It’s no secret that in our world today the competitive landscape has got increasingly difficult for small businesses. Small businesses are being battered from all sides, increasing online competition, increasing geographical competition, and increasing competition from traditional businesses being squeezed into new markets. All of this causes constant headaches for small business owners who are having to find new and innovative ways to compete.
The vast majority of small businesses are run by people who are very good at what they do i.e Plumbing, Construction, Web design, Small scale manufacturing etc, etc, but they are rarely experts in the nature of business itself. This is because small businesses are started by people who have a certain skill, expertise or product offering, but not necessarily in the art of business strategy.
When we think about business strategy we intend to think that this is for the ‘big boys’ of the corporate world and not for us little guys. I believe that we couldn’t be more wrong in this. Your business strategy, be it competitive strategy, management strategy, or your operations strategy sets the whole theme for how your business works for you.
However, before we talk about strategy we got to decide what we mean when we say strategy? There’s often confusion between Strategy and Tactics, Strategy and planning, and vision and mission. So let’s start by explaining what we mean by vision and mission and how these link to business strategy and finally tactics.
Vision and Mission.
Have you ever been involved in an organisation or business that never seems to accomplish very much? Regardless of how hard you work, you just go in circles. The problem is that the business or organisation hasn’t decided where they want to get to, and haven’t created a roadmap of how to get there. Your vision is the destination you want to get to and the mission is the means by which you’ll achieve this.
So for example Tesla’s vision is to “create the most compelling car company of the 21st century by driving the world’s transition to electric vehicles,” while its mission is “to accelerate the advent of sustainable transport by bringing compelling mass-market electric cars to market as soon as possible.
Ok, it’s fine using an example like Tesla but how does that equate to the average small business owner. Let’s take a small building company. The business owner may be in their 50’s and starting to think about the next stage in their life. They may want to, in five years’ time, retire, sell the business and go and live in Spain.
From this, we can create a vision for them of their life in 5 years time of buying a place in Spain and having enough money for them to live comfortably for the remainder of their days. The mission for them is to build a business that is capable of being sold for enough to allow them to achieve their vision. i.e to create a high-value self-managing business.
- So ‘Vision’ is – Big picture of what you want to achieve. Communicated via a Vision Statement – A mental picture of what you want to accomplish or achieve. The vision of our building company could be – To build a highly profitable and sellable construction company within 5 years.
- A Mission is – A statement of how you will achieve the vision. Communicated via a Mission Statement – A general statement of how the vision will be achieved. The mission statement is an action statement that usually begins with the word “to”. The Mission of our building company could be – To provide unique and high-quality buildings to local property developers.
Once you have identified what you want your business to achieve (vision) and generally how the vision will be achieved (mission), the next step is to develop a strategy specifying how the mission will be utilized to achieve the vision.
A strategy is a statement of how you are going to achieve something. More specifically, a strategy is a unique approach of how you will use your mission to achieve your vision. Strategies are critical to the success of a business because this is where you begin outlining a plan for doing something. The more unique the business, the more creative and innovative you need to be in crafting your strategies.
The more successful small business owners know and understand this and have spent time defining their strategy, ensuring that in all areas of their business it works for them. If you’re unsure what we mean by strategy then the rest of this article is for you.
In his seminal work on strategy, Micheal Porter provided a framework for people to understand the concepts of strategy and how to apply them to their businesses.
Porter identified 4 generic strategies that can be used to gain competitive advantage, so if you’re currently looking at your strategy then reminding yourself of the generic strategies can be very useful.
The four strategies are called:-
- Cost Leadership.
- Differentiation.
- Cost Focus.
- Differentiation Focus.
You’ll see right away that the strategies have shared qualities. Fundamentally there are two generic strategies, cost, and differentiation, and two ways of applying these strategies. We’ll now define each of these and give an example of each using our construction company from earlier.
It’s important to note that it doesn’t matter which strategy you choose to use. It’s use will impact every business function within the company. So although they are called competitive strategies, they impact operations, finance, management as well as marketing.
What is the Cost Leadership Strategy?
The Cost Leadership Strategy is where a business focuses on reducing their entire cost base to deliver the products or services to a customer, ensuring they’re more profitable. Every aspect of costs within the business need to be controlled otherwise the strategy will fail. This includes everything from the corporate travel policy to the sourcing of products or raw materials, to marketing and sales etc.
There are a number of factors to consider when you’re going for Cost Leadership:
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- What impact will the drive down on costs have to your customers and employees?
- Is it maintainable as you scale?
- How will you produce the lowest cost delivery vs your competitors?
- Will any of the savings be passed on to customers?
- Can you maintain your position as the lowest cost, or will competitors catch up?
When looking at the Cost Leadership Strategy you will need to consider factors such as:-
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- Your current suppliers and their costs.
- Technology and innovations that can reduce your processes.
- Process speed and efficiency.
- Your people cost and their progression.
- Your management team skills – detail, process-driven, analytical and financial are required attributes of the team.
When done well the Cost Leadership Strategy allows businesses to increase their profit margins by maintaining their costs and resist price increases when competitors are forced to do so.
However, for most small businesses it is a very difficult strategy to implement as they simply don’t have the size to benefit from economies of scale or the necessary buying power, and therefore they are vulnerable to price pressures from larger competitors. Remember, Cost Leadership is a long term strategy – if you stop focusing on it, costs will start to creep back into the business in ways that were not intended.
If our construction company were to adopt a Cost leadership strategy then they would have to find ways to reduce their costs compared to the industry standards. This could be achieved by employing cheaper labour or using lower-quality materials. However, neither of these tactics would be suitable for long term sustainability as both can easily be duplicated by competitors.
What is the Differentiation Leadership Strategy?
The Differentiation Strategy is where the business focuses on differentiating its products or services from competitors. This strategy has a wide spectrum from full product diversity through to unique features of a product. For the differentiation strategy to be successful it’s important to note that the point of differentiation must a) be something your customer’s value and b) defined as different by your customers.
There’s a number of factors to consider when you’re going for Differentiation:
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- How mature is the market your product or service operates in?
- What is the history of competitor innovation?
- What does your customer feedback suggest?
- Is your business set up to take advantage of new features with strong marketing?
- Why do you currently win or lose sales deals?
- How do you currently research the market and requirements?
- Your management team skills – creativity, outward thinking, market expertise are required attributes
When looking at the Differentiation Strategy you will need to consider factors such as:
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- Your current product or service portfolio
- Your competitors and their portfolio
- Trends within customer feedback
- Current resources and effort to innovation
- Cost of resource
When done well the Differentiation Strategy is extremely effective for small businesses. Perhaps the single most important feature of a true differentiation strategy is that it completely takes ‘price’ out of the equation. If you’ve communicated your points of difference and your prospect values it, they won’t be able to get it anywhere else. Being different and valued also allows you to build a community around your product or service, which is very valuable to the business.
Remember: Differentiation as a strategy can open you up to risks – Today’s innovations are tomorrow’s norms. A great example of this is King Gillette’s innovative marketing strategy when introducing the safety razor, giving away the handles, and selling the blades separately. This is now pretty much standard in the men’s grooming sector and across many other industries e.g. inkjet printers. Thus if using a differentiation strategy you need to adopt a constant innovation mindset, you can not stay still.
Our construction company could implement a differentiation strategy, for example, they could devise unique construction methods which significantly speed up the time for construction through the use of automation. Or they could find a unique source of building materials that others don’t have access to.
What is the ‘Cost Focus’ Strategy?
The Cost Focus Strategy is an evolution of the Cost Leadership Strategy. As the name suggests, there are two aspects to this strategy. The “Focus” refers to when a business focuses on a niche market, either by industry or geography, and becomes the expert in delivering for that industry. The “Cost” refers to the company producing the product or service for an aggressive cost to them, much like the Cost Leadership Strategy we discussed earlier.
In addition to the factors from Cost Leadership, you should consider the following:-
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- How big is the niche market you’re operating in or working towards?
- Can you provide the product or service at a cheaper cost than the competition?
- Can you maintain the quality required to be the leader in your chosen niche market?
- What is the level of cost per customer to become the leader within this market?
This strategy has all the benefits of Cost Leadership while also providing the small business with a greater chance of success. It’s easier to be a ‘big fish’ in a little pond. It is also easier to gain cost leadership within a specific market as opposed to a broad market with many different competitors.
There are some added benefits of this strategy in that it becomes possible to become the ‘go to’ thought leader within a niche providing a level of credibility to your overall company story.
Remember: You can’t have a Cost Focus Strategy without focusing on the Cost!
For our construction company, the Cost focus strategy is highly implementable. Being small and nimble should give them cost advantages over their larger competitors within a small geographical area. So they could become the most cost-competitive construction company in the South Yorkshire area if they focused on keeping labour and material costs within appropriate bounds.
What is the Differentiation Focus Strategy?
The Differentiation Focus Strategy is an evolution of the Differentiation Strategy. As with Cost Focus, there are two aspects – one focusing on the Differentiation aspect of the strategy while the other highlights the fact the business is entering a niche marketplace.
In addition to the factors from Differentiation, you should consider the following:
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- How big is the niche market you’re operating in or working towards?
- Does the market lend itself to differentiation?
- What is the size of the market vs the investment required to differentiate?
- What new features or products will make you successful?
This strategy has all the benefits of the generic Differentiation strategy while also providing additional options such as Cross-selling between customers within markets. It allows the small business to become a ‘big fish’ in a little pond through being entirely focused on the needs of this particular niche, which others may try to serve generically. Being something for someone is always a great strategy.
Remember: Initiating a Differentiated Focus strategy is hard in a mature marketplace – investigate your competitor products and customer feedback before deciding on this approach. Consider running both Five Forces and Porter’s Three Tests on the new marketplace.
Our construction company can implement a differentiation focus strategy through a) deciding on a niche and b) by introducing processes or products that the niche highly values. For example they could develop a modular construction method using innovative materials that reduces the construction time for fast food restaurants and operating costs through highly efficient materials.
Strategy versus Tactics.
While strategy and tactics originated as military terminology, their use has spread to planning in many areas of life. As we’ve seen strategy is an overarching plan or set of goals to achieve our mission. Changing strategies is like trying to turn around an oil tanker—it can be done, but not quickly. E.g. if a small business had implemented a differentiation focus strategy it would be difficult to change to a Cost focus strategy.
Tactics are the specific actions or steps you undertake to accomplish your strategy. So for example, if our construction company had chosen a differentiation focus strategy then the tactics to implement the strategy would be focused around the sourcing of the materials and development of the construction process to support the strategy.
It doesn’t stop there though, their marketing strategy would be about communicating their points of difference, i.e. reduced construction time for fast food restaurants and reduced operating costs. The tactics they could employ to implement this strategy could be through direct mail sent to the business development heads of the fast food chains or through a presence at industry events.
Their HR strategy would be focused on employing specialists in both modular construction and innovative materials and the tactics they might use to implement this could be through the use of specialist recruitment agencies.
The point here is that the chosen strategy to support the mission and vision is all-encompassing throughout the business, and the tactics used to implement the strategy need to be consistent with it.
Final word.
As you can see ‘Strategy’ is not just for the big boys and neither is ‘Vision’ and ‘Mission’. The problem that most small businesses have is that they are not clear with their vision, what they’re trying to achieve in the first place. This leads to problems with both ‘mission’ and chosen strategy. They end up not having a consistent mission because they chop and change and therefore no viable strategy. This is the worst of all worlds.
The starting place should be to fix the ‘vision’ and ‘mission’. The business can then choose the best strategy to achieve these.
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