“We shall either find a way or make one.”

Hannibal

In this chapter

• Competitive position
• Strategy
  • Generic strategies
  • Strengthening competitive position
  • Boosting strategic position
• Strategy in a start-up
• Strategic risks and opportunities

You have already set out the micro-economic backdrop to your business. In Chapter 3 you assessed prospects for market demand and in Chapter 4 for industry competition. Now it’s time to slot your business into that context.

How competitive is your business in each of its main segments? What is your strategy for strengthening competitiveness in key segments? Or boosting the balance of your overall portfolio of segments? What risks may you face and what opportunities can you exploit? That’s for this chapter to consider, and in Chapter 6 we will look at the resources you’ll need to deploy to put that strategy into effect.

And your conclusions in this chapter will form an essential component of the justification of your sales and operating profit forecasts in Chapter 7 of your plan.

One caveat for this chapter of your plan. As for Chapters 3 and 4, this chapter will set out conclusions from the extensive research and analysis you’ll undertake before writing your plan – in this instance on your competitive position and strategy. Very little of the detailed analysis set out below will find its way into your plan. You would lose or bore your backer in no time. Only the conclusions go into the plan. Any further detail can be laid out in Appendix C to your plan on competitive position.

But it will be hugely beneficial if you can convince your backer that your assertions have been pulled not from the top of your head, but from a foundation of solid research and analysis.

Your assertions will have depth, balance and relevance. In so many business plans, the author waxes lyrical on their company’s strengths – for example, how a product has a feature that is unique or by far the best in the market. That may have some truth, but let’s have some perspective. Does the customer perceive a significant difference between your product and that of the closest competitor? Do they care? How important is that feature in an assessment of overall competitive position? Without the rigorous analysis, the reader may remain unconvinced.

In this chapter of your plan, you must not overexaggerate your strong points, nor their importance to the buying decision, nor gloss over your weak points. You must place your firm’s strengths and weaknesses in context – in terms of both the customer’s buying decision and the capabilities of the competition. Imagine if a competitor stumbled across a stray copy of your business plan, left lying on a table at a conference (it does happen). Would they split their sides laughing at the one-sided hyperbole?

Your assertions must be sufficiently robust to withstand the forensic examination of your backer. If they are not, they will pull out, having wasted your time and theirs.

Competitive position

You need to be clear about how your business stacks up against the competition. In each of your main business segments, how well placed are you? And how is that likely to change over the next few years?

To answer that you should ideally go through three stages, for each of your main segments:

1. Identify and weight customer purchasing criteria (CPCs) – what customers need from their suppliers in each segment – that is, you and your competitors.
2. Identify and weight key success factors (KSFs) – what you and your competitors need to do to satisfy these customer purchasing criteria and run a successful business.
3. Assess your competitive position – how you rate against those key success factors relative to your competitors.

Appendix A to this book shows you how to do just that. It shows you how to develop a systematic assessment of where your firm is currently placed relative to your main competitors, and how this is likely to develop over the next few years.

I strongly recommend that you follow the approach of Appendix A. It is comprehensive, rigorous and can be revelatory. It is not, however, necessary for your business plan. Indeed it will not form part of your business plan as delivered to your backer.

It will lie there in the background, forming a solid bedrock of research and analysis to underpin your forecasts in Chapter 7, ready to counter any clever cross-questioning from your backer.

The alternative, a short-cut, is to set out here your firm’s strengths and weaknesses, as recommended in most business plan guides. I have three problems with this approach:

• Setting out strengths and weaknesses without weighting and rating them and deriving a reasoned, balanced conclusion, preferably a weighted average assessment of competitive position, can be misleading.
• This exercise is seldom done for each main business segment, where, virtually by definition of being a different segment, both the weighting and rating, and indeed the overall competitive position, will differ.
• It is too often thrown in as part of a SWOT exercise (Strengths, Weaknesses, Opportunities, Threats), which is a dreadful construct. It typically shows just a jumble of items, ungraded for importance, relevance, probability or impact, muddling up business opportunities with market opportunities, business risks with market risks, and coming to no conclusion whatsoever; it is a mess.

But by all means have a go at strengths and weaknesses if you would prefer not to go through the rigour (and, yes, time) of Appendix A. If so, please make sure you are as clear as possible when describing a strength or weakness to your backer by observing these tips:

• Give your backer some impression of the relevance of that factor in assessing a firm’s competitiveness in your main business segment.
• Explain to what extent this is more important in some segments than others.
• Set it out relative to the competition – sure, your customer retention rates are high, but are they higher than those of the market leader? And, if not, what plans do you have to raise them to the best in the business?
• Do not mix opportunities and threats with this assessment of your firm’s strengths and weaknesses – market opportunities and threats have already been discussed in Chapters 3 and 4; business opportunities and threats will be assessed below in the section on strategy and again later in the section on strategic risk.

Once you have set out your firm’s competitive position in its main business segments (following the approach of Appendix A in this book), or taken a short-cut and listed your firm’s strengths and weaknesses (as above), it is time to set out your plans for proactively strengthening your firm’s competitiveness. That is your strategy, and it is covered in the next section.

Strategy

There are myriad definitions of strategy, ranging from that of General Sun Tzu (‘know your opponent’) in the sixth century BC to that of the rather more recent Kenichi Ohmae (‘in a word, competitive advantage’).

I am an economist, so I believe that we should bring the word ‘resources’ into the definition. Just as economics can be defined as the optimal allocation of a nation’s scarce resources, so I define a company’s strategy thus:

Strategy is how a company deploys its scarce resources to gain a sustainable advantage over the competition.

What your backer needs to know is how you plan to allocate your company’s resources over the business plan period to meet your goals. These resources are essentially your assets – your people, physical assets (for example, buildings, equipment and inventory) and cash (and borrowing capacity). How will you allocate – or invest – these resources to optimal effect?

More precisely, your backer needs to be convinced that your strategy will enhance your firm’s competitive position in key business segments.

You have already set out your firm’s competitive position in the section above. You even had a go at examining how that may change over time.

In this section you must show how you can proactively improve that position through deployment of a winning business strategy. That is how you will provide commercial underpinning to your forecasts in Chapter 7 of your plan. That is how you will convince your backer to back you.

What is your company’s strategy? How will you deploy your scarce resources to gain a sustainable competitive advantage?

First, let’s look at the generic strategies.

Generic strategies

There are again many definitions of generic strategies, with each business guru seeming to come up with their own. But, in essence, and in the vast majority of cases, a company needs to choose between two, very different and easy-to-grasp generic strategies: low-cost or differentiation.

Either strategy can yield a sustainable competitive advantage. Either the company supplies a product that is at lower cost to its competitors or it supplies a product that is sufficiently differentiated from its competitors that customers are prepared to pay a premium price – where the incremental price charged adequately covers the incremental costs of supplying the differentiated product.

For a ready example of a successful low-cost strategy, think of easyJet or Ryanair, where relentless maximisation of load factor enables them to offer seats at scarcely credible prices, compared with those prevailing before they entered the market, and still produce a profit. Or think of IKEA’s stylish but highly price-competitive furniture.

A classic example of the differentiation strategy would be Apple. Never the cheapest, whether in PCs, laptops or mobile phones, but always stylistically distinctive and feature-intensive. Or Pret A Manger in fresh, high-quality fast food.

One variant on these two generic strategies worth highlighting is the focus strategy, developed prominently by Professor Michael Porter. While acknowledging that a firm can typically prosper in its industry by following either a low-cost or differentiation strategy, this alternative is not to address the whole industry but narrow the scope and focus on a slice of it, a single segment. Under these circumstances, a firm can achieve market leadership through focus and exceptional differentiation leading to scale-driven low unit costs.

A classic example of a successful focus strategy would be Honda motorcycles, whose focus on product reliability over decades has yielded the global scale to enable its quality products to remain cost competitive.

Strengthening competitive position

Having clarified which generic strategy underpins your business, how are you planning to improve your competitive position over the plan period? How will you reinforce your competitive advantage?

The answer should lie in the analysis you have already done above when assessing your competitive position versus that of your competitors.

Against which key success factors did you rate less favourably than a key competitor? Is this an important, highly weighted KSF? Will it remain so in the future? Could it become even more important over time? Should you take action to strengthen your performance against this KSF? Should this relative weakness be addressed?

Or should you instead be building on your strengths, widening an already existing gap between you and competitors in a particular KSF? It is inadvisable to generalise, but in theory investment in building on strengths should offer a more favourable risk/reward profile than investing to address weaknesses.

If your generic strategy is one of low cost, what investments or programmes are you planning to reduce costs even further and so stay ahead of the competition? What major investments in plant, equipment, premises, staff, systems, training and/or partnering are you planning? What performance improvement programmes are underway or planned?

If your generic strategy is one of differentiation, what investments or programmes are you planning to reinforce that differentiation and make you stand out even more clearly than your competitors? What major investments in plant, equipment, premises, staff, systems, training, marketing and/or partnering are you planning? What strategic marketing programmes are underway or planned?

If your generic strategy is one of focus, what investments or programmes are you planning to reduce costs and/or reinforce your differentiation? What major investments, performance improvement or strategic marketing programmes are underway or planned?

How will these investments or programmes impact on your competitive position in key business segments? Your backer needs to know.

Boosting strategic position

So far our analysis has been premised on the strengthening of your competitive position in your key product/market segments over the next few years.

But suppose you don’t have the resources, whether in cash, time or manpower, to do all you would like to do. How should you prioritise between the segments? Which investments or programmes should you do first? Which should be dropped, possibly for ever? Which segments should you get out of?

You may benefit from undertaking a portfolio analysis. This will set out how competitive you are in markets ranked by order of attractiveness. You should invest ideally in segments where you are strongest and/or which are the most attractive. And you should consider withdrawal from segments where you are weaker and/or where your competitive position is not that good.

And finally, should you be looking at entering another business segment (or segments) that is in more attractive markets than the ones you currently address? If so, do you have grounds for believing that you would be at least reasonably placed in this new segment, or that you could readily become reasonably placed?

This analysis will identify your strategic position. This is not to be confused with your competitive position, which relates to how competitive your company is in a particular product/market segment. Your strategic position relates to your balance of competitiveness across all segments, of varying degrees of attractiveness.

First, let’s be clear what we mean by an ‘attractive’ market. The degree of market attractiveness should be measured as a blend of four factors:

• Market size
• Market demand growth
• Competitive intensity
• Market risk.

The larger the market and the faster it is growing, the more attractive, other things being equal, the market is. But be careful with the other two factors, where the converse applies. The greater the competitive intensity in a market and the greater its risk, the less attractive it is.

You will have to use your own judgement on the weighting you apply to each of these factors. Simplest would be to give each of the four an equal weighting, so a rating for overall attractiveness would be the simple average of the ratings for each factor.

You may, however, be risk averse and give a higher importance to the market risk factor. In this case, you would need to derive a weighted average of each of the four ratings.

An example may help. Suppose your company is in four product/market segments and you are contemplating getting into a fifth. You draw up a strategic position chart, where each segment is represented by a circle (see Figure 5.1).

The segment’s position in the chart will reflect both its competitive position (along the x-axis) and its market attractiveness (along the y-axis). The size of each bubble should be roughly proportional to the scale of revenues currently derived from the segment.

The closer your segment is positioned towards the top right-hand corner, the better placed it is. Above the top right dotted diagonal, you should be thinking of investing further in that segment. Should the segment approach the bottom left dotted diagonal, however, you should consider exiting.

figure 5.1 Strategic position: an example

The strategic position shown in Figure 5.1 is sound. It shows favourable strength in the biggest and reasonably attractive segment C, and an excellent position in the somewhat less attractive segment A. Segment D is highly promising and demands more attention, given the currently low level of revenues.

Segment B should perhaps be exited – it’s a rather unattractive segment, and you’re not that well placed. The new segment E seems reasonably promising.

In developing a strategy for this example, you may consider the following worth pursuing:

• Continued development in segments A and C.
• Investment in segment D (see arrow showing the resultant improvement in competitive position).
• Entry to segment E (with competitive position improving over time as market share develops).
• Exit from segment B (see the cross).

How is your strategic position? Hopefully your main segments, from which you derive most revenues, should find themselves positioned above the main diagonal.

Do you have any new segments in mind? How attractive are they? How well placed would you be?

Are there any segments you should be thinking of getting out of?

Which segments are so important that you would derive greatest benefit from improving your competitive position? Where should you concentrate your efforts?

One final word on strategic position. The above example showed the strategic position of a small company involved in five product/market segments.

Exactly the same analysis can and should be undertaken for a larger company involved in, say, five businesses – or strategic business units (SBUs, in management-speak). Each SBU can be plotted against both competitive position (itself a weighted average of that SBU’s competitive position in each of its addressed product/market segments) and market attractiveness (again a weighted average).

And the same conclusions can be drawn. Investment in one SBU, holding another for cash, exiting a third and so on.

If you have plans for improving your strategic position, they should be in your business plan. Your backer needs to know.

Strategy in a start-up

The process set out in this chapter is not that different for a start-up, whether serving an existing market or creating a new one. You need to assess your likely competitive position in the main segments where you intend to compete and develop a strategy to enhance that competitiveness over time.

There are three main differences:

• Your competitive position is in the future rather than the present tense.
• It will be affected adversely from the outset by a low rating against all key success factors pertaining to experience.
• Your backer will want to know whether it is defensible once achieved.

Your competitive position in a new venture is a judgement on the future. For an established business, the debate revolves as much around the present and recent past as it does around the future – around the weighting of KSFs and/or your ratings against specific KSFs, as justified by evidence from customer, supplier and other interviews, each of which will be as much based on fact and performance track record as on judgement.

But for a start-up, the debate will be part conjecture, especially if your venture is in a new market. So your arguments must be stronger. And you must find evidence from any possible source.

There is nothing you can do about your new venture’s rating against those KSFs that demand experience. And your rating against market share will be low at the outset; so too perhaps against some cost-related factors, especially those pertaining to scale.

Likewise your rating against some differentiation factors may be low. Your lack of track record may count against you in consistency of product quality, delivery, customer service, sales and marketing, and so on.

In that case, how will your firm compete? It’s not easy being a new entrant to an existing market. Your competitive position will indeed be low relative to the leaders at the outset. However, if you are addressing a growing market and/or you can differentiate your product or service sufficiently, things should improve. Your competitive position in three to five years’ time should have improved measurably – your market share rating should be up, your unit costs down and your service performance improved.

But this analysis further highlights what we discussed in Chapters 2 and 3 about segmentation. If your new venture does not serve an existing market but creates its own, then all changes. The analysis of competition will be undertaken not for the market as a whole but for your addressed product/market segment. And if that is a new segment, created by your new venture, you effectively have no direct competition.

But there are two caveats:

• You will have indirect competition, as discussed in Chapter 4.
• You will in due course face competition from new entrants, if your new market is worthy of pursuit.

This brings us to the third of the main differences between strategy for a start-up and that for an established business: its defensibility.

Remember the definition we used for strategy: ‘Strategy is how a company deploys its scarce resources to gain a sustainable advantage over the competition.’ The all-important word for a start-up in a new market is sustainable.

If your new venture succeeds, you will be targeted. Competitors will eye your newly carved space with envy. They will come after you. And soon.

How will you protect yourself against that competitive response? Your backer needs to know this. If they are a venture capitalist, they will be looking for an exit after five to seven years. Could this be when your competitors have started taking chunks out of your market share? If so, your backer won’t be able to sell out, or only at a discounted price. If there’s a chance of that scenario from the outset, they won’t back you.

There are a number of ways you can try to sustain your competitive advantage:

• Patent protection of key products.
• Sustained innovation, staying one step ahead in product development.
• Sustained process improvement, staying one step ahead in cost competitiveness and efficiency.
• Investment in branding, identifying in the mind of the customer the particular benefit brought by your offering with its name.
• Investment, for business-to-business ventures, in customer relationships.

However you aim to do so, this must form a key component of your business plan. Set out here not only how you are going to achieve a competitive advantage in this newly created market, but also how you will sustain it.

For further reading on strategy in a start-up, or indeed for further thoughts on market demand (see Chapter 3) and competition (Chapter 4) in start-ups, along with more case studies on what worked, what didn’t and why, try John Mullins’ terrific book, The New Business Road Test (3rd edition, FT Prentice Hall, 2010). This is essential reading on all the preparatory work and research you should undertake before drawing up a business plan for a start-up, especially in a new market.

Strategic risks and opportunities

In Chapters 3 and 4 of your plan, you pulled out the main market demand and industry competition risks and opportunities in your line of business. Now you can add those that relate to your competitive position and strategy over the next few years.

In the pages above, you have assessed your competitive position (or prospective position if your venture is a start-up) in key segments. You have set out your strategy for strengthening your position in each key segment, as well as your overall strategic position.

That is what you believe to be the most likely scenario. What are the risks that your competitive positioning could turn out to be worse than that? Suppose, for example, a competitor were to steal a major customer from you? How likely is that? With what sort of impact? What could happen to make your positioning even worse than that?

Conversely, what could happen to improve your competitive prospects significantly? Could a major competitor exit from the market, for example? How likely is that, and with what impact?

What are the big risks – those which are reasonably likely and with reasonable impact (as defined in Chapter 3)? How can they be mitigated? What are the big opportunities? How can you exploit them?

We will return to these big risks and opportunities in Chapter 8.