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published December 09, 1999
Revised and
Updated on July 07, 2008
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The following article
was located on the internet. We wrote to the author at Katz
Graduate School of Business for permission on November
10,1999, to reproduce the article but we have not heard from
them so far. We found the article very useful and informative
and is reproduced below for educative and non-commercial
purposes only. This is reproduced verbatim and without editing
any portion. Copyright, if any, is acknowledged. This page is
not to be reproduced or retransmitted in any form except for
personal reference.
Focus!
Written
by Dr. John C. Camillus - The
author is Donald R. Beall Professor of Strategic Management at
the Katz Graduate School of Business, University of
Pittsburgh.
Competitive strategy in
the case of small businesses offers special challenges and
also special opportunities. For instance, in the case of an
undifferentiated product, the generic "cost
leadership" strategy may not be available to small
businesses. The cost advantages stemming from high volumes and
the experience curve effects that are available to large
businesses are not accessible by small businesses. On the
other hand, "focus" strategies play to the unique
strengths and flexibility of the small business. When thinking
about strategy, particularly when competitors possess many
different characteristics, it is useful to remember that if
one is an alligator, it is better to fight a bear in the swamp
rather than on hard ground. In this article we will offer some
guidelines regarding the competitive options that need to be
considered by small businesses, in effect, describing the
swamp into which we wish to draw the competition. These
guidelines will include how best to tailor generic strategies
to the context of small businesses, the relevance of game
theory to small businesses, and the implications of being a
follower or first mover.
Tailoring Generic
Strategies to Small Businesses
The three generic
strategies identified by Michael Porter, namely cost
leadership, differentiation and focus are all options
available to small businesses. However, the contexts in which
these individual strategies may gainfully be considered by
small businesses need to be well understood. In the area of
cost leadership, the advantages of high volume and rapid
movement down the experience curve are advantages that large
businesses, by definition, possess. The areas in which small
businesses may find cost advantages are very limited. Advances
in manufacturing technology are not likely to provide small
companies with a sustainable advantage. Such advances can
often be readily replicated by large companies. Smaller
companies may find that their ability to control overhead
costs and maintain a lean organization, while significant, can
be matched by well-managed, larger companies that understand
and exploit economies of scale and scope.
A valuable tool that
can help in the search for cost leadership is the value chain.
The value chain is perhaps the most widely used tool of
strategic analysis. In fact, it can be a very effective and
powerful way of determining what generic strategies may be
most relevant and how best to implement the selected
strategies. The value chain as described by Michael Porter is
diagrammed in Figure 1. By examining each element of the value
chain it may be possible to identify areas in which a smaller
organization may find opportunities for lowering costs below
those of the competition. Procurement and inbound logistics
may perhaps be addressed by locating close to sources. This
kind of locational flexibility may not be possible for larger
companies without sacrificing some of the advantages of scale
and scope on which they build cost leadership. Similarly other
elements of the value chain may be managed differently than
the approach adopted by competitors.
Another approach to
operating with lower total costs than larger competitors is
available to smaller organizations. By engaging in
partnerships with selected customers, it may be possible to
reduce costs such as advertising and distribution. In order to
develop partnerships with customers it is necessary to offer
advantages that cannot be matched readily by other
organizations. This suggests that it is necessary to pay
substantial attention to being very different than other
companies.
This search for
differentiation is likely to be more productive for small
businesses than the search for cost leadership. Here again the
value chain is perhaps the most important analytical tool. By
examining each element of the value chain it should be
possible to identify the areas with the highest potential for
differentiation. In order to ensure that larger competitors
with greater resources cannot swiftly duplicate the
characteristics that distinguish the product or service, it
may be necessary to go beyond the more obvious, physical
elements of the value chain. For instance, it may be possible
to consider providing access to the company's internal
management information system to selected customers in order
to speed up their ordering process, or to provide them with
the latest information regarding delivery status. For a large
company to provide similar access may be considerably more
difficult given that their systems are likely to be more
complex and that more executives would be involved in such a
policy decision.
The greater flexibility
of smaller organizations is a characteristic that needs to be
exploited in the context of building a differentiation
strategy. The small chemical companies in New Jersey are able
to survive and in fact prosper despite the enormous resources
of the major chemical companies, both domestic and
international, that operate in the U.S. The small companies
differentiate themselves in terms of the rapidity with which
they are able to provide specialized chemicals with unique
characteristics that are required by their customers.
Furthermore, their small scale is often an advantage in the
context of very specialized chemicals because the quantities
ordered are likely to be limited and therefore more consistent
with their production capabilities.
This matching of
products, markets and technologies is the hallmark of a
strategy of focus. Indeed, almost by definition, small
businesses are most suited to the nature of a focus strategy.
The literature on competitive strategies is replete with
examples of small and medium-size companies that do
extraordinarily well in selected niches. Not only do they
dominate the niches in which they operate, but they also tend
to be highly profitable.
The effective
implementation of focus strategies requires a recognition of
the importance of identifying and building on the
organization's distinctive or core competence. Engaging in
modification of elements of the value chain in ways that are
not consistent with the organization's distinctive competence
is likely to be detrimental to the elements of differentiation
and cost leadership on which a good focus strategy has to be
built.
An interesting aspect
of implementing a strategy of focus is that increasing sales
by widening the customer base may not prove beneficial to the
organization. Selecting the right customers is a not so
obvious but an utterly necessary element of a focus strategy.
Selling to the " wrong" customer may increase costs
and complexity beyond the marginal income that such additional
sales may provide. If customers become too diverse in terms of
their needs, the many advantages of a focus strategy tend to
vanish.
The notion of selecting
the "right" customers is a logical sequence to the
next set of concepts that have particular significance for
smaller businesses, namely that of partnering with key
stakeholders.
Game Theoretic
Perspectives
The traditional
perspective of game theory is that it is a zero-sum game,
where, for one player to win another player must lose. This
highly adversarial approach is risky for a small player
competing with a larger opponent with deep pockets. An
alternative perspective that merits consideration is that of
redefining the rules of the game in order to create a niche
for one's own organization that is not attractive or directly
threatening to competitors with greater resources. One
approach to creating such a niche is to engage with selected
stakeholders to fashion a new way of doing business or a new
business segment with high barriers to entry.
Partnering with
important stakeholders is a very real possibility for small
businesses because of their intrinsic flexibility and their
focus on a limited set of customers and other related
organizations such as suppliers and distributors. Assuming a
focus strategy it is likely that these stakeholders are few in
number, or even if there are several, it is likely that they
possess homogeneous characteristics. It is reasonable to
expect that it would be relatively easy to get to know them
well in preparation for building mutually beneficial
partnerships.
Normally, when thinking
of the customer one is inclined to view the relationship in a
limited fashion, essentially as a transaction that involves
the exchange of goods or services for an appropriate
compensation. Partnering, however, suggests that multiple and
strong interactions or connections exist. Not surprisingly,
the value chain can again be employed in order to identify
stakeholders with the greatest potential for a productive
partnership and also to identify the bases on which such
partnerships can be developed. For instance, suppliers' design
and engineering departments may appreciate information about
desired performance characteristics rather than material and
dimensional information. Such information could enable them to
effect simplifications that make production easier or more
efficient. Similarly, sharing long term sales estimates and
demand patterns with the supplier could be of great value to
them in developing their own procurement and production
schedules. Becoming a preferred and accommodating customer in
the eyes of one's suppliers could lead to significant quality
and cost enhancements, not to mention a greater willingness on
the part of the supplier to adjust to occasional unanticipated
requirements that one may encounter.
Analyzing the
customers' value chain may uncover or suggest many such areas
for building partnerships. The potential for building a strong
relationship with the customer's procurement operations is
obvious and has been touched upon earlier. Warehousing,
inventory and distribution practices can be tailored to the
customers' particular requirements Multiple other points of
interaction will be apparent when looking at each element of
one's own value chain in juxtaposition with each element of
the customer's value chain .For example, interacting with a
customer's R&D and design units could not only provide
advance information about planned changes, but also offer the
opportunity to influence or assist in identifying
possibilities for improvement that relate better to one's own
capabilities and preferred developmental directions. Getting
to know the customer's marketing department and, indeed, the
customer's customer may provide valuable insights as to how
one can serve the customer better and tie the two
organizations together even more strongly. Such relationships
can result in building market segments or niches that the two
organizations together are uniquely equipped to serve.
Such alliances with
major customers promote the likelihood of growing with and
sharing in the customer's success. If the customers one
partners with expand internationally, then the small supplier
may be provided with a minimal risk opportunity to also grow
internationally. Interestingly, being small does not
necessarily mean being a one-country, domestic company. As
Germany's mittelstand firms have shown, a relatively small
business can dominate a carefully developed niche worldwide.
These examples
illustrate the secrets of successful growth for the small
business. By growing the niches in which it operates, and by
partnering with growing companies the small business can grow
without inviting retaliatory moves on the part of larger and
more resource-rich competitors. Growth through diversification
may in effect shine a light on the territory that may attract
the competition. On the other hand, growth through innovation
creates the "swamp" that larger competitors may find
forbidding territory.
Innovation to Create
First-Mover Advantages
Small businesses that
are willing to eke out a subsistence existence may choose to
follow the lead of major competitors in terms of new products
and markets. This would entail minimal R&D, market
research, creativity and risk-taking. Judgment would, of
course, have to be applied so as not to violate the larger
competitors' sense of the territory that they wish to claim as
their own. The preceding discussion on focus and partnering
and the attractive routes to growth suggests, however, that
small businesses with high aspirations in terms of
profitability and growth need to innovate, need to stimulate
growth in the niches that they occupy and need to support the
growth of their partners.
Adopting a first-mover
stance is inherently more risky than being a follower. Of
course, the potential rewards are greater. First, the virgin
nature of the territory being developed means that the first
mover faces no immediate competition and may be in a position
to erect entry barriers such as patent protection, long-term
contracts with customers, no-compete agreements with key
employees, agreements with the best-suited distributors, image
and brand equity development, and commitments from suppliers.
Second, profitability can be controlled so as not to encourage
aggressive new entries by deep-pocket competitors. Third,
tacit knowledge can be developed that would provide a
sustainable edge over later entries.
There are situations in
which being a first-mover could be highly undesirable. A
context to be approached with caution is where complementary
resources or infrastructure development are required to
support the new products or services. Large companies with
substantial resources at their command are better equipped to
innovate in such situations where distribution channels need
to be built, or supporting equipment, devices or technology
need to be developed. If, however, innovation is undertaken in
the context of a focused strategy, and partnerships with key
customers, suppliers and distributors, the risks attendant on
being a first-mover can be minimized.
Conclusion
There is considerable
anecdotal evidence to support the key recommendations, namely
implementing a strategy of focus, building partnerships with
major stakeholders and adopting a first-mover approach. In
addition to the American chemical boutiques and the German
mittelstand firms referred to earlier, several instances of
the synergistic power of these three approaches in combination
can be cited. A particularly striking example is the
development and growth of Safelite, a company that installs
replacement windshields in cars. It competed successfully with
major and dominant companies in the business by a strategy of
focusing on selected regions, by partnering with insurance
companies that usually paid for the replacement windshields by
simplifying the insurance companies' verification and
reimbursement processes thereby significantly reducing their
clerical and claim processing costs, and by doing its own
installations contrary to the more expensive industry practice
of authorizing independent installers. Other companies such as
Air Products & Chemicals and Marks & Spencer have
followed these recommended guidelines to grow from being
industry upstarts to being the dominant players in their
industries.
A small business that
chooses to be focused, that is eager to build partnerships and
that dares to innovate is likely to be well positioned for
enduring success.
The
views, opinions and interpretations are personal.
Sponsorship does not mean that the sponsors endorse them.
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