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Evaluate the ramifications of each generic strategy for the operations of a small business.
Without a strategy, the organization is like a ship without a rudder, going around in circles. As mentioned in Chapter 2 "Your Business Idea: The Quest for Value", it is critically important for any business organization to be able to accurately understand and identify what constitutes customer value.
Here is an example: a restaurant identified its prime customer base as being upscale clientele in the business section of a major city.
So how does one go about balancing the need to provide customer value within the resources available while always maintaining a watchful eye on competitors’ actions? The word strategy is derived from the Greek word strategos, which roughly translates into the art of the general, namely a military leader. We define the strategy of a business as follows: A firm’s strategy is the path by which it seeks to provide its customers with value, given the competitive environment and within the constraints of the resources available to the firm. Whatever definition of strategy is used, it is often difficult to separate it from two other terms: strategic planning and strategic management.
A Center for Management Organization and Effectiveness (CMOE) discussion of strategy; it leads to other similar videos.
Two Wharton professors discuss how strategic thinking is critical to the acquisition of competitive advantage. We have argued that all businesses have strategies, whether they are explicitly articulated or not. The extent to which a strategy should be articulated in a formal manner, such as part of a business plan, is highly dependent on the type of business. Any business with employees should have an articulated strategy that can be conveyed to them so that they might better assist in implementing it.
A cost leadershipA firm is in the position of being the lowest cost producer in its competitive environment. Obviously, following a cost leadership strategy dictates that the business be good at curtailing costs. A differentiationA firm provides products or services that meet customer value in some unique way. Adopting a differentiation strategy requires significantly different capabilities than those that were outlined for cost leadership.
Firms adopting focus strategies look for distinct groups that may have been overlooked by their competitors. As previously stated, focus strategies can be bifurcated into two directions—cost focus or differentiation focus.
A focus differentiation strategy concentrates on providing a unique product or service to a segment of the market. The selection of a generic strategy by a firm should not be seen as something to be done on a whim. Even successful generic strategies must recognize that market and economic conditions change along with the needs of consumers. Any firm, regardless of size, needs to know how it will compete; this is the firm’s strategy. Strategy identifies how a firm will provide value to its customers within its operational constraints. Strategy can be reduced to four major approaches—cost leadership, differentiation, cost focus, and differentiation focus. Once a given strategy is selected, all of a firm’s operations should be geared to implementing that strategy. It’s a tour de force into the most powerful, practical, personal leadership strategies and tactics to grow, manage or transform your personal career, business or organisation. The restaurant recognized that it has numerous competitors that are interested in providing the same clientele with an upscale dining experience. We are going to argue that what is required for that firm is to have a strategyThe path by which a firm seeks to provide its customers with value, given the competitive environment and within the constraints of the resources available to the firm..


Generals are responsible for marshaling required resources and organizing the troops and the basic plan of attack.
Both terms are often perceived as being in the domain of large corporations, not necessarily small to midsize businesses. Wilson Harrell took a small, closely held, cleaning spray company known as Formula 409 to the point of having national distribution. Perry stated that “small business leaders seem to recognize that the ability to formulate and implement an effective strategy has a major influence on the survival and success of small business.”Stephen C. One might not expect a formally drafted strategy statement for a nonemployee business funded singularly by the owner. Curtis pointed out that in the absence of such communication, “employees make pragmatic short-term decisions that cumulatively form an ad-hoc strategy.”David A. To simplify Porter’s thesis, while competition is beneficial to customers, it is not always beneficial to those who are competing. Firms that employ a differentiation strategy must have a complete understanding of what constitutes customer value. He said that focus strategies can be segmented into a cost focusA firm seeks to provide value through low cost for a subset of the market given the competitive environment and within the constraints of the resources available to the firm. Many small firms, out of necessity, will limit themselves to a particular geographic region. Firms may wish to limit themselves with respect to the means by which they sell their products and services. This group needs to be of sufficiently sustainable size to make it an economically defensible option. IKEA sells low-priced furniture to those customers who are willing to assemble the furniture.
Once a strategy is selected, all aspects of the business must be tied to implementing that strategy.
Henry Ford used a cost leadership strategy and was wildly successful until General Motors began to provide different types of automobiles to different customer segments. Show how a variety of local firms could successfully compete with Walmart by the correct selection of one of the generic strategies. Our example restaurant might provide a five-course, five-star gourmet meal to its customers.
Much in the same way, executives as owners of businesses are expected to have a general idea of the desired outcomes, acquire resources, hire and train personnel, and generate plans to achieve those outcomes. In 1967, the position that Formula 409 held was threatened by the possible entry of Procter & Gamble into the same spray cleaning market. Perry, “A Comparison of Failed and Non-Failed Small Businesses in the United States: Do Men and Women Use Different Planning and Decision Making Strategies?,” Journal of Developmental Entrepreneurship 7, no. One researcher found that formal plans are rare in businesses with fewer than five employees.Stephen C. Competition may involve lowering prices, increasing research and development (R&D), and increasing advertising and other expenses and activities—all of which can lower profit margins. Walmart’s investment in customer relations and inventory control systems plus its huge size enables it to secure the “best” deals from suppliers and drastically reduce costs. Focus strategy entails deciding to some extent that we do not want to have everyone as a customer. It cuts its costs by using a warehouse rather than showroom format and not providing home delivery. Likewise, those who follow a differentiation strategy must be cautious that customers may forgo “extras” in a downturn economy in favor of lower costs. An organization must be able to provide customer value within several important constraints.
In this sense, all businesses, large and small, have strategies, whether they are clearly written out in formal business plans or reside in the mind of the owner of the business.
Porter suggested that firms should carefully examine the industry in which they are operating and apply what he calls the five forces model. It might appear that cost leadership strategies are most suitable for large firms that can exploit economies of scale.
A firm may try to build a particular brand image that differentiates itself from its competitors. Often, a differentiation strategy involves offering these products and services at a premium price. However, if the demand is not sufficiently large for this particular type of food, then the restaurant will probably fail. The successful implementation of any generic strategy requires that a firm possess particular skills and resources. One of these constraints deals with the competition—what offerings are available and at what price. If a comparable restaurant failed to provide a comparable meal than the example restaurant, the example restaurant would have a competitive advantage. It was mainly concerned with assisting huge multidivisional or global businesses in coordinating their activities.
General Douglas MacArthur shocked the North Koreans with his bold landings behind enemy lines at Inchon.
Procter & Gamble began a program of extensive market research to promote its comparable product they called Cinch.
However, any business that seeks external funding from bankers, venture capitalists, or “angels” must be able to specify its strategy in a formal business plan. These five forces are as follows: the power of suppliers, the power of buyers, the threat of substitution, the threat of new entrants, and rivalry within the industry. If price is a major driver of customer value, then the firm with the lowest price should sell more.


A differentiation strategy may accept lower sales volumes because a firm is charging higher prices and obtaining higher profit margins. Companies that lack the resources to compete on either a national level or an industry-wide level may adopt focus strategies. It provides a constantly rotating menu of more than 300 exotic flavors, such as Cajun, beer, lox, corn, and pizza. Further, it must impose particular requirements on its organization (see Table 5.1 "Summary of Generic Strategies"). If the example restaurant offered these sumptuous meals for a relatively low price in comparison to its competitors, it would initially seem to have even more of an advantage. In the intervening half-century, strategic planning has produced a vast quantity of literature. However, you should clearly have that expectation for any other type of small or midsize business.
We do not need to cover these five forces in any great detail, other than to say that once the analysis has been conducted, a firm should look for ways to minimize the dysfunctional consequences of competition. The low-cost producer also has the option of selling its products or services at prices that are comparable to its competitors.
Other firms will try to differentiate themselves on the basis of the services that they provide.
A danger in this approach is that customers may no longer place a premium value on the unique features or quality of the product or the service. Focus strategies enable firms to marshal their limited resources to best serve their customers.
A second critically important constraint is the availability of resources to the business organization.
However, if the price charged is significantly less than the cost of providing the meal, the service in this situation could not be maintained. Porter identified four generic strategies that firms may choose to implement to achieve that end. However, this would mean that the firm would have a much higher margin than its competitors. They can position themselves in low-cost areas, and they can exploit their lower overhead costs. Dominoes began to distinguish itself from other pizza firms by emphasizing the speed of its delivery. This leaves the firm that offers a differentiation strategy open to competition from those that adopt a cost leadership strategy.
By building to order, it almost totally eliminated the need for any incoming, work-in-process, or finished goods inventories. Resources consist of factors such as money, facilities, equipment, operational capability, and personnel.
With that number of different schools, it is clear that the discipline has not arrived at a common consensus. Actually, he initially identified three generic strategies, but one of them can be bifurcated. Family businesses can use family members as employees, or they can use a web presence to market and sell their goods and services. Differentiation also can be achieved by offering a unique design or features in the product or the service. Providing excellent customer service may be a necessary condition for business survival but, in and of itself, it is not a sufficient condition. Strategic planning has been seen as a series of techniques and tools that would enable organizations to achieve their specified goals and objectives. Rather than directly confront this much larger competitor, he began a program where he reduced advertising expenditures in Denver and stopped promoting his Formula 409.
A small family-run luncheonette that purchases used equipment and offers a limited menu of standard breakfast and lunch items while not offering dinner might be good example of a small business that has opted for a cost leadership strategy.
Strategic management was seen as the organizational mechanisms by which you would implement the strategic plan. The outcome was that Procter & Gamble had spectacular results, and the company was extremely excited with the potential for Cinch.
A firm may wish to differentiate itself on the basis of the quality of its product or service.
Some of the models and approaches associated with strategic planning and strategic management became quite complex and would prove to be fairly cumbersome to implement in all but the largest businesses.
We will examine each strategy and then discuss what is required to successfully implement them.
Further, strategic planning often became a bureaucratic exercise where people filled out forms, attended meetings, and went through the motions to produce a document known as the strategic plan.
They further facilitate their differentiation by having their truck routes available on their website and on their Twitter account. Strategic thinking is the creative analysis of the competitive landscape and a deep understanding of customer value.
Procter & Gamble was confused and confounded by its poor showing after the phenomenal showing in Denver. He leveraged his small company’s creative thinking and flexibility against the tremendous resources of an international giant.



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