Section I - the Challenges of Entrepreneurship s1

SECTION 2 BUILDING THE BUSINESS PLAN: BEGINNING CONSIDERATIONS

———————————————————————————————————————————————————————————————————————— Chapter 2 Strategic Management and the Entrepreneur

Part One: Learning Objectives 1. Understand the importance of strategic management to a small business. 2. Explain why and how a small business must create a competitive advantage in the market. 3. Develop a strategic plan for a business using the ten steps in the strategic planning process. 4. Discuss the characteristics of three basic strategies: low-cost, differentiation, and focus. 5. Understand the importance of controls such as the balanced scorecard in the planning process

The “Chapter Review” on pages 70-71 summarizes these learning objectives.

Part Two: Chapter Outline – At a glance PowerPoint Slides: 2.1-2.38 Introduction Slide 2.1-2.3 Building a Competitive Advantage Slide 2.4-2.5 Strategic Management and Competitive Edge Slide 2.6-2.7 Key: Core Competencies Slide 2.6-7 The Strategic Management Process Slide 2.8-2.9 Step 1: Develop a Vision and Create a Mission Statement Slide 2.10-2.12 Step 2: Assess Company Strengths and Weaknesses Slide 2.13 Step 3: Scan for Opportunities and Threats Slide 2.14-2.16 Step 4: Identify Key Success Factors Slide 2.17 Step 5: Analyze Competitors Slide 2.18-2.25 Step 6: Create Company Goals and Objectives Slide 2.26 Step 7: Formulate Strategies: Three Strategic Options Slide 2.27-2.33 Step 8: Strategies into Action Plans Slide 2.34 Step 9: Establish Accurate Controls Slide 2.35 Balanced Scorecard Slide 2.36-2.38 Conclusion

Part Three: Lesson Plan

Introduction Developing a strategy for success is essential for entrepreneurs. Companies that are strategically prepared can gain and establish a competitive edge.

Strategic Management and the Entrepreneur Strategic management is:  Necessary for success is vital for success  Often over-looked as entrepreneurs rush to launch their business and never stop to define a workable strategy that sets them apart from their competition.  Viewed by some as dull and unnecessary and their tendency is to start a business, try several approaches, and “see what works.” Companies lacking clear strategies may achieve some success, but as competition stiffens or an unanticipated threat arises, they usually “hit the wall” and fold. Without a basis for differentiating itself, the best a company can hope for is mediocrity. Slide 2.1

Strategic Management Strategy is increasingly critical in today’s global competitive environment.  Any business not thinking and acting strategically is extremely vulnerable.  Every business is exposed to the forces of a rapidly changing competitive environment, and in the future small business executives can expect even greater uncertainty. This is due to: - Sweeping political changes. - Technological advances. - More intense competition and newly emerging global markets.

The “Knowledge Revolution” will spell disaster for companies that are not prepared for it, but it will spawn tremendous opportunities for entrepreneurs who are equipped with the strategies to exploit it.  The rules of the competitive game have been dramatically altered.  To be successful, entrepreneurs can no longer do things in the way they have always done them. Slide 2.2

A Major Shift The biggest change entrepreneurs face is unfolding now. The shift in the world’s economy from a base of financial to intellectual capital. “Knowledge is no longer just a factor of production,” says futurist Alvin Toffler. “It is the critical factor of production.’’ A company’s intellectual capital is likely to be the source of its competitive advantage in the marketplace. Intellectual capital is comprised of three components: 1. Human capital. The talents, skills, and abilities of a company’s workforce. 2. Structural capital. The accumulated knowledge and experience that a company possesses, including forms such as processes, software, patents, copyrights. 3. Customer capital. The established customer base, positive reputation, ongoing relationships, and goodwill a company builds up over time with its customers. Slide 2.3

Strategic Management Strategic management involves developing a game plan to guide the company as it strives to accomplish its vision, mission, goals, and objectives and to keep it from straying off its desired course. It is a blueprint for matching the company’s strengths and weaknesses to the opportunities and threats in the environment. Slide 2.4

BUILDING A COMPETITIVE ADVANTAGE

Strategic Management and Competitive Edge The goal of developing a strategic plan is to create for the small company a competitive advantage. The strategic plan is the aggregation of factors that sets the small business apart from its competitors and gives it a unique position in the market. The key to business success is to develop a unique competitive advantage and to create value for customers in a way that is difficult for competitors to duplicate. One of the biggest pitfalls many entrepreneurs stumble into is failing to differentiate their companies from the crowd of competitors. Entrepreneurs need to use creativity in order to set their business apart from their larger, more powerful competitors (who can easily outspend them). Examples of developing a competitive edge through strategic management include Honest Tea and In-N-Out Burger. Slide 2.5

Key: Core Competencies A company gains a sustainable competitive advantage through its ability to develop a set of core competencies. Core competencies are a unique set of capabilities that 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.  A company is likely to build core competences in no more than five or six (sometimes fewer) areas.  These core competences become the nucleus of a company’s competitive advantage.  Markets, customers, and competitors may change, but a company’s core competencies are more durable, forming the building blocks for everything a company does.  To be effective, these competences should be difficult for competitors to duplicate, and they must provide customers with some kind of perceived benefit.  Small companies’ core competences often have to do with the advantages of their size: agility, speed, closeness to their customers, superior service, and the ability to innovate. Their smaller size can be a significant advantage, allowing these more nimble organizations to do things that their larger rivals cannot. The key to success is building these core competences (or identifying the ones a company already has) and then concentrating them on providing superior service and value for its target customers. Small companies have a variety of natural advantages over their larger competitors.  Fewer product lines.  A better-defined customer base.  A specific geographic market area.  Close contact with their markets, providing valuable knowledge on how to best serve customers’ needs and wants.  Owners are in closer touch with employees. Slide 2.6-7

Discussion: What company do you consider successful? What are their core competencies? Expect student to discuss the core competencies of the companies they select and facilitate discussion to illustrate the significance of these competitive advantage those organizations have realized through those capabilities.

THE STRATEGIC MANAGEMENT PROCESS Strategic Management Process Strategic management may come more naturally to small businesses than to larger companies. Strategic management can increase a small firm’s effectiveness, but owners first must have a procedure designed to meet their needs and their business’s special characteristics. The strategic management procedure for a small business should include:  A relatively short planning horizon: two years or less for most small companies.  Informality and not overly structured; a shirtsleeve approach is ideal.  Participation of employees and outside parties to improve the reliability and creativity of the plan.  Failing to focus on setting objectives at the beginning—extensive objective setting early on may interfere with the creative process.  Strategic thinking, not just on planning, linking long-range goals to day-to-day operations. The Strategic Management Process is a continuous planning process consisting of 9 steps: Step 1: Develop a clear vision and translate it into a meaningful mission statement. Step 2: Assess the company’s strengths and weaknesses. Step 3: Scan the environment for significant opportunities and threats facing the business. Step 4: Identify the key factors for success in the business. Step 5: Analyze the competition. Step 6: Create company goals and objectives. Step 7: Formulate strategic options and select the appropriate strategies. Step 8: Translate strategic plans into action plans. Step 9: Establish accurate controls. Slide 2.8-9

Step 1: Develop a Vision and Create a Mission Statement A vision and a mission statement focuses attention and efforts on the same target. The vision touches everyone associated with the company—employees, investors, lenders, customers, and the community.  It is an expression of what entrepreneurs believe in and the values on which they build their businesses.  A vision statement addresses the questions: “What do we stand for?” “What do we want to become?”  Successful entrepreneurs are able to communicate their vision and their enthusiasm about that vision to those around them. Vision is based on an entrepreneur’s values. Slide 2.10

The mission statement:  Addresses the first question of any business venture: What business am I in?  Establishes the purpose of the business in writing gives the company a sense of direction.  Makes clear “why we are here” and “where we are going.”  Helps create an emotional bond between a company and its stakeholders, especially its employees and its customers. | Slide 2.11

Without a mission statement, a small business risks wandering aimlessly in the marketplace. The mission statement essentially sets the tone for the entire company. The elements of a mission statement include answers to these questions:  What are the basic beliefs and values of the organization? What do we stand for?  Who are the company’s target customers?  What are our core products and services? What customer needs and wants do they satisfy?  How can we better satisfy those needs and wants?  Why should customers do business with us rather than with the competitor down the street (or across town, on the other coast, on the other side of the globe)?  What constitutes value to our customers? How can we offer them better value?  What is our competitive advantage? What is its source?  In which markets (or market segments) will we choose to compete?  Who are the key stakeholders in our company, and what effect do they have on it?  What benefits should we be providing our customers five years from now?  What business do we want to be in five years from now?

Step 1: Develop a Vision and Create a Mission Statement - continued By answering the basic questions of the mission statement, the company will have a much clearer picture of what it is and what it wants to be. The firm’s mission statement may be its most essential and basic communication.  The mission statement expresses the firm’s character, identity, and scope of operations.  The most difficult part is living that mission every day.  That is how employees decide what really matters.  To be effective, a mission statement must become a natural part of the organization, embodied in the minds, habits, attitudes, and decisions of everyone in the company every day. A company may have a powerful competitive advantage, but it may be ineffective unless:  The owner has communicated that advantage to workers, who, in turn, are working hard to communicate it to customers and potential customers.  Customers are recommending the company to their friends because they understand the benefits they are getting from it that they cannot get elsewhere. Slide 2.12

Discussion: If you worked for a company, did you know their mission statement? If so, how was that mission statement communicated to the employees? Expect student to discuss if they were aware of the mission statements of former employers. Visit Websites that may assist in facilitating this discussion such as www.missionstatements.com.

Step 2: Assess Company Strengths and Weaknesses Strengths are positive internal factors that contribute to the accomplishment of a company’s mission, goals, and objectives. Weaknesses are negative internal factors that inhibit the accomplishment of its mission, goals, and objectives.  Identifying strengths and weaknesses helps an entrepreneur understand her business as it exists (or will exist).  An organization’s strengths should originate in its core competencies. The strength’s and weaknesses of a company are essential to its ability to remain competitive in each of the market segments in which it competes. The key to building a successful strategy is using the company’s underlying strengths as its foundation and matching those strengths against competitors’ weaknesses.

Strategic inventory: Prepare a balance sheet of the company’s strengths and weaknesses  The positive side should reflect important skills, knowledge, or resources that contribute to the firm’s success.  The negative side should record honestly any limitations that detract from the company’s ability to compete. This balance sheet should analyze all key performance areas of the business:  Personnel  Finance  Production  Marketing  Product development  Organization, and others This balance sheet should give owners a more realistic perspective of their business. This process points out foundations on which they can build future strengths and obstacles that they must remove. Slide 2.13

Step 3: Scan for Opportunities and Threats Opportunities are positive external options that the firm could employ to accomplish its objectives. The number of potential opportunities is limitless, so managers need analyze only factors significant to the business. Entrepreneurs must pay close attention to new potential markets.  Are competitors overlooking a niche in the market?  Is there a better way to reach customers?  Have environmental changes created new markets?  Examples include Emily Dalton, Jack Black, and Curran Dandurand. Threats are negative external forces that inhibit the firm’s ability to achieve its objectives. Threats to the business can take a variety of forms such as:  New competitors entering the local market.  A government mandate regulating a business activity.  An economic recession.  Rising interest rates.  Technological advances making a company’s product obsolete. These external market forces will have direct impact upon the behavior of the markets in which the business operates, the behavior of competitors, and the behavior of customers. By monitoring demographic trends as well as trends in their particular industries, entrepreneurs can sharpen their ability to spot most opportunities and threats well in advance, giving themselves time to prepare for them. Slide 2.14-16

Step 4: Identify Key Success Factors Every business is characterized by controllable variables that determine the relative success of market participants.  Identifying and manipulating these variables is how a small business gains a competitive advantage.  Focusing efforts to maximize their companies’ performance on these key success factors enables entrepreneurs to achieve dramatic market advantages over their competitors.  Companies that understand these key success factors tend to be leaders of the pack, whereas those who fail to recognize them become also-rans.  Key success factors are relationships between a controllable variable and a critical factor influencing the firm’s ability to compete in the market. For example, plant size, size of sales force, business location, distribution system, product packaging. Many of these sources of competitive advantages are based on cost factors such as:  Manufacturing cost per unit  Distribution cost per unit  Development cost per unit Some sources of competitive advantage are less tangible and less obvious such as:  Product quality  Services offered  Store location  Customer credit Entrepreneurs must analyze their businesses, their competitors, and their industries. They must then determine how well their companies meet these criteria for successfully competing in the market. Highly successful companies know and understand these relationships. Slide 2.17

Discussion: Perform a SWOT analysis on a company—possibly for the following Netflix “In the Entrepreneurial Spotlight” or using a case from the text—and lead students through this process. Expect student to participate as they identify the internal strengths and weaknesses, and the external opportunities and threats.

In the Entrepreneurial Spotlight – What’s Next for Netflix? Questions and Answers pages 51-52

1. What core competencies has Netflix developed? How has it used those core competencies to gain a competitive edge over it rivals? Netflix has developed core competencies in the area of cost efficiencies and responsiveness in transporting movies via a common delivery system—the United States Postal Service. They have leveraged these core competencies to provide a superior experience for their customers resulting in rapid growth and a high customer loyalty.

2. Conduct a SWOT (Strengths, Weaknesses, Opportunities, and Threats) analysis for Netfilx. (Refer to steps 2 and 3 of the strategic planning process.) An example of a SWOT analysis might include: Strengths: - No late fees—customers can keep movies as long as they want - Easy access to an extensive video library of 85,000 titles - Ultimate convenience with fast turnaround times with one-day delivery 95% of the time. - Ownership of commercial real estate properties Weaknesses: - A physically intensive and demanding infrastructure to store and process movie

deliveries and returns Opportunities: - Well positioned to be a movie download provider Threats: - Competitive activity from similar systems such as Blockbuster and others - Movie vending machines at fast food and grocery stores - Movie downloading over the Internet from competitors

3. Work with a group of your classmates to brainstorm ideas for ways in which Netflix can capitalize on Internet movie downloading. What should the company’s future strategy be? Expect students to use brainstorming to generate ideas for Netflix to position the corporation to take advantage of movie downloading opportunities. Students should then develop an initial strategy to facilitate the implementation of those ideas.

Step 5: Analyze Competitors A competitive intelligence exercise enables entrepreneurs to update their knowledge of competitors by answering the following questions:  Who are your major competitors? Where are they located? (An online search is a great place to start.)  What distinctive competencies have they developed?  How do their cost structures compare with yours?  How do their financial resources compare with yours?  How do they market their products and services?  What do customers say about them? How do customers describe their products or services; their way of doing business; the additional services they supply?  What are their key strategies?  What are their strengths? How can your company surpass them?  What are their primary weaknesses? How can your company capitalize on them?  Are new competitors entering the business? Entrepreneurs can benefit by analyzing their competition.  Study the industry and establish an understanding of its dynamics.  Identify key factors that may influence your ability to compete, including rivals, price competition and increased customer awareness. Slide 2.18

Competitor Analysis Categorize competitors as:  Direct competitors  Significant competitors  Indirect competitors Monitoring rivals’ movements through competitive intelligence programs is a vital a strategic activity. The primary goals of a competitive intelligence program. Slide 2.19

Competitor Analysis – continued Analyzing key competitors provides competitive insight and helps entrepreneurs in a number of areas including:  Avoiding surprises from existing competitors’ new strategies and tactics.  Identifying potential new competitors.  Improving reaction time to competitors’ actions.  Anticipating rivals’ next strategic moves. Many small companies fail to gather competitive intelligence because their owners mistakenly assume that doing so is too costly or simply unnecessary. One study by Stanford University and UCLA found that nearly 80 percent of business owners had no idea what their competitors were up to! Slide 2.20

Techniques to gain competitive information do not require unethical behavior. A small business owner can collect a great deal of information about competitors through low- cost methods including the following:  Monitor industry trade publications for announcements from competitors.  Talk to customers and suppliers about industry trends and issues  Listen to employees, especially sales representatives and purchasing agents.  Attend trade shows and conferences and collect the competitors’ sales literature. Slide 2.21

 Monitor competitor’s employment ads in the classifieds and online, including Criagslist.com  Conducting patent searches for patents that competitors have filed.  Check EPA reports for manufacturing updates and announcements.  Search databases for they types of materials and equipment competitors are importing. Slide 2.22

 Study competitor’s literature and, if appropriate, benchmark competitors’ products against yours.  Obtain credit reports from firms such as Dun & Bradstreet on each of your major competitors to evaluate their financial condition.  Check out the resources of your local library, including articles, computerized databases, and on-line searches.  Use the Internet to learn more about your competitors.  Visit competing businesses periodically to observe their operations. Slide 2.21-23

Discussion: Brainstorm with students regarding how entrepreneurs with limited resources can accomplish the goal of gaining insight into competitive activities. Expect student to leverage the ideas and concepts from the text in this discussion .

Competitor Analysis – continued By this stage of the planning, the owner has begun to compare her firm’s strengths with those of her competitors and to formulate ways of magnifying her strengths and exploiting their weaknesses. In other words, the entrepreneur is looking toward the future and planning ahead. One method to accomplish this is through knowledge management. Knowledge Management is the practice of gathering, organizing, and disseminating the collective wisdom and experience of a company’s employees to strengthen its competitive position. Many small companies fail to gather competitive intelligence because their owners mistakenly assume that it is too costly or unnecessary. The cost of collecting information about competitors and the competitive environment typically is minimal. The key is learning how to manage the knowledge a company accumulates. Knowledge management enables companies to get more innovative products to market faster, respond to customers’ needs faster, and solve (or avoid altogether) problems more efficiently. Because of their size and simplicity, small businesses have an advantage over large companies. Knowledge management requires that a small company identify:  What its workers know  Incorporate that knowledge into the business  Distribute it where it is needed  Leverage it into more useful knowledge In creating a knowledge management program, take an inventory of the special knowledge a company possesses that gives it a competitive advantage.  This involves assessing the knowledge bank that employees have compiled over time such as their customer databases, which can give insight into customers’ likes, dislikes, and buying habits and patterns.  Organize the essential knowledge and disseminate it throughout the company to those who need it using high-tech solutions such as e-mail, computerized databases, and software that allows many different employees to work on a project simultaneously.  Creating a knowledge management program is to continue to add to the knowledge base the company has assembled.

Competitive Profile Matrix A business owner can set up teams of managers and employees to evaluate each

Chapter 2: Strategic Management and the Entrepreneur 30 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall competitor and to make recommendations on specific strategic actions that will improve the firm’s competitive position against each. The owner can construct a competitive profile matrix for each market segment.  First, list the key success factors identified in Step 4 of the strategic planning process and to attach weights to them reflecting their relative importance.  Next, identify the company’s major competitors and to rate each one (and your company) on each of the key success factors. If factor is a: Rating is: Major weakness 1 Minor weakness 2 Minor strength 3 Major strength 4  Finally, simply multiply the weight by the rating for each factor to get a weighted score and then adds up each competitor’s weighted scores to get a total weighted score. The results should show which company is strongest, which is weakest, and which of the key success factors each one is best and worst at meeting. By carefully studying and interpreting the results, the small business owner can begin to envision the ideal strategy for building a competitive edge in her market segment. Slide 2.24-25

Step 6: Create Company Goals and Objectives Business goals and objectives provide targets to aim for and provide a basis for evaluating company’s performance. Creating goals and objectives is an essential part of the strategic management process. Goals are the broad, long-range attributes that a business seeks to accomplish; they tend to be general and sometimes even abstract. Goals are not intended to be specific enough for a manager to act on, but simply state the general level of accomplishment sought. These questions may help to establish these levels of accomplishment:  Do you want to boost your market share?  Does your cash balance need strengthening?  Would you like to enter a new market or increase sales in a current one?  What return on your investment do you seek?

Step 6: Create Company Goals and Objectives - continued Objectives are specific targets of performance.  Common objectives concern profitability, productivity, growth, efficiency, markets, financial resources, physical facilities, organizational structure, employee welfare, and social responsibility.  Because some objectives might conflict with one another, the manager must establish priorities. Well-defined objectives are:  Specific. Objectives should be quantifiable and precise. For example, “to increase retail sales by 12 percent and wholesale by 10 percent in the next fiscal year.”  Measurable Managers should be able to plot the organization’s progress toward its objectives.  Assignable Creating objectives without giving someone responsibility for accomplishing them is futile.  Realistic yet challenging Objectives must be within the reach of the organization.  Timely A time frame for achievement is important.  Documented The manager should make the number of objectives relatively small, from five to fifteen. The strategic planning process works best when managers and employees are actively involved jointly in setting objectives. Slide 2.26

Step 7: Formulate Strategies The next step is to evaluate strategic options and then prepare a game plan designed to achieve the business’s objectives. A strategy is a road map of the actions the entrepreneur draws up to fulfill the firm’s mission, goals, and objectives.  The mission, goals, and objectives spell out the ends.  The strategy defines the means for reaching them. A strategy is the master plan that covers all of the major parts of the organization and ties them together into a unified whole. The plan must be action-oriented and use the company’s core competencies as the springboard to success. In addition, a successful strategy is comprehensive and well integrated. Slide 2.27

Discussion: What are some examples of goals? What are some examples of objectives? How do goals and objective differ? Expect student to provide examples of each and demonstrate an understanding of the differences. A key point of differentiation is that objectives are quantifiable.

Three Strategic Options In his classic book Competitive Strategy, Michael Porter defines these three strategies: 1. Cost leadership 2. Differentiation 3. Focus Slide 2.28

Three Strategic Options – continued These strategic options are determined by the source of competitive advantage and the target market. Slide 2.29

Cost Leadership A company pursuing a cost leadership strategy strives to be the lowest-cost producer relative to its competitors in the industry. Low-cost leaders have a competitive advantage in reaching buyers whose primary purchase criterion is price, and they have the power to set the industry’s price floor.  Such a strategy works well when: - Buyers are sensitive to price changes. - Competing firms sell the same commodity products. - Companies can benefit from economies of scale. The most successful cost leaders know where they have cost advantages over their competitors, and they use these as the foundation for their strategies. An example of low-cost leader is Google that relies on a low-cost strategy to stay on top in a fiercely competitive search engine industry. Dangers in following a cost leadership strategy.  Sometimes, a company focuses exclusively on lower manufacturing costs without considering the impact of purchasing, distribution, or overhead costs.  Misunderstanding the firm’s true cost drivers.  A firm may pursue a low-cost leadership strategy so zealously that it essentially locks itself out of other strategic choices. Slide 2.30

Differentiation A company following a differentiation strategy seeks to build customer loyalty by positioning its goods or services in a unique or different fashion. There are many ways to create a differentiation strategy, but the key concept is to be special at something that is important to the customer. If a small company can improve the product or service’s performance, reduce the customer’s cost and risk of purchasing it, or both, it has the potential to differentiate. The key to a successful differentiation strategy is to build it on a distinctive competence, something the small company is uniquely good at doing in comparison with its competitors. Common bases for differentiation include:  Superior customer service  Special product features  Complete product lines  A custom-tailored product or service  Instantaneous parts availability  Absolute product reliability  Supreme product quality  Extensive product knowledge  The ability to build long-term, mutually beneficial relationships with customers To be successful, a differentiation strategy must create the perception of value in the customer’s eyes. There are risks in pursuing a differentiation strategy.  One danger is trying to differentiate a product or service on the basis of something that does not boost its performance or lower its cost to the buyer.  Another pitfall is over differentiating and charging so much that the company prices its products out of the market.  The final risk is focusing only on the physical characteristics of a product or service and ignoring important psychological factors: status, prestige, image, and style. Slide 2.31

Focus The principal idea of this strategy is to select one or more segments, identify customers’ special needs, wants, and interests, and approach the customers with a good or a service designed to excel in meeting those needs, wants, and interests. Focus strategies build on differences among market segments. A successful focus strategy depends on a small company’s ability to identify the changing needs of its targeted customer group and to develop the skills required to serve them.  Rather than attempting to serve the total market, the focusing firm specializes in serving a specific target segment or niche.  A focus strategy is ideally suited to many small businesses, which often lack the resources to reach a national market.  The most successful focusers build a competitive edge by concentrating on specific market niches and serving them better than any other competitor can.  A focus strategy depends on creating value for the customer either by being the lowest-cost producer or by differentiating the product or service in a unique fashion, but doing it in a narrow target segment. Pursuing a focus strategy is not without risk.  Companies sometimes must struggle to capture a large enough share of a small market to be profitable.  There is also the danger that larger competitors will enter the market and erode market share.  Sometimes a company with a successful niche strategy gets distracted by its success and tries to branch out into other areas. An effective strategic plan identifies a complete set of three success factors:  Financial  Operating  Marketing Combining these factors together produce a competitive advantage for the small business. Slide 2.32-33

In the Entrepreneurial Spotlight – Strategies for Success Questions and Answers page 64

1. Which of the three strategies described in this chapter are these companies using? Explain. SavRow uses a focus strategy that offers premium laptops to an elite customer group. This focus strategy allows them the ability to compete on a different level with other laptop manufacturers at a higher margin. Bacchus Caves has differentiated itself through its underground construction versus traditional solutions for home space. Their target market has unique needs that Bacchus Caves is able to meet through applying their expertise through this innovative construction method.

2. What advantages does successful execution of their strategies produce for SavRow Bespoke Technology and Bacchus Caves? In both cases, their strategies offer unique competitive advantages within the target markets they serve.

3. What are the risks associated with the strategies of these companies? The risks associated with these strategies may include: - The strategies are not sustainable—competitors may emulate their production techniques and the companies will not be able to defend their position. - Market tastes may change and depart from the focus of either company. - The companies may be inflexible and unwilling or unable to innovate and change. - The companies may become distracted as they attempt to branch out in other areas.

Step 8: Strategies into Action Plans To make the plan workable, the business owner should divide the plan into projects, carefully defining each one by the following:  Purpose What is the project designed to accomplish?  Scope Which areas of the company will be involved in the project?  Contribution How is the project related to other projects and to the overall strategic plan?  Resource requirements What human and financial resources are needed to complete the project successfully?  Timing Which schedules and deadlines will ensure project completion? Once managers assign priorities to these projects, they can begin to implement the strategic plan by involving employees and delegating adequate authority to them. Early involvement of the total workforce in the strategic management process is a luxury that larger businesses cannot achieve. It is important to remember that without committed, dedicated employees, an organization’s strategies usually fail. When putting their strategic plans into action, small companies must exploit all of the competitive advantages of their size by:  Responding quickly to customers’ needs.  Remaining flexible and willing to change.  Continually searching for new emerging market segments.  Building and defending market niches.  Erecting “switching costs” through personal service and special attention.  Remaining entrepreneurial and willing to take risks.  Acting with lightning speed to move into and out of markets as they ebb and flow  Constantly innovating Slide 2.34

Entrepreneurship In Action – Launching a New Airline: You Must Be Crazy! Questions and Answers page 66

1. Use the resources of the Web to research EOS and MAXjet and their positions in the airline industry. Are their strategies proving to be successful? What threats do EOS and MAXjet face? What do you product for the future of these two companies? Students should be able to find information regarding EOS at www.eosairlines.com . MAXjet is currently in a state of transition and the link at www.maxjet.com will provide information regarding its status. Based on this research, students should find a contrast in the performance of these two airlines. EOS seems to have found a unique space in the market and MAXjet experienced severe difficulties. Students may speculate on the fate of MAXjet and the potential of EOS. This comparison presents and opportunity to compare strategies and relate that to their outcome.

2. On a scale of 1 (high) to 10 (low), how would you rate the attractiveness of the airline industry to entrepreneurs who want to launch businesses? Explain. Student response will vary and most may find the airline industry unattractive primarily based on the level of rivalry within the industry. The power of suppliers, specifically airplane manufactures, may be secondary consideration.

3. Give the challenges the airline industry is facing, why would entrepreneurs such as David Spurlock and Gary Rogliano choose to launch start-up companies in such a challenging industry? What strategic recommendations would you make to these entrepreneurs? A key motivator might have been that they identified unmet needs that they thought their airlines might be able to profitably meet. For example, EOS targeted the travel needs of those looking for additional space at a premium price points. MAXjet focused on the value oriented business traveler. The performance of other specialty airlines, such as Virgin Airlines, may have supported this premise for success. The entrepreneurs must constantly review their strategies to confirm they are valid, meaningful to customers, and potentially profitable.

Step 9: Establish Accurate Controls Rarely, if ever, will the company’s actual performance match stated objectives. Hence the need to control actual results that deviate from plans. Controlling the strategy involves:  Planning without control has little operational value.  The plans created in this process become the standards against which actual performance is measured.  It is important for everyone in the organization to understand and be actively involved in the planning and controlling process.  The entrepreneur must identify and track key performance indicators.  Accounting, production, sales, inventory, and other operating records are primary sources of data the manager can use for controlling activities. Slide 2.35

Balanced Scorecard Some companies are developing balanced scorecards—a set of measurements unique to a company that includes both financial and operational measures.  The premise behind such a scorecard is that relying on any single measure of company performance is dangerous.  The complexity of managing a business demands that an entrepreneur be able to see performance measures in several areas simultaneously. Slide 2.36

The balanced scorecard looks at a business from five important perspectives. 1. Customer: How do customers see us? Customers judge companies by at least four standards: time, quality, performance, and service. 2. Internal Business: At what must we excel? The internal factors that managers should focus on are those that have the greatest impact on customer satisfaction and retention and on company effectiveness and efficiency. 3. Innovation and Learning: Can we continue to improve and create value? A company’s ability to innovate, learn, and improve determines its future. 4. Financial: How do we look to shareholders? These measures focus on such factors as profitability, growth, and shareholder value. Companies may break their financial goals into three categories of survival, success and growth.

5. Corporate Citizen: What must we do to meet our social responsibility to society as a whole, the environment, the community, and other stakeholders? This requires a company to have a sustainable and responsible strategy. Slide 2.37

Balanced Scorecard – continued Although the balanced scorecard is a vital tool that helps managers keep their companies on track, it is also an important tool for changing behavior in an organization and for keeping everyone focused on what really matters.  As conditions change, managers must make corrections in performances, policies, strategies, and objectives to get performance back on track.  A practical control system is also economical to operate. Slide 2.38

Discussion: What value might the balanced scorecard approach offer an entrepreneur? Expect student to identify the benefits of this five-perspective approach in evaluating the performance of the venture.

CONCLUSION The strategic planning process is an ongoing procedure that the small business owner must repeat. The resulting strategy should provide vision, direction and be practical. No small business should be burdened with an elaborate, detailed formal planning process that it cannot easily use. What does this strategic planning process lead to?  It teaches discipline that is important to his business’s survival.  It helps the entrepreneur in learning about his or her business, competitors, and, most importantly about customers. Although strategic planning cannot guarantee success, it does dramatically increase the small firm’s chances of survival in a hostile business environment.

Part Four: Discussion Questions

1. Why is strategic planning important to a small company? Companies lacking clear strategies may achieve some short-term success, but as competition stiffens or an unanticipated threat arises, they usually “hit the wall” and fold. Without a basis for differentiating itself, the best a company can hope for is mediocrity. Any business not thinking and acting strategically is extremely vulnerable to global competitors. Every business is exposed to the forces of a rapidly changing competitive environment, and in the future, small business executives can expect even greater uncertainty. The biggest change entrepreneurs face is the shift in the world’s economy from a base of financial to intellectual capital. It is a blueprint for matching the company’s strengths and weaknesses to the opportunities and threats in the environment.

2. What is a competitive advantage? Why is it important for a small business to establish one? The goal of developing a strategic plan is to create a competitive advantage for the small company. The aggregation of factors that sets the small business apart from its competitors and gives it a unique position in the market. It helps the small business focus on its best markets and develop the strengths that will help it dominate that market.

3. What are the steps in the strategic management process? Strategic planning is a continuous process that consists of 9 steps. Step 1: Develop a clear vision and translate it into a meaningful mission statement. Step 2: Assess the company’s strengths and weaknesses. Step 3: Scan the environment for significant opportunities and threats facing the business. Step 4: Identify key success factors Step 5: Analyze the competition. Step 6: Create company goals and objectives. Step 7: Formulate strategic options and select the appropriate strategies. Step 8: Translate strategic plans into action plans. Step 9: Establish accurate controls.

4. What are strengths, weaknesses, opportunities, and threats? Give an example of each. Strengths are positive internal factors that contribute to the accomplishment of a company’s mission, goals, and objectives. Example: Exceptional management team and a registered patient. Weaknesses are negative internal factors that inhibit the accomplishment of its mission, goals, and objectives. The key to building a successful strategy is to use the company’s strengths as its foundation and to match those strengths against competitors’ weaknesses. Example: Poor financial position and inadequate training of employees. Opportunities are positive external factors that the firm could employ to accomplish its objectives. The number of potential opportunities is limitless, so managers need analyze only factors significant to the business (probably two or three at most). Example: Entering a new high-potential market and the application of a proprietary technology to improve product performance. Threats are negative external forces that inhibit the firm’s ability to achieve its objectives. Example: Competitive activity that may diminish sales and government regulations that may hamper efficiencies.

5. What is knowledge management? What benefits does it offer a small company? Knowledge Management is the practice of gathering, organizing, and disseminating the collective wisdom and experience of a company’s employees for the purpose of strengthening its competitive position. Knowledge management enables companies to get more innovative products to market faster, respond to customers’ needs faster, and solve (or avoid altogether) problems more efficiently. It requires that a small company accomplish the following:  Identify what its workers know  Incorporate that knowledge into the business  Distribute it where it is needed  Leverage it into more useful knowledge

6. Explain the characteristics of effective objectives. Why is setting objectives important? Business goals and objectives provide targets to aim for and provide a basis for evaluating company’s performance. Goals are the broad, long-range attributes that a business seeks to accomplish; they tend to be general and sometimes even abstract. Objectives are specific targets of performance.

7. What are business strategies? Explain the three basic strategies from which entrepreneurs can choose. Give an example of each one.

A strategy is a road map of the actions the entrepreneur draws up to fulfill the firm’s mission, goals, and objectives. A strategy is the master plan that covers all of the major parts of the organization and ties them together into a unified whole. Entrepreneurs may choose one of these three strategies:  Cost Leadership: The ability to provide the product in a highly efficient manner with examples like Ikea and Wal-Mart.  Differentiation: Providing a unique product with examples like Rolex and Pharmaca.  Focus: Selection of a limited segment to meet their specific needs with examples such as Jolt Cola, Clown Shoes and Props from the text.

8. Describe the three basic strategies available to small companies. Under what conditions is each most successful? In his classic book Competitive Strategy, Michael Porter defines these three strategies: cost leadership, differentiation, and focus.  A company pursuing a cost leadership strategy strives to be the lowest-cost producer relative to its competitors in the industry.  A company following a differentiation strategy seeks to build customer loyalty by positioning its goods or services in a unique or different fashion.  The principal idea of the focus strategy is to select one or more segments, identify customers’ special needs, wants, and interests, and approach the customers with a good or a service designed to excel in meeting those needs, wants, and interests.

9. How is the controlling process related to the planning process? Rarely, if ever, will the company’s actual performance match stated objectives. Hence the need to control actual results that deviate from plans. The measures created in the control-planning process become the standards against which actual performance is compared. To control projects and keep them on schedule, employees must identify and track key performance indicators.

10. What is a balanced scorecard? What value does it offer entrepreneurs who are evaluating the success of their current strategies? The balanced scorecard looks at a business from four important perspectives. Although the balanced scorecard is a vital tool that helps managers keep their companies on track, it is also an important tool for changing behavior in an organization and for keeping everyone focused on what really matters. The balanced scorecard addresses these perspectives and answers these questions: 1. Customer: How do customers see us? Customers judge companies by at least four standards: time, quality, performance, and service. 2. Internal Business: At what must we excel? The internal factors that managers should focus on are those that have the greatest impact on customer satisfaction and retention and on company effectiveness and efficiency. 3. Innovation and Learning: Can we continue to improve and create value? A company’s ability to innovate, learn, and improve determines its future. 4. Financial: How do we look to shareholders? These measures focus on such factors as profitability, growth, and shareholder value. Companies may break their financial goals into three categories of survival, success and growth. 5. Corporate Citizen: What must we do to meet our social responsibility to society as a whole, the environment, the community, and other stakeholders? The role of the corporate citizen requires a company to have a sustainable and responsible strategy.

Chapter 2: Strategic Management and the Entrepreneur 44