years' counseling business owners through the Small Business Institute, SCORE .... larger firms typically have more money to allocate to information technology, ...
SMALL BUSINESS IMPERATIVE: IDENTIFYING & DEVELOPING COMPETITIVE ADVANTAGE Martin S. Bressler, Houston Baptist University Abstract Perhaps one of the most critical activities for any business is to identify and develop a sustainable competitive advantage. This process can be difficult and time consuming, especially for small and emerging businesses in industries where numerous competitors already exist. Many entrepreneurs, however, do not understand the process or the importance of developing a sustainable competitive advantage. All too often new small businesses fail to stake out a position in the market where they can succeed. Some attempt to compete against much larger competitors on the basis of price, while others presume that all they have to do is open a storefront and customers will come to buy from them. In this paper, key research findings will be examined and a model approach will be provided for business owners to leverage their business resources and strengths. Introduction One of the most important keys to success for any entrepreneur is to develop a competitive advantage, particularly one that is sustainable over a period of time. In the course of many years’ counseling business owners through the Small Business Institute, SCORE, and the Small Business Development Center, the author has found that this is an area where many small business owners are not well-prepared. Generally, the business community does not welcome the entrepreneur with open arms; rather, competitors seek to keep the new entry business from taking market share away from them. This is especially true when the market is not growing and cannot easily assimilate new market entrants. Developing competitive advantage becomes critical at the market entry stage and continues in importance throughout the life of the business. New entrants to existing markets need an entry wedge to successfully penetrate the market and earn enough market share to become profitable and successful. A strategy based upon real sustainable competitive advantage can provide the new business entry the necessary wedge, thus establishing the business in the market. Too many entrepreneurs suffer from the “If we build it, they will come” mentality. Simply putting a sign out front and opening up for business will not be enough. Small business owners generally cannot compete with larger businesses on the basis of price, and therefore must consider other approaches to competition. A popular entrepreneurial venture is to open a restaurant, and when asking the prospective restaurant owner how he will compete, the typical answer is “we will offer good food at good prices”.
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Winer (2004) states that competitive advantage is developed on the basis of three characteristics. First, competitive advantage must be able to generate customer value. Customer value may be defined by the customer in terms of speedy delivery, lower price, convenience, or other characteristics. Second, the customer must be able to perceive the increased value of the product or service. Whether or not your product is superior to the competition is not as important as whether the customer perceives your product to be superior. Intel recognized this fact and began an aggressive marketing campaign using the catch phrase “Intel inside” and printed on labels on the outside of computers manufactured by IBM, Compaq, and others. Third, for competitive advantage to be effective, it should be difficult for competitors to copy. The more difficult to copy the more sustainable that advantage is. American Airlines was the first to offer customers a Frequent Flyer program, but the concept was too simple and easy to copy. Before long, virtually every airline offered a similar program. How did new, emerging airlines develop competitive advantage? SouthWest Airlines found creative ways to manage costs by using airports in secondary cities and only one model aircraft while providing customers a unique flying experience. Discussion Many of the competitive advantage examples found in the literature are larger companies. In some instances, small businesses may be able to adapt big business strategy to their small business. However, examples also exist of smaller businesses that effectively develop competitive advantage. Following are examples of both small and larger companies’ strategies for competitive advantage. Businesses may develop competitive advantage through application of marketing mix elements. The marketing mix is typically considered to be product, price, place, and promotion. The author considers people to be the linchpin that pulls together the other four elements of the marketing mix. Price, as a component of the marketing mix, can be controlled by the entrepreneur. Of course there are a number of value propositions; however, small businesses may find their best chance for success by competing on high price, better value. In other words, offering the customer “more value” which may be delivered in terms of higher levels of customer service, product knowledge, or key locations (including going to the customer). According to Timmons, (2004) a common mistake among high value-added products and services is to under price---sometimes by as much as 20 percent (p.99). An effective strategy for an emerging business may be to price at the higher end, especially if the customer perceives greater value, as defined by the customer. Some business owners presume that customers will always purchase on the basis of price. However, experience shows that customers will pay higher prices for better quality, better service, brand or image, and convenience. A product offering which might not be readily available by other competitors such as broader selection, or specialty brands may be an effective means to leveraging the marketing mix. Small businesses may also use a focused approach to merchandising which results in narrow product
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categories but with a broad selection of goods. For example, Wal Mart might sell a few models of golf clubs at low prices but there exists an opportunity for a golf store to offer many brands ranging from lower to higher prices, along with a broad selection of accessories. Small businesses might also engage in product differentiation. Some examples are Perdue chicken, Volvo automobiles, and Bose electronics speakers. Product differentiation may be based upon appearance (as with Perdue chicken with that golden yellow color) that convinces us that Perdue chicken is fresher and better. Volvo differentiates their automobiles on the basis of safety features, performance, and style (note: you can combine several characteristics to provide a unique mix of benefits to offer the consumer). Bose speakers are priced higher than the competition but have the reputation for superior sound quality. Differentiation may also be accomplished through service offerings which could include delivery, installation, customer training, repair and warranty work. While many big companies have cut back on these services or charge a higher price for them, smaller businesses might develop a competitive advantage through offering these services. During the 1970’s Americans went back to riding bicycles; in part for exercise and in part as a response to the energy crisis. Many of the big chain stores started offering more bicycles for sale. Small, local bicycle shops offered services the big chain stores could not----assembly and service. Many businesses leverage the marketing mix through effective use of place. For example, Club Med uses unique locations to attract customers to vacation at their resorts. To this, they have added a unique sailing ship that cruises the Caribbean with special water sports features. Ice cream vendors realized a great way to sell more ice cream was to go to the customer by sending trucks out to neighborhoods, baseball parks, and beaches. Amazon.com uses channel differentiation with the Internet and sidesteps the need to build bookstores across the country much the same way Dominoes Pizza outmaneuvered Pizza Hut by building low cost storefronts which offer customer pickup and home delivery rather than the traditional eat-in restaurant. Caterpillar Equipment, Lexus and Saturn automobiles use exceptional dealer networks to differentiate their product lines from the competition. Small businesses may also be able to leverage place through effective distribution. Except for a few giant firms such as SYSCO and U.S. Foodservice, the foodservice industry is characterized by many small firms. With approximately 3,500 companies and 6,000 warehouses competition is fierce. Perkins (2004) finds that smaller firms can effectively compete three ways. Smaller firms can develop long-term relationships, provide outstanding service, and develop economies of scale. Typically, these are accomplished through membership in alliances such as the Progressive Food Alliance or UniPro Foodservice. According to Nation’s Restaurant News (Perkins, 2004) These member groups provide benefits to their members that they otherwise could not attain including sales training facilities, marketing services, networking, and procurement strength. Competitive advantage through distribution can be achieved if the small business is able to leverage technology to develop cost savings. Unlike most sanitation companies which invest their money on purchasing trucks; Rumpke Consolidated (Eckhouse, 1998) utilizes a routing management system for their fleet which allows the company to be more efficient. Although
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larger firms typically have more money to allocate to information technology, new emerging ventures are funding their information technology at a rate of 8.9% percent of sales, compared to 7.1% for Fortune 500 companies. Another way to differentiate small business can be through promotional activities. Your business may choose to offer more promotions or more visible promotions. Too many promotions go unnoticed because of poor promotion choices, poor timing, or not linking promotions to other marketing activities. Successful marketing requires an integrated approach that connects promotion to advertising, public relations, direct marketing, and other activities. Inscape, a small Toronto based manufacturer (Vinas, 2004) of workstation office furniture managed to secure a 17 million dollar contract from Best Buy as a result of an intense effort on the part of senior management at Inscape. Although their quality was not in question, Inscape management had to convince Best Buy that they could deliver on a contract of that size. Small businesses might be able to coordinate promotional activities with local events which may include a county fair, rodeo, film festival, or other event. Competing restaurants may even get together to develop a chef cook-off featuring pastries, chili, barbeque, or other type of food. Companies such as Ritz Carlton, McDonald’s, and Starbucks develop a unique image that customers associate with that business. An image may be formal or informal, based on lifestyle, quality, atmosphere, or other characteristic. For example, Starbucks has developed an excellent image based on lifestyle. Although their basic product, coffee, has been around for a long time, Starbucks focuses on high quality coffee combined with a relaxed setting and fun, casual atmosphere. Although the importance of people is noted by Peters (1985), Drucker (, and other authors, the role of your employees is not considered to be an equally important ingredient in the marketing mix. People, however, are not only responsible for producing products, but more importantly for delivering service. Employees on the front lines; such as cashiers, customer service representatives, and salespeople have the greatest contact and often the greatest impact on customer satisfaction. As with the elements of the marketing mix, people play a critical role in development and implementation of competitive advantage. More and more companies today are recognizing the importance of customer satisfaction and the relationship to profitability, and more importantly, competitive advantage. Sheth (stated in Whitely) found that it costs companies five times more to acquire a new customer than to keep the customers it already has. Other studies confirm this belief. Bain and Sasser’s research (cited in Whitely) revealed that as little as a five percent increase in customer loyalty can increase profitability up to one hundred percent. Bain & Sasser found no correlation between “satisfied” customers and customer retention. Only when customers indicated they were “highly satisfied” did customer retention increase. Jones and Sasser (1995) studied customer satisfaction in five different industries and found that as satisfaction levels increase, so does customer loyalty. Another study (cited in Kotler, 2004) by AT&T revealed that 70 percent of customers who report satisfaction with service are still willing to switch to a competitor and Xerox reported that “totally satisfied” customers are six
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times more likely to be repeat purchasers of Xerox products than customers who are “satisfied”. Obviously, as employees throughout the organization are responsible for customer satisfaction, leveraging your employees and other relevant stakeholders should be the cornerstone of developing your competitive advantage. A Long Beach, California small business (Hyatt et al, 2004) was faced with heavy competition from Starbuck’s and other coffee competitors. The owner of Polly’s Gourmet Coffee, Mike Sheldrake, now has 11 competitors within 900 yards of his coffee shop. Sheldrake uses his employees as a key part of his marketing strategy. Sheldrake retrained his employees to greet customers by name and provide superior service. Incentives are now given to employees to motivate them to higher levels of service. Along with some in-store promotions, this new strategy has helped Sheldrake turn his business around from losing money to increasing sales and profitability. Disney employees are known for superior product knowledge and personalized service. Disney spends greater effort on training their employees, recognizing that the return in customer satisfaction will be far greater than training costs. A local Dairy Queen franchisee known to the author owns two franchise locations which consistently rank first and second in sales in their region spends more than twice as much time training employees than other fast food chains. This successful franchise owner focuses on highly selective hiring practices, detailed and formalized training, and recognizing and rewarding their employees. The result is increased sales and profitability and extremely low employee turnover in an industry known for high turnover. When IBM came under attack from a number of competitors, they focused efforts on using their highly trained professional employees to provide customer solutions. In this age of poor customer service, small businesses may find “people” as the key to effectively competing against larger companies with more resources. Peters and Austin (1985) suggest employees are critical in converting customers to “raving fans”, who will help promote your company for you by sharing their exceptional customer experiences with friends and family (p. 87). Small businesses may also develop competitive advantage through franchise arrangements. Though not conclusive, some studies suggest that a franchise agreement might
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Figure 1 The New Marketing Mix
PRODUCT
PEOPLE
PLACE
The Marketing Mix
PRICE
PROMOTION
enhance small business competitiveness (Knight, cited in Pilling). Other studies (Bracker and Pearson, cited in Pilling) found no significant performance improvement among franchised small businesses. These studies do argue that failure rates among franchised businesses tend to be lower than other small businesses. Many small companies have banded together in buying groups so that collectively they have the buying power of much larger firms. Buying groups have emerged in groceries, hardware, appliances, and furniture among other categories. Hardy & Magrath (1987) reported that almost half of retail hardware sales in the U.S. are by dealer buying groups representing more than 25,000 members. Buying groups have become so popular that hospitals, dentists, veterinarians, and even lawyers are developing their own buying organizations.
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In addition to this new variation of the marketing mix, emerging small businesses may leverage buying groups, franchise agreements, and strategic partnerships. Small businesses must also be aware of key issues and concerns to be considered in developing comparative advantage. Key Issues in Competitive Advantage Cost plays a major role in competitive advantage and is often the basis upon which larger companies compete. Some are even able to become the low cost producer. Cost is usually not an advantage for smaller companies as big companies can negotiate lower resource costs. However, the possibility of lowering costs through reduced capital equipment, location, or overhead should not be overlooked. Some companies may not have an overall lower cost structure, however may be able to leverage specific costs such as lower distribution cost, lower labor cost, or lower capital investment cost. Another issue in competitive advantage is control. According to research (Porter, 1985) fragmented markets having leaders with less than 20% market share have less control over supplier resources than smaller markets where the market leader has a larger share of the market. Small businesses and new business ventures need to be mindful of this as they are less likely to have large market shares. Entry and exit barriers may also provide competitive advantage. These barriers may take various forms. Entry barriers that thwart competitors but help your business may include a favorable window of opportunity that results in advantages in response/lead time, innovation, people, location, resources. Smaller businesses often have an advantage here, as many larger companies are slower to act and react, as decision making often goes through corporate bureaucracy. In addition, the conservative nature of corporate managers not wanting to risk making mistakes and sabotaging their own careers means managers in larger companies are more risk averse. Entry barriers may also include intellectual property rights, specialized knowledge, or licensing and permits. Exit barriers make it difficult for a company to leave an industry, sometimes due to high cost of investment in capital equipment or leases. Management, or leadership, plays a critical role in developing competitive advantage. Can management motivate employees and inspire them to higher levels of performance? Has the new business venture assembled the right team with diversity of opinion and complementing strengths? Does management have the ability to find the future and inspire innovation throughout the organization? Porter contends that managers often focus on financial performance, obtaining assistance from the government, or building alliances and mergers rather than real leadership. Porter (1996) suggests that “today’s competitive realities demand leadership. Leaders believe in change; they energize their organizations to innovate continuously” (p. 195). Organizational culture signals receptivity to innovation and entrepreneurship within an organization. Porter (1985) states “business unit managers can often create the greatest competitive advantage through entrepreneurship that identifies and exploits interrelationships” (p. 391). Companies such as 3M have created a culture of entrepreneurship throughout the
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organization and have been able to extend or create new product life cycles and benefit from the most profitable cycle stages. Management must also possess industry and technical expertise. Will the new business venture be operating in an industry familiar and well-known to the management team? If not, the new business venture may have a much lower probability of success. New business ventures will also need to build credibility early to be perceived by customers, suppliers and others as a company with integrity. Some managers may find this task difficult as it relates not only to industry and technical expertise, but also honesty and the ability to deliver to the customer as promised. This may include meeting deadlines or delivery dates, product quality levels, or other terms of business. Intellectual honesty relates to the above, and becomes especially important when the entrepreneurial team has left other companies to start their own new business venture. Business opportunity begins with strategic fit. Do the goals and objectives of the new business venture fit with the strategy necessary to be successful in the marketplace? When evaluating business opportunities risk must also be considered. Typically in small companies, with fewer resources, entrepreneurs are more motivated to seek resources or create them. By having fewer resources, they experiment more, and have more incentive to act (Mosakowski, reported in Hitt, p. 5). Is there a balance between risks and rewards? Generally, it appears that small companies tolerate risk more, though there may not be as much room for error. Many entrepreneurs recognize the need to delegate and allow room for trial and error as the means to innovation. Opportunity also includes timing. Some may call it luck, but identifying and exploiting the window of opportunity is critical to market penetration. Timing selection may be enhanced with a greater examination and review of new developments in technology as well as changes in society and lifestyle. Smaller companies often have the advantage of flexibility, being able to change direction quickly if needed. Larger companies, tied up with bureaucracy, might take months to make decisions and act on them. But even small companies might not be able to leverage flexibility if management fails to delegate or slows down reaction times with bureaucratic policies and procedures. Competitive advantage requires offering the customer more value than the competition. Value is defined by the customer and may mean more quantity for less (value meals), better, or extra services (such as delivery or installation), speed of delivery, whatever the customer values. Some customers value lower prices while others value time or convenience. Customers often seek a combination of these, such as speed of delivery and lower prices. Whiteley (1996) recommends developing a special process for your best customers and points to what Westin Hotels has done to distinguish their hotel chain in a very crowded marketplace (p. 180). Shackleton, the CEO at Westin, researched and found that a significant percentage of their
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business came from a small number of key business clients. Westin then worked to develop strategic partnerships with these key accounts so that they would not have to negotiate each year on price, but rather on the basis of key shared values. Figure 2 Key Issues in Developing Competitive Advantage
COSTS
*Overall low cost producer *Distribution *Labor *Raw materials MANAGEMENT
OPPORTUNITY
*The Team *Integrity *Industry & Technical expertise
*Strategic fit *Risk/reward *Opportunity costs *Innovation
CUSTOMER SATISFACTION
*customers who are “highly satisfied” *“raving fans”
ENTRY/EXIT BARRIERS
PRICING
*High/low? *Value *Cost *Target return *Competition
*Regulations *Licensing *Timing *Experience curve effect
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Steps in Developing Competitive Advantage The first step in developing competitive advantage is to identify your relevant competitors. In some businesses, such as the fast food industry, your competitors may be relatively close in distance. How far would someone reasonably travel to buy lunch? In other industries, the nature of your product or service offering is such that customers will go out of their way to purchase your product or service. An example of this might be ice skate sharpening. There are few places that sharpen ice skates; therefore customers are accustomed to go out of their way to get skates sharpened. The more unique your product or service offering, the more likely customers will travel some distance for it. Next, business owners must identify their strengths and business resources. These might include location, specialty product merchandise, or better-trained and more knowledgeable employees. If the business is a new business venture, this step should focus on the various resources that the business is able to bring together. While these may seem limited compared to the resources of larger competitors, competitive strategy is more about leveraging what resources are available to you. Finally, the business venture needs to identify a position in the market commensurate with the resources and capabilities of the business. Porter (1996) states “strategy can be viewed as building defenses against the competitive forces or as finding positions in the industry where the forces are weakest” (p. 35).
Steps in Developing Competitive Advantage
Identifying Competitors
Identifying Company Strengths & Resources
Stake out a Market Position
Summary Early researchers such as Gale (cited in Dean et al) found that larger companies possessed numerous advantages over small firms (p. 709). However, more recent studies such as Hamermesh and Woo and Cooper (cited in Dean et al) concluded that smaller market shares did not always result in poor financial performance (p. 709). More studies are confirming that small business ventures can indeed compete successfully against larger firms.
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Emerging small businesses can model competitive techniques utilized successfully by other small businesses. Studies (Barney, 2001; Sushil, 2000 cited in Ambastha & Momaya) cite the importance of flexibility, agility, speed and adaptability as becoming increasingly important sources of competitiveness in the current dynamic business environment. Small businesses, by their very nature, should have the advantage in these areas but only if they can leverage these sources of competitiveness effectively. In addition, buying groups, strategic partnerships, intense promotional efforts, and effective use of people within the small business have been proven techniques in developing competitive advantage for small businesses. The competitive marketplace has reached the point of “super competition”, where today competition comes from across the globe and by way of the Internet. Competitive advantage has never been more important. Businesses, especially small businesses, must go back to the basics of competition to develop sustainable competitive advantage.
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References Ambastha, A. & Momaya, K. (2004). “Competitiveness of Firms: Review of Theory, Frameworks, and Models,” Singapore Management Review, 26 (1), 45. Dean et al (1998). “Differences in Large and Small Firm Responses to Environmental Context: Strategic Implications from a Comparative Analysis of Business Formations,” Strategic Management Journal, 19 (8), 709-728. Eckhouse, J. (1998). “Technology Gives Edge to Smaller Businesses,” InformationWeek, November 30, 1998; 711, 2-5SR. Hardy, K. & Magrath, A. (1987). “Buying Groups: Clout for Small Business,” Harvard Business Review, September-October, 16-21. Hitt et al, (2002). Strategic Entrepreneurship, Creating a New Mindset. Malden, MA: Blackwell Publishing. Hyatt et al. (2004). “Beat the Beast,” Fortune Small Business, 14 (7), 42-48. Kotler, P. & Armstrong, G., Principles of Marketing, (2004), Upper Saddle River, NJ: Prentice Hall, Publishing. Perkins, C. (2004). “Independent Distributors Join Forces in Marketing Groups,” Nation’s Restaurant News, 38 (21), 34. Peters, T. & Austin, N. (1985). A Passion for Excellence. New York, NY: Random House. Pilling, B. (1991). “Assessing Competitive Advantage in Small Business: An Application to Franchising,” Journal of Small Business Management, 29, 4. Porter , M. (1985). Competitive Advantage, Creating and Sustaining Superior Performance, New York, NY: The Free Press. Porter, M. (1996). On Competition, Cambridge, MA: Harvard Business Review Press. Sasser, T. & Jones, W. (1995). “Why Satisfied Customers Defect,” Harvard Business Review, November-December, 91. Timmons, J. & Spinelli, S. (2004). New Venture Creation, Entrepreneurship for the 21st Century, New York, NY: Irwin/McGraw-Hill Publishers. Vinas, T. (2004). “Bagging the Big One,” Industry Week, 253 (4), 54-57. Whitely, R. & Hessan, D. (1996). Customer Centered Growth, Five Proven Strategies for Building Competitive Advantage, Reading, MA: Addison Wesley Publishing Company.
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Winer, R.S. (2004). Marketing Management, Upper Saddle River, NJ: Prentice Hall Publishing Company.
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