Strategic Management and the Entrepreneur

Learning Objective
Upon completion of this chapter the students will be able to
Understanding the importance of strategic management to a small business. Explain why and how a small business must create a competitive advantage in the market Develop a strategic plan for a business using the steps in the strategic management process. Discuss the characteristics of low-cost, differentiation, and focus strategies and know when to employ them. Understand the importance of control as the balanced scorecard in the planning process

A Major Shift. . .
Without strategic plan a company can have success for a short time. Shift in the world economy from a base of financial capital to intellectual capital. Human- talent, skill, ability Structural- accumulated knowledge and experience Customer- customer base, positive reputation, ongoing relationship and goodwill.

Strategic Management
Is crucial to building a successful business. Involves developing a game plan to guide a company as it strives to accomplish its mission, goals , and objectives, and to keep it on its desired course.

Strategic Management and Competitive Advantage

The goal of developing a strategic plan is to creating a competitive advantage,
the aggregation of factors that sets a company apart from its competitors and gives it a unique position in the market.

Example: Blockbuster Video

Inventory cost is one tenth of the inventory Greater collection

Key: Core Competencies

Only building competitive advantage is not enough sustainable competitive advantage can be built by developing set of core competencies
Unique set of capabilities a company develops in key areas, (such as superior quality, customer service, innovation, team-building, flexibility, responsiveness, and others) that allow it to vault past competitors.

They are what a company does best. Best to rely on a natural advantage (often linked to a companys smallness).

Examples: Netflix online DVD rental Service

Strategic Management Process

Step 1. Develop a vision and translate it into a mission statement. Step 2. Assess strengths and weaknesses. Step 3. Scan environment for opportunities and threats. Step 4. Identify key success factors. Step 5. Analyze competition. Step 6. Create goals & objectives. Step 7. Formulate strategies. Step 8. Translate plans into actions. Step 9. Establish accurate controls.

Step 1: Develop a Vision and Create a Mission Statement

Vision
Purpose is to focus everyones attention on the same target and to inspire them to reach it An expression of what an entrepreneur stands for and believes in.

A clearly defined vision:

Provides direction determine the path Determines decisions influence decision Motivates people.- inspire people for action

Mission statement
Addresses question:" What business are we in?

Step 2: Assess Company Strengths and Weaknesses

Strengths
Positive internal factors that contribute to accomplishing the mission, goals, and objectives. Important skills, knowledge, resources that contribute to the firms success

Weaknesses
Negative internal factors that slow down the accomplishment of the mission, goals, and objectives.

Step 3: Scan for Opportunities and Threats Opportunities

Positive external factors the company can employ to accomplish its mission, goals, and objectives. Restaurant industry analysis Big Toys Coach Works

Threats
Negative external factors that inhibit the firm's ability to accomplish its mission, goals, and objectives. Competitor, government regulation, economic recession, interest rate raise, technological advances Wal-Mart

The Power of External Market Forces

Technological Competitive Economic

Political and Regulatory

Social and Demographic

Step 4: Identify Key Success Factors

Key success factors: relationships between a controllable variable and a critical factor that influence a companys ability to compete in the market. The keys to unlocking the secrets of competing successfully in a particular market segment.
Cost factors Product quality Solid relationship

Step 5: Analyze Competitors

Analyzing key competitors allows an entrepreneur to: Avoid surprises from existing competitors new strategies and tactics. Identify potential new competitors and the threats they pose. Improve reaction time to competitors actions. Anticipate rivals next strategic moves.

Sample Competitive Profile Matrix

Key Success Factors (from Step 4) Market Share Price Competitiveness Financial Strength Product Quality Customer Loyalty Total Weight 0.10 0.20 0.10 0.40 0.20 1.00

Your Business Competitor 1 Competitor 2 Weighted Weighted Weighted Rating Score Rating Score Rating Score 3 0.30 2 0.20 3 0.30 1 0.20 3 0.60 4 0.80 2 0.20 3 0.30 2 0.20 4 1.60 2 0.80 1 0.40 3 0.60 3 0.60 2 0.40 2.90 2.50 2.10

Step 6: Create Company Goals and Objectives

Goals and objectives give them target to aim for and provide a basis for evaluating performance. Goals - broad, long-range attributes to be accomplished. Objectives - more detailed, specific targets of performance that are S.M.A.R.T.
Specific Measurable Attainable Realistic (yet challenging) Timely

Step 7: Formulate Strategies

Strategy - a road map of the actions an entrepreneur draws up to fulfill a companys mission, goals, and objectives. It is the companys game plan for gaining a competitive advantage. Three basic strategies: Cost leadership

Strategy?

Differentiation

Focus

Three Strategic Options

Cost Leadership

Goal: to be the low-cost producer in the industry (or market segment). Low-cost leaders have an advantage in reaching buyers who buy on the basis of price, and they have the power to set the industrys price floor. Works well when:
Buyers are sensitive to price changes. Competing firms sell the same commodity products. A company can benefit from economies of scale.

Cost Leadership

Example: McDonald's has been extremely

successful with this strategy by offering basic fastfood meals at low prices. They are able to keep prices low through a division of labor that allows it to hire and train inexperienced employees rather than trained cooks. It also relies on few managers who typically earn higher wages. These staff savings allow the company to offer its foods for bargain prices.

Differentiation

Company seeks to build customer loyalty by positioning its goods or services in a unique or different fashion. Idea is to be special at something customers value. Key: Build basis for differentiation on a distinctive competence, something that the small company is uniquely good at doing in comparison to its competitors. Examples:
Federal Express with superior service; Caterpillar with high spare parts availability

Focus

Company selects one or more customer segments in a market, identifies customers special needs, wants, or interests, and then targets them with a product or service designed specifically for them. Strategy builds on differences among market segments.

Focus

Rather than try to serve the total market, the company focuses on serving a niche (or several niches) within that market.
Example, if you operate a bakery that only prepares wedding cakes, you would aim to be the cheapest producer of wedding cakes, although your competitors might produce cheaper cakes of other varieties. Examples: Its A Wrap! Production Wardrobe Sales . Sell wardrobe, props and equipments from several of the studios recent movies for the customers who wanted to wear what the stars had worn.

Step 8: Translate Strategies into Action Plans

Create projects by defining:

Purpose Scope Contribution Resource requirements Timing

Step 9: Establish Accurate Controls

The plan establishes the standards against which actual performance is measured. Entrepreneur must: Identify and track key performance indicators. Take corrective action.

Balanced Scorecards
A set of measurements unique to a company that includes both financial and operational measures Gives managers a quick, yet comprehensive, picture of a companys overall performance. Four Perspectives:
Customer: How do customers see us? Internal Business: At what must we excel? Innovation and Learning: Can we continue to improve and create value? Financial: How do we look to shareholders?

Balanced Scorecards
Four Perspectives:
Customer: How do customers see us?
Time : how long it takes to deliver Quality :reliability, durability accuracy of the product Performance : performance and expectation Service : how well it meets customer expectation of value?

Internal Business: At what must we excel?

Quality, cycle time, productivity, cost, other that employees directly influence

Innovation and Learning: Can we continue to improve and create value?

Continuous improvement

Financial: How do we look to shareholders?

Profitability, growth and shareholder value.

The Balanced Scorecard Links Performance Measures.

Financial Perspective
Goals Measures

How do we look to shareholders?

How do customers see us?

At what must we excel?

Customer Perspective
Goals Measures

Internal Business Perspective

Goals Measures

Innovation and Learning Perspective

Goals Measures Can we continue to improve and create value?