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Strategic Positioning & Competitive Advantage

How Important Is Your Differentiation?

I believe every business needs to have some way to differentiate itself from competitors who are equally eager to snare business from customers.

Your task is to communicate the factors that differentiate your business and its products quickly and effectively so your customers understand and appreciate why they should buy from you.

First list down all your features about your product or service.

Second, link them to benefits for your customers. You need to translate your features into things that your customers want. It can be useful to use the FAB model – Features, Advantages & Benefits.

For example.

This PC has the super XYZ chip (feature) and is the fastest PC on the market (advantage) and tests show it will save the average Windows user 20 minutes per day (benefit).

Super techie people will know all about the XYZ chip and go looking for the feature when they want to buy, others will want the advantage (the fastest) whilst others will be eager to save so much time – 20 minutes per day is nearly a day each month.

Third, I want you to plot your features/advantages/benefit combinations on a 2 x 2 matrix. One side is about the uniqueness of the feature/benefit and the other side is the importance to the customer. [The brave can go one step further and ask their current and prospective customers to assess the features/benefits.]

You’re got four boxes to consider:

Unique & Important

Unique & Not Important

Standard & Important

Standard & Not Important

This can be a humbling experience as you realise that many of the reasons for buying that you promote in your marketing are generic benefits of your product or service which virtually every provider promises.

Even more alarming, you may realise that your claims for uniqueness are not important to the customer.

We can be so eager to find something unique that we don’t think whether it matters to the customer. We know that we need to be perceived as different.

Because I’m 6 foot 4 inches tall, I genuinely stand out in a crowd. It’s a silly example because my height has no bearing on my ability as a strategic business coach. However,  as a supermarket shelf stacker, it’s got value but a coaching client is more interested in my brain and my ability to communicate my ideas.

Even worse, we can be wasting our time talking about things that a customer takes for granted. I am staggered at the number of accountants who promote a “professional service”. It’s a disgrace if there are accountants don’t offer a professional service. This is what I call an order qualifier and is a minimum standard that is normally assumed unless there is evidence to the contrary.

The gold is in that first category – genuinely unique (or at least rare) and of significant value to customers. These are your order winners.

For me, this is my positioning as a coach who specialises in helping service and commodity product businesses to differentiate themselves.

It may be the accountant who specialises in green technology businesses and who has plenty of contacts with investors who want to provide funds for environmentally friendly start-ups.

It is these special and unique factors which really resonate with potential customers and need to be the focus for your marketing message.

You then supplement and extend your marketing messages with the standard items that are important to customers. Your customer may be specifically looking for solutions or assurance on these factors. Not mentioning them could mean you miss out, even though you know they are standard.

You should only drop to the unique but unimportant level if you don’t have any unique and important factors. They may lack impact, but they can help make you stand out.

And any positive reason to be memorable is better than nothing.

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Does Your Marketing Dazzle Like A Zebra?

If your marketing dazzles like a zebra, then potentially you’ve got a big problem.

Let me explain.

On its own, a zebra is a beautiful creature unlike anything else. You can think of it as a stripy horse but smaller.

I took this photo on a safari holiday in Botswana many years ago and I think it makes the point well.

Just like your marketing, a zebra looks good on its own.

But zebras normally hang around in groups or small herds. In fact the collective name for a zebra is a “dazzle” for one very good reason.

When in a group, it’s difficult to see where one zebra ends and another begins.

In fact, it is a challenge to even count up how many zebras are in the photo because of the angles and the way the stripes confuse the eyes.

This trick works very well for the zebras because it helps to protect them from predators like lions. Apart from a powerful kick, the zebra doesn’t have any defence but if a lion can’t single out one animal from the dazzle, it won’t attack.

Not standing out from the crowd is good for zebras but it’s a killer for your business.

Just like zebras tend to congregate together, your customers are looking at your business along with your competitors.

It’s the way old Yellow Pages always worked by bring you and your competitors together and forcing a difficult selection decision. It’s the same with the Internet.

There’s another problem too.

The on-tap power of the Internet to give your customers access to the information they want, when they want it, means traditional outreach marketing – which lets your business be the equivalent of the single zebra standing on its own – is less effective. Potential customers see little value wasting time on things that interrupt them when they are not relevant and when they can go to Google and find everything when they want it.

This puts the emphasis on your business to be different, to look different, and to feel different in some way that matters to the customer.

Or your customer will decide that you and your competitors are much the same.

Which gives you a problem.

Because your customer will decide that the only difference that matters is price and the lowest price wins the customer’s preference.

That’s bad for you, bad for your profit margins and bad for the customer who may actually have special needs which aren’t being catered for – see Is Your Marketing Hitting The Bullseye?

How Your Marketing Becomes Zebra Marketing

It is very easy to fall into the zebra marketing trap.

You look at how your more successful competitors are marketing and you borrow phrases and ideas which you think will appeal to your customers.

In fact, you’re probably right to do so.

There will be some things that really matter and you should cover them in your marketing – see key success factors.

But you don’t want to find yourself playing marketing bingo where a customer will look at five competitors and see the same “you must buy from me” reasons from each of them.

Stop Being A Normal Zebra

You need to find a way to make your marketing stand out. If Seth Godin can have a Purple Cow, I can have  Pink Zebra.

Your marketing needs to emphasise your unique selling point or your key factors of difference if you have more than one. It’s much better that these differences are genuine and not a case of “jazzing up your marketing to look different” when the underlying product or service is the same – see You Want Deep Not Shallow Differentiation. This isn’t a case where you want to “razzle dazzle them” as Billy Flynn in the musical, Chicago would try.

You need to give your business a chance to attract attention and to create preference with buyers. It’s true that not everyone wants a pink zebra but some will if you make sure your differences are important to your target group of customers – see How Important Is Your Difference?

What If You’re Guilty Of Giraffe Marketing?

Did you notice the giraffe in the photograph of the zebras?

You don’t have any difficulty telling a giraffe and a zebra apart – a zebra is like a horse with black and white stripes, a giraffe is a creamy yellow with brown spots… oh yes and it has a very long neck and very long legs.

A giraffe shouldn’t have any trouble standing out from the crowd of zebras.

But this one does.

Take another look. It seems to be hiding, putting itself in the background and making itself look small.

That can happen with a business and its marketing too.

You can have genuine differences that existing customers recognise and value. They can be the reasons why repeat customers keep coming back to buy again and again (what I call order winners).

But what if your marketing doesn’t recognise these vital factors and explain them to the other people you want as customers?

What if you don’t recognise what it is that does make your business unique and special?

“It can’t happen” you might be thinking.

But it does.

We grow used to things and accept them as normal.

It’s just the way things are.

So you hide rather than shout about the things that will make your business stand out from the crowd.

It’s an important reason why it is so useful to work with someone from the outside who looks at things with fresh eyes and can be amazed by what you really do for your customers and how they benefit.

Just like you want your customers to be.

in 3 – Your Strategic Positioning, 4 – Lead Generation

Differentiation Strategy

If you are going to implement a differentiation strategy in your business in a way that is valuable to your target market, you need to focus on:

  • What you can do;
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  • What your target customers want; and
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  • What competitors offer

I have a ten step, four stage differentiation strategy process to help you to create the deep strategic differentiation which leads to success.

Beware of zebra marketing, it looks good on its own but is too similar to competitors.

My Differentiation Strategy Process

Stage 1 – Your Strategic Snapshot

The first step is to do a quick but comprehensive review of your business against the five pathways to profit to highlight key issues which need to be focused on and which issues don’t require detailed assessment.

Stage 2 – Your Differentiation Analysis

Steps 2 to 6 involves taking a detailed look at your business, your customers and your competitors and then thinking about how things might change in the future.

Stage 3 – Your Differentiation Options & Strategy

Steps 7 and 8 involve clarifying your potential differentiation options and deciding which to choose. Read about order winners and qualifiers.

Stage 4 – Communicating Your Differentiation Strategy

Steps 9 and 10 involve communicating your new differentiation strategy to your staff and to the market. Your staff need to understand the new priorities while your marketing, from your USP to your detailed copy and sales scripts need to emphasise these key factors of difference.

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Bullseye Marketing: Is Your Marketing Hitting The Bullseye?

Bullseye marketing is a powerful analogy for niche marketing and differentiating your business.

Imagine You Are A Buyer

I’d like you to put yourself in the shoes of a potential customer looking for what you sell.

You have some idea of what you want or need so you go out looking.

You see something but it doesn’t measure up – it’s in the outer ring of our buying bullseye target. You’d have to have a desperate and urgent need to make do with that product.

Then you see another offer.

It’s a bit better but it’s still not close enough to the centre to make you reach for your credit card.

And then you see another offer which has some things you want but not others or it has a deal-breaker – something you want to avoid so again you don’t buy.

As you look at options, you clarify your thoughts on what you really want – what represents a bullseye – because you learn about what’s available (including features, advantages and benefits you’d never thought of previously) and what you need and like.

Have You Found The Bullseye When Buying?

Sometimes you find what you’re looking for.

Sometimes you find something that’s good enough and you buy that because the extra value you get from a bullseye purchase isn’t enough to compensate you for the extra time and effort you need to hit the bullseye.

Other times you find a collection of products and services which are all stuck in the outer-rings. None are what you are looking for so you have to decide to:

  • Seriously compromise what you want and buy the best of a bad bunch (often a short-cut to dissatisfaction and frustration);
    .
  • Delay your purchase while you either keep looking or hope that the ideal product appears; or
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  • Find another way to solve the underlying problem.

Me-too, generic products are often in the outer-rings of the buyers’ bullseye and that’s why they are vulnerable to a business who focuses on a particular niche.

Sure, the product will miss the target for many people but for some it will either hit the bullseye or the inner-ring and be a convincing “good enough” to persuade you that it makes sense to buy rather than delay.

Are You Using Bullseye Marketing In Your Business?

How is your marketing doing?

Is it attracting customers who are a natural fit for your business and what you offer? Does your product or service match their bullseye?

And are your identifying and emphasising what makes you a bullseye fit in your marketing in a way that is compelling? Does your marketing promote the few factors that make your product uniquely meet their needs?

Your marketing can fail if:

  • You have the perfect product and in theory it hits the bullseye but your marketing doesn’t show that it’s perfect for your target customers.
  • Your product doesn’t hit the bullseye of (m)any potential customers.

Solving the first is a marketing problem, solving the second is a product or process innovation problem. To use an analogy, you can put lipstick on a pig but it’s still a pig.

Bullseye Marketing Is A Powerful Analogy

The bullseye marketing target is a powerful analogy that helps to explain why some people buy and why some don’t.

Your task is to make sure that your offer reaches those who it will appeal to. You do that by targeting a niche and using bullseye marketing.

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Small Business Strategic Planning

Small business strategic planning is a cut down version of the strategic planning techniques used by big businesses to help improve competitiveness.

It’s that last word that is the key.

Strategic planning is about helping you to improve the way you win profitable business from customers instead it going to your competitors.

It’s Even More Important For Small Businesses To Compete Effectively

Big businesses can sometimes succeed through sheer brute force marketing. TV advertising is expensive but constant exposure to an advertisement can move you through the Attention Interest Desire process which may lead to a buying Action.

Small businesses don’t have the resources to waste so it’s even more important that they:

  1. Only fight competitive battles they stand a good chance of winning.
  2. Know how to apply the strengths of the business against the weaknesses of competitors

Small businesses get the same benefits from strategic planning as big businesses.

The Small Business Strategic Planning Process

Small businesses can benefit from the same five steps of strategic planning

The strategic planning process is based on five steps:

  1. Strategic analysis – using some famous strategic planning models
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  2. Finding new strategic insights  identifying opportunities and threats. Finding new ways to compete more effectively.
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  3. Developing a strategic action plan
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  4. Taking effective action
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  5. Comparing the results with expectations and feeding that back into the strategic learning process since it will either confirm previous analysis or encourage you to find out why things didn’t work as expected.

To this extent, effective strategic planning is the same in a small business as it is in a big business.

Small Business Strategic Planning Is Simpler And More Limited In Scope

Where small business strategic planning differs from that done in big businesses is that it is usually smaller and simpler in scope.

First, there aren’t the resources to do the full strategic analysis work.

Secondly there isn’t the need to do it all based on the particular circumstances of the business. That’s why I take clients through a business health check that I call a Strategic Snapshot.

The Scope Of The Business

First, small businesses often benefit from concentrating on a narrow geographical area.

As a business expands outwards, it gets more complicated, brings into consideration many more customers, potentially with different needs and more competitors.

Second, a small business often works in a tightly defined niche market which again helps to limit strategic issues as well as providing focus and a stronger sense of identify for the business.

The Four Types Of Competition

Economists identify four different types of competition which also impact on the extent of strategic planning needed for a small business:

  • Perfect competition – this is where many small firms provide identical products. Businesses can’t make a big profit because the market is self-regulating but through sales and profit performance, it sends a very clear signal to the management of the business.
    .
  • Monopolistic competition – this is where many small businesses sell differentiated products and therefore have some freedom from destructive competitive forces which reduce profitability.
    .
  • Oligopolistic competition – this is where there are only a few sellers of a product which may be a commodity or differentiated but the actions of one competitor directly impact on the other competitors in the market.
    .
  • Monopoly – there is only one supplier the customer can buy from.

The strategic planning priorities differ:

  • In perfect competition, there is little to gain from strategic planning because no advantage can be sustained. While perfect competition is a theoretical rather than practical concept, it’s bad news if the market heads in this direction.
    .
  • In monopolistic competition, the priority is establishing and maintaining differentiation so that the business keeps its own private market space although it will also be concerned with the future prospects of the specialist market.
    .
  • In oligopolistic competition, the focus is on competitors, how you can gain an advantage and how they will react plus what your competitors are trying to do and how you should react.
    .
  • In a monopoly, the focus would be on threats to the monopoly coming from outside the market.

Your situation will depend partly on how you define your market and the barriers between market segments – when you go to buy a new car do you look at everything, a tightly defined price range or a particular category of vehicle?

It also depends on your share of the market. Having a  60% share of the market means you need to monitoring the prospects of the market because your business is so dominant, it will rise and fall with it. Having 0.1% of the market makes you much less dependent on what the overall market does or what other small share competitors do.

Practical Implications of Small Business Strategic Planning

Strategic planning for a small business should be designed around the particular needs of the business.

While I have a differentiation strategy process, it is customised to the business situation.

I want to understand the key success factors and key factors of difference that apply in the market and think about how those are likely to change through the environmental pressures revealed by techniques like PEST analysis.

Consciously or unconsciously we’ll prepare a SWOT analysis to focus on the important things.

The focus of the small business strategic planning work then turns to what will be changed to improve the competitiveness of the business.

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Scenario Planning Techniques Are More Important Than Ever

Years ago I believed that scenario planning techniques were too complicated and time consuming for many small businesses to focus on.

I saw scenario planning as a strategic planning tool for big companies but small and medium sized businesses were better off-putting together their plan on most likely assumptions and then get on with implementing it.

I was wrong.

While scenario planning still won’t be right for many smaller businesses – what they get out from the exercise won’t be worth the time and effort they put in – for some, using effective scenario planning techniques is the only was to make sure that the strategy is robust enough to cope with alternative future realities.

What Is Scenario Planning?

Scenario planning first appeared in American military planning after World War 2  to understand the possible outcomes.

In business scenario planning techniques were developed in Royal Dutch/Shell to interpret, understand and prepare for alternative versions of the future including the first OPEC oil price shock in 1973. Because the company had thought about what could happen in detail, it was much more prepared to take advantage of opportunities and respond to threats than its competitors (SWOT Analysis).

Scenario planning is a discipline for rediscovering the original entrepreneurial power of creative foresight in contexts of accelerated change, greater complexity, and genuine uncertainty.

Pierre Wack, Royal Dutch/Shell, 1984

Just to be clear, scenario planning isn’t about making a single prediction of the future but about creating alternative realistic versions of the future, each with its own logic and internal consistency.

The image above shows the movement in the price of oil and the expectations for the future oil price which highlights the inherent uncertainty in some situations.

You can see that predictions are strongly influenced by the  recent past:

  • when oil prices were stable, they were expected to stay stable
  • when oil prices were rising, they were expected to continue to rise
  • when oil prices were falling, they were expected to continue to fall

But all the predictions were wrong and in a business where the price of oil determines whether oil wells are profitable or loss making and where exploration costs are large with high risks of failure, viewing strategy under different oil price scenarios made a lot of sense.

Scenario Planning For Small & Medium Sized Businesses Going Forward

I realise that you are almost certainly not in the oil industry but recent years have emphasised the importance of considering the external business environment in more detail.

The Uncertain World Environment

Using scenario planning techniques is a way to make sense of what has been happening and what may happen as a result of shocks to the worldwide economic systems:

  • The rise of the BRIC countries in world trade – Brazil, Russia, India and China – and their acquisitions of landmark businesses. For example in the UK, manufacturing giants like British Steel is now part of the Tata group in India or MG Rover is owned by a Chinese group.
    .
  • The development of the Internet, its impact on access to information, the development of long tail global promotions and the impact of retail buying moving from the High Street to online.
    .
  • The credit crunch in 2007 and crisis in 2008 which saw the UK government step in and save RBS, Lloyds TSB and Northern Rock.
    .
  • The recession of 2008/9 and despite huge fiscal and monetary stimuli, the failure to pull out of the recession strongly
    .
  • The national debt crises of 2010/11 in Greece, Ireland and Portugal that risk spreading to other European countries
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  • The national government austerity measures necessary to bring annual deficits under control.
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  • The Arab spring uprisings and political changes in much of North Africa and the Middle East
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  • Rising inflation in commodity prices, fuel and food which risk causing civil unrest as markets have been pumped with cash from quantitative easing. In August in the UK we saw nights of riots and looting in London, Birmingham, Manchester and other towns and cities.

As I write this in September 2011, the following could happen

  • The world economy experiences a double dip as austerity measures and reductions in consumer confidence cause demand to weaken further.
    .
  • The Euro-zone could collapse, splitting Europe into two (strong and weak economies) or even back into the individual countries. Alternatively the economic pressures could force progress for fiscal and political union to accelerate rapidly.
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  • Debt defaults from Greece and potentially Ireland, Portugal and other at risk European countries will create a huge crisis in the European banking system which will make 2008 look like a picnic in the park. The knock-on effects will be worldwide because financial systems are so interlinked.
    .
  • Inflation and unemployment both shoot up or perhaps even worse, deflation and high unemployment
    .
  • Civil unrest becomes widespread

Business will still go on but not as normal.

Trade is essential since none of us as families, as local regions and as countries are self sufficient.

The Simple Choice

You can either put your head in the sand and think that it’s all too difficult, you can’#t control any of it and you’ll react as things happen.

Or you can start thinking about the alternative futures and plan how you can make sure your business is positioned well in all likely scenarios.

How To Put Scenario Planning Techniques Into Practice

Step 1 – form your scenario planning team. You’ll find it easier to do with other people than on your own because one idea sparks another and where there are heated debates, you have a warning that there may be a further split in scenarios.

Step 2 – Gain a shared understanding of the current situation. The future is uncertain but you want to be clear about the present. Agree how far you want to look into the future. For most businesses I’d think in terms of two to three years but some might need to look ten years or more ahead.

Step 3 – Use the common environmental and industry analysis tools like PEST Analysis, Porter’s Five Forces and SKEPTIC to look back to look forward. Identify the trends and any recent or potential turns. As the graph of the oil prices above shows, trends can continue, they can stop or reverse.

Step 4 – Identify either/or situations which will form the basis for your scenario planning. For example it looks like the Euro can’t continue as it is and it will either break up or force political union. The impact of either will create very different scenarios for anyone who trades with Europe.

Step 5 – prune your options by rating each in terms of potential impact and likelihood. Rate each dimension in terms of high, medium and low. One big problem with scenario thinking is that you can create an overwhelming number of options and you lose yourself in all the different possibilities. That goes against the objective of scenario planning which is to provide more clarity to your strategy.

If you don’t find the high, medium, low to give you sufficient clarity, go back and rate the lows as 1 to 3, the mediums as 4 to 6 and the highs as 7 to 10. Some strategists favour going straight in from 1 to 10 but I find it much easier to filter through the high, medium and low first, group like items together and then further refine the ratings.

Go through and eliminate the easy ones – the lower impact or lower likelihood options and steadily move up so you’re left with three main categories to focus:

  • high impact, high probability
  • high impact, medium probability
  • medium impact, high probability

If all the major future changes are highly probable, you have the option of reverting back to the standard strategic planning techniques since you view the future with a lot of certainty.

If you have different high impact, medium probability changes, then you need to continue your scenario planning exercise.

Step 6 – sketch out possible scenarios as combinations of the big issues – try to limit to two or three factors since the matrix of possibilities again grows quickly.

e.g. a 2 x 2 will generate four combinations, 3 x 3 will generate nine.

Again look to eliminate based on lower impact and probability because I want you to focus on three or four scenarios to take forward for more detailed analysis.

e.g. for a luxury goods company which sold high volumes into Europe and had European competitors I’d want to focus my scenario thinking on:

  • Euro-zone collapse, banking crisis, five to ten year global depression
  • Long term European uncertainty, banking crisis, one to three year global depression
  • United States of Europe, no banking crisis, one year global recession
  • United States of Europe, no banking crisis, no recession

Step 7 – Flesh out the scenarios into logically consistent stories falling back on PEST analysis and the Five Forces. Think through the impact of the different scenarios on:

  • Directly on your business, your employees and suppliers
  • On your customers and their customers further upstream in the value chain
  • On your competitors and their employees and suppliers

Step 8 – Look at the likely transition from here to there and the likely events and warning signs that will tell you which way the future looks to be moving. It’s always much easier to look backwards and see the route than it is to look forward.

Step 9 – If you already have a strategic plan for the next few years, look at it under your different scenarios to see how robust it is. Where does the plan come under pressure? Where are the fundamental assumptions open to challenge?

Step 10 – Identify how you can change your strategy to work under the different scenarios. What strategic options are there that make sense under the different views of the future? What strategic options make sense regardless of what happens?

You’ll see three types of options emerge:

  1. Those that you need to get on and do because they make the business stronger and more competitive under each scenario.
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  2. Those that make sense once it is clear that something is happening and which can wait until you get clear signals from the market.
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  3. Those that create a winning strategy under one scenario but not the others and may even severely damage the business under the different scenarios but, if you’re going to seize the advantage, they can’t wait until you know the way the future will develop. These are the big bets which can make or break the business. Whether you go ahead depends on your own attitude to risk, the potential rewards and losses and how likely you believe the scenario is. They will either make you look a business genius or a fool but at least with scenario planning, you’re going into the decision with your eyes open.

Step 11 – Start implementing your strategy decisions.

Step 12 – Keep monitoring the external environment for indications that one scenario is becoming more likely and reflect that in your emerging strategy.

Scenario Planning Techniques A Quick Summary

There is a lot to take in when you start thinking about using scenario planning techniques to guide your business strategy development.

Here’s a quick summary:

  1. Use PEST analysis and the five forces to identify what may happen in the foreseeable future.
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  2. Focus attention on two or three key variables.
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  3. Develop logically consistent scenarios
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  4. Design a winning strategy under each – compare and contrast to identify things to do now, future options and big bets

When Should A Smaller Business Use Scenario Planning Techniques?

If you’re responsible for strategy in a business employing thousands, then I believe scenario planning should be part of your annual strategic planning process.

If you employ 50 to 250 people – what is classified in the UK as a medium sized company – then you should use the scenario planning techniques I’ve explained only when you believe you’re facing major uncertainty in the wider business environment.

You’ll have realised that scenario planning is time consuming and can take you throw more darkness before you find clarity. It can get scary looking into the future and the options can appear overwhelming as you start using scenario planning.

You’ll also find that some of your managers cope with talking through the uncertainties much better than others. Some people find it much easier to think conceptually and imagine different situations while others are much more practical and grounded in what’s happening in the real world.

These people present a challenge since if you don’t involve them in building up the scenarios, they will reject the implications. The clearer the drivers of the scenarios are, the easier it will be to gain their support.

If you’re a smaller business, then you’re less likely to have problems applying the scenario planning techniques because of the natural closeness of the management team and perhaps as a business owner, your more powerful position in the team.

But the time required to benefit of scenario planning ratio worsens as the business gets smaller. That’s just because the returns from winning will be smaller.

However scenario planning can still be useful for even the smallest of businesses.

If you’re business is in a town or city dependent on one big business – or even a specialist trade – and that dominant force is under threat then you have two or three clear scenarios:

  • Things carry on as they are
  • The big business closes its local plant
  • The big business closes another plant and moves its production to your local plant

Now imagine you want to grow your retail business and you can do it by increasing the size of your current store, opening up a second store in another part of the town or city or opening up a second store in another town or city.

Scenario planning helps you to make judge each of the options and make a more informed decision about which is the best option.

If you’re the owner of a small or medium sized business and you’re waking up in the middle of the night worrying about what may happen if events play out in certain ways, then it’s clear that your subconscious is wrestling with fundamental uncertainties.

It’s worthwhile committing yourself to thinking through the uncertainties and working your way through the scenario planning techniques. Uncertainty creates stress which causes mental processing difficulties rationally and emotionally.

If You Don’t Want To Use The Scenario Planning Techniques

If you don’t want to use the scenario planning techniques outlined above then you have two choices:

  1. To make bold strategic moves effectively on gut-feel or the toss of a coin
  2. To keep your strategies focused on the short term, no lose options

Both are a gamble when their is fundamental environmental uncertainty.

In the first option, you may win big or you may lose.

In the second, by playing it safe, you may be condemning your business to a long term struggle against a competitor who has seized the advantage.

Have You Used Scenario Planning?

If you’ve used scenario planning in your strategy development, I’d love to hear about your experiences so please leave a comment.

Did the scenario planning help you to think through the issues more clearly?

Do you have any special tips to share about scenario planning?

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SKEPTIC Environmental Scanning

I thought this SKEPTIC acronym for environmental planning from Stephen Haines was pretty neat when he mentioned it in an email.

I use PESTER and Michael Porter’s Five Forces but SKEPTIC environmental scanning combines them both if you’re not going to venture into detailed scenario planning.

What is SKEPTIC Environmental Scanning?

SKEPTIC stands for

S = Social Demographic (the S from PESTER)

K = Competition and Substitutes (two of the five forces)

E = Economics and Ecology (the two Es from PESTER)

P = Political/Regulatory (the P and R from PESTER)

T = Technology (the T from PESTER)

I = Industry/Suppliers (supplier power and new entrants from the five forces)

C = Customers and Citizens (the buyer power from the five forces).

Thoughts On SKEPTIC Environmental Scanning

OK SKEPTIC may not introduce much new into environmental scanning (although citizens doesn’t directly translate) but if you’ve used PESTER (or PEST, PESTEL or STEP) and the Five Forces in the past, then using SKEPTIC may freshen things up a bit and get your top team thinking again.

I see some cynicism towards both the five forces and PEST analysis because they are often not used well by management teams working on their strategy.

SKEPTIC Is A Strategic Planning Model

SKEPTIC Environmental Scanning is one of the frameworks included in my Strategic Planning Models guide.

Click the link to find out what other models could help you to develop a winning business strategy.

Have You Used The SKEPTIC Environmental Scanning Strategy Tool?

Have you used SKEPTIC as a way to combine PEST analysis with the five forces or do you know of any other similar tool which combines them both.

I’d like to know so please leave a comment.

in 3 – Your Strategic Positioning

Conservative Strategy In The SPACE Matrix

The SPACE Matrix or more formally, the Strategic Position and Action Evaluation Matrix recommends one of four basic strategic approaches for a business and today I’m going to focus on the Conservative Strategy dimension.

This is when the business is in a good position in its financial strength and environmental stability but its market offers limited opportunities because it is either unattractive or the business has a competitive disadvantage or both.

The SPACE Matrix

The SPACE  matrix assesses the strategic position of a business along four dimensions – Industry attractiveness, Competitive advantage, Environmental stability and Financial strength.

The SPACE matrix recommends four broad strategic directions depending on the assessment of each dimension:

Conservative Strategy In The SPACE Matrix

The business is trapped into a weak position in an unexciting market – this is the dog position in the Growth Share Matrix characterised by low market share and low (perhaps negative) market growth.

The company has a choice:

  1. To improve its current competitive position by developing competitive advantages or focusing on the more attractive niches of the overall market.
  2. Looking outside the current market for profitable opportunities, either building on existing resources and capabilities or diversifying into a new area.

Which approach makes sense depends on how badly it rates on the Industry Attractiveness / Competitive Advantage matrix.

Combined the individual assessments are negative but this may be:

  • IA and CA are both weak
  • IA is OK but CA is weak
  • IA is weak but CA is OK

If the industry looks bad and the business has significant competitive advantages, then any remaining profitability is under major threat and the business can become a cash drain which will reduce financial strength to diversify elsewhere.

The business should look to trim costs and any loss making customers and products wherever it can to buy more time to find attractive diversification opportunities. It should also cut back on capacity so that it shrinks to fit the future market expectations.

Otherwise, the business may be able to improve its position through a determined strategy to improve its competitive advantages.

Businesses new to strategic management and customer value strategies may find they can make major gains through focused action and even find overlooked assets and opportunities. The business should be careful it doesn’t over-invest since upside is weak because the market isn’t considered to be attractive. The business may identify niches where it does have advantages or can quickly develop advantages that are not appreciated in the wider market.

The nice thing about the conservative strategy in the SPACE matrix is that the business is not under major threats from the environment and because of its financial strength, it has time to consider its options.

in 3 – Your Strategic Positioning

Competitive Strategy In The SPACE Matrix

The SPACE Matrix or more formally, the Strategic Position and Action Evaluation Matrix recommends one of four basic strategic approaches for a business and today I’m going to focus on the Competitive Strategy dimension.

This is when the business is in a good position in its marketplace but its financial strength is insufficient to compensate for environmental instability.

What Is The SPACE Matrix

The SPACE  matrix assesses the strategic position of a business along four dimensions:

Combining these four dimensions provides four broad strategic directions:

Competitive Strategy In The SPACE Matrix

When Does The SPACE Matrix Recommend Following A Competitive Strategy?

The competitive strategy approach is recommended when:

The business scores well on the Industry Attractiveness / Competitive Advantage  (IA/CA) axis of the SPACE matrix but unfavourably on the Financial Strength /  Environmental Stability (FS/ES) axis.

The high IA/CA score can be when:

  • The industry is considered attractive and the company has competitive advantages over its rivals, a very strong position.
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  • The industry is considered attractive and the business is neutral on competitive advantage.
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  • The industry is reasonable but the business has a strong competitive advantage.

The low FS/ES score can be when:

  • The environment is unstable and the company is weak financially.
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  • The environment is considered to be unstable and the business has modest financial resources.
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  • The business is weak financially but environmental stability is reasonable.

What Does A Competitive Strategy In The SPACE Matrix Involve?

The key strategic imperative is to  acquire financial strength to compensate for the environmental instability so that the business can then follow an aggressive strategy.

The business needs to split its attention between strengthening the balance sheet and improving the underlying profitability of its sales.

To strengthen the balance and to provide the funds for expansion, it can:

  • Raise extra share capital or even long term loans. A private business can turn to private equity in terms of business angels or venture capital firms to provide cash although this will dilute the interest of the current shareholders.
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  • Merge with a cash rich company who is looking for opportunities to expand.
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  • Form alliances to gain access to tangible and intangible assets without having to incur high investment costs.
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  • Improving profitability will also lead to strengthening the balance sheet provided the gains aren’t withdrawn by the owners. This will take time to build up cash and equity.

To improve profitability of the business and take advantage of its strong combined position on the industry attractiveness /  competitive advantage axis, the business should:

  • Reduce its fixed and variable costs provided it doesn’t damage the competitive advantage. Innovate to improve productivity.
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  • Emphasise the differentiation competitive advantages, make sure they are communicated well to the market and increase prices to improve margins. This action will depend on where the business is on the customer value map.
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  • Expand into new markets and products where the business is confident it will be profitable  – see the Ansoff Growth matrix.

What To Look Out For Following A Competitive Strategy

The intention of the competitive strategy is to boost profitability and balance sheet strength so that it can move into an aggressive strategy.

The business must make sure that its hard-nosed emphasis on profitability does not undermine its competitive advantage. Businesses are often poor at cutting costs strategically since it involves hard decisions to save some areas – perhaps even increasing investment – while cutting back in others. The 10% off all costs is easier to manage and looks fairer to employees in particular but it risks undermining key capabilities and driving away essential staff who want to move to more secure employment.

in 3 – Your Strategic Positioning

Financial Strength In The SPACE Matrix

The SPACE or Strategic Positioning matrix assesses a business along four dimensions to find an appropriate strategic thrust and in this article, we’ll look at the SPACE factors for financial strength.

Financial Strength In The SPACE Matrix

According to the creators of the Strategic Position and Action Evaluation Matrix, (Strategic Management – A Methodical Approach”, Rowe, Mason, Dickel, Mann and Mockler. Published by Addison Wesley) the following items should be considered when assessing Financial Strength:

  • Return on investment (low to high)
  • Leverage (debt to equity ratio) (inbalanced to balanced)
  • Liquidity (access to quick money when needed) (inbalanced to solid)
  • Capital required versus capital available) (high to low)
  • Cash flow (low to high)
  • Ease of exit from market (difficult to easy)
  • Risk involved in the business (much to little)
  • Inventory turnover (slow to fast)
  • Use of economies of scale and experience (low to high)

The factors for Financial Strength are marked from 1 to 6 and a high score is good, a low score indicates financial weakness.

Interpreting Financial Strength In The SPACE Matrix To Your Situation

This is the most generic of the dimensions in the SPACE matrix. High profit margins and access to cash to invest when you want it are valuable in any business.

Several of the financial measures are not black and white:

  1. Leverage ranges from imbalanced (bad) to balanced (good) on the basis that equity finance is more expensive than moderate levels of debt so the business should aim for the lowest weighted average cost of capital. Finance theory is beyond the scope of this blog so I won’t go into details. In my accountancy training I was taught that a debt to equity ratio of around 1:1 was good but it is much more dangerous to be highly geared (high debt to equity) than under. Over the last twenty years many private equity deals have been done on the basis of high debt ratios and while the credit crunch has made access to funding difficult, the record low interest rates have prevented many bankruptcies.
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  2. Liquidity also ranges from imbalanced (bad) to balanced (good) because high levels of cash will depress returns on investment while liquidity problems will mean the business struggles to pay creditors as they fall due and may mean the business is technically insolvent. Going back to my days as an accountancy trainee, a current ratio of 2:1 (current assets to current liabilities) and a quick ratio of 1:1 (debtors plus cash/creditors) was considered good.

Businesses have different financial needs in terms of:

  • asset intensity – some businesses need large investments in capital equipment
  • working capital cycles – a supermarket will be paid in cash by customers well before it has to pay its suppliers while a distributor may have to hold high levels of stocks/inventories, finance trade debtors and even pay for imported goods before they are despatched.

The Impact On Strategic Direction For Different Levels Of Financial Strength

Financial strength is used to offset any environmental instability on the y-axis of the SPACE matrix diagram. The other axis offsets industry attractiveness and competitive advantage.

A strong score on financial strength backed up with reasonable environmental stability suggests that either an aggressive strategy or conservative strategy is appropriate depending on the position for competitive advantage and industry attractiveness.

A poor score without remarkable environmental stability indicates that either a competitive strategy or defensive strategy is required.

in 3 – Your Strategic Positioning