essential and basic communication that it puts forward. The communication that it puts forward. The mission statement expresses the firm’s mission statement expresses the firm’s character, identity, and scope of its character, identity, and scope of its operations, but writing it is only half the operations, but writing it is only half the battle, at best. The most difficult part is battle, at best. The most difficult part is living that mission every day. To be living that mission every day. To be effective, a mission statement must effective, a mission statement must become a natural part of the become a natural part of the organization, embodied in the minds, organization, embodied in the minds, habits, attitudes, and decisions of habits, attitudes, and decisions of everyone in the company every day. A everyone in the company every day. A well-used mission statement serves as a well-used mission statement serves as a strategic compass for a small company. strategic compass for a small company.

A company may have a powerful A company may have a powerful competitive advantage, but it is wasted competitive advantage, but it is wasted unless (1) the owner has communicated unless (1) the owner has communicated that advantage to workers, who, in turn, that advantage to workers, who, in turn, are working hard to communicate it to are working hard to communicate it to customers and potential customers and customers and potential customers and (2) customers are recommending the (2) customers are recommending the company to their friends because they company to their friends because they understand the benefits they are getting understand the benefits they are getting from it that they cannot get elsewhere. from it that they cannot get elsewhere. That’s the real power of a mission That’s the real power of a mission statement. statement.

Step 2: Assess the company’s Step 2: Assess the company’s strengths and weaknessesstrengths and weaknessesHaving defined the vision for his/her Having defined the vision for his/her company and translated that vision into company and translated that vision into meaningful mission statement, an meaningful mission statement, an entrepreneur can turn his/her attention entrepreneur can turn his/her attention to assessing company strengths and to assessing company strengths and weaknesses. Building a successful weaknesses. Building a successful competitive strategy requires a business competitive strategy requires a business to magnify its strengths and overcome or to magnify its strengths and overcome or compensate for its weaknesses. compensate for its weaknesses. StrengthsStrengths are positive internal factors are positive internal factors that a company can use to accomplish its that a company can use to accomplish its mission, goals, and objectives. They mission, goals, and objectives. They might include special skills or might include special skills or knowledge, a positive public image, an knowledge, a positive public image, an experienced sales force, and many other experienced sales force, and many other factors. factors.

Weaknesses Weaknesses are negative internal factors are negative internal factors that inhibit a company’s ability to that inhibit a company’s ability to accomplish its mission, goals, and accomplish its mission, goals, and objectives. Lack of capital, a shortage of objectives. Lack of capital, a shortage of skilled workers, and an inferior location skilled workers, and an inferior location are examples of weaknesses. are examples of weaknesses. Identifying strengths and weaknesses Identifying strengths and weaknesses helps owners understand their business helps owners understand their business as it exists (or, for a start-up, will exist). as it exists (or, for a start-up, will exist). An organization’s strengths should An organization’s strengths should originate in the core competencies that originate in the core competencies that are essential to gaining an edge in each are essential to gaining an edge in each of the market segments in which the of the market segments in which the firm competes. The key to building a firm competes. The key to building a successful strategy is using the successful strategy is using the company’s underlying strengths as its company’s underlying strengths as its foundation and matching those foundation and matching those strengths against competitors’ strengths against competitors’ weaknesses.weaknesses.

One effective technique for taking this One effective technique for taking this strategic inventory is to prepare a strategic inventory is to prepare a “balance sheet”“balance sheet” of the company’s of the company’s strengths and weaknesses. This balance strengths and weaknesses. This balance sheet should analyze all key performance sheet should analyze all key performance areas of the business –human resources, areas of the business –human resources, finance, production, marketing, product finance, production, marketing, product development, organization, and others. development, organization, and others. This analysis should give owners a more This analysis should give owners a more realistic perspective of their businesses, realistic perspective of their businesses, pointing out foundations on which they pointing out foundations on which they can build future strengths and obstacles can build future strengths and obstacles that they must remove for business that they must remove for business progress. progress.

Step 3: Scan the environment Step 3: Scan the environment for significant opportunities for significant opportunities and threats facing the businessand threats facing the businessOpportunities.Opportunities. Once entrepreneur have Once entrepreneur have taken an internal inventory of company taken an internal inventory of company strengths and weaknesses, they must strengths and weaknesses, they must turn to the external environment to the turn to the external environment to the external environment to identify any external environment to identify any opportunities and threats that might opportunities and threats that might have a significant impact on the have a significant impact on the business. Opportunities are positive business. Opportunities are positive external options that a firm can exploit to external options that a firm can exploit to accomplish its mission, goals, and accomplish its mission, goals, and objectives. The number of potential objectives. The number of potential opportunities is limitless, so opportunities is limitless, so entrepreneurs need to analyze only those entrepreneurs need to analyze only those factors that are most significant to the factors that are most significant to the business (probably two or three at most). business (probably two or three at most).

When identifying opportunities, an When identifying opportunities, an entrepreneur must pay close attention to entrepreneur must pay close attention to new potential markets. new potential markets. Are competitors overlooking a niche in Are competitors overlooking a niche in the market? the market? Is there a better way to reach customers? Is there a better way to reach customers? What opportunities are trends in the What opportunities are trends in the industry creating?industry creating?For instance, analysts predict that the For instance, analysts predict that the restaurant industry as a whole in the USA restaurant industry as a whole in the USA will grow up by just two percent until will grow up by just two percent until 2010. This growth is causing problems 2010. This growth is causing problems for many segments of the industry; the for many segments of the industry; the profits of fast-food chains are under profits of fast-food chains are under pressure as firms emphasize low-cost pressure as firms emphasize low-cost (and low-profit) value meals. (and low-profit) value meals.

Full-service restaurants offer the freshly Full-service restaurants offer the freshly prepared foods are demanding now, but prepared foods are demanding now, but for them speed and efficiency remain a for them speed and efficiency remain a serious challenge as busy customers serious challenge as busy customers demand ever-faster service. The real demand ever-faster service. The real opportunity for growth in the restaurant opportunity for growth in the restaurant industry is occurring in the middle industry is occurring in the middle ground, the “fast casual” segment. The ground, the “fast casual” segment. The restaurants experiencing the greatest restaurants experiencing the greatest success are those that focus on dinner, success are those that focus on dinner, the most popular meal for customers the most popular meal for customers outside the home, outpacing both outside the home, outpacing both breakfast and lunch combined. Many breakfast and lunch combined. Many fast-casual chains are experiencing fast-casual chains are experiencing profit margins that are two or three profit margins that are two or three times higher than those in other times higher than those in other segments of the industry. segments of the industry.

Opportunities almost always arise Opportunities almost always arise as a result of factors that are as a result of factors that are beyond entrepreneur’s control.beyond entrepreneur’s control.

Threats.Threats. Threats are negative external Threats are negative external forces that inhibit a company’s ability to forces that inhibit a company’s ability to achieve its mission, goals, and achieve its mission, goals, and objectives. Threats to the business can objectives. Threats to the business can take a variety of forms, such as take a variety of forms, such as competitors entering the local market, a competitors entering the local market, a government mandate regulating a government mandate regulating a business activity, an economic recession, business activity, an economic recession, rising interest rates, technological rising interest rates, technological advances making a company’s product advances making a company’s product obsolete, and many others.obsolete, and many others.Although they cannot control the threats Although they cannot control the threats themselves, entrepreneurs must prepare themselves, entrepreneurs must prepare a plan for shielding their businesses a plan for shielding their businesses from these threats. from these threats.

Opportunities and threats are products Opportunities and threats are products of interactions of forces, trends, and of interactions of forces, trends, and events outside the direct control of the events outside the direct control of the business. These external forces will have business. These external forces will have a direct impact on the behavior of the a direct impact on the behavior of the markets in which the business operates markets in which the business operates the behavior of competitors, and the the behavior of competitors, and the behavior of customers. behavior of customers.

Interactions of strengths and weaknesses Interactions of strengths and weaknesses and opportunities and threats can be the and opportunities and threats can be the most revealing aspects of using a SWOT most revealing aspects of using a SWOT analysis as a part of a strategic plan. This analysis as a part of a strategic plan. This analysis also requires entrepreneurs to analysis also requires entrepreneurs to take an objective look at their businesses take an objective look at their businesses and the environment in which they and the environment in which they operate as they address many issues operate as they address many issues fundamental to their companies’ success fundamental to their companies’ success in the future. in the future.

Step 4: Identify the key factors for Step 4: Identify the key factors for success in the businesssuccess in the business

Every business is characterized by Every business is characterized by controllable variables that determine the controllable variables that determine the relative success of market participants. relative success of market participants. Identifying and manipulating these Identifying and manipulating these variables is how a small business gains a variables is how a small business gains a competitive advantage. By focusing competitive advantage. By focusing efforts to maximize their companies’ efforts to maximize their companies’ performance on these key success performance on these key success factors, entrepreneurs can achieve factors, entrepreneurs can achieve dramatic market advantages over their dramatic market advantages over their competitors. competitors.

Key success factors come in a variety of Key success factors come in a variety of different patterns depending on the different patterns depending on the industry. They are the factors that industry. They are the factors that determine a company’s ability to determine a company’s ability to compete successfully in an industry. compete successfully in an industry. Many of these sources of competitive Many of these sources of competitive advantages are based on core factors advantages are based on core factors such as manufacturing cost per unit, such as manufacturing cost per unit, distribution cost per unit, or distribution cost per unit, or development cost per unit. Some are less development cost per unit. Some are less tangible and less obvious but are just as tangible and less obvious but are just as important, such as superior product important, such as superior product quality, solid relationships with quality, solid relationships with dependable suppliers, number of dependable suppliers, number of services offered, prime store locations, services offered, prime store locations, available customer credit, and many available customer credit, and many others. others.

For example, one restaurant For example, one restaurant owner identified the following owner identified the following key success factors:key success factors:tight cost controls (labor costs, 15-tight cost controls (labor costs, 15-

18 percent of sales, and food costs, 18 percent of sales, and food costs, 35-40 percent of sales)35-40 percent of sales)

trained, dependable, honest in-trained, dependable, honest in-store managersstore managers

close monitoring of wasteclose monitoring of wastecareful site selection (the right careful site selection (the right

location)location)maintenance of food qualitymaintenance of food qualityconsistencyconsistencycleanlinesscleanlinessfriendly and attentive service from friendly and attentive service from

a well-trained waitstaffa well-trained waitstaff

These controllable variables determine These controllable variables determine the ability of any restaurant in the the ability of any restaurant in the market segment to compete. market segment to compete. Restaurants lacking these key success Restaurants lacking these key success factors are not likely to survive, but factors are not likely to survive, but those that build their strategies with those that build their strategies with these factors in mind will prosper. these factors in mind will prosper. Entrepreneurs must use the information Entrepreneurs must use the information gathered to analyze their businesses, gathered to analyze their businesses, their competitors, and their industries their competitors, and their industries to isolate sources of competitive to isolate sources of competitive advantage. They must then determine advantage. They must then determine how well their businesses meet these how well their businesses meet these criteria for successfully competing in criteria for successfully competing in the market. the market.

Step 5: Analyze the competitionStep 5: Analyze the competitionThe greatest challenge faced by small The greatest challenge faced by small business owners is competition. World business owners is competition. World Wide Web and e-commerce increase the Wide Web and e-commerce increase the ferocity of the competition. E-commerce ferocity of the competition. E-commerce reshapes the ways in which they do reshapes the ways in which they do business. Keeping tabs on rival’s business. Keeping tabs on rival’s movements through competitive movements through competitive intelligence programs is a vital strategic intelligence programs is a vital strategic activity. It is said that: “Business is like activity. It is said that: “Business is like any battlefield. If you want to win the any battlefield. If you want to win the war, you have to know who you’re up war, you have to know who you’re up against.” Unfortunately, many against.” Unfortunately, many businesses are not very good at businesses are not very good at competitive intelligence; great percent competitive intelligence; great percent of businesses do not systematically track of businesses do not systematically track the progress of their key competitors. the progress of their key competitors.

The primary goals of a The primary goals of a competitive intelligence competitive intelligence

program include the following:program include the following: Avoiding surprises from existing Avoiding surprises from existing

competitors’ new strategies and competitors’ new strategies and tactics.tactics.

Identifying potential new Identifying potential new competitors. competitors.

Improving reaction time to Improving reaction time to competitors’ actions.competitors’ actions.

Anticipating rival’s next strategic Anticipating rival’s next strategic movesmoves.

Competitor Analysis.Competitor Analysis. Sizing up the Sizing up the competition gives business owners a competition gives business owners a more realistic view of the market and more realistic view of the market and their company’s position in it. their company’s position in it. Direct Direct competitorscompetitors offer the same products and offer the same products and services, and customers often compare services, and customers often compare prices, features, and deals from these prices, features, and deals from these competitors as they shop. competitors as they shop. Significant Significant competitorscompetitors offer some of the same offer some of the same products and services. Although their products and services. Although their product or service lines may be product or service lines may be somewhat different, there is competition somewhat different, there is competition with them in several key areas. with them in several key areas.

Indirect competitors offer the same or similar products or services only in a few areas, but their target customers seldom overlap yours. Entrepreneurs should monitor closely the actions of their direct competitors, maintain a solid grasp of where their significant competitors are heading, and spend only minimal resources tracking their indirect competitors.

Entrepreneurs can use the result of their Entrepreneurs can use the result of their competitive intelligence efforts to competitive intelligence efforts to construct a competitive profile matrix for construct a competitive profile matrix for their most important competitors. A their most important competitors. A competitive profile matrix allows competitive profile matrix allows business owners to evaluate their firms business owners to evaluate their firms against major competitors on the key against major competitors on the key success factors for that market segment. success factors for that market segment.

Knowledge Management.Knowledge Management. Many small Many small companies fail to gather competitive companies fail to gather competitive intelligence because their owners intelligence because their owners mistakenly assume that it is too costly or mistakenly assume that it is too costly or simply unnecessary. In reality, the cost simply unnecessary. In reality, the cost of collecting information about of collecting information about competitors and the competitive competitors and the competitive environment typically is minimal, but it environment typically is minimal, but it requires discipline. Identifying and requires discipline. Identifying and organizing the information a company organizing the information a company possesses and then getting it efficiently possesses and then getting it efficiently to those who need it when they need it is to those who need it when they need it is the real challenge. In an age where the real challenge. In an age where knowledge is primary source of a knowledge is primary source of a company’s competitive edge, the key is company’s competitive edge, the key is learning how to manage the knowledge learning how to manage the knowledge and information a company accumulates. and information a company accumulates.

Knowledge managementKnowledge management is the practice is the practice of gathering, organizing, and of gathering, organizing, and disseminating the collective wisdom and disseminating the collective wisdom and experience of a company’s employees for experience of a company’s employees for the purpose of strengthening its the purpose of strengthening its competitive position. Business owners competitive position. Business owners who practice knowledge management who practice knowledge management realize that knowledge is power that realize that knowledge is power that managing it can produce huge benefits. managing it can produce huge benefits. Because of their size and simplicity, Because of their size and simplicity, small businesses have an advantage over small businesses have an advantage over large companies when it comes to large companies when it comes to managing employees’ collective managing employees’ collective knowledge. knowledge.

Step 6: Create company goals and Step 6: Create company goals and objectivesobjectives

Before entrepreneurs can build a Before entrepreneurs can build a comprehensive set of strategies, they comprehensive set of strategies, they must first establish business goals and must first establish business goals and objectives, which give them targets to objectives, which give them targets to aim for and provide a basis for aim for and provide a basis for evaluating their companies’ evaluating their companies’ performance. Without them, it is performance. Without them, it is impossible o know where a business is impossible o know where a business is going or how well it is performing. going or how well it is performing.

Goals.Goals. Goals are the broad, long-range Goals are the broad, long-range attributes that a business seeks to attributes that a business seeks to accomplish; they tend to be general and accomplish; they tend to be general and sometimes even abstract. Goals are not sometimes even abstract. Goals are not intended to be specific enough for a intended to be specific enough for a manger to act on but simply state the manger to act on but simply state the general level of accomplishment sought. general level of accomplishment sought. It is determined that one of the factors It is determined that one of the factors that set apart successful from that set apart successful from unsuccessful ones is the formulation of unsuccessful ones is the formulation of very ambitious, clear, and inspiring very ambitious, clear, and inspiring long-term goals. long-term goals.

Objectives.Objectives. Objectives are more specific Objectives are more specific targets of performance than goals. targets of performance than goals. Common objectives concern profitability, Common objectives concern profitability, productivity, growth, efficiency, markets, productivity, growth, efficiency, markets, financial resources, physical facilities, financial resources, physical facilities, organizational structure, employee organizational structure, employee welfare, and social responsibility. welfare, and social responsibility.

Because some of these objectives might Because some of these objectives might conflict with one another, it is important conflict with one another, it is important to establish priorities. Well-written to establish priorities. Well-written objectives have the following objectives have the following characteristics:characteristics:

They are specific.They are specific. Objectives should be Objectives should be quantifiable and precise. quantifiable and precise.

They are measurable.They are measurable. They are assignable.They are assignable. Creating objectives Creating objectives

without giving someone responsibility for without giving someone responsibility for accomplishing it is futile. accomplishing it is futile.

They are realistic, yet challenging.They are realistic, yet challenging. The more The more challenging an objective is (within realistic challenging an objective is (within realistic limits), the higher the performance will be.limits), the higher the performance will be.

They are timely.They are timely. Objectives must specify not Objectives must specify not only what is to be accomplished but also when only what is to be accomplished but also when it is to be accomplished. it is to be accomplished.

They are written down.They are written down. This writing process This writing process does not have to be complex; in fact, the does not have to be complex; in fact, the manager should make the number of manager should make the number of objectives relatively small, from five to fifteen. objectives relatively small, from five to fifteen.

The strategic planning process works The strategic planning process works best when managers and employees are best when managers and employees are actively and jointly involved in setting actively and jointly involved in setting objectives. Developing a plan is top objectives. Developing a plan is top management’s responsibility, but management’s responsibility, but executing it falls to managers and executing it falls to managers and employees; therefore, encouraging them employees; therefore, encouraging them to participate broadens the plan’s to participate broadens the plan’s perspective and increases the perspective and increases the motivation to make the plan work. motivation to make the plan work.

Step 7: Formulate strategic Step 7: Formulate strategic options and select options and select appropriate strategiesappropriate strategies By this point in the strategic By this point in the strategic management process, entrepreneurs management process, entrepreneurs should have a clear picture of what their should have a clear picture of what their businesses do best and what their businesses do best and what their competitive advantages are. They also competitive advantages are. They also should understand their firms’ should understand their firms’ weaknesses and limitations as well as weaknesses and limitations as well as those of its competitors. The next step is those of its competitors. The next step is to evaluate strategic options and then to evaluate strategic options and then prepare a game plan designed to achieve prepare a game plan designed to achieve the stated mission, goals, and objectives.the stated mission, goals, and objectives.

Strategy. Strategy. A strategy is a road map of the A strategy is a road map of the actions an entrepreneur draws up to actions an entrepreneur draws up to fulfill a company’s mission, goals, and fulfill a company’s mission, goals, and objectives. In other words, the mission, objectives. In other words, the mission, goals, and objectives spell out the ends, goals, and objectives spell out the ends, and the strategy defines the means for and the strategy defines the means for reaching them. A strategy is the master reaching them. A strategy is the master plan that covers all the major parts of plan that covers all the major parts of the organization and ties them together the organization and ties them together into a unified whole. into a unified whole.

The plan must be action oriented; it The plan must be action oriented; it should breathe life into the entire should breathe life into the entire planning process. An entrepreneur must planning process. An entrepreneur must build a sound strategy based on build a sound strategy based on preceding steps that uses the company’s preceding steps that uses the company’s core competencies and strengths as the core competencies and strengths as the springboard to success. springboard to success. A successful strategy is comprehensive A successful strategy is comprehensive and well integrated, focusing on and well integrated, focusing on establishing the key success factors that establishing the key success factors that the manager identified in Step 4. the manager identified in Step 4.

Three Strategic Options.Three Strategic Options. Obviously, the Obviously, the number of strategies from which the number of strategies from which the small business owner can choose is small business owner can choose is infinite. When all the glitter is stripped infinite. When all the glitter is stripped away, three basic strategies remain. away, three basic strategies remain. These strategies are: (1) coThese strategies are: (1) cosst leadership, t leadership, (2) differentiation, and (3) focus. (2) differentiation, and (3) focus.

Cost leadership.Cost leadership. A company pursuing a A company pursuing a cost leadership strategy strives to be the cost leadership strategy strives to be the lowest-cost producer relative to its lowest-cost producer relative to its competitors in the industry. Low-cost competitors in the industry. Low-cost leaders have a competitive advantage in leaders have a competitive advantage in reaching buyers whose primary purchase reaching buyers whose primary purchase criterion is price, and they have the criterion is price, and they have the power to set the industry’s price floor. power to set the industry’s price floor. This strategy works well when buyers are This strategy works well when buyers are sensitive to price changes, when sensitive to price changes, when competing firms sell the same competing firms sell the same commodity products, and when commodity products, and when companies can benefit from economies companies can benefit from economies of scale. of scale.

Not only is a low-cost leader in the best Not only is a low-cost leader in the best position to defend itself in a price war, position to defend itself in a price war, but it also can use its power to attack but it also can use its power to attack competitors with the lowest price in the competitors with the lowest price in the industry. industry.

There are many ways to build a low-cost There are many ways to build a low-cost strategy, but the most successful cost strategy, but the most successful cost leaders know where they have cost leaders know where they have cost advantages over their competitors, and advantages over their competitors, and they use these as the foundation for they use these as the foundation for their strategies. For instance, because it their strategies. For instance, because it is not unionized, JetBlue Airlines has a is not unionized, JetBlue Airlines has a significant advantage over its rivals in significant advantage over its rivals in labor cost. Its labor cost is just 25 labor cost. Its labor cost is just 25 percent of revenues compared to 33 to percent of revenues compared to 33 to 44 percent of revenues for its 44 percent of revenues for its competitors, and the company uses this competitors, and the company uses this to deploy its fleet of planes more to deploy its fleet of planes more efficiently and more profitably than its efficiently and more profitably than its competitors. competitors.

Differentiation.Differentiation. A company following a A company following a differentiation strategy seeks to build differentiation strategy seeks to build customer loyalty by positioning its customer loyalty by positioning its goods or services in a unique or goods or services in a unique or different fashion. That, in turn, enables different fashion. That, in turn, enables the business to command a higher price the business to command a higher price for its products or services than for its products or services than competitors. There are many ways to competitors. There are many ways to create a differentiation strategy, but the create a differentiation strategy, but the key is to be special at something that is key is to be special at something that is important to the customer. In other important to the customer. In other words, a business strives to be better words, a business strives to be better than its competitors at something than its competitors at something customer value. customer value.

If a small company can improve a If a small company can improve a product’s or services’ performance, product’s or services’ performance, reduce the customer’s cost and risk of reduce the customer’s cost and risk of purchasing it, or both, it has the purchasing it, or both, it has the potential to differentiate. To be potential to differentiate. To be successful, a business must make its successful, a business must make its product or service truly different, at product or service truly different, at least in the eyes of its customers. least in the eyes of its customers.

Although few businesses as unique as Although few businesses as unique as the the Ice HotelIce Hotel, the goal for a company , the goal for a company pursuing a differentiation strategy is to pursuing a differentiation strategy is to create that kind of uniqueness in the create that kind of uniqueness in the mind of its customers. The key to a mind of its customers. The key to a successful differentiation strategy is to successful differentiation strategy is to build it on core competencies that a build it on core competencies that a small company is uniquely good at doing small company is uniquely good at doing in comparison to its competitors. in comparison to its competitors.

Common bases for differentiation Common bases for differentiation include superior customer service, include superior customer service, special customer service, special special customer service, special product features, complete product product features, complete product lines, instantaneous parts availability, lines, instantaneous parts availability, absolute product reliability, supreme absolute product reliability, supreme product quality, and extensive product product quality, and extensive product knowledge. To be successful, a knowledge. To be successful, a differentiation strategy must create the differentiation strategy must create the perception of value in customer’s eyes. perception of value in customer’s eyes.

There are risks in pursuing There are risks in pursuing differentiation strategy. One danger is differentiation strategy. One danger is trying to differentiate a product or trying to differentiate a product or service on the basis of something that service on the basis of something that does not boost its performance or lower does not boost its performance or lower its cost to customers. Business owners its cost to customers. Business owners also must consider how long they can also must consider how long they can sustain a product’s or service’s sustain a product’s or service’s differentiations; changing customer differentiations; changing customer tastes make the basis for differentiation tastes make the basis for differentiation temporary at best. Imitations and temporary at best. Imitations and knockoffs from competitors also pose a knockoffs from competitors also pose a threat to a successful differentiation threat to a successful differentiation strategy. strategy.

For instance, entrepreneurs have built For instance, entrepreneurs have built an Ice Hotel in Finland to compete with an Ice Hotel in Finland to compete with the original ice hotel in Sweden. the original ice hotel in Sweden. Another pitfall is overdifferentiating Another pitfall is overdifferentiating and charging so much that the company and charging so much that the company prices its products out of the market. prices its products out of the market. The final risk is focusing only on the The final risk is focusing only on the physical characteristics of a product or physical characteristics of a product or service and ignoring important service and ignoring important psychological factors such as status, psychological factors such as status, prestige, and image, which can be prestige, and image, which can be powerful sources of differentiation. powerful sources of differentiation.

Focus.Focus. A focus strategy recognizes that A focus strategy recognizes that not all markets are homogeneous. In not all markets are homogeneous. In fact, in any given market, there are fact, in any given market, there are many different customer segments, each many different customer segments, each having different needs, wants, and having different needs, wants, and characteristics. The principal idea of characteristics. The principal idea of this strategy is to select one (or more) this strategy is to select one (or more) segment(s), identify customers’ special segment(s), identify customers’ special needs, wants, and interests, and needs, wants, and interests, and approach them with a good or service approach them with a good or service designed to excel in meeting these designed to excel in meeting these needs, wants, and interests. Focus needs, wants, and interests. Focus strategies build on differences among strategies build on differences among market segments. market segments.

A successful focus strategy depends on a A successful focus strategy depends on a small company’s ability to identify the small company’s ability to identify the changing needs of its targeted customer changing needs of its targeted customer group and to develop the skills required group and to develop the skills required to serve them. That means an to serve them. That means an entrepreneur and everyone in the entrepreneur and everyone in the organization must have a clear organization must have a clear understanding of how to add value to the understanding of how to add value to the product or service for the customer.product or service for the customer.

Rather than attempting to serve the Rather than attempting to serve the total market, the focusing firm total market, the focusing firm specializes in serving a specific target specializes in serving a specific target segment or niche. A focus strategy is segment or niche. A focus strategy is ideally suited to many small businesses, ideally suited to many small businesses, which often lack of resources to reach which often lack of resources to reach overall market. Common bases for overall market. Common bases for building a focus strategy include zeroing building a focus strategy include zeroing in on a small geographic area, targeting in on a small geographic area, targeting a group of customers with similar needs a group of customers with similar needs or interests, specializing in a specific or interests, specializing in a specific product or service, or selling specialized product or service, or selling specialized knowledge.knowledge.

Pursuing a focus strategy is not without Pursuing a focus strategy is not without risks. Companies sometimes must risks. Companies sometimes must struggle to capture a large enough struggle to capture a large enough share of a small market to be profitable. share of a small market to be profitable. If a small company is successful in a If a small company is successful in a niche, there is also the danger of larger niche, there is also the danger of larger competitors entering the market and competitors entering the market and eroding it. eroding it. An effective strategic plan identifies a An effective strategic plan identifies a complete set of success factors – complete set of success factors – financial, operating, and marketing – financial, operating, and marketing – that, taken together, produce a that, taken together, produce a competitive advantage for a small competitive advantage for a small company. company.

Strategy in Action.Strategy in Action. The strategies a small The strategies a small business selects depend on its business selects depend on its competitive advantages in the market competitive advantages in the market segments in which it competes. In some segments in which it competes. In some cases, the business implements several cases, the business implements several strategies across several segments. When strategies across several segments. When a business has a well-defined strategic a business has a well-defined strategic advantage, it may pursue highly advantage, it may pursue highly aggressive growth strategies in an aggressive growth strategies in an attempt to increase its market share. attempt to increase its market share.

This is especially true when a business This is especially true when a business achieves a achieves a “first-mover”“first-mover” advantage in a advantage in a market with little direct competition. By market with little direct competition. By being the first in the market, it being the first in the market, it establishes name recognition and a loyal establishes name recognition and a loyal customer base. Aggressive strategies customer base. Aggressive strategies sometimes can backfire if larger sometimes can backfire if larger competitors decide to fight back. In competitors decide to fight back. In many cases, the old adage of being the many cases, the old adage of being the “big frog in a small pond” allows a small “big frog in a small pond” allows a small business to earn a handsome profit in a business to earn a handsome profit in a market niche without attracting the market niche without attracting the attention of larger competitors. attention of larger competitors.

Small companies must develop Small companies must develop strategies that exploit all of the strategies that exploit all of the competitive advantages of their competitive advantages of their size by:size by: Responding quickly to customers’ Responding quickly to customers’

needs. needs. Remaining flexible and willing to Remaining flexible and willing to

change.change. Constantly searching for new, emerging Constantly searching for new, emerging

market segments.market segments. Building and defending market niches.Building and defending market niches. Erecting “switching costs”, the cost a Erecting “switching costs”, the cost a

customer incurs by switching to a customer incurs by switching to a competitor’s product or service, competitor’s product or service, through personal service or loyalty.through personal service or loyalty.

Remaining entrepreneurial and willing Remaining entrepreneurial and willing to take risks and act with lightning to take risks and act with lightning speed. speed.

Constantly innovating. Constantly innovating.

Step 8: Translate strategic Step 8: Translate strategic plans into actionsplans into actions

No strategic plan is complete until it is No strategic plan is complete until it is put into action. Entrepreneurs must put into action. Entrepreneurs must convert strategic plans into operating convert strategic plans into operating plans that guide their companies on a plans that guide their companies on a daily basis and become a visible, active daily basis and become a visible, active part of the business. part of the business.

Implement the strategy.Implement the strategy. To make the To make the workable, the business owner should workable, the business owner should divide the plan into projects. Once divide the plan into projects. Once entrepreneurs assign priorities to entrepreneurs assign priorities to projects, they can begin to implement projects, they can begin to implement the strategic plan. the strategic plan. Involving employees and delegating Involving employees and delegating adequate authority to them is essential adequate authority to them is essential since these projects affect them most since these projects affect them most directly.directly.

If an organization’s people have been If an organization’s people have been involved in the strategic management involved in the strategic management project to this point, they will have a project to this point, they will have a better grasp of the steps they must take better grasp of the steps they must take to achieve the organization’s goals as to achieve the organization’s goals as well as their professional goals. Early well as their professional goals. Early involvement of the workforce in the involvement of the workforce in the strategic management process is a strategic management process is a luxury that larger businesses cannot luxury that larger businesses cannot achieve. Commitment to reaching the achieve. Commitment to reaching the company’s objectives is a powerful force, company’s objectives is a powerful force, but involvement is a prerequisite for but involvement is a prerequisite for achieving total employee commitment. achieving total employee commitment. Without a team of committed, dedicated Without a team of committed, dedicated employees, a company’s strategy usually employees, a company’s strategy usually fails. fails.

Step 9: Establish accurate Step 9: Establish accurate controlscontrols

So far, the planning process has created So far, the planning process has created company objectives and has developed a company objectives and has developed a strategy for reaching them, but rarely, if strategy for reaching them, but rarely, if ever, will the company’s actual ever, will the company’s actual performance match stated objectives. performance match stated objectives. Entrepreneurs quickly realize the need Entrepreneurs quickly realize the need to control actual results that deviate to control actual results that deviate from plans.from plans.

Controlling the strategy.Controlling the strategy. Planning Planning without control has little operational without control has little operational value; therefore a sound planning value; therefore a sound planning program requires a practical controlling program requires a practical controlling process. The plans created in the process. The plans created in the strategic planning process become the strategic planning process become the standards against which actual standards against which actual performance is measured. It is important performance is measured. It is important for everyone in the organization to for everyone in the organization to understand – and to be involved in – the understand – and to be involved in – the planning and controlling process. planning and controlling process.

Controlling projects and keeping them Controlling projects and keeping them on schedule means that an entrepreneur on schedule means that an entrepreneur must identify and track key performance must identify and track key performance indicators. The source of these indicators. The source of these indicators is the operating data from the indicators is the operating data from the company’s normal business activity; they company’s normal business activity; they are the guideposts for detecting are the guideposts for detecting deviations from established standards. deviations from established standards. Accounting, production, sales, inventory, Accounting, production, sales, inventory, quality, customer service and quality, customer service and satisfaction, and other operating records satisfaction, and other operating records are primary sources of data that are primary sources of data that managers can use to control activities. managers can use to control activities.

The strategic planning process does not The strategic planning process does not end with the nine steps outlined here; it end with the nine steps outlined here; it is an ongoing procedure that is an ongoing procedure that entrepreneurs must repeat. Strategic entrepreneurs must repeat. Strategic planning process teaches business planning process teaches business owners a degree of discipline that is owners a degree of discipline that is important to business survival. It helps important to business survival. It helps them learn about their businesses, their them learn about their businesses, their core competencies, their competitors, core competencies, their competitors, and, most important, their customers. and, most important, their customers. Although strategic planning cannot Although strategic planning cannot guarantee success, it does dramatically guarantee success, it does dramatically increase a small firm’s chances of increase a small firm’s chances of survival in a hostile business survival in a hostile business environment. environment.