Entrepreneur's Handbook
STRATEGIC MANAGEMENT IN SMEs
The concept of sustainable competitive advantage lies behind the strategic management of ventures. Being ahead of other competitors operating in the same industry or performing above the industry average means competitive advantage. If the venture can maintain its competitive advantage over a long period (e.g. five years), it has a sustainable competitive advantage. (Porter, 2008). Profitability is the most preferred way to measure venture performance (Hamann et al., 2013). Return on equity (net profit / equity), return on assets (net profit / total assets), return on income (net profit / total income) and return on sales (net profit / total sales) are among the most preferred profitability criteria in strategic management. Net profit is derived from the income generated from sales minus the cost of the products sold, operating expenses (eg sales, general and administrative costs) and interest and taxes.
Strategy is the set of target-oriented actions that the venture takes to achieve a sustainable competitive advantage. Strategic management is an integrated management process that combines the analysis of the venture’s external and internal environment, strategy formulation and implementation. External environment analysis consists of far and near environment analysis. In the far environment analysis Political (e.g. executive decisions), economic (interest rates, inflation, exchange rates, etc.), socio-cultural (e.g. traditions, values and population), technological (e.g. innovations in production methods and new products), ecological (eg global warming) and legal (laws, regulations, regulations and court decisions) aspects are examined. Often the ventures are severely affected by these factors while they cannot affect them. (Rothaermel, 2016).
Neighborhood analysis consists of analysis of market and industry structure. While products are bought and sold in the marketplace, each market covers at least one industry. The industry is a group of ventures that produce to meet the same customer needs (Hill et al.2015). Ventures have the potential to affect these factors while being affected by the elements of the immediate environment.
The ventures operate in four different market structures. In the perfect competition market, many ventures produce and sell an undifferentiated product such as iron, crude oil and sugar beet, and pricing is done by the market as a whole, not by ventures. In the monopolistic competition market, many manufacturers sell a product that can be differentiated, such as television, shirt and biscuit. If a venture manages to differentiate its product significantly from its competitors, it gains a temporary "monopoly" advantage over pricing. In the oligopoly market, very few ventures sell products with significant pricing power. The mobile phone services and passenger aircraft market in Turkey are examples of the oligopoly market. Finally, in monopoly markets, a single venture has the opportunity to sell an undifferentiated product such as water, electricity, and natural gas with very high pricing power (Wheelen et al., 2015).
In industry analysis, the situation of the five forces shaping competition is analyzed. The bargaining power of customers is high when few customers have many procurement opportunities and when switching costs are low. Suppliers' bargaining power is high when few suppliers have a large number of customer options and the cost of switching customers is low. The threat of substitute products is high when substitute products (eg tea are substitutes for coffee) have an attractive price-performance balance and the cost of switching to the replacement product by the customer is low. In perfect competition and monopolistic competition markets, barriers to entry are low when the venture costs are low, and when industry entrepreneurs do not retaliate, such as aggressive pricing for new ventures. Again, in perfect competition and monopolistic competition markets, when there is overcapacity in the industry and the growth rate of the industry is very low, there is zero or the industry is shrinking, the intensity of the existing competition is high. (Porter, 2008).
In the internal environmental analysis, the resources, skills, basic skills and activities of the venture are examined. Resources are assets that the venture can use in strategy formulation and implementation, divided into tangible and intangible resources. Concrete resources such as labor, capital and land have physical properties and are visible. Intangible resources such as brand equity, reputation, and intellectual assets (eg patents, trade secrets, and copyrights) have no physical properties and are not visible. Competitive advantage tends to develop from abstract sources that are harder to buy and harder to develop (Rothaermel, 2016). The resources that allow the venture to take full advantage of the other resources it controls are called skills. Marketing skills of the venture are among the leading venture skills (Barney & Hesterley, 2015). Resources and skills duplicate and perfect each other. In addition, the interaction of resources and skills generates core capabilities, which are venture-specific strengths that are deeply embedded within the venture. Basic capabilities such as being superior in manufacturing, design or sales are crucial for sustainable competitive advantage. Fundamental capabilities trigger entrepreneurial activities that will lead to competitive advantage (Rothaermel, 2016). All of the activities within the venture constitute the value chain of the venture. Activities such as manufacturing, sales and after-sales services that directly create value for the customer in the value chain are main activities and activities such as accounting, human resources management and finance that facilitate the main activities and increase their performance (Porter, 1996). There are three different business strategy options available for ventures that complete external and internal environmental analysis: cost leadership, differentiation, and integration.
4.1. Cost Leadership Strategy
The cost leadership strategy is to produce the product at a lower cost than the competitors and offer the customer at an average or lower price than the competitors. Accessing inputs such as capital, land, energy, labor and raw materials at low cost is one of the main methods of cost leadership strategy. (Porter, 1985).
The prominent methods offered by marketing for the cost leadership strategy are aggressive pricing and promotional activities such as "low price every day", "buy one, second free" and comparison advertising with competitors' products.
In order to reach lower costs, the production department has the methods of achieving economies of scale and process innovation. Economies of scale mean that the cost per product decreases as the amount of production increases (Porter, 1980). There are three ways to achieve economies of scale. The first is to distribute fixed costs such as electricity, water and natural gas expenditures, insurance expense and property tax, which do not change according to the amount of production, to more units. The second is to employ professionals that will provide higher productivity and to use hardware and software such as 3D printers and artificial intelligence. The last method is to provide discounts for large purchases. Process innovation refers to a new method or technology to produce an existing product. Significant cost advantages can be obtained through new methods or technologies to be used in production.
According to a human resources strategy focused on cost leadership, the venture should employ low-wage, repetitive and low-skilled employees (Wheelen et al.2015). Cost leadership strategy requires job descriptions that determine working methods that aim to reduce waste. There is a high tendency to use output-based control methods such as electronic surveillance, such as tracking how much time it takes to complete a job, and regular assessment of whether predetermined goals are met. (Child, 2015).
4.2. Differentiation Strategy
The differentiation strategy involves offering higher value to customers by selling products with unique characteristics at prices above average while keeping costs at the same or similar levels to competitors (Porter, 1985).
In an venture that adopts a differentiation strategy, the role of the marketing function is very important. Product innovation, customer service, and complementary products are the leading differentiation tools. Product innovation, which means introducing new products or new product features, is a common tool for differentiation. In general, ventures tend to prefer incremental innovation based on the existing knowledge base and the development of existing products in the venture they consider easy and low risk (e.g. redesigning an automobile model or powering the processor of a smartphone model). Radical innovation, which occurs less frequently, involves the discovery of new knowledge and the development of new and different products such as biotechnology for pharmaceutical companies or jet engines for aircraft manufacturers (Pisano, 2015). Another tool commonly used in differentiation is providing high-level customer service, such as free and / or fast delivery, creating a perfect store atmosphere (Jones & George, 2016). Finally, offering complementary products to customers can entice them to pay higher prices. Complementary products are products that meet customer demands better when used with the main product and thus increase the value of the main product (Rothaermel, 2016). Examples of supplements are whole wheat bread produced specifically for sandwiches or tires produced specifically for a car manufacturer.
4.3. Integration Strategy
As mentioned above, the strategic choices most embraced by ventures are focusing on reducing costs or creating more value. These two options are often in conflict with each other. When the focus is on creating higher value, costs tend to rise, while the focus tends to decrease costs. However, few ventures are able to offer more value to customers by satisfying their desires and attain lower costs than their competitors. However, it should be kept in mind that the integration strategy is very risky. Failing to fully realize neither cost leadership nor differentiation, the venture may encounter adverse situations called "jamming in between", lose customers and face performance decline. (Chan and Mauborgne, 1997).
Production is extremely important in terms of the integration strategy, and access to economies of scope, flexible manufacturing and mass customization are the main tools. Economies of scope occur when the value chains of two separate products share activities with the same market, such as using their channels or being manufactured in the same facilities (eg, when a computer manufacturer also produces smartphones and tablets). The cost of combined production of a large number of products may be lower than production separately (Wheelen et al.2015). Flexible manufacturing means using machines that perform a variety of tasks and thus can produce a variety of products. With this method, low volume but high variety of products can be produced at low cost. Computer aided numerically controlled (CNC) benches and robots are common elements of flexible manufacturing systems (Heizer et al.2017). Mass customization means adapting products to the individual preferences of a large number of customers quickly and at low cost (Nickels et al.2016). Mass customization requires a limited product line and a limited number of easily replaceable product components, a flexible product design to respond to design innovations and volume fluctuations, tight inventory control, tight production schedules and harmonious value chain partners (Heizer et al.2017). Some furniture ventures that offer a large number of options for a variety of different components or features, such as different fabrics or furniture legs, modular builders, who allow customers to make changes on the base house model, and sports shoe manufacturers who offer different material and color options to customers to produce their favorite sports shoes model are examples of mass customization.