Small Business Strategies

For a business, the purpose of small business strategies should be to seize competitive advantage for the long term. The three main small business strategies as proposed by Michael Porter are cost leadership, differentiation and focus - these three business concepts are now the cornerstones of any business strategy. We will at these three strategies individually.

As part of the small business strategies - competitive strategy is essential for the organization to survive. Hence we will also look at the most important competitive tactics and strategies.

Strategic choice: Having determined the gap that needs to be filled to achieve budgeted performance we can look at the alternative small business strategies that can be implemented to fill the gap.

There are broadly three categories of strategic choice: 

1. The competitive strategies are the strategies that the organization will pursue for competitive advantage. They determine how you compete.

2. Product-market strategies – determine where you compete and the direction of growth.

3. Institutional strategies – determine the method of growth.
   

Competitive strategy: how-to compete?

Competitive advantage is anything that gives one organization an edge over its rivals in the products it sells and the services it offers. A firm should adopt a competitive strategy to secure a competitive advantage.

The management guru Michael Porter states that there are three generic competitive strategies.

They are:

1. Cost leadership – being the lowest cost producer in the industry as a whole;

2. Differentiation – is the exploitation of a product or service which the industry as a whole believes to be unique;

3. Focus involves a restriction of activities to only a part of the market (a segment) through;
   a. Providing goods and/ or services at lower cost to that segment (cost-focus)
   b. Providing a differentiated product or service to that segment (differentiation-focus)
   

They are graphically illustrated in figure below:

Cost leadership and differentiation are industry wide small business strategies. Focus involves segmentation but involves pursuing, within the segment only, a strategy of cost leadership or differentiation.

Cost leadership

A cost leadership strategy seeks to achieve the position of lowest cost producer in the industry as a whole. By producing at the lowest cost, the manufacturer can compete on price with every other producer in the industry as a whole. By producing at the lowest cost, the manufacturer can compete on price with every other producer in the industry, and earn unit profits, if the manufacturer so chooses.

How to achieve overall cost leadership:

1. Set up production facilities to obtain economies of scale;

2. Use the latest technology to reduce cost and/or enhance productivity (or use cheap labour if available).

3. In high technology industries, and in industries depending on labour skills for product design and production methods, exploit the learning curve effect. By producing more items than any other competitor, a firm can benefit more from the learning curve and achieve lower average costs.

4. Concentrate on improving productivity.

5. Minimize overhead costs.

6. Get lower cost sources of supply.

7. Relocate to cheaper areas.
   

Differentiation

A differentiation business strategy assumes that competitive advantage can be gained through particular characteristics of a firm’s products. Products may be categorized as:

1. Breakthrough products offer a radical performance advantage over competition, perhaps at a drastically lower price.

2. Improved products are not radically different from their competition but are obviously superior in terms of better performance for a similar price.

3. Competitive products derive their appeal from a particular compromise of cost and performance. For example, cars are not all sold at rock bottom prices, nor do they all provide emaculate comfort and performance. They compete with each other by trying to offer a more attractive compromise than rival models.
   

How-to differentiate

1. Build-up a brand image (e.g. Volvo cars supposed to be safer than any other car)

2. Give the product special features to make it stand out.

3. Exploit other activities of the value chain.
   

Advantages and disadvantage of industry-wide strategies

Focus or niche strategies

In a focus strategy, a firm concentrates its attention on one or more particular segments or niches of the market, and does not try to serve the entire market with a single product.

1. A cost-focus strategy: aim to be a cost leader for a particular segment. This type of strategy is often found in the printing, clothes manufacturer and car repair industries.

2. A differentiation-focus strategy: pursue differentiation for a chosen segment. Luxury goods are the prime example of such a strategy.
   

Advantage of focus

1. A niche is more secure and a firm can insulate itself from competition.

2. The firm does not spread itself out too thinly.
   

Drawbacks of a focus strategy

1. The firm sacrifices economies of scale which would be gained by serving a wider market.

2. Competitors can move into the segment, with increased resources (e.g. the Japanese moved into the US car market, to compete with Mercedes and BMW)

3. The segments needs may eventually become less distinct from the main market.
   

Which strategy?

Although there is a risk with any of the generic small business strategies, Porter argues that a firm must pursue one of them. A stuck in the middle strategy is almost certain to make only low profits. “This firm lacks the market share, capital investment and resolve to play the low cost game, the industry-wide differentiation necessary to obviate the need for a low cost position, or the focus to create differentiation or a low cost position in a more limited sphere.”

In practice, it is not simple to draw hard and fast distinctions between generic strategies – here are some of the problems:

a. Problems with cost leadership

1. Internal focus. Cost refers to internal measures, rather than market demand. It can be used to gain market share: but it is the market share that is important not cost leadership
   

2. Only one firm. If cost leadership applies cross the whole industry, only one firm will pursue this strategy successfully.
   

3. Higher margins can be used for differentiation. Having lower cost does not mean that you have to charge lower prices or compete on price. Being a cost leader gives the company freedom to choose other competitive strategies.
   

b. Problems with differentiation – the assumption here is that the differentiated good will always be sold at a higher price:

1. In practice a differentiated product may be sold at the same price as competing products in order to increase market share.
   

2. Differentiation against which competitor? Do they compete on the same basis? Are the same market segments covered? Are some of the questions not covered.
   

3. Source of differentiation – this can include all aspects of the firms offer not only the product. Restaurants aim to create an ambience as well as serving food of good quality.
   

Focus small business strategies probably have fewer conceptual difficulties, as it compares well against ideas of market segmentation. In practice many companies follow this strategy.

Follow the links below to more important articles on factors that affect small business strategies.

1. Learn how to use Product-Market mix strategy.
2. Understand basic offensive defensive strategies.
3. Learn important business growth strategies.
4. Hostile and declining markets.