Academic journal article Academy of Strategic Management Journal

Small-Firm Competitive Strategy

Academic journal article Academy of Strategic Management Journal

Small-Firm Competitive Strategy

Article excerpt

INTRODUCTION

In 1980 Michael Porter published Competitive Strategy: How to Analyze Industries and Competitors. This book quickly became a New York Times best seller. Thirty-one years later, it remains in print in hardback only. Porter's thesis was that there were only two ways to compete successfully: Cost Leadership and Differentiation. He called these "generic competitive strategies." Cost Leadership means just what it says: achieving the lowest cost of goods or services sold in the firm's competitive domain (industry or industry segment). The Cost Leader in discount retailing is Wal-Mart; through massive scale, the efficiency of its distribution system, and effective advertising, it has become the world's largest retailer. The challenge for the cost leader in any domain is not to be so cost-focused that it fails to spot innovations which change the domain. Examples: Sears, independent booksellers.

In contrast, differentiation is about being different. Porter's phrase is "perceived uniqueness." Successful differentiators set themselves apart from the competition by offering something features, options, customer service, image, etc.--for which customers are willing to pay more. Examples in department-store retailing are Nordstrom and Neiman Marcus. The danger for differentiators is not to allow the price gap between them and the cost leader to become so large that customers are no longer willing to pay the difference. Examples: Wanamakers (Philadelphia) and many other now-defunct upscale, local department stores. Common characteristics of cost leaders are large production facilities, long production runs, centralized decision-making, and tight control systems. Differentiators, on the other hand, rely heavily on surveys to keep them abreast of what their customers value and perceive in the differentiator's product or service offerings. They are also characterized by decentralization, informality, higher gross margins, and significant investments in R&D. They are ever-alert to complaints about price because those tell them that customers don't perceive value.

Porter also offered a 2x2 matrix of these strategies. The "Y-axis" is for the scope of operations. "Wide" means a business that competes industry-wide, and "narrow" is for a company competing in an industry segment, which the strategy literature (Caves & Porter, 1977) calls a 'strategic group.' Marketers might think of such a group as a "niche." The Porter strategy matrix, then, is a 2 x2 matrix with two choices for how to compete and two for scope.

Although numerous studies have attempted to relate these two basic strategies to firm performance, we are aware of none that address this research question: "What percentage of small, non-public companies employ which type of strategy with which breadth of scope?" The purpose of this study was to answer that question. We define "small non-public companies" as those employing fewer than one hundred people.

METHODOLOGY

MBA students and final-semester undergraduates conducted 167 onsite interviews with CEOs and sole practitioners in the Fall 2010 semester. Interviewees were from southwest Missouri and southeast Kansas. Each respondent was asked to complete a questionnaire--Appendix 1. All of the interviewers had been trained (in class) about generic strategies. That turned out to be important because, as we later learned, in most cases the interviewer had to explain what "generic strategies" are.

Respondents were also asked to check the appropriate block on the survey form indicating the generic strategy they employed, to indicate their type of business (service, retail, manufacturing or wholesale), and to disclose employment levels for 2009 and 2010.

RESULTS

All companies reported employing fewer than 100 people in 2010. Thirty-two (19%) reported an increase in employment last year, while the rest reported flat or declining headcount . …

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