BA350

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Chapter Seven
Small Business Strategies:
Imitation with a Twist
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Strategy in the Small Business
Strategy is the idea and actions that explain how a firm will make its profit
– it defines how your business operates.
The strategic planning process for small businesses are taken in steps.
• The first step involves reviewing and confirming the goals that define
your firm and knowing your magic number.
• The second step is finding your distinctive competence – plot your
customers and the benefits you want to offer against competitors.
• The third step is studying dynamics and trends of your industry using
industry analysis to identify the best way and time to enter business.
• The fourth step involves building on the prior three steps to determine
the best strategic direction and strategy for the firm.
After this four-step process, there is a continuing effort called post start-
up, refining your strategies/tactics to maintain a competitive advantage.

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Figure 7.1: The Small Business Strategy Process
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Goals: The First Step of Strategic Planning
Goal decisions set
the stage for the
kind of business
you will have.
Goals are the
foundation for
further analyses.
There are five initial
key goal 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/service, how innovative or
imitative will you be?
4. Scale: Whom do you plan to sell to –
everyone or targeted markets?
5. Scope: Where do you plan to sell – locally,
regionally, nationally, globally?

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Goals: Owner Rewards
Chapter 2 introduced the rewards sought by entrepreneurs.
• Some were universal – flexibility, personal growth, personal income.
You need to find your “magic number” or how much you want to make.
• Taxes account for roughly 29 percent.
• If you wish to take home $24,000 a year, after taxes, you will need:
Pretax Income = $24,000/(1 – 0.29) = $33,802
• If your costs are 75 percent of sales, not including your salary, then:
Company sales = $33,802/(1 – 0.75) = $135,208
• This can be broken down to determine what would need to be
accomplished each day to reach this sales level.
Knowing these numbers from the start, you are better able to evaluate if
your proposed business can deliver on that very basic need, your pay.

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Goals: Product/Service Idea and Industry
The ‘idea’ gets made real as a product or a service.
If you have a product/service, you also have an
industry.
• The general name for your line of
product/service being sold.
• In addition, industries have numeric NAICS
and SIC codes.
• Industry is important as some industries are
more profitable than others.
• Industries with high profits and minimal risk
have high industry attractiveness.
It is important to
know there are no
“safe” industries.
B2B sales has the
highest average
sales.
Professional
services have the
highest sales in
B2C sales.

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Goals: Imitation and Innovation
Owners who imitate competitors still want something that distinguishes
them from the others.
• An imitative strategy is the classic small business strategy.
• An innovative strategy means they do something very different.
Most firms use imitation plus or minus one degree of similarity.
• Competing locally in the same industry is parallel competition.
• Imitation plus one degree of similarity is incremental innovation.
• When a new product or service is introduced, this is pure innovation,
also called a blue ocean strategy.
Research shows that imitators do better than pioneers in the long run.

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Goals: To Whom Will You Sell?
There are two strategic decisions about your market in general you need
to make early in the process of going into business.
• One is the scale of the market, the size of the market – mass or niche.
• The other is the scope of the market, the range – from local to global.
A mass market is broad, while a
niche market is narrowly defined.
• Most industries have both
mass and niche markets.
Market scope is important.
• Your scope focuses your sales
and advertising efforts and
identifies potential competitors.

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Figure 7.3: How Strategy and Marketing Relate
Marketing is the
actions related to
promoting and
selling.
Marketing
focuses on value
proposition.
While strategy
focuses on the
firm’s
competitive
advantage.
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Customers and Benefits:
The Second Step of Strategic Planning
The focus here is on the kinds of customers you want to sell to and the
benefits that will attract them.
• If you seek wealth, having wealthy customers may be rewarding.
• If your goal is growth, having customers you can learn from is best.
Some types of customers are particularly attractive.
• Corporate customers may produce greater profits.
• Loyal customers return and are already presold, they also refer others.
• Local customers are now less about geographic distance and more
about social relationships.
• Passionate customers are not just loyal, they rave about your product.
Thinking ahead about your customers is the best way to orient your
strategic planning process.

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Customers and Benefits:
Value and Cost Benefits
Benefits are characterized as value benefits or cost benefits.
• Value benefits refer to what a customer senses in the product/service.
• Cost benefits refer to ways a firm keeps costs low for the customer.
As you decide what benefits to offer, you can use a distinctive
competence map.
• Core competencies are skills all competitors have.
• How your firm differs is your distinctive competence.
These benefits that differ represent your competitive advantage.

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Value Benefits and Cost Benefits
• Quality and style.
• Delivery and service.
• Technology.
• Shopping ease.
• Personalization.
• Assurance.
• Place.
• Credit.
• Brand/reputation.
• Belonging.
• Altruism.
• Lower costs.
• Scale savings.
• Scope savings.
• Learning.
• Organizational practices.

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Industry Dynamics and Analysis:
The Third Step of Strategic Planning
Look at the changes in competitors sales and profits – the industry
dynamics – to make sure it is a good time to enter into business.
• Industries move in predictable ways.
• Most industries’ introduction stage start with only a few firms.
• When the general public becomes involved, it leads to either the
growth stage, or other firms jump in for the boom.
• All booms come to an end, and there is the shake-out stage and
many firms close down.
• The industry eventually reaches a stable number of firms in the
maturity stage before entering the decline stage.
• Some industries face death, others go through retrenchment to
survive.

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Figure 7.4: The Industry Life Cycle
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Tool: Industry Analysis
Industry analysis (IA) allows an entrepreneur to see how profits are
generated, which tells if an industry is growing, stable, or in decline.
A basic IA consists of seven pieces of information.
• NAICS number and description.
• Industry size over time.
• Profitability – look for gross profit, net profit,
and profit before taxes.
• How profits are made – evaluate: sales growth
potential, if a premium is possible, how to keep
costs and operating expenses below average.
• Target market competitor concentration.
• Analysis and sources.
You want a
business that can
help you meet your
magic number.
The timing of entry
into an industry is a
key to success.
If the IA outcomes
are not promising,
try another
industry.

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Strategy Selection: The Fourth Step in Strategic Planning
There are three generic strategies.
• Differentiation.
• Aimed at mass markets but with
value benefits.
• Cost strategies.
• Also aimed at mass markets but with
an appealing cost benefit.
• Focus strategies.
• Target a segment or niche.
There are also classic benefit combinations
called supra-strategies.
Craftsmanship.
Customization.
Super-support.
Serving the
underserved/interstices.
Elite.
Single-mindedness.
Comprehensiveness.
Formula facilities.
Bare bones or no-frills.
Cutting out the
intermediary.
Tightly manage
decentralization.

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Strategy Selection: Entry Wedges
Most of the time your preferences for a type of business or industry and
your industry analysis are closely tied together.
• But there are times when an opportunity pops up and you must decide
if the opportunity is right for you
• These are entry wedges and seven types come up again and again.
Supply shortages.
Un-utilized resources.
Customer contracting.
Second sourcing.
Market relinquishment.
Favored purchasing.
Government rules.

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Post Start-Up Tactics
The goal of strategy after the start-up is to secure competitive advantage.
There are five sources of competition for any business.
• One source is the supply chain you face.
• Another is existing firms in your industry
• These firms pose the threat of rivalry.
• Another threat is the potential for new entrants.
• There is a broad threat of substitutes.
The major ways you cope with these competitive pressures is by using
some combination of strategic actions and tactical actions.

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Strategic and Tactical Competitive Actions
Strategic actions include:
• Entering new markets.
• New product introductions.
• Changing production capacity.
• Mergers/alliances.
Tactical actions include:
• Price cutting (or increases).
• Product/service enhancements.
• Increased marketing efforts.
• New distribution channels.

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Figure 7.5: Porter’s Five-Forces Model of Industry
Competition
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Source: Adapted by the authors from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. (New York: Free Press, 1988).

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