Crafting a Business Plan and Building a Solid Strategic Plan 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 value proposition that sets a small business apart from its competitors and gives it a unique position in the market that is superior to its rivals. – It is the differentiating factor that makes customers want to buy from your business rather than from your competitors. • Example: Blockbuster Video – Inventory cost is one tenth of the inventory – Greater collection Building a Competitive Advantage • Entrepreneurs should examine five aspects of their businesses to define their companies’ competitive advantages – Products they sell – Service they provide – Pricing they offer – Way they sell – Values to which they are committed 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. – Small companies’ core competencies often have to do with the advantages of their size, such as agility, speed, closeness to their customers, superior service, or the ability to innovate. – Examples: Netflix – online DVD rental Service Key: Core Competencies • Successful small companies are able to build strategies that exploit all the competitive advantages that their size gives them by doing the following: ● Responding quickly to customers’ needs ● Providing the precise desired level of customer service ● Remaining flexible and willing to change ● Constantly searching for new, emerging market segments Key: Core Competencies • Successful small companies are able to build strategies that exploit all the competitive advantages that their size gives them by doing the following: ● Building and defending small market niches ● Raising “switching costs,” the costs a customer incurs by switching to a competitor’s product or service, through personal service and loyalty ● Remaining entrepreneurial and willing to take risks and act with lightning speed ● Constantly innovating 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 everyone’s 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 Political and Regulatory Economic Social and Demographic Step 4: Identify Key Success Factors • Key success factors (KSF): these factors determine a company’s ability to compete successfully in an industry – Cost factors (such as manufacturing cost per unit, distribution cost per unit, or development cost per unit.) – superior product quality, – solid relationships with dependable suppliers, – superior customer service, – a highly trained and knowledgeable sales force, – prime store locations, – readily available customer credit, and many other Step 4: Identify Key Success Factors • Identifying the KSFs in an industry allows entrepreneurs to determine where they should focus their companies’ resources strategically. • Successful entrepreneurs focus on surpassing their rivals on one or two KSFs to build a sustainable competitive edge Step 5: Analyze Competitors The primary goals of a competitive intelligence program include the following: – Conducting continuous rather than periodic analysis of competition – 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 company’s mission, goals, and objectives. It is the company’s 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 industry’s 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 • Successful cost leaders often find – low-cost suppliers (or use a vertical integration strategy to produce their own products), – eliminate the inefficiencies in their channels of distribution, – use the Internet to cut costs, and – operate more efficiently than their competitors. – They are committed to squeezing every unnecessary cost out of their operations. • Example: McDonald's has been extremely successful with this strategy by offering basic fast-food 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. • A small company has the potential to be a successful differentiator. – If it can improve a product’s (or service’s) performance, – reduce the customer’s cost and risk of purchasing it – provide intangible benefits that customers value (such as status, prestige, exclusivity, or a sense of safety), • Examples: – Federal Express with superior service; – Caterpillar with high spare parts availability Focus • Businesses with a focus strategy sell to these specific segments rather than try to sell to the mass market • Because they are small, flexible, and attentive to their customers’ particular needs, small companies can be successful in niches that are too narrow for their larger competitors to enter profitably. • These companies focus on a narrow segment of the overall market and set themselves apart either by becoming cost leaders in the segment or by differentiating themselves from competitors. 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: It’s 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. What is the project designed to accomplish? – Scope. Which areas of the company will be involved in the project? – Contribution. How does the project relate 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? 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 company’s 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? – Corporate Citizenship Balanced Scorecards • Five 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. – Corporate Citizenship • How well are we meeting our responsibility to society as a whole, the environment, the community, and other external stakeholders? Even small companies must recognize that they must be good business citizens.