Strategy
Background
Customers
The Market
The Tools
Strategies
a. Lower Prices
b. More Choices and Selection
c. Maximum Use of Technology
d. Better Service
e. Minimal Overhead
f. Alliances, Cooperation with Another Firm/Firms
g. Target Missed or Poorly Served Customers
h. Highest Possible Quality
i. New or Previously Unavailable Goods/Services
j. A Superior Location
k. Unique Marketing
l. Expansion or Growth
m. Creation of New Products/Services/Processes to Sell or Lease
Types of Strategies Employed
a. Strategies and Growth
b. Change in Strategy
Final Comments
Background
When shaping their new ventures, aspiring business owners should ask themselves
why potential customers would purchase my product/service rather
than something else or, more commonly, why would potential customers purchase
those products/services from me rather than my competitors. ‘What am
I going to do differently or better than my competitors?’ is the question. If
that question has no good answer, the aspiring owner would be well advised
to find one or postpone plans until he does. Without an edge or competitive
advantage, starting a business becomes an uninformed crap shoot. Experienced
business owners too must understand the competitive advantage they
hold or only blind luck will allow them success.
Before the strategies employed by small businesses are examined, a brief detour intrudes in order to scan the customers that small businesses typically serve, the competitive environment in which they operate, and some of the tools they use and the plans they have to implement their strategies.
Customers
Employing small businesses typically sell most
of their goods and services to the general
public. Fifty-seven (57) percent report that
the general public represents their principal
customer-base (Q#1). Retail, construction,
and many services, such as dry cleaners or hair
salons, are examples. Fourteen (14) percent
see their customer base as a small number
of clients. The professional services, such as
medical and legal firms, often fit this description.
Another 15 percent have business in
general as their principal customer. Manufacturers
and wholesalers are cases in point. But
another 4 percent sell to only one or two other
businesses. These also are likely to be manufacturers
or wholesalers, though they could
also be business service firms, such as janitorial
firms or delivery services. The remainder
(4%) list government and/or non-profits as
their principal customer base. Those firms are
divided into ventures that have many such
customers (3%) and ventures whose sales are
confined to just one or two governments and/
or non-profits. Finally, 7 percent claim their
customer base is so varied that it does not fit in
any of the preceding categories.
Assessing the principal customer base in
a different way, 71 percent deal principally
with the public, 19 percent with business, and
4 percent with government and non-profits.
Assessing it yet another way, 75 percent have a relatively broad customer base, that is, many different customers, while 19 percent have a relatively narrow one. Some strategies fit one class of customer better than others, but it isnot clear whether the small employer adjusts his/her strategy to fit the customer base or whether the small employer finds a customer base to fit the strategy. Later it will be shown that young firms have a much less well-defined strategy, suggesting that at least initially, considerable iterating between the two may occur.
The overwhelming share of small enterprises has a regional, if not localized, customer base. Thirty-four (34) percent of small employers estimate that 90 percent of their customers lie within 10 miles of their primary location (Q#12). A somewhat larger percentage (40%) broadens that diameter to 100 miles. Another 6 percent stretch the distance to 1,000 miles and 13 percent maintain that at least 90 percent of their customers lie within the United States. Six percent claim their customers are dispersed all over the world. The latter point is not to be confused with the number of small firms that export or even the location of the overwhelming majority of their customers.
The Market
The Great Recession lingers and small-business
sales remain weak. While 43 percent say
that the market they sell in (not their market
share) is stable, another 36 percent report it is
declining, 8 percent that it is rapidly declining
(Q#2). In contrast, 20 percent indicate that
their market is growing; 4 percent say that it is
rapidly growing.
A change (growth or decline) in market size is typically not a function of population change. Just 19 percent assert that the market change they are experiencing is principally related to population growth/decline; 80 percent say that it is not (Q#2a). Hence, 29 percent of small-business owners see themselves in declining markets, not associated with population change.
The markets in which small employers compete are also perceived to be quite competitive. Forty-four (44) percent describe their market as “highly competitive” and another 33 percent term it “competitive” (Q#3). Twenty (20) percent think their market is just “somewhat competitive” and just 3 percent claim that it is not competitive. Owners of larger, small firms are more often inclined to characterize their principal market as “highly competitive” than are owners of smaller, small firms.
The competitive balance could easily be affected by the existence of a dominant competitor in the market. Indeed, 40 percent report a dominant competitor in their market and another 4 percent are not certain; 56 percent think that there is none (Q#4). But in a twist, 36 percent (14% of the entire population) claim that theirs is the dominant firm (Q#4a). They think they are the most powerful competitor in their market.
A majority intend to move into new markets in the next five years. Thirty-six (36) percent plan to move into new geographic markets (Q#5). Forty-six (46) percent expect to move into new product/service markets (Q#6) and 25 percent plan to do both. Owners of larger, small firms want to extend their markets more frequently than owners of smaller, small firms. Yet, the differences are relatively modest. Forty (40) percent plan to move into neither. No information was gathered on plans to change strategies in light of such expansion.
The Tools
The tools small employers use to compete are
often a function of the strategy and offerings
the business has. Franchising is an example. A
franchise reduces the small-business owners’
range of strategy options. Franchising in and
of itself could be considered a strategy. And,
while familiar franchise names seem ubiquitous,
just 7 percent of small ventures are 100
percent franchised operations (Q#7). Franchised
goods/services in the remainder constitute
just a portion of business sales, often a
small portion. U-Haul franchises, for example,
frequently are associated with rent-all businesses,
storage firms, and/or gas stations.
About 26 percent of all employing small businesses
have at least some of their sales in franchised
goods/services; 71 percent have none.
The Internet is another tool. Most small businesses sell a relatively modest portion of their goods and services via the Internet. Seventy-one (71) percent sell nothing on it and another 16 percent sell approximately 10 percent of their annual gross receipts (Q#8). The remainder sell more, though the average among those firms gravitates toward the lower end. Direct sales is, of course, not the only reason for a small business to have an Internet presence. Given the extent of direct Internet sales, these other reasons for an Internet presence currently appear the more important.
The electronic age has brought even more targeted means to market a small firm than the Internet and direct Internet sales. Three social networking methods in particular have become 5 | NFIB National Small Business Poll Strategy prominent – Facebook, Twitter, and discount sites such as Groupon or Living Social. Thirtytwo (32) percent claim to now use Facebook to promote their firms (Q#9). Eleven (11) percent claim the same with Twitter (Q#10). And, 7 percent say they use organizations like Groupon or Social Living (Q#11). There is overlap in use of these sites. While 65 percent do not use any of them, 22 percent use one, 10 percent two and 2 percent all three.
The use of Facebook is highly related to age with younger people using it much more frequently than older ones. The same is not necessarily true of Twitter or Groupon. However, the number of cases grows thin with the latter two.
Strategies
The author compiled a list of potential strategies
that a small-business owner might employ.
The entries are not necessarily mutually exclusive.
Frequent overlap appears as will subsequently
be discussed. Survey respondents
were presented a list of 13 possible strategies
and asked to rank each strategy on a scale of
1 - 7 where 1 meant it played no part in their
competitive strategy and 7 meant that it was
their competitive strategy. The list appears in
the headings below:
Lower Prices
Lower prices is an obvious strategy that while
popular with consumers is very difficult for
small businesses to pursue. This strategy is
tied to the idea of scale economies, which is
an advantage large size typically confers. As
a result, small employers assess lower prices
as the ninth ranked strategy out of 13. This
strategy is near the bottom, among the least
important, with a 3.73 average (Q#13A). Thirteen
(13) percent of small-business owners
term lower prices their strategy and 24 percent
claim it represents no part of theirs.
More Choices and Selection
More choices and selection also implies scale
economies. Having more from which the
customer can choose implies broader inventories,
whether in products and services, and
hence somewhat larger size. However, small
employers consider it one of the more important
parts of their business strategy. That may
reveal as much about their competition as
themselves. They rank it fifth out of 13 with a
4.17 average (Q#13B). Eighteen (18) percent
claim that it is their business strategy while 20
percent claim it plays no part.
Maximum Use of Technology
The maximum use of technology may not be
so much a strategy as a tactic, somewhat akin
to a method for achieving maximum productivity.
Still, it became part of the strategy list
because technology, electronic technology in
particular, has become such a large, typically
in-house part of marketing and sales for many
small ventures. Regardless of whether it is a
formal strategy or not, small-business owners
as a group contend technology plays an important
strategic role for them. It represents an
important way small firms can compete against
larger ones. Twenty-five (25) percent declare
that maximum use of technology is their
strategy while 13 percent declare it is none of
theirs (Q#13C). The strategy ranks fourth and
averages 4.60.
Better Service
Better service is one of the two most common
and important strategies small employers are
likely to employ. In fact, 60 percent claim that
better service is their strategy while 5 percent
say that it plays no part (Q#13D). The strategy’s
average rank is 6.0 out of a possible 7.0.
A reason that better service is a popular smallbusiness
strategy is that it appears costless, and
to some extent that is true. The owner can
train/demand that employees pay close attention
to customer concerns and the owner can
do the same. Yet, the strategy is not likely to
be costless. Better service can mean higher
quality employees which can mean higher
wages/benefits. It could also mean more liberal
(costly) return policies, more time devoted to
individual treatment (cost), etc., business policies
that are far from costless.
Minimal Overhead
Minimal overhead means maintaining a tight lid
on expenses. A retail operation, for example,
might sport a warehouse look; a professional
service firm could be located in the garage; a
distributer may limit inventory, carrying only
the most popular items. Minimal overhead
proves to be the third most common strategy,
at least in term of its share of the cumulative
strategy of all small businesses. Twenty-eight
(28) percent term it their entire strategy while
13 percent consider it none of theirs (Q#13E).
Its average is 4.66.
Alliances, Cooperation with
Another Firm/Firms
Alliances are typically considered a strategy
exclusively for large firms. Nothing could
be farther from the truth. Many small firms
engage in alliances, for purposes of production,
marketing, R &D, etc. They can ally with
a large firm or another small one. Competition
is so deeply ingrained that it is possible
to forget that cooperation in some aspects of
the business is not only possible (and legal),
but highly advantageous. Still, alliances prove
the least common strategy of the 13 assessed.
Its average is 3.21 with 13 percent claiming it
their entire strategy and 37 percent claiming
that it is none (Q#13F).
Target Missed or Poorly
Served Customers
Targeting missed or poorly served customers
is normally not a strategy that would immediately
come to mind, at least in those terms.
However, if one thinks of the strategy in terms
of a new Mexican restaurant in a small community
with a large Hispanic population that
now has none, or a trucking firm that transports
materials on a scheduled rather than ad
hoc basis, the strategy’s applicability becomes
readily apparent. The strategy earns a 3.79
average with 17 percent saying it represents
their entire strategy and 26 percent saying it
represents none of it (Q#13G).
Highest Possible Quality
Quality is the single most commonly pursued
small-business strategy. It, along with better
service, is of vastly greater importance to
a vastly greater number of small-business
owners than are any others. Sixty-four (64)
percent identify it as their strategy compared
to 4 percent who claim it represents no part of
theirs (Q#13H). The average rank is 6.22 out
of a possible seven, 0.22 points above better
service and 1.34 points above the third highest
ranked strategy, minimal overhead.
New or Previously Unavailable
Goods/Services
New or previously unavailable goods/services
can involve the sale of a new technology or
a very old technology in a new form. It can
consist of well-established goods/services sold
to a group of customers or a locality not familiar
with them. Thus, they only have to be new to
a relevant market. Such a strategy is one of
the least popular, ranking twelfth out of the
13 listed. Just 11 percent claim new or previously
unavailable goods/services is their entire
strategy while 31 percent claim it is not part of
theirs (Q#13I). The average is 3.35, just 0.14
points higher than the lowest ranked strategy.
A Superior Location
A superior location is very important to those
dependent on foot traffic, somewhat less
so for many others dealing with the general
public. However, it is much less so for business
owners that typically come to the customer,
such as contractors, or who distribute relatively
large and costly orders to locations
removed from the firm’s premises. The result
is that a superior location should be an important
part of the strategy for a large segment of
the small-business population and no part of it
for another large segment. The data show that
to be the case. Twenty-two (22) percent say
a superior location is their strategy contrasted
to 25 percent who say it represents no part of
theirs (Q#13J). The average is 3.97, making it
the sixth most commonly employed strategy.
Unique Marketing
The thrust of the unique marketing strategy is
self-evident. That does not mean it is any less
viable or difficult to construct or implement. In
fact, it can be more difficult because it requires
something creative and probably clever. Fourteen
(14) percent sell their business and its
offerings entirely in this manner while 22
percent have no part of it (Q#13K). Unique
marketing averaged 3.77 out of a possible seven.
Expansion or Growth
Growth is another example of a listed strategy
that is perhaps not so much a strategy as an
outcome. Still, attempted growth may attract
(or repel) customers because it exhibits a type
of aggressiveness or dynamism, perhaps even a
freshness that can become self-fulfilling. Most
small businesses do not grow after an initial
spurt. That reflects small employer appraisal
of growth as their business strategy. Just 13
percent consider growth or expansion is their
strategy; 25 percent take the polar opposite
view (Q#13L). The average 3.48 ranking is
one of lowest of the strategies evaluated.
Creation of New Products/Services/
Processes to Sell or Lease
Creation is the innovation strategy. It is aboutproducing new and different things to sell,
lease, or license. Those things are not necessarily
technology-oriented, though a large
number likely are. This is another strategy that
tends to be less frequently employed, in part
because the business/owner is doing essentially
what has never been done, at least to the
owner’s knowledge. Fifteen (15) percent claim
innovation as their strategy while 31 percent
claim innovation plays no part in theirs. The
average rating is 3.57, almost identical to the
expansion or growth strategy.
Types of Strategies Employed
Small-business owners commonly have many
parts to their business strategies. They tend
to be a bit of this, a bit of that, and a dabble
of still something else. Rarely does a strategy
consist of one “pure” type. That is not to imply
that they have no emphasis or direction.
Four broad blends of strategies statistically tend to appear. The first might be termed the “Innovation” blend. It includes the new or previously unavailable goods/services, creation of new products/services/processes to sell or lease, and more choices and selection strategies. In other words, think of the three creating a hybrid which cluster around the idea of new and innovative. A second is the “Soft” blend. It includes better service and the highest possible quality. The term Soft is meant to convey the notion that these strategies can be highly subjective. The third is the “Price” blend. The lower prices and minimal overhead strategies lie at its core, though superior location can also appear. Finally, “Alliances” form the last blend and includes only the alliances, cooperation with another firm/firms strategy. It is effectively not a blend therefore, but a pure strategy.
The components are more evident as employment increases. It also is more evident among the firms that are more than five years old. That means owners of new, very small firms are least likely to have a well-defined business strategy. The lack of a well-defined strategy might be expected given that many new, very small firms are continuously adjusting and frequently morphing. The positive view terms such activity flexibility, rapid adaptation, and dynamism; the negative view terms it a lack of focus or an unclear vision.
Strategies and Growth
The Innovation blend is related to growth, both
in terms of growth over the last three years and
desired growth over the next five. A strong relationship
is present in both when controlling for
firm size and firm age. That suggests that some
type of innovation strategy is typically tied to
growth, both experienced and desired. The
strategy does not have to be high tech nor the
invention of new products/services/processes,
but it brings something new to a market.
The antithesis of the Innovation blend is the Soft blend, which is not related to either growth measure. Its pursuit therefore may result in growth, but not consistently. In fact, it is just as likely to run in the opposite direction. The other two blends are not consistent. The Price blend is negatively associated with experienced growth, meaning that it is associated with firms that lost size during the Great Recession and its aftermath. However, that blend is not associated with desired growth (though it has a negative sign). The Alliance strategy is strongly tied to desired growth, but has no relationship to experienced growth (though it has a positive sign).
Change in Strategy
The last three years have been very difficult
economically for many small enterprises.
Thirty (30) percent of the sample who have
been in business for the last three years lost
employees over the period; those data include
only surviving ventures. One likely result of
those difficult times is that a hefty majority
of small employers decided to change their
basic competitive strategies (Q#14). Seventeen
(17) percent report that they changed
theirs “significantly” within the last three years
and another 10 percent changed theirs “noticeably”.
Twenty-six (26) percent altered theirs
“somewhat” and 18 percent more altered theirs
“modestly”. That leaves only 28 percent who did
not change their strategy. They are competing
the same way today that they competed at the
beginning of the Great Recession.
Small employers cite a number of reasons for changing their strategies. The most frequently offered is that the market changed. Forty (40) percent who adjusted their strategies name a changed market, likely the result of the economic slowdown accompanying the Great Recession (Q#14a). Another 21 percent altered theirs for an apparently positive reason: they saw new opportunities. These data underscore the point that even in severe economic downturns opportunities arise that some business owners discover and exploit. Fifteen (15) percent claim the old strategy simply was not working; 11 percent identify the changing financial and human resources available to them; and, 9 percent mention a new competitor or competitors entering the market.
Most small employers who changed strategies within the last three years report that they are satisfied with the changes made. Twentytwo (22) percent claim to be “very satisfied” and another 38 percent say that they are “somewhat satisfied” (Q#14b). The remainder are less happy in varying degrees with 17 percent thinking that it is too soon to make an evaluation. The tie between satisfaction with a changed strategy and satisfaction with profits in the last year is strong, suggesting happiness with the change is tied to favorable financial results. On the other hand, some patience may also be exhibited as satisfaction with changed strategies is greater than satisfaction with last year’s profits.
The Great Recession obviously played a significant role in the strategy changes made and are likely responsible for the sheer number of them. However, the lengthy economic slowdown is not the only stimulus for change. Normal market transformations also prove to be a large influence, though the precise mix between recession-induced factors and others is difficult to separate. However, a substantial number changed their strategies prior to the onset of the recent economic slowdown, the exact number of which cannot be determined from the available data. Twenty-six (26) percent report significant changes in their competitive strategies over the lifetime of their businesses (Q#15). That is nine percentage points greater than significantly changed strategies in the last three years. Another 15 percent changed strategies noticeably over their business lifetimes compared to 11 percent who changed noticeably over the last three years. Those numbers indicate a substantial number of strategy shifts prior to the Great Recession. What is not known is the number who changed both prior to and during the recent downturn. In other words, how many have changed strategies more than once. This comparison also minimizes the number of small employers who change strategies since 11 percent of respondents were not in business more than three years ago.
Final Comments
Relatively few small businesses grow substantially
after their initial growth spurt. The most
popular competitive strategies, that is, better
service and highest possible quality, therefore
are not likely to be associated with growth
and they prove not to be. That does not mean
service and quality are not important components
of growth for those who do grow, or at
least, want to grow. But it suggests that those
strategies, either independently or as the blend
in which they typically occur, are likely insufficient
to achieve growth should that be the
small-business owner’s objective. More is likely
required. That seems to be where innovationtype
strategies emerge. The data presented
here exhibits a clear association between the
innovation blend and growth. A similar association
does not appear for any other strategy
or blend, the exception being alliances tied to
desired (not experienced) growth.
The strategies small-business owners employ frequently change. Obviously a powerful stimulant, such as the Great Recession, motivates owners to do so. But reassessments do not always occur during times of great stress. They occur at other points as well and may be a reaction to opportunity as well as shock. The fact that strategies can and do change demonstrates flexibility in small ventures. It also suggests that more established firms can move in a growth-oriented mode should the owner be so inclined.
