PART TWO OF STRATEGIC PLANNING FOR FAMILY- OWNED BUSINESSES
Just like Baskin-Robbins ice cream, strategies come in different flavors. And, just as one person prefers Rocky Road ice cream while another really wants Very Berry Strawberry, different family-owned businesses will gravitate toward a particular kind of strategy. The gravitational forces at work on your company are the industry you serve, the competitive landscape, your products and services, your customers, and your own business preferences or personality. Here’s the thing though: it’s important to know what kind of strategy you are following. If you don’t, you can’t drive your company to success. As we said in part one of this series, if you don’t know where you are going, any road will take you there. Focusing on your strategy is a best practice of effective organizations that achieve their mission and vision statements.
The end of the year is a great time for leaders of small and mid-sized companies to examine their strategy. Goals for 2014 will organically emerge if you take the time to discuss and document your overall business plan. When I consult with family businesses, I always recommend doing strategic work first, then setting annual goals that are attune to such strategies. A three- to five-page strategy document is sufficient for most smaller companies. A simple plan is far more effective than no plan!
Academically speaking, there are four basic types of strategy, which are: 1) low cost, 2) differentiation, 3) customer relationship, and 4) the network effect. In practicality, there are countless ways to either combine strategies or put your own special spin on them. So that you may better understand what the different strategy types are, we’ll further discuss each one here.
Low Cost Strategy
Low cost strategy is followed by retailers like Wal-Mart and Target. The low cost producer seeks to squeeze its production and supplier’s costs in order to offer the most competitive price to customers. Typically, this is possible only by using economies of scale and/or disruptive changes. Here’s a good example of a disruptive change creating the opportunity for a low-cost strategy: When the high technology industry began its transition from main frame computing to desktop PCs, many PC-based hardware and software companies succeeded as the low cost alternative.
Differentiation is an important strategic consideration across all businesses. Each organization must differentiate itself from its competitors by identifying its unique value proposition to the customer. If the differentiation becomes highly desirable to customers, a low cost strategy is not needed. In other words, you can increase prices for a highly differentiated product or service. Designer label clothing, luxury cars, and other brands use differentiation in this way. Family businesses can differentiate based on product features, quality, service, and other aspects of its business.
Customer Relationship Strategy
A customer relationship strategy puts serving the customers with “kid gloves” as their unique value proposition. Ritz-Carlton Hotels is a good example of a company that leverages a customer relationship strategy to a profitable result. One family business that I consult with has differentiated itself on its customer service for years. Its customers know they can call the service center and get a friendly voice on the phone, whereas many competitors don’t even offer a phone-based service. (This is a good example of how two basic strategies of Differentiation and Customer Relationship can be combined effectively.) In a software company I worked with, the sales department confessed that they had been selling based solely on the excellent client support services as they were waiting for a new release of the software program.
Network effect strategy
The network effect is used by companies such as eBay, who had to create a network of users/customers in order to succeed. Only by creating the network can the business ensure it will have customers. Bell Telephone is another example of this kind of company – it created a network of telephone lines and in-home telephones to enable its own growth.
Choosing a type of strategy cannot be made without a holistic view of the business, including its mission/vision/values and the entirety of the SWOT analysis. A best-fit approach can be taken to ensure that the strategy fits with the core competencies of the business. A spectacular strategy will look forward three to five years and provide marching orders for the organization in the short- and long-term. However, strategy is not static and must be regularly examined and revised. In this manner, a strategy will have a rolling three- to five-year window.