Size doesn’t provide protection. Look at Kmart, at one time they were the largest discount retailer, and without a clear strategy on fighting this pressure, lost the commodity battle to both Target (product innovation position) and Wal-Mart (low price—efficient operator position). Size and brand recognition doesn’t provide protection. Look at the entire airline industry losing the commodity battle on price against Southwest Airlines. A position of innovation doesn’t provide protection. Look at the collapse of Wand, DEC and others to Dell and now Apple.

This is especially challenging for a small or medium sized business. How does a small business marshal the resources to fight this battle against larger, better financed competitors? How can the small business leader carve out a niche that provides for a decent level of profitability?

It starts with defining a strategy around one of three choices. A business can effectively compete by embracing and executing one of three strategies; a leader in innovation, a position around excellent, customized customer service, or to be the low price leader with incredibly efficient operations. The key is to understand your ability to compete effectively in one of these areas, and to design all aspects of your business to compliment this strategy. Just like Kmart who flopped from low price leader (competing with Wal-Mart’s position) to product innovator (with the Martha Stewart lines against Target), the business leader needs to beware of a mixed message to the market and to employees. This can be worse than no strategy at all!

Taking Stock

Many of the small and medium business leaders I meet with are competing within a strategy that developed over time and in most cases is not specific or targeted. In some instances, they believe they hold a different market position then the one their organization is really working within. I hear, “My market position is to provide exceptional customer service”, when in fact they are winning business based on price. When you investigate, their margins can’t possibly afford their desired position of customer service leader.

Other businesses often compete in multiple strategies, depending upon the last customer meeting. They waffle between customized services demanded by customers and downward price pressure to gain business.

The end result from a lack of focus on strategy is marginal profitability and no or slow growth.

This doesn’t mean that you embrace one of these strategies and disregard the others. If you are going to be the price leader, just like Wal-Mart, you need to provide a decent level of customer service. However, Wal-Mart will never compete with a Nordstrom’s on customer service. Nordstrom’s has captured the customer service niche for department stores and has achieved higher than average returns. Apple has captured innovation leadership in PC’s, in digital music distribution and players with the iPod, as well as PDA’s with the iPhone. However, Apple has a considerable effort in customer service, you only have to spend a little time at one of their stores and experience the Genius Bar, and their One-to-One training program to confirm. They also have focused on lowering costs; the last generation iPhone is now available for $99. However, their real market differentiator is clearly innovation.

Taking Action

You have a choice. You can limp along suffering with no strategy while your margins erode and sales slow to competitors, or you can more clearly define your operating strategy and market differentiation to better focus the efforts of your employees. It’s the proverbial “everyone with their ores in the water pulling in the same direction”!

The first step is to understand what your current strategy is. This is best achieved by spending time with customers and also with lost business prospects to find out why people buy, and why they don’t. You need to understand what your differentiator is for their purchase. This inquiry has to be done with an open mind and without influencing the comments. Be prepared to hear a different reason than the one you thought.

The next step is to create a team of associates representing all functional areas of your business. This team needs to challenge the question of what you are really good at, what makes you different, and how can these key competencies be packaged in a comprehensive offering to the market.

I crafted an MBO of the firm I was working with when I was 24. Datatec Systems, Inc. was very small with $500,000 in revenue and provided low voltage cabling for the nascent technology industry. We had a couple of trucks and technical teams that would string low voltage cables in stores for credit pads. Mostly the company competed on low price.

We realized that there was demand for a nationwide service offering all aspects of technology deployment from companies that had large numbers of facilities needing a fairly complex level of technology. The first step was defining the services offering. We expanded our services to include fixture modifications, electrical extensions, the staging and installation of systems components and the porting of existing files. The company established technology warehousing and staging facilities in four areas of the country. We opened offices in 20 locations in the US and Canada.

Starting as a very small, unsophisticated cable installer, we grew to a $100m enterprise and the largest independent technology deployment company in North America. We rose above the price competition with a comprehensive service where we customized every project to the needs of the customer and satisfied over 99% of our customers. We grew revenues by 25% compounded every year for 25 years and had over 500 technicians deploying over 5,000 distinct sites each month for all the major retailers, fast food chains, and financial services companies. This was accomplished through an innovative approach of expanding to a comprehensive services offering.

Another interesting example is a small security firm in New Jersey called Motivated Security Services, Inc. The owner-President was faced with the constant pressure from other regional players on price, and the more comprehensive services and national coverage of the bigger competitors.

The security services industry has been commoditized to a degree where the level of service is terrible. We have all experienced the tired, disheveled security guard standing post with their feet up and a big nap underway. Motivated was experiencing customer loss and a drop in margin that was business threatening.

In working with the leadership team we established the potential of creating a service based culture within their business, and taking the customer service niche in competing for business. This was not an easy task, the pay rates were not going to change in the short term, and the available and existing work force was feeling underappreciated and a little abused!

We created a concept of WOW—to create an industry leading customer service commitment that would over time reduce the price pressure. We defined the elements of WOW, the single most important was engaging with the guards and unleashing their potential by having them participate in the solution. We tested with one of their largest customers; a NJ based warehousing business with three locations. There was some urgency as their customer was highly dissatisfied and ready to terminate. This was based on several major thefts including the loss of three ocean containers.

We started a regular survey process of customer satisfaction. This gave us a benchmark of performance. We then partnered with the customer, and created an innovative approach to additional compensation for a sustained increase in customer service as measured through the survey. We then included all of the guards and selected customer managers in a planning session for improving service and providing better protection. The feedback was tremendous; the guards had a number of really important issues that the customer needed to resolve. In addition, the guards became very focused and interested when they realized that an increase was possible with improved service.

Over the next few months, the guards significantly improved the level of security, the thefts and losses completely stopped, the customer service scores went through the roof, and the guards received their raise. After two years, the profitability of the account increased, revenue increased as more services were contracted, and guard turnover dropped dramatically.

Motivated launched WOW to all new and existing accounts. In a one year period ending December 2008, the company increased customer satisfaction scores from 62% to 92%, reduced turnover from 140% to 63% and turned around from an operating loss of $38,000 to a profit of $208,000.

Dramatic improvements are possible by creating a focused approach to how you go to market, and what strategy you employ. Trying to be everything to all customers will only dilute your efforts and reduce your potential profitability.