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
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:
The competitive strategies are the strategies that the
organization will pursue for competitive advantage. They determine how you
Product-market strategies – determine where you compete
and the direction of growth.
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.
Cost leadership – being the lowest cost producer in the
industry as a whole;
Differentiation – is the exploitation of a product or
service which the industry as a whole believes to be unique;
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
b. Providing a differentiated product or service to that segment
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.
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:
Set up production facilities to obtain economies of scale;
Use the latest technology to reduce cost and/or enhance
productivity (or use cheap labour if available).
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
Concentrate on improving productivity.
Minimize overhead costs.
Get lower cost sources of supply.
Relocate to cheaper areas.
A differentiation business strategy assumes that competitive
advantage can be gained through particular characteristics of a firm’s
products. Products may be categorized as:
Breakthrough products offer a radical performance advantage
over competition, perhaps at a drastically lower price.
Improved products are not radically different from their
competition but are obviously superior in terms of better performance for a
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.
Build-up a brand image (e.g. Volvo cars supposed to be safer
than any other car)
Give the product special features to make it stand out.
Exploit other activities of the value chain.
Advantages and disadvantage of industry-wide strategies
|Economies of scale raise entry barriers
|Brand loyalty and perceived uniqueness are entry barriers
|Firm is not vulnerable as its less cost-effective
competitors to the threat of substitutes
|Customer loyalty is a weapon against substitutes
|Customers cannot drive down prices by further than the
most efficient competitor
|Customers have no comparable alternative
|Flexibility to deal with cost increases
|Higher margins can offset vulnerability to supplier price
|Firm remains profitable when rivals go under through
excessive price competition
|Brand loyalty should reduce price sensitivity
|Technological change will require capital investment or
make production cheaper for competitors
|New entrants can differentiate too
|Sooner or later customers become price sensitive
|Cost concerns ignore product design or marketing issues
|Customers may not value the differentiating factor
|Increase in input costs can reduce price advantages
|Differentiation may require specialist inputs
|Competitors can benchmark their processes or cut costs
|Competitors can copy
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.
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.
A differentiation-focus strategy: pursue
differentiation for a chosen segment. Luxury goods are the prime example of
such a strategy.
Advantage of focus
A niche is more secure and a firm can insulate itself from
The firm does not spread itself out too thinly.
Drawbacks of a focus strategy
The firm sacrifices economies of scale which would be gained
by serving a wider market.
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)
The segments needs may eventually become less distinct from
the main market.
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
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
Only one firm. If cost leadership applies cross the
whole industry, only one firm will pursue this strategy successfully.
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:
In practice a differentiated product may be sold at the same
price as competing products in order to increase market share.
Differentiation against which competitor? Do they compete on
the same basis? Are the same market segments covered? Are some of the
questions not covered.
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.
Learn how to use Product-Market mix strategy.
Understand basic offensive defensive strategies.
Learn important business growth strategies.
Hostile and declining markets.