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In the ever-evolving world of small business, the term strategy comes up frequently. But it’s not just a buzzword — it’s the foundation upon which businesses build their competitive advantage to ensure long-term success.
For a small business owner, getting to grips with what strategy is and how to apply it effectively can make all the difference in today’s competitive marketplace.
Here are some quick links to the main sections of this article to make it easier for you to navigate:
Over the years, various thought leaders have given their perspectives on how to understand strategy. In this article, I’m going to cover the philosophies of three leading business strategists — Michael Porter, Richard Rumelt and Peter Drucker. I’ll explore how their principles can be tailored to apply to small companies as they develop and execute their strategies.
It is often the work of these three eminent strategists that small business advisors look to when helping clients get started in designing their business strategy.
Understanding strategy for small businesses
At its core, strategy for small businesses revolves around making informed decisions to achieve specific goals in a competitive environment. It's about carving a unique position that sets your company apart, capitalises on your strengths and enables you to adapt to changes in the market.
For small businesses, the concept of strategy is not about complexity — it's about clarity. It's not about adhering to rigid plans — it's about agility and adaptability.
Now, let's see how the philosophies of strategic thinkers can be incorporated into the workings of small business strategy.
Michael Porter — differentiation and cost leadership
For small businesses aiming to achieve sustainable success in their chosen target market, Michael Porter’s insights into competitive strategy are invaluable.
Michael Porter is a renowned Harvard Business School professor and business strategist. He is often associated with competitive strategy. His emphasis is on two key strategic approaches that act as the fundamental avenues for achieving competitive advantage — differentiation and cost leadership.
In Porter's view, a successful strategy relies on identifying a clear target market, understanding the needs of that market and then crafting a unique value proposition that differentiates a company from its competitors.
By carving out a distinct place in the market, that company can establish a strong competitive position that is not easy to copy.
Looking at each of these two principles in turn:
Differentiation involves offering customers something distinctive that sets you apart from your competitors. This would be done by considering your unique products, services or expertise.
So, how can you offer something distinct that resonates with your target audience?
Porter's differentiation strategy encourages small firms to consider how they can achieve this. For example, through superior product quality, innovation, customer service or brand image.
By delivering a distinctive offering that addresses an unmet need in your target market, you can build a loyal customer base and establish a competitive edge.
Cost leadership, on the other hand, involves becoming the low-cost producer in an industry while maintaining acceptable levels of quality.
This approach would enable you to offer products or services at a lower price than your competitors — allowing you to attract price-sensitive customers.
For a small business to achieve cost leadership, it needs to have a relentless focus on operating efficiently and managing resources wisely, streamlining processes to eliminate waste and taking advantage of any economies of scale.
Remember always, however, that cost leadership should not mean sacrificing quality — it's about finding ways to provide value while keeping your costs at a minimum.
Richard Rumelt — clear analysis and focused strategy kernel
Richard Rumelt, a renowned strategy scholar, strongly emphasises insightful analysis as the foundation for effective strategy formulation.
In his view, a good strategy stems from a deep understanding of a company’s strengths, weaknesses, opportunities and threats. Often, this approach is referred to as a SWOT analysis. It helps companies identify their internal capabilities and external environment so they can make informed strategic choices.
What Rumelt cautions against is falling into the trap of bad strategy. He defines this as a collection of vague goals, wishful thinking and hazy high level statements that sound impressive but lack substance (which he describes as fluff).
A good example of bad strategy is something often referred to as achieving failure — doing a great job of executing something that will deliver no value to your customers.
Managers often create bad strategy when they fall victim to common cognitive biases like over-confidence or groupthink.
Instead, he advocates for the development of a clear and coherent strategy that addresses critical challenges head-on. This is achieved by identifying the most significant obstacles to success and formulating a plan to overcome them.
A key insight from Rumelt's philosophy is the importance of focusing on what he calls the kernel of strategy. This strategy kernel comprises three essential parts:
Diagnosis of the problem: Identifying the core challenges your company faces. Is it low customer retention, lack of brand visibility or operational inefficiencies? By diagnosing the problem, you can address it directly rather than go off-track by treating symptoms.
Guiding policy: Developing a guiding policy that outlines how you'll tackle the challenges you’ve identified. This policy should be aligned with your differentiation or cost leadership strategy. For example, if your diagnosis is low customer retention, your guiding policy could focus on enhancing customer engagement and loyalty.
Coherent actions: Translating your guiding policy into specific, coherent actions. These actions should be tangible steps that can be taken to achieve your strategic objectives. Each action should contribute to your unique value proposition or cost advantage.
By distilling strategy down to these fundamental elements, your company should be able to avoid complexity and uncertainty and follow a more focused and effective approach.
Peter Drucker — continuous adaptation and customer-centricity
Peter Drucker, often referred to as the father of modern management, offers a broader perspective on the dynamic nature of strategy. Drucker believed that strategy is not a one-time event but a continuous process that requires companies to adapt to changing circumstances.
His philosophy is rooted in the concept that organisations exist to create customers. He argued that a successful strategy must be centred around understanding customer needs and creating value that fulfils those needs.
However, he acknowledged that markets, technologies and customer preferences are also in constant flux. Therefore, a strategy that was effective yesterday may not be suitable for tomorrow.
For Drucker, effective business strategy requires ongoing assessment, experimentation and adaptation. Companies must be willing to challenge assumptions, learn from failures and capitalise on emerging opportunities. They need to develop the art of taking sound strategic decisions even though the future is uncertain (which it always is) .
He introduced the concept of purposeful abandonment, i.e. that companies should be willing to let go of activities or strategies that no longer serve their purpose or yield results. Being able to adapt in this way should ensure that a firm remains agile and responsive to shifting market dynamics.
Small businesses can embrace Drucker's approach by understanding that strategy is not a fixed blueprint but a flexible roadmap. This is particularly relevant for fast-growing small companies, which may need to adapt their strategy regularly as their growth opens up additional market opportunities but creates new execution challenges.
His concept of customer-centricity is also very important. Building strong relationships with customers is the cornerstone of success for any company — and you need to understand your customers’ needs, preferences and pain points to achieve this.
By leaning on this idea, you can tailor your products, services and customer interactions to achieve a perfect product-market fit.
By consistently delivering value and delighting your customers, you can build a loyal base and foster positive word-of-mouth marketing.
Integrating strategy philosophies
While the strategy perspectives of Porter, Rumelt and Drucker are distinct, their philosophies can be integrated seamlessly to provide a comprehensive framework for your strategic thinking and decision making. Here's a brief summary on how to do that with more detail in the section below:
Clear differentiation and analysis: By incorporating Porter's emphasis on differentiation and cost leadership. Start by conducting a thorough analysis of your organisation's strengths, weaknesses, opportunities and threats. Identify areas where you can create a unique customer proposition or achieve cost leadership.
Focused strategy kernel: By adopting Rumelt’s concept of the kernel of strategy. Diagnose the core challenges your organisation faces, develop guiding policies to address those challenges and create a set of coherent and actionable steps to execute your strategy successfully.
Continuous adaptation: By embracing Drucker’s philosophy of constant adaptation. Recognise that your strategy is not set in stone but should evolve based on changing market dynamics. Regularly reassess what your customers need or want, monitor industry trends and be prepared to pivot whenever necessary.
Implementing a holistic approach to strategy
So, in more detail, if you want to implement an integrated framework based on the work of Porter, Rumelt and Drucker, you’ll need to think about putting in place a system that involves strategic planning, execution and constant evaluation.
1. Strategic planning
Begin by conducting a comprehensive analysis of your organisation’s internal capabilities and the external environment in which you operate. This step aligns with Rumelt’s idea of insightful analysis.
Consider the strengths that set your organisation apart, the weaknesses that need to be addressed, the opportunities that can be capitalised on and the threats that could hinder your progress.
During this analysis, also think about Porter's principles of differentiation and cost leadership. Identify areas where your company can offer unique benefits to customers. Is there an aspect of your product or service that can be enhanced to stand out?
Simultaneously, you should explore ways that could help you achieve cost leadership by optimising processes, streamlining operations and harnessing economies of scale.
2. Crafting the strategy kernel
Now you have a clear understanding of your company’s position, challenges and opportunities, you can create your strategy kernel — the heart of your strategic approach.
As Rumelt outlines, this kernel consists of three key elements: a diagnosis, a guiding policy and a set of coherent actions.
Your diagnosis should pinpoint the fundamental challenges your company faces. This could involve addressing declining market share, responding to changing customer preferences or overcoming competitive threats.
Once you've diagnosed your problem, you should develop a guiding policy that outlines how you intend to tackle it.
This policy should align with Porter's ideas on differentiation and cost leadership. Will you differentiate through innovation or customer service? Will you achieve cost leadership through process optimisation?
You should then translate your guiding policy into a set of actionable steps. These steps should be specific, measurable, achievable, relevant and time-bound (SMART). As Porter advises, each action should contribute to the distinct customer benefit or cost advantage your company offers
3. Continuous adaptation and evolution
Peter Drucker's philosophy comes into play as you move into the execution phase of your strategy. However, Drucker's ideas are not limited to execution alone — they extend to the entire strategy lifecycle.
Drucker's principle of continuous adaptation stresses the importance of staying on top of changing market dynamics and customer preferences.
This means you’ll need to regularly monitor how your existing strategy is performing and whether it’s effective enough to get you to your goals.
In short, is what you’re doing yielding the expected results? If not, are you willing to pivot and make changes?
Drucker's concept of purposeful abandonment becomes particularly relevant here. If a particular strategy or initiative is not aligning with your organisation's objectives or failing to generate value, it might be time to let it go and reallocate resources elsewhere.
4. Learning and improvement
As you progress through your strategy implementation and adaptation phases, remember that learning from both successes and failures is essential.
Drucker's philosophy encourages companies to view failures as opportunities for learning and growth. When a strategy doesn't yield the desired outcomes, you should conduct a thorough analysis to understand what went wrong and extract valuable lessons.
Conversely, when your strategies succeed, it’s worth taking the time to dissect the reasons behind that success. You should isolate the factors that contributed to the positive outcomes and consider how you can replicate those in future initiatives.
Case Studies: Applying philosophies in the real world
To bring the concepts of strategy to life, let's look at how three well-known companies have applied the philosophies of Michael Porter, Richard Rumelt and Peter Drucker with great success.
Apple: differentiation and innovation
Apple's strategy is a testament to Michael Porter's principles of differentiation and Richard Rumelt's focus on insightful analysis.
Apple has consistently differentiated itself by producing innovative, user-friendly products that cater to a loyal customer base.
The company's diagnosis pinpointed the need for devices that seamlessly integrate technology into everyday life. Their guiding policy revolves around creating products that are intuitive and aesthetically appealing.
Apple's coherent actions include investing in research and development to continually innovate and improve their products.
The launch of the iPhone revolutionised the smartphone industry. It established a new standard for user experience and design. This strategy not only differentiates Apple from its competitors but also addresses customer needs in an ever-evolving technological landscape.
Toyota: operational excellence and adaptation
Toyota's success embodies both Michael Porter's cost leadership and Peter Drucker's continuous adaptation philosophies.
Toyota's diagnosis recognised the importance of offering reliable and affordable vehicles to a wide range of customers. Its guiding policy revolves around operational excellence and a commitment to delivering value to customers.
Toyota's coherent actions include using lean manufacturing techniques to optimise production processes and reduce waste. This commitment to efficiency allows it to offer high-quality vehicles at competitive prices.
Toyota's adaptation to changing market demands, such as its pioneering role in the development of hybrid vehicles, also demonstrates its commitment to staying ahead of the curve.
Amazon: Customer-centric innovation
Amazon's strategy is a great example of how Michael Porter's differentiation, Richard Rumelt's strategy kernel and Peter Drucker's continuous adaptation principles can merge seamlessly.
Amazon's diagnosis recognised the potential of e-commerce to transform retail and reshape customer expectations. Its guiding policy is focused on customer-centricity and delivering unique convenience.
Amazon's coherent actions encompass creating a vast online marketplace, offering fast and reliable delivery and leveraging data-driven insights to personalise customer experiences.
This dynamic approach also aligns with Drucker's philosophy of embracing change and adapting strategies to evolving circumstances. As Amazon expanded into various industries, including cloud computing and streaming services, its focus on customer-centric innovation remained at its core.
Case Studies: Relevance for small business strategy
In the realm of small companies, strategy shouldn’t be thought of as a lofty concept reserved for corporate giants. Even the smallest business needs a coherent strategy . It's actually a practical tool for growth and resilience.
With this in mind, it’s worth exploring how three fictional small businesses could apply the philosophies of Porter, Rumelt, and Drucker:
Boutique retail store (differentiation)
Imagine a boutique home decor store that differentiates itself by offering one-of-a-kind, artisan pieces that can't be found in larger retailers. Its guiding policy could revolve around celebrating craftsmanship and personalisation. Its coherent actions could include collaborating with local artisans, hosting workshops and providing exceptional customer service.
Sock manufacturing business (cost leadership)
This type of business could achieve cost leadership by sourcing cost-effective materials, optimising their production processes and minimising overhead costs. Its guiding policy could focus on offering a good quality product at a competitive price. Its coherent actions could involve regularly engaging with its target customer base to identify trends, needs and preferences. This could help drive a subscription model where customers receive regular shipments of new and limited edition sock designs.
IT consulting firm (adaptation)
This firm could thrive through continuous adaptation. It could diagnose the challenge of rapid technological changes. Its guiding policy could centre on staying up-to-date with the latest tech trends and offering tailored solutions. Its coherent actions could include regular up-skilling of employees, agile project management and a consultative approach with clients.
So what is clear is that strategy is not a fixed destination but an ongoing journey for every company, irrespective of size.
It’s also clear that the true essence of strategy lies not just in understanding it theoretically, but successfully putting it into practice.
By embracing your uniqueness, analysing with clarity, adapting with agility and putting customers at the heart of what you do, you too can become an effective business strategist and create a successful and flexible business.
[1] Porter, M. (1985) Competitive Advantage. New York, Simon & Schuster Inc. For more about Michael Porter’s life and work, see his biography page at Harvard Business School here: https://www.isc.hbs.edu/about-michael-porter/biography/Pages/default.aspx , where he is Bishop William Lawrence University Professor. [2] Rumelt, R. (2011) Good Strategy/ Bad Strategy. 4th Ed. London, Profile Books Ltd. Richard Rumelt is one of the world’s most renowned authors on strategy. For more about Richard Rumelt’s life and work, see his biography page at the UCLA Anderson School of Management here: https://www.anderson.ucla.edu/faculty-and-research/strategy/faculty/rumelt#tab-biography , where he is Professor Emeritus.
[3] Drucker, P. (2007) Essential Drucker. 2nd Ed. Routledge. For more about Peter Drucker's profile and work, see https://www.bl.uk/people/peter-drucker.