Strategy development for small businesses

Having a strategy is critical for every business because it provides direction for everybody in the company to make focused decisions consistent with a common objective. However, Strategy is one of the most misunderstood elements of business planning. I was recently doing research in preparation for this article and when I did a search for “Strategy for small businesses” most of what I got were ideas on how to increase customer traffic or how to do low-cost advertising; all good ideas but no real strategy talk. Also, sometimes strategy seems to be a luxury that the smaller businesses cannot afford because it is a complicated process and there are more immediate issues that need to be resolved.

A good strategy is the result of research, insight, and vision and the tools below should make it accessible to most businesses.

What is the objective of a Business Strategy?

The main goal of the company’s strategy is to provide direction and clarity for the actions and decisions the company makes. For instance, if you decide that your strategy is to become the lowest cost alternative, then you would package your products using uncomplicated designs and lower cost materials. Anything that adds cost and does not directly contribute to higher sales should be out. Also, you would invest in initiatives to improve efficiency and lower costs more so than in having the latest and greatest tech.

What's included in a strategy statement?

A company-wide strategy should provide direction to every functional area of the organization. At a minimum, your company's strategy should clearly identify which markets you are going after, what makes your products unique, and what is the compelling message you want to deliver to your customers. For instance, your strategy could be “to become the leading distributor of lighting fixtures in the greater Boston area by offering state of the art lighting products at the lowest possible price”. This statement clearly identifies a finite market (Greater Boston), a product segment (State of the art lighting), and the competitive statement (low price).

If you want to communicate your strategy in a more comprehensive document, here is a suggested list of the content you may want to include:

• Executive summary

• Vision and Mission statements

• Goals and how to evaluate results (KPIs)

• Industry analysis

• An analysis of your Strengths, Weaknesses, Opportunities, and Risks (SWOT analysis)

• Target Customers and Ideal Customer profiles

• Competitive analysis

• Marketing and Operational plans

• Projected financials

How can you develop a basic strategy for your business?

Large companies invest significant money and time in developing, maintaining and adjusting their strategies. They do so because they have learned that having clear direction saves money and time and contributes to a nimbler decision process. However, you don’t have to spend a lot to get started. Below is a simple process that you can follow to develop a high-quality strategy for your business.

While this is a condensed version of a strategy development session, it can still deliver tremendous benefits for your organization by providing focus and cohesion to the team. The quality of the result will depend on how much time and thought you put in the process, so take your time and don’t be shy about restarting a few times.

Step 1: Start with your competitive differentiation.

The first step is to identify what will be your “main claim”; what makes your products compelling to the market. In the book “The Discipline of the Market Leaders”, Michael Treacy and Fred Wiersema identified three main ways in which companies compete: pricing, innovation and customer intimacy. The authors suggest that you should look at your internal capabilities (core competencies) and determine which one of these three possibilities your company is better suited for. Here is a brief description of these options:

Pricing: If your company can achieve cost levels that are significantly lower than competitors’ or you are in a better position to take advantage of higher production volumes, then you should be able to offer and maintain lower prices and position your products as the market’s low-cost option and win the business of cost conscious buyers.

Innovation: Companies that pursue this strategy need to be able to offer the latest and greatest technology to their customers. The objective is to first introduce new and improved solutions and spare no cost in R&D. Innovators can command higher prices for their products as customers understand that new tech is more expensive than established commodities. Additionally, being the first to market with a successful product can secure long term loyalty from customers committed to your solution.

Customer Intimacy: This strategy is used by companies that seek to grow by continuously increasing their business with their current customer base. These companies need to have a deep understanding of the business and operations of their customers and try to anticipate what would be the next un-met need that will arise as a result of the customer’s evolution. For instance, a company that sells product packaging material could also offer a service to outsource the labor required to package finish products and make them ready to sell.

Step 2: Focus on your market

The second step is look at your industry to understand the market conditions that could impact your business. The best way to go about it is to use a visual tool created by Michael Porter. Commonly known as “Porter’s Model of 5 Competitive Forces”, this provides a structured process to analyze a company’s competitive environment. As the name indicates, there 5 main areas of concern:

1. Competition in the industry: The more competitors in a market, the less power those companies will have. Suppliers will not be able to demand higher prices as buyers have multiple options and could easily find a better deal.

2. Potential of new entrants into the industry: Also known as barriers to entry, this analysis seeks to understand how easy it is to enter the market. A market with low barriers to entry would invite new competitors and increase competition. On the other hand, an industry with high barriers allows current suppliers to charge higher prices and further invest in their business.

3. Power of suppliers: If your suppliers control components that are critical to your products, then they have power over your business. If it is difficult for you to get an alternative component, then they could increase their prices and impact your margins. Needless to say, the more power your suppliers have, the higher the risks for your company.

4. Power of customers: This focuses on the ability the customers have to lower prices. A smaller customer base will result in more powerful customers. Having many smaller customers will spread the risk better than selling to only a few customers.

5. Threat of substitute products: When customers have products that can easily substitute your products, you are at a higher risk. Companies that produce more unique products that are harder to substitute will enjoy higher prices and therefore better control in the market.

Using Porter’s model to analyze your industry will allow you to refine your business strategy and help you to focus your resources to achieve better results.

Step 3: Create and communicate your strategy

The final step is to document your findings in the form of a strategy statement and make it known to your entire organization. Recall that a strategy should clearly identify which markets you are going after, what makes your products unique, and what is the compelling message you want to deliver to your customers.

Use the Porter Model analysis to clearly identify which markets you are going after. Use the analysis of your core competencies to explain what makes your products unique. Finally, use your Porter Model again to build a compelling message for your customers.