BUSINESS STRATEGIES TO ADOPT- YOUR CHOICE OF THREE
Ultimately
you have to settle for one of the three business strategy options,
and it is important that you are clear on what one you are going
for.
Your
business strategies choices are, at the end of the day, very simple.
The big question is, how do you want to position yourself in
relation to
your competition.
Basically your options are:
- To
be the cheapest
- To
be the best
- To dominate a market niche
Many
small businesses go for the first option, in the mistaken belief
that it is the only way to survive.
The problem is, there will always be someone who can do what
you do more cheaply than you can.
A
cost leadership strategy is only really suitable for big businesses
that have substantial economies of scale.
They are able to spread their overheads thinly over large
volumes, and charge low unit prices.
So, if you are running a small business, this strategy
probably won’t work for you.
If,
as a small business, you build your business reputation on being the
cheapest, you are operating from a position of weakness.
Even if you can survive with your low prices, you will not be
able to withstand a price war with a bigger competitor.
The
second strategy, being the best, can be used to build a powerful
competitive advantage.
It means, however, that you have to have a unique product.
Otherwise you will have to spend a lot of money on research
and development to stay ahead of the competition.
You
need deep pockets to win with this strategy.
Unless, of course , your product is so specialised that no
one else is producing it.
And big companies, for whatever reasons, don’t want to
produce it either.
That would give you dominance over a niche of your own.
Generally speaking, a product leadership strategy is only for
the big boys.
While being the best in the category and staying that way can
be a powerful strategy for highly specialised small businesses, it
is just not sustainable for most.
Dominating
a market niche in your industry is the most suitable business
strategy for most small businesses.
By adding value in a way that attracts a particular kind of
customer, you can steadily build your business success. You are able
to charge a premium.
And you don’t have to be the “best”.
The
trick, of course, is to clearly identify your niche market, and
convince your target market that you provide the best solution to
their problem.
For nearly all businesses, finding a niche and dominating it
provides a solid foundation for building a business on.
It
is very important that you are absolutely clear on what generic
strategy you are relying on.
Your business direction, by definition, is supported by a
number of strategic tactics, whether you are aware of using them or
not.
If you aren’t clear about your overall strategic direction,
you may end up using conflicting strategies. For example, focusing
customers on your low prices at the same time as you introduce best
of class products.
Doing this means your profitability suffers and you fail to
attract the customers you want…. not good!
Deciding on the generic strategy that will create the
business success you are looking for, clarifies your thinking.
And it helps you see clearly what tactics you need to use.
PROFIT IMPROVEMENT STRATEGIES
Profit
improvement strategy must focus on either or both of two things:
- Achieving
a higher gross margin per dollar of sales by increasing price
and/or reducing variable costs, and/or
- Achieving greater sales per dollar of fixed costs by increasing the productivity of those things which have a fixed cost.
Improving Gross Margin
Your
gross margin is the difference between the price of your product and
what it costs you to buy or make it.
Therefore , the only way to increase your gross margin is to
sell at a higher price or buy at a lower price.
In most cases, but not all, you will have limited scope to
buy at a lower price. For
this reason your selling price is the critical variable.
You
should be aware that to a price discounting policy to capture sales
can be a dangerous policy for the financial health of a business.
The following table illustrates how much you have to increase
sales by if you reduce your prices:
Reduce
Price By |
|
|
|
Present |
|
|
|
|
|
|
20% |
25% |
30% |
35% |
40% |
45% |
50% |
55% |
60% |
2% |
11% |
9% |
7% |
6% |
5% |
5% |
4% |
4% |
3% |
4% |
25% |
19% |
15% |
13% |
11% |
10% |
9% |
8% |
7% |
6% |
43% |
32% |
25% |
21% |
18% |
15% |
14% |
12% |
11% |
8% |
67% |
47% |
36% |
30% |
25% |
22% |
19% |
17% |
15% |
10% |
100% |
67% |
50% |
40% |
33% |
29% |
25% |
22% |
20% |
12% |
150% |
92% |
67% |
52% |
43% |
36% |
32% |
28% |
25% |
14% |
233% |
127% |
88% |
67% |
54% |
45% |
39% |
34% |
30% |
16% |
400% |
178% |
114% |
84% |
67% |
55% |
47% |
41% |
36% |
18% |
900% |
257% |
150% |
106% |
82% |
67% |
56% |
49% |
43% |
20% |
|
400% |
200% |
133% |
100% |
80% |
67% |
57% |
50% |
That
is, if your Gross Margin is 30% and you reduce price by 10% you need
sales volume to increase by 50% to maintain your profit.
Its unlikely such a strategy will work .
Many
small business people regard price as the only factor influencing
the buying decision of their customers.
Sure , there are some customers who may only buy at the
lowest possible price but this does not apply to all customers and
it may be that a premium price can be achieved if the product or
service is marketed in such a way that the customer perceives added
value and you promote other features and benefits that you can offer
your customers. For example better quality, longer warranty,
satisfaction guarantee, 24 hour accessibility, more convenient
location, greater resale value etc.
Improving Productivity
This
is all about getting more sales per dollar of fixed costs.
It can be achieved by either or both, increasing your sales
at a faster rate than your fixed costs increase or reducing your
fixed costs without affecting your sales.
Advertising your product or service is one of the best ways to increase your sales. Effective advertising means getting the most out of your advertising dollar and includes:
-
Ensure you use the most effective media pertinent to your product or service
-
Target your customers- never try to appeal to everyone and focus specifically on those people who you know will benefit from your product/ service
-
Make your offer compelling and relevant to the market you target
-
Backup your advertising/ marketing strategies with first class service to get repeat business and further business by word of mouth
Fixed
Costs must be incurred for you to remain in business.
In the short term they do not change as your volume of sales
increases. Some of these costs are discretionary in the sense that
you can make a decision to reduce them simply by cutting back.
Others, however, are committed and you cannot avoid them.
The critical thing with each fixed cost is to ask yourself the following questions:
-
What service does this cost provide to my business
-
Can I obtain the same service from another source at a lower cost? If so, is it practically feasible to switch to another supplier of that service?
-
If I do switch to another supplier, would I get equivalent quality and would this affect the quality of my product or service?
-
If I were to spend more on this service would it generate a gross profit that exceeds the additional cost?
You
will notice that all of these questions are directed towards what
you are getting for what you are spending.
They are not simply concerned with whether or not you can
eliminate or reduce cost.
Take wages for example.
In difficult times people will often think of dismissing
staff. This may
be appropriate but should be considered carefully, as it may be more
appropriate to invest more in staff training to show them how to
improve customer service and how to sell more to customers.
Illustration of Increasing Profit
It
is startling what effect relatively small changes can make to your
bottom lines. The
following illustration indicates that , in these circumstances that
profit increased by more than double with change factors of only 5%
for the number of customers, the frequency of purchase, the average
sales value and an increase in the Gross Margin %, and a 10% change
factor in fixed costs:
|
Now |
Change
Factor |
Plan |
No.
of Customers |
1,000 |
x
1.05 |
1,050 |
Frequency
of Purchase |
10 |
x
1.05 |
10.5 |
No.
of Sales transactions |
10,000 |
|
11,025 |
Average
Value/ |
$62.50 |
x
1.05 |
$65.60 |
Total
sales |
$625,000 |
|
$723,240 |
Gross
Margin % |
40% |
x
1.05 |
42% |
Gross
Margin $ |
$250,000 |
|
$303,760 |
Less
Fixed Costs |
$220,000 |
x
1.10 |
$242,000 |
NET
PROFIT |
$30,000 |
|
$61,760 |