Ch. 7 Small Business Strategies: Imitation with a Twist

Goals

An intended outcome for your business

Magic number

The post-tax income the entrepreneur personally seeks from the business.

Industry

The general name for the line of product or service being sold, or the firms in that line of business.

Competitor

Any other business in the same industry as yours.

Imitative strategy

An overall strategic approach in which the entrepreneur does more or less what others are already doing.

Degree of similarity

The extent to which a product or service is like another.

Parallel competition

An imitative business that competes locally with others in the same industry.

Incremental innovation

An overall strategic approach in which a firm patterns itself on other firms with the exception of one or two key areas.

Pure innovation

The process of creating new products or services, which results in a previously unseen product or service.

Blue ocean strategy

A strategy based on creating a new product or service which has no competitors.

Market

The business term for population of customers for your product or service.

Scale

A characteristic of a market that describes the size of the market- a mass market or a niche market.

Scope

A characteristic of a market that defines the geographic range covered by the market- from local to global

Mass Market

A customer group that involves large portions of the population.

Niche Market

A narrowly defined segment of the population that is likely to share interest or concern.

Types of customers:

Corporate customers- Selling to another business may produce greater profits.

Loyal customers- Return and are already presold, also refer friends, great source of revenue.

Local customers- Now in this digital age its less about geographic proximity than about you taking the time to stay in touch with your customers.

Passionate customers- People who are not just loyal but rave about your business, are likely to generate more potential customers than any other type.

Perceptual map

A graphic display which positions products, services, brands, or companies according to their scores on important strategic dimension.

Industry Dynamics

Changes in competitors, sales and profits in an industry over time.

Introduction Stage

An industry life cycle stage in which customers purchases increase at a dramatic rate.

Boom

A type of life cycle growth stage marked by a very rapid increase in sales in a relatively short time.

Shake-out

A type of life cycle stage following a boom in which there is a rapid decrease in the number of firms in an industry.

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.

Decline Stage

A life cycle stage in which sales and profits of the firms in the industry begin a falling trend.

Retrenchment

An organizational life cycle stage in which established firms must find new approaches to improve the business and its chances for survival.

Industry Analysis (IA)

A search process that provides the entrepreneur with key information about the industry, such as its current situation and trends.

Gross Profit

Funds left over after deducting the cost of goods sold.

Net Profit

The amount of money left after operating expenses are deducted from the business.

Profit before taxes

The amount of profit earned by a business before calculating the amount of income tax owed.

Generic strategies

Three widely applicable classic strategies for businesses of all types- differentiation, cost, and focus.

1. Differentiation Strategy

A type of generic strategy aimed at clarifying how one product is unlike another in a mass market.

2. Cost Strategy

A generic strategy aimed at mass markets in which a firm offers a combination of cost benefits that appeals to the customer.

3. Focus Strategy

A generic strategy that targets a portion of the market, called a segment or niche.

Entry wedge

An opportunity that makes it possible for a new business to gain a foothold in a market.

1. Supply Shortages

Supply shortages occur when a new product is in demand. The target audience is leading-edge buyers who are willing to pay a premium to be the first to have the product. This short-term market is one that changes rapidly. The key benefits are delivery, shopping ease, and style.

2. Un-utilized Resources

Un-utilized resources can be a physical source like gravel in farm field or even entire inner cities. It can also be a human resource. The key benefits are lower costs, scale savings, or organizational practices.

3. Customer Contracting

Customer contracting occurs when a customer, most often a business, is willing to sign a contract with a small business to ensure a product or service. Because big business frequently downsize, they have ongoing needs to outsource work. The key benefits are quality, delivery, technology, shopping ease, brand/reputation, and assurance.

4. Second Sourcing

Second sourcing seeks out customers who are already being serviced by another firm. The strategy is to offer customers a second place to obtain goods or services. Often the advantage the small business offers is being locally based. Second securing provides the customer with greater certainty of supplies or services, and at its best provides a competitive pressure to keep both suppliers providing the best services and prices. The key benefits are quality, delivery, technology, shopping ease, brand/reputation, and assurance.

5. Market Relinquishment

Market relinquishment occurs when business firms leave a market. Ex. After 9/11 American Airlines dramatically scaled back their service, giving room for commuter airlines to gain opportunities in that market. The key benefits are place, shopping, ease, quality, delivery, and service.

6. Favored Purchasing

Favored purchasing occurs because governmental agencies, government-sponsorship commercial contracts, and many big businesses have policies that provide for set-aside or quotas for purchases from small businesses. The key benefits are quality, delivery, service, assurance, place, and belonging.

7. Government Rules

Rule changes by the government can help small firms compete. Ex. When the Environmental Protection Agency let small construction firms out of some of the water pollution treatment requirements that large firms must face, it gave the small businesses a savings of $1.5 billion, which made them more competitive. The Regulatory Flexibility Act of 1980 drives many of these rule changes in government. The key benefits are technology, service, personalization, lower costs, and organizational practices.

Competitive Advantage

The particular way a firm implements customer benefits that keep the firm ahead of other firms in the industry.

Strategic actions

Competitive responses requiring a major commitment of resources.

Tactical actions

Competitive responses with low resource requirements.