A small business operating in a single industry must develop and exploit a competitive advantage if it is to be profitable. You can gain competitive advantage by outperforming your competition in some aspect of business to produce your goods or services at a lower cost. Owners also can demonstrate the superiority of their products to sell them at a premium.
The decisions a company makes on its way to creating, maintaining and using its competitive advantages are business-level strategies. After evaluating the company’s product line, target market and competition, a small business owner can better identify where her competitive advantage lies.
A gourmet candy company, for example, might find that it cannot compete on price; larger corporations often enjoy economies of scale that keep costs low. Instead, the small business would choose a differentiation strategy, emphasizing freshness, quality ingredients or some other attribute consumers will value highly enough to pay extra. Business strategy will affect the small company’s functional decisions such as the selection of its promotions and distribution channels.
When a business identifies opportunities outside its original industry, it might contemplate diversification. When additional businesses become part of the company, the small business owner must consider corporate-level strategy. To be effective, the umbrella company must contribute to the efficiency, profitability and competitive advantage to each business unit. The gourmet candy maker may decide to enter the dried-fruit business, for example. This corporate decision is sound only if the parent company can extend and develop a competitive advantage – say economy of scope, integrated management or procurement – over both businesses.
For example, the owner may determine that her mail-order candy distribution system is perfectly suited for the dried-fruit business and that customer research indicates existing customers will purchase items from both companies. Or she may be able to negotiate volume discounts for raisins, dried cranberries and dried cherries she will use in both businesses.
Often the most important corporate strategy decisions are whether to diversify and if so, how? Any new products or services must offer potentially lucrative returns, must not present unduly high cost of entry and must give the company a strategic advantage. If a business in a new industry meets these qualifications, the company may increase profits by executing a strategy to diversify.
Corporate and business strategies work together and influence each other in an effort to make the business units and the corporation successful. Small businesses engaged in a single industry already have made the only corporate-level strategic decision they have – which industry to join. Small businesses contemplating diversification, on the other hand, face a raft of additional corporate-strategy decisions, as well as business-level decisions for the new business unit, should it decide to diversify.
Our start-up candy maker’s corporate decision was to enter the confectionary market. Her business decisions were based on how to compete, which in turn influence her operational strategies concerning distribution, manufacturing, promotion, price etc.. When she diversifies, the addition of another unit necessitates business-level decisions for the new unit. But it may also require a rethinking of the original candy making operation’s business strategy.