Strategy comes from the military. Here, it was first recognized that the one who spreads his resources across all areas and tasks does not win the war. The one who uses a clear strength to his advantage wins. Three things are important for this:
1. You have to assess the situation.
2. From the information obtained, you describe policies for your actions.
3. Based on these guidelines, you derive specific activities.
In the following post, I outline a step-by-step frame in which these three points are developed further.
The steps to creating a small business strategy are:
- Analyse the competitive environment
- Analyse your potential customers
- Assess your company’s strengths and weaknesses
- Decide on a strategic direction
- Formulate strategic objectives
- Set up policies for your actions
- Find coherent actions to execute the strategy
- Define lead indicators for your actions
- Think of routines to develop
- Write a strategic plan
- Build a controlling spreadsheet
Analyse the competitive environment
Let’s start by looking at what a strategy is actually supposed to be. In essence, it sets out how a goal is to be achieved. The emphasis is on “how”! A forecast of sales and costs can therefore not be a strategy. Because, it only shows what (!) should be achieved. Even a vision or mission cannot be a strategy. Because here, too, we only learn what (!) is to be achieved.
A real business strategy shows a way (!!!) to act in certain situations. In order to chart that way, you have to figure out what terrain you are in, hence you have to analyse your competitive landscape.
How to conduct an industry analysis?
There is a famous model by Michael Porter – the 5 forces model. Here you should answer a few key questions.
- What is my market? (geographical, service offered, general target group, price level)
- How many competitors do I have and what are the top 5 or 10?
- What challenges do most market participants face?
- How did the top 5 players position themselves to overcome these challenges?
- What competitive advantages do they use?
- How do the top 5 find their customers and which customer groups do they address?
- How do suppliers influence business success? (Especially in the case of service providers and other small companies, you should also address landlords, employees, important cooperation partners and the like.)
- How easy is it for new competitors to enter the market, and why?
- How is the industry likely to develop over the next 10 years?
As mentioned, the questions correspond to the 5 forces model. However, they are just a basic version to start with. Anything else would go beyond the scope of this post.
In case you’d like to have more detail, I recommend you go to the source. It is the most comprehensive book on business strategy I know. I can honestly recommend it, if you are generally fit in business strategy already. It will boost your understanding immensely.
Analyse your potential customers
I deliberately left out the analysis of the customer side so far. The reason being, that especially small businesses (and I mean anybody up to $2-3 million in revenue) have to be extra cautious in this dimension.
Small businesses usually can’t go after the whole market on a state or nationwide level. This means that they need to differ from the big players. In order to achieve that, an analysis of what customers want has to be extra thorough, although it is a part of the first step.
How to analyse potential customers?
If you answer the following questions, you are going to get a detailed picture of the customers that make up your potential market.
- What specific buyer groups are in your market? (segment by age, location, income, motivation, values, etc. or company size, business sector, etc.)
- Why do these buyer groups usually buy your product or service?
- What about the product or service is most valuable or important to them?
- When and where do they normally buy?
- Which target groups can you not serve? Whose demands can you not meet? Which target group can you serve better than anybody else?
- What bargaining power or will do the customers have? (Are there many alternative providers? Is there proof they are willing to pay more?)
- What alternatives does the customer have outside the market? (= indirect competition)
- What portion of the customer‘s monthly budget does your product represent?
- Is the demand growing, stable or declining?
- Are there regional differences?
- Is your product or service used together with something else by the customer?
Also, this list isn‘t complete and the answers have to be considered with the other information about your competitve environment. They probably form the base of your marketing, after you designed your strategy.
A (thankfully quite short) book that definitely helped me understand the importance of being different with my service, is Seth Godin‘s „The Dip“. If you run your own company or are planning to do so, you have to read it. Because, it‘s going to kill your illusion that you can just offer the same as everybody else, just cheaper.
Analyse your company’s strengths and weaknesses
Think about what you can and want to bring to the party. This is about the question of which lasting (!) competitive advantages you already have or can develop. In general, there are the following categories into which advantages are sorted.
- the reputation of a company (especially with start-ups, you have to build it up first…)
- the network between companies, customers, suppliers and the organization of cooperation contained therein
- innovation not only in new products, but also in better processes or new ways of accessing customers (Caution: Innovation is only a lasting competitive advantage if it is not easy to copy.)
- monopoly situations, e.g. as the locally closest provider or as the only provider with a certain capability
- knowledge, skills, brand value or production capacities that have already been built up
- exclusivity, e.g. through distribution licenses or patents
If you decide to build up certain advantages to compete in your market, remember that you should focus on as few things as possible. Your goal must be to have one or two, at most three, strengths and use them better than your friendly competitor next door.
What is not a strength?
In my practice, I often encounter people who think that having a lot of money is a sustainable advantage. Especially single entrepreneurs also tend to think that being able to live on a low income means a competitive advantage. Neither falls in that category.
Having a broad capital base certainly helps. However, it is not very hard to copy. All I need as a competitor is a loan.
Using the red pencil on your income also helps to reduce payroll. However, it is not sustainable in the long term. So, that one doesn‘t fit the bill either.
Decide on a strategic direction
The next big step on the way to your small business strategy is to determine a general direction of action. This is about the question of what things you should and shouldn’t do in order to survive in your market with your competitive advantages and despite your competition.
Classic options for this step are:
- not doing something that all other competitors are doing
- to do something that the rest does not do
- a focus on a special target group within the market that no one or hardly anyone else serves or can serve
- to provide service standards or value propositions that stand out from the market
Behind these classics is Michael Porter‘s concept of generic strategies.
Basically, he concluded that a company in a broad market should go either for
- differentiation or „being the premium supplier“ or
- cost leadership or „being the cheapest supplier“.
Trying to be both is futile most of the time (and I mean like 98%+). The simple logic that you have to spend more on marketing than the competition, when following a differentiation strategy, excludes being the low cost leader, at least in this regard.
If you are in a narrow market, and nearly all small businesses are, you should follow a focus or niche strategy. Within it there is plenty of room for differentiation and cost leadership as well. It‘s just not aimed at everybody and his brother, trying to compete in the broad market.
In case you want to deepen your knowledge on differentiation strategy, I wrote an article on „When differentiation strategy works best“. It looks at the conditions under which differentiation can be applied and, even more important, when not to go down that road.
Deciding on a niche
Even though focus is not the same as niche, we could say, that all niches are a kind of subset of focus strategies. However, not all focus is niche. A niche is limited through geography, topic, customer group or specialised know-how. Focus on the other hand would also include a special production process, for example. Though, I admit the boundaries between the two are somewhat misty.
Anyway, many small business carve out a geographical niche for themselves or focus on a particular buyer group.
Formulate strategic objectives
Once, you decided on a general direction, you come to the heart of your business strategy. Your strategic objectives need to be well-chosen. By this I mean:
- they need to be rooted in reality
- you have to take your analysis into account („It doesn‘t make any sense to become the biggest fast food restaurant in town, when there is a McDonald and a Burger King right around the corner.“)
- ideally, they include using or building a sustainable competitive advantage
- they give you leverage
In the best case, you’ll find a goal or a group of goals that build on and reinforce each other. If that happens, prioritise your goals that allow you to support more than one. That is leverage.
Just like in a bowling alley, you want your pins (= goals) to stand close together, so you have to throw (= resources) only once. Imagine having only two pins, one on the left and one on the right. You are bound to use „twice the resources“.
To give you another resource to make your strategy the best it can be, I wrote an article on the factors that make a business strategy more likely to succeed. „What makes strategy successful?“ delves into the research on what makes some businesses more profitable than others. Some of it is common business sense. But there are also (at least for me) two surprises.
Set up policies for your actions
Your strategic guidelines should provide a general direction and rules on where not to go. They are not concrete activities yet, but rather the categories of actions that are then filled with real actions. As you formulate them, keep the following points in mind:
- You want your strategy to make the world easier for you. So, look for policies that don’t make your life unnecessarily complex. Keep them short and easy to understand. It will be hard enough to follow them.
- At the end of the day, you want to use a few strengths in the best possible way. So, you want to lay out rules for actions that will produce the greatest possible effect.
- The policies should make sense as a set and build on one another and reinforce one another. (By the way, this makes it more difficult for the competition to copy you…) For example, a high-priced service rarely goes well with ongoing discounts in the customer’s mind. So, a possible rule could be „We don‘t give discounts.“
The most difficult thing for you will probably be that you have to make decisions. And that means that you have to ignore some options and possibilities, even though they look interesting. If they don’t fit the focus of your business strategy, then don’t include them.
One of our customers needed to get rid of his two largest buyers. They brought 95% of the revenue. So, we said that all marketing and sales activities have to focus on medium-sized companies. No exception. (It was extremely hard for him to execute that rule. But it was the right choice… 🤓)
Of course, you should also put the guidelines in writing. It is best to cast them in the form of a single sentence. You should end up with about three to five of these strategic guidelines.
By the way, the logic of „Analysis -> Policies -> Coherent Actions“ comes straight out of Richard Rumelt‘s book „Good Strategy/Bad Strategy“. If you are new to strategy work or want to refresh some basics, this is the book I would go for. Rumelt is a master of cutting through the clutter and getting right to the heart of what a strategy is. The examples he uses are from all fields, from biblical and business to game theory and military. (It is on my „best books ever“-list…)
Find coherent actions to execute the strategy
After the guidelines, the vast majority of people have the feeling that this is a pretty sensible business strategy already. However, that is still not enough. The strength of your strategy is ultimately determined by how it is implemented in real life. To do this, it is crucial that you have a connection from a relatively abstract guideline to a concrete activity. It is even better, if you put this consideration into a time frame.
Your task now? Come up with activities from the policies and put them in a time frame! Here, too, it becomes painful when you realize that you cannot do everything and not everything at once. You have to decide what needs to be done first and what can wait.
My recommendation is to define small projects and tackle them one at a time. This could be:
- development of a sales process within half a year
- testing marketing ideas by the end of the following quarter
- creation of a process for customer support until the end of the next year
- generation of 3 innovation opportunities by 31.05. next year
Hopefully you can see that these things are already much more concrete. In addition, they have defined end times in the examples. There is an order that should, of course, follow an inner logic.
Example of coherent actions
What is there to consider at this stage? Well, you can’t make everyone happy and create everything that makes sense! You may have to give up some things. For many (including me) this is one of the most difficult aspects of a strategy. What you should definitely pay attention to is that things interlock. Many situations in real life have a logical sequence to follow. (“Getting dressed first and then taking a shower is proven not to be a useful way.”) Unfortunately, the use cases are also too different to be able to recommend a specific procedure here. Nevertheless, I attempt to give you an example, hoping to clear things up. It is a short version of the strategy we set up for the bookkeeping service we run.
Define lead indicators for your actions
In other articles, I said it already, coming up with a strategy is hard. Implementing it in real life makes creating it seem like pre-school. Just remember how hard it is to change your habits and routines. Then, you get an idea…
Fortunately for us, there is a body of research that provides us with some tools to overcome these conditions. In their book „The 4 disciplines of execution“, the authors designed routines to execute basically any strategy. The book shows you which (actually quite tiny) adjustments and routines you can generate a lot of impact when it comes to execution.
From this book, you should adopt the idea of finding lead indicators. By this, I mean, that revenue goals are all well and good. But they are lag indicators. It is more important to track the activities that generate revenue, which would be a lead indicator. With this little twist, you are able to steer your actions on a day-to-day basis.
For me, the indicators looked something like this:
| Coherent Actions | Performance indicator |
|---|---|
| write and publish 1 article per week | 500 words written per day |
| build up a marketing database of all small Ltd’s/LLCs in the area | 5 addresses entered per week |
| create a spreadsheet to visualise business data of our customers | Project plan to achieve the goal -> one activity per week |
Think of routines to develop
Speaking of lead indicators, the most powerful way to push your business to performance, is to develop routines and processes. Everything that can be routinised and developed as a habit AND that creates value for your customer should be in your focus.
It might seem the most boring way to you. However, if you look at every successful company, you‘ll see that they standardised their value creation chain.
Write a strategic plan
Write down what you found out. There are two reasons for this. On the one hand, writing it down forces you to think everything through logically and close some thoughts. On the other hand, by writing it down,
- you have created a form that you can transport, share, change and discuss.
- It also allows you to free your mind for other things and
- You can also come back later and update and revise your analysis, for example.
My suggestion is to put your whole reasoning into that plan. The last business strategy I worked on had a total of about 25 pages.
But do one thing as well: Write down your strategy as a kind of elevator pitch or something you could answer, if someone asks you what your strategy is.
To show you what I mean, I would like to briefly put a “classic” corporate strategy and the alternative next to each other using an example.
Example of a corporate strategy for a hairdressing salon
Classic version
Our vision is to become the market leader in our city and give every customer the best quality service. Our goal is to increase sales by 20% per year over the next 4 years, retain our employees and reduce costs by 10%.
Proper strategy
Our local market is characterized by many small salons. Most focus on none or one of the following 3 target groups: young adults; Adults between 30-50 or seniors. The difficulties everyone is struggling with are low prices, high employee turnover and high rents.
Therefore, we focus on children and young people. We will rent rooms away from the center and only open in the early afternoon. In this way, we can save costs and pay our employees better. Marketing is geared towards mothers online as they are mostly the decision makers.
We will promote one celebrity hairstyle per month (both boys and girls). We will also provide tablets for the entertainment of our little customers and a feel-good zone for the waiting parents. In addition, a photo series is set up with each child so that there are pictures of the coolest haircuts and the kids can find their own look.
Decide for yourself what sounds “more strategic” to you. I hope you see that the three elements of a good corporate strategy mentioned were all contained in the second version. And not once did I use the words revenue or vision.
Build a controlling spreadsheet
At last, you reached the end of our roadmap. To be effective, you should have a simple system in which you check on your progress. Of course, your lead indicators should be in it. Also, financial data and work times (especially for a service business) belong in there.
My only suggestion here is to report monthly. If you do it on a weekly basis, you soon notice that it is a lot of work. And the advantage you gain from having weekly data instead of monthly is not that high in most cases. Of course, your lead indicators you should track weekly.
Summary
A good corporate strategy consists of the right focus and the appropriate actions in which to specialize. The focus should not be chosen arbitrarily, but should be derived from a market analysis and your own (future) strengths.
In order to simplify and find a strategic direction, you should set guidelines for your daily activities. Based on this, you then look for specific things that you can do at a suitable time.
I hope I was able to convey an image that makes it clear that strategy is more than just writing down a few thoughts on vision and sales goals. And that it can give you an edge in the market, if done correctly.