Entrepreneurial Small Business 4th edition by Katz Green ISBN
0078029422 9780078029424
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CHAPTER 7: SMALL BUSINESS STRATEGIES: IMITATION WITH A TWIST
Chapter Summary
This chapter introduces a number of tools – some of which have been touched on in earlier chapters: industry analysis, SWOT analysis, industry life cycle, and Porter’s generic strategies. The strategic planning process is discussed as are the strategic options a firm faces. The types of benefits that win customers are explored and the concept of competitive advantage is introduced.
Learning Objectives
After studying this chapter, the student should be able to:
1. Describe the decisions needed as a foundation for strategic planning.
2. Identify the forms for imitative and innovative businesses.
3. Articulate the benefits that win over customers.
4. Assess how industry changes can affect strategies.
5. Explain the major strategies of business – differentiation, cost, and focus.
6. Determine how to sustain competitive advantage through attracting customers and discouraging competition.
Focus on Small Business: Mindnautilus.com
Taking a family idea that had been proposed at the wrong time, Nick Tostenrude and Dennis Moulton formed Mindnautilus, a firm that sold cognitive functioning software via the Internet to people recovering from brain trauma. They have since expanded into related assistive devices and other software for disabled or injured people through their firm Enablemart. The key to their success? Finding the right niche.
Instructor information:
The Mindnautilus case is a great example of the idea of the “corridor principle.” While most folks in entrepreneurship think of it as coming from Bob Ronstadt (Ronstadt, R.C. 1988. The corridor principle. Journal of Business Venturing, 3, no. 1: 31-40), the idea was actually a major tenet of career theorist Samuel Osipow’s open systems model of careers (Theories of career development, 1973). Both authors liken career experience (regular or entrepreneurial) to walking down a corridor full of closed doors. As you walk down the corridor of life as an entrepreneur, you get the chance to open some of the doors. Some of the doors may set you on a new path.
That is what happened to Nick and Dennis. They ended up changing the fundamental strategies of their business – from software to retailing, from conventional sales to the fledgling internet sales, and from a focus on their own products to a focus on the products of
others. What was comparatively constant in their approach was their focus on their customer segment (those with handicaps who would benefit from assistive devices), and how to best serve this group.
The case is a great starting point for students who only have an inkling of what kind of business they think might work, and it serves as a cautionary tale to those who are absolutely certain they know exactly what needs to be done. Nick and Dennis’ strength from a strategic analysis standpoint is that they let the information they gathered guide their identification and articulation of a business. Their initial passion for the software sustained their hard work learning about the industry, the market and the needs out there, but when the data began to point to other businesses, they let reason come to the front, helping to identify a business that would work. Armed with this insight, they reignited and refocused their passion on making the retailing business work.
For all these reasons, Mindnautilus is a great starting point for thinking about the power of strategic analysis, and a good transition from the discussion of entrepreneurial paths, which we’ve looked at in the prior 2 chapters, to the discussion of specific entrepreneurial actions.
Discussion Questions
1. What were the strengths Mindnautilus possessed? What were the weaknesses it faced?
Their strengths were that they had an in-depth understanding of the target market – people with cognitive disabilities. The market was large. They also had extensive (for the time) knowledge about creating Internet shopping sites using available software. Combining the large market and the Internet, they had a good fit of sales channel (online) and market (diffuse). They had the some support from Dennis’ father (who created the software), and there were two partners available to work, Nick and Dennis, and they had time to devote to the business.
The weaknesses were a lack of suitable sales channels for the product, a lack of customers with the right equipment for using the therapeutic software, and ramping up the software to meet customer expectations in a more sophisticated market. The team lacked the funds to finish the R&D.
2. What would Mindnautilus do better than its competition?
Mindnautilus focused on being a superior marketing organization. Their website offered a variety of assistive products. They marketed their website to major organizations (like Microsoft and Goodwill) gaining credibility and visibility. Building on this, they would become one of the most effective sales outlets for many of their suppliers, strengthening their relationships with suppliers, and decreasing the chance of suppliers competing with Mindnautilus.
3. What kind of strategy did Nick and Dennis plan for Mindnautilus?
The original plan was to create a software company. The final plan was to create an online store (or catalog). Some folks will take Nick’s comment at face value “Find a niche”. Indeed Mindnautilus fills a niche for assistive technologies for the disabled. But is the disabled a niche? It absolutely can be seen as one.
However, some folks could make the argument that the disabled are actually a mass market (millions of people scattered all over the country or world), and Mindnautilus followed a differentiation strategy, giving their mass market customers a broader selection, or the convenience of one-stop shopping, or the benefit of the expertise of Mindnautilus. Using this sort of approach, an answer of a mass-market differentiation strategy might be supportable. Not knowing from the case the advertising approach used, a student could reasonably go either way, although the niche market approach is the simpler and more straightforward answer.
4. Do you think Dennis and Nick could have predicted they would start Enablemart when they started Mindnautilus? Why or why not?
It is unlikely that Dennis and Nick could have predicted their becoming a retailer when their intention was to sell software. They might have figured they would have to market their own product, but the idea of become a clearinghouse for other companies’ products might have seemed at first to be a major distraction from their goal of getting their own software into the marketplace.
Extended Chapter Outline
Note: Key terms are in boldface.
Teaching tool
International application
Internet application
Group activity
Objective 1: Describe the decisions needed as a foundation for strategic planning.
1.1 Strategy is the idea and actions that explain how the firm will make its profit.
1.1.1 Good strategy leads to greater chances of survival and higher profits
1.1.2 Since most small businesses are imitative rather than innovative, strategy becomes very important.
1.2 Strategy is a four step process:
1.2.1 Goals, customer and benefits, industry dynamics and analysis, and strategy selection and implementation
1.2.2 After these four steps there is the continuing post start-up tactics phase.
1.3 Strategy is based on four major decisions:
1.3.1 The product or service you’ve chosen (also known as the industry);
1.3.2 The scope of the market you plan to serve, which can range from local to global;
1.3.3 The scale of the market for your product or service, whether it is a mass market or a niche market; and
1.3.4 The decision to go for a firm that imitates existing businesses or one that seeks to be innovative.
1.4 The goals segment is the time for five basic decisions:
1.4.1 What do you expect from the business?
1.4.2 What is your product or service?
1.4.3 How innovative or imitative will you be?
1.4.4 Who do you plan to sell to?
1.4.5 Where do you plan to sell?
1.5 The first goal question to answer deals with your own expectations
1.5.1 What rewards (as discussed in Chapter 1) are important to you?
1.5.2 What is your magic number?
1.5.3 This reward is the “why” which drives the process of entrepreneurship.
Skills Module 7.1: Finding Your Magic Number
1.5.4
Working with the income you’d like to draw from your business, you compute backwards to the total sales figure your firm will need. This number can then be used to calculate what you need to accomplish each day in order to make those sales.
1.6 The product or service is the second goal decision to be made.
1.6.1 37% of businesses start with an idea while another 21 % have the idea and the desire to start a business simultaneously.
1.6.2 The idea gets real as either a product or service.
1.6.3 A product or service idea implies an industry.
1.6.3.1 Select an industry that offers good potential for making a profit and with a minimum of risk and competition, a combination known as industry attractiveness.
1.6.3.2 Use either the NAICS or SIC code to find more information about the industry.
Skill Module 7.2: Finding Your Firm’s Industry
This exercise helps students determine their firm’s NAICS and SIC codes.
If the classroom is smart, work through this exercise in class, but for something other than a restaurant. Use this industry throughout the lecture to illustrate other techniques as well.
Teaching tool: Have the students work in groups. Give each group several copies of trade magazines for different industries. If available, have them use the Internet to find NAICS or SIC number, and other trade associations that might be affiliated with the industry. Have them visit the Websites of these associations and other trade magazines. From all this information, they should be able to compose a list of helps for starting a business in this industry.
Objective 2: Identify the forms for imitative and innovative businesses.
2.1 For most small businesses, the owner will want to be a lot alike the rest of the industry – with something that distinguishes them from their competition.
2.2 Businesses have several choices.
2.2.1 Many do more or less what others do in an imitative strategy.
2.2.1.1 Advantages include being able to buy existing technology.
2.2.1.2 Vendors and service suppliers are familiar with what you are doing.
2.2.1.3 Customers already know about your product or service and you don’t have to educate them.
2.2.2 An innovative strategy is pursued by those firms doing something very different than what’s been done before.
2.2.2.1 The advantage here is making your business precisely fit your own ideas and preferences.
2.2.2.2 The main disadvantage is in the energy needed to market these products.
2.2.3 Most firms operate somewhere on the continuum of purely innovative to “cloned,” imitative businesses, and varying on degrees of similarity.
2.2.3.1 If your business if basically the same as the competition with a few minor differences, you are following a parallel competition approach.
2.2.3.2 Add a few more significant changes in one or two key areas, and you are following an incremental innovation approach.
2.2.3.3 A brand new product or service is pure innovation, also known as blue ocean strategy.
2.2.3.4 Parallel innovation makes up of using the standard-setter’s approach for lower start-up costs but without the standard-setter’s mistakes.
2.2.3.5 Incremental innovation takes it to a new level by picking one area in which to do much better than the pioneer or to borrow something
from another industry and use it.
2.3 Once armed with this knowledge, you are ready to begin to create a basic strategy.
2.3.1 This often starts with a close consideration of your customers.
2.3.2 This also entails considering how your product or service can best attract their attention.
Objective 3: Articulate the benefits that win over customers.
3.1 The second step in the strategy process focuses on the kind of customer to whom you want to sell and the benefits that will attract them.
3.2 A market is a business term for the population of customers for your product or service.
3.2.1 Scale has to do with the size of the market.
3.2.1.1 A market’s scale may cover large portions of the populations – a mass market.
3.2.1.2 It may also cover a narrowly defined segment of the populations – a niche market.
3.2.1.3 Most industries have both mass and niche markets
3.2.2 Scope looks at the market’s geographic spread.
3.2.2.1 A market’s scope may be local to global; most small businesses tend to be local in scope.
3.2.2.2 Scope helps you determine where to focus your sales and advertising efforts.
3.2.2.3 Scope also helps you identify the more important competitors.
3.3 There are certain groups of customers considered attractive:
3.3.1 Corporate customers: B2B sales exceed B2C.
3.3.2 Loyal customers: the ones who return and are pre-sold.
3.3.3 Local customers: in the digital age “local” has more to do with the relationship you develop.
3.3.4 Passionate customers: those who rave about your business.
3.4 Thinking about who your potential customers will be helps you find them.
3.4.1 One key decision in finding the customers is to offer them benefits they want.
3.4.1.1 The best way to find these is to ask the customers, either directly or indirectly.
3.5 Benefits are how you appeal to your target customer base.
3.5.1 Value benefits include quality, style, delivery, service, technology, ease of shopping, personalization, assurance, place, brand or reputation, belonging and altruism.
3.5.2 Cost benefits come from lowering costs, scale or scope economies and greater efficiencies.
© 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Skill Module 7.3: Checking Customer Opinion Online
This exercise leads students through checking for on-line opinions in order to be able to produce and market a new iPhone case acceptable to consumers.
Students are lead through a series of increasingly less direct ways to find opinions and are warned of fraudulent reviews.
The Thoughtful Entrepreneur: Value and Cost Benefits
Listed here are definitions of the various cost and value benefits possible. Have students come up with examples of companies – large and small – that make use of these benefits.
3.5.3 As you decide what benefits to offer you can use perceptual mapping, a powerful strategic analysis tool explored further in the Skills Module below.
Skills
Module 7.4: Building Perceptual Maps
The Skills Module leads students through the process of creating a perceptual map of EnableMart.
Objective 4: Assess how industry changes can affect strategy
4.1 Industry refers also to your competitors.
4.1.1 You will want to consider your industry dynamics, that is, the changes in competitors, sales and profits.
4.1.2 Industries move in traditional ways:
4.1.2.1 During introduction stage there are only a few firms.
4.1.2.1.1 They are innovative
4.1.2.1.2 The number of firms and their sales grow slowly.
4.1.2.2 Once customer are more aware there are two growth stage possibilities:
4.1.2.2.1 Most firms grow at a regular rate where the growth in new firms more or less meets customer demand.
4.1.2.2.2 Alternatively there are some ‘hot” products or services with grow extremely rapidly.
4.1.2.2.2.1 Other firms jump into the market to take advantage of this growth or boom
4.1.2.2.2.2 As the boom ends, there is a shake-out where many of the firms close down.
4.1.2.3 Once the industry reached a fairly stable number of firms, the industry has reached the maturity stage
4.1.2.4 Eventually mature industries start to decline.
4.1.2.5 Decline results in death for some industries while other go through retrenchment.
4.1.3 Industry dynamics inform you about the prospects of your industry as a whole and can be evaluated through an industry analysis.
Skill Module 7.5: Short and Sweet Industry Analysis:
This exercise helps the student conduct the five steps of an Industry Analysis:
1. SIC/NACIS number
2. Industry size over time
3. Profitability, including gross profit, net profit, and profit before taxes.
4. How profits are made
5. Target market competitor concentration
6. Analysis
7. Sources
While doing an IA is an important step in exploring possible industries, the fact that some of this information is “for pay” only can be discouraging. Many universities allow graduates (and sometimes the general public) permanent access to library resources. Other times, a SCORE office may be affiliated with a university and may be able to help get the information you need.
Teaching tool: Check out your university’s library to see what resources are available to assist in doing IA’s. If some of these resources are available electronically, show students how to get to them and use them.
This may be a good time to have a reference librarian as a guest speaker or to have a session in the library to familiarize students with the resources available.
As mentioned under the skill module 7.5, check out your universities policy on access to this information for graduates.
4.1.3.1 Industry analysis can be a good way for you to look at cutting costs or leveraging other resources in order to meet you magic number.
4.1.3.2 Knowing the stage or trend of the industry will help you make certain business decisions.
4.1.3.2.1 If the industry is established, you will be able to find location, equipment and experienced workers.
4.1.3.2.2 It the industry is in earlier stages, you may need to spend more time and money as those resources will not be readily available.
4.1.3.2.3 If the analysis shows a large number of competitors, you will carefully analyze their positions to see if you can find the right niche in order to be successful.
Objective 5: Explain the major strategies of business – differentiation, cost, and focus.
5.1 The three classic strategies possible are so widely applicable that they are called generic strategies.
5.1.1 Showing how your products or services are different than your competition’s products or services is known as differentiation strategy. This strategy is aimed at a mass market.
5.1.2 Cost strategy, also aimed at mass markets, shows how your product or service offers cost benefits the competition does not.
5.1.3 Concentrating efforts on a segment of the mass market is known as focus strategy.
5.1.3.1 A focus strategy generally uses aspects of cost or differentiation as well.
5.1.3.2 A small firm (especially service firms) often focuses on a specific geographic area and competes within this area on cost or differentiation.
5.2 As an extension, there are a number of small business supra-strategies that can be pursued:
5.2.1 Craftsmanship
5.2.2 Customization
5.2.3 Super-Support
5.2.4 Serving the Underserved/Interstices
5.2.5 Elite
5.2.6 Single-mindedness
5.2.7 Comprehensiveness
5.2.8 Formula facilities (e.g., franchising)
5.2.9 Bare bones or no-frills provider
5.2.10 Cutting out the intermediary
5.2.11 Tightly managed decentralization.
Teaching tool: List a number of businesses with which your students are familiar. For the purposes of this exercise, you may use both small and large businesses. Have students decide which generic strategy then think they follow as well as supra-strategies strategies as appropriate.
5.3 Knowing your intended level of imitation tells you a lot about your business as shown in Table 7.2.
5.4 Occasionally, however, opportunities pop up and you may need to consider a quick pivot.
5.4.1 These opportunities are called entry wedges:
5.4.1.1 Supply shortages.
5.4.1.2 Unutilized resources
5.4.1.3 Customer contracting.
5.4.1.4 Second sourcing.
5.4.1.5 Market relinquishment.
5.4.1.6 Favored purchasing.
5.4.1.7 Government rules.
Small Business Insights: Initiative for a Competitive Inner City
Sundra Ryce founded SLR Construction Service Company in Buffalo, New York’s inner city, using the “unutilized resources” entry wedge.
Have students identify other companies that have made use of this entry wedge
5.5 At this point:
5.5.1 The industry analysis shows you if you are in the right industry and where your competitors are and the current industry stage.
5.5.2 Your earlier decision about imitative or innovative strategy has been made.
5.5.3 Now it’s time to decide how to set up your firm in order to implement these strategies.
Objective 6: Determine how to sustain competitive advantage through attracting customers and discouraging competition.
6.1 The goal of strategy after the start-up stage is to maximize profits or other rewards and protecting your business from competition.
6.1.1 This is the step of securing competitive advantage. Competitive advantage is the particular way your firm stays ahead of other firms in the industry based on the way you implement the customer benefits you have selected
6.1.2 It’s harder than it looks to determine this because there are a number of threats a firm faces. These are captured in Porter’s model:
6.1.2.1 Existing firms are usually obvious.
6.1.2.2 Consider potential entrants to the industry.
6.1.2.3 What substitutes are there for your firm’s product or service?
6.1.2.4 Suppliers can have a major impact on your business.
6.1.2.5 Buyers or customers can also aversely affect your business.
6.2 The major ways you cope with competitive pressures is by undertaking a combination of strategic actions and tactical actions.
6.3 Strategy is the way an entrepreneur plots the path to success. Every business has a strategy and successful businesses have strategies that fit their industry, market and resources
Key Terms
Blue ocean strategy: a strategy based on creating a new product or service which has no competition.
Boom: a stage of extremely rapid growth
Competitive advantage: the particular way a firm implements customer benefits that keeps the firm ahead of other firms in the industry or market.
Competition: others firms selling the same or substitute products or services.
Cost strategy: a generic strategy aimed at mass markets in which a firm offers a combination of cost benefits that appeal to the customer.
Decline: a life cycle stage in which when sales and profits of the industry begin a falling trend.
Degree of similarity: the extent to which a product or service is like another.
Differentiation strategy: a type of generic strategy that is aimed at clarifying how one product is unlike another in a mass market.
Entry wedge: is an opportunity that makes it possible for a new business to gain a foothold in a market.
Focus strategy: a generic strategy that targets a portion of the market – called a segment or niche.
Generic strategies: three widely applicable classic strategies for businesses of all types –differentiation, cost, and focus.
Goal: an intended outcome for your business.
Growth stage: and industry life cycle stage in which customer purchases increase at a dramatic pace.
Gross profit: funds left over after accounting for the cost of goods sold.
Imitative strategy: an overall strategic approach in which the entrepreneur does more or less what others are already doing.
Incremental innovation: an overall strategic approach in which a firm patterns itself on other firms, with the exception of one or two key areas.
Industry: the general name for the line of product or service being sold, or the firms in that line of business.
Industry Analysis (IA): a research process that provides the entrepreneur with key information about the industry, its current situation and trends.
Industry dynamics: changes in competitors, sales and profits in an industry.
Innovation strategy: an overall strategic approach in which the firm seeks to do something that is very different from others in the industry.
Introduction stage: the life cycle stage in which the product or service is being invented and initially develops.
Intangible resources: capabilities, organizational processes, information, or knowledge of a firm that are not clearly evident.
Magic number: the post-tax income the entrepreneur personably seeks from the business.
Market: the business term for the population of customers for your product or service.
Mass market: a customer group that involves large portions of the population.
Maturity stage: the third life cycle stage marked by a stabilization of demand, with firms in the industry moving to stabilize or improve profits through cost strategies.
Net profit: what is left after operating expenses for the business.
Niche market: a narrowly defined segment of the population that is likely to share interests or concerns.
Parallel competition: an imitative business competing locally with others in the same industry.
Perceptual map: a graphic display which positions produce, services, brands or companies according to their score on important strategic dimensions.
Profit before taxes: what the owner or owners take out of the firm annually.
Pure innovation: the process of creating new products or services, which results in a previously unseen product or service.
Retrenchment: an organizational life cycle stage for established firms that involves finding new approaches pursued to improve the business and its chances for survival.
Scale: a characteristic of a market, which describes is the size of the market; a mass market or a niche market.
Scope: a characteristic of a market, which tells the geographic range covered by the market – from local to global.
Shake-out: after a boom when only the strongest firms remain viable.
Strategic actions: competitive responses requiring a major commitment of resources.
Tactical actions: responses with low resources requirements.
Discussion Questions:
NOTE: many questions allow for a number of different answers. Below are some suggestions.
1. The book asserts “All strategy stars with the owner.” Many of the gurus of strategy say strategy starts with the environment outside the firm. Which do you think is true? Be ready to back it up.
Answers will vary. There is some truth in both statements. A potential entrepreneur starts with an idea and develops a strategy to take it to fruition; this is support for the first. What in happening in the environment, separate and most likely preceding the entrepreneur’s decisions has a tremendous effect on what the entrepreneur should do or even if his idea is feasible; in other words, the entrepreneur’s strategy is molded by the environment.
2. A lot of famous entrepreneurs brag how innovative their product is, when it is fundamentally like the competition, although better in one way or another. How do you classify such entrepreneurs in terms of the innovation/imitation balance?
While there is room for discussion, most would agree that they are really purely imitative or incrementally imitative.
3. Imagine you have developed a new two-way GPS system for trucks and their dispatchers. Trucking companies are all over the country. So are you looking at a mass market? Why or why not?
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The Project Gutenberg eBook of Cousin Becky's champions
This ebook is for the use of anyone anywhere in the United States and most other parts of the world at no cost and with almost no restrictions whatsoever. You may copy it, give it away or re-use it under the terms of the Project Gutenberg License included with this ebook or online at www.gutenberg.org. If you are not located in the United States, you will have to check the laws of the country where you are located before using this eBook.
Title: Cousin Becky's champions
Author: Eleanora H. Stooke
Illustrator: Isabel Watkin
Release date: September 4, 2023 [eBook #71566]
Language: English
Original publication: London: National Society's Depository, 1909 ***
Transcriber's note: Unusual and inconsistent spelling is as printed.
A PERILOUS SITUATION.