The Basics – Business Strategy

I was re-reading my handy copy of Rich Dad Poor Dad the other day and was reminded that in Robert’s concept of financial IQ the number 1 area of expertise is…accounting! [number 2 is investing, number 3 is understanding markets or capitalism and 4 is the law.]

I could just sit here and sob and wish I had stayed awake during accounting class in college, but for the sake of moving forward I’ve decided to dig out my old notes and present a series of financial IQ boosting accounting tips and principles that every entrepreneur and/or wanna be rich person should know.

So tonight’s topic is really a precursor to accounting. I decided to skip over all the business form and nature of business in general stuff, but the business strategy is particularly interesting to me.

Most small businesses don’t have a clear strategy before they start. Here’s the technical definition:

A business strategy is an integrated set of plans and actions designed to enable the business to gain an advantage over its competitors and, in doing so, to maximize its profits.

I know I have always thought to myself that this concept didn’t really apply to a small website or even a blog…but after a year on the web as an entrepreneur, I realize I was wrong. If you are trying to make money from your website you need to be thinking [a lot!] about how you are going to gain an advantage over your competition. Your competition are the other sites that come up before you in the search engine results, or get tagged more in social bookmarking circles.

In the brick and mortar world there are two well known strategies that are used: the first is the low cost strategy [Wal-Mart] and the other is differentiation [Starbucks].

The low cost strategy is pretty straight forward. Produce goods of an acceptable quality for the lowest possible price and go after the common denominator, the largest section, of the market. With this method you end up constantly driving your systems towards efficiencies and cost cutting. You end up like Wal-Mart having your operation headquartered in a third world country because labor costs are so much lower.

A differentiation strategy is producing a product or service that has a uniqueness for which customers are willing to pay a premium for. The unique attribute can fall under many categories: experience, dependability, rarity, image or design.

This business model needs to spend a lot of time capturing data that helps them understand their customers and potential client. They are in the business of getting inside the skin of the customer and selling them things they may not even know that they want. Many businesses that implement the differentiation strategy have loyalty programs or customer cards that give the customer a perceived cost benefit but are really used to gather data about customer preferences that allows the business to fine tune and optimize both their products and their marketing.

The last general strategy would be a combination strategy – a blend of the two other approaches. This is probably the most difficult model for a business to pull off because it’s easy to fail in both departments since your are competing against specialists at both ends of the spectrum. A company that comes to mind that has been able to pull of this approach is Dell. I guess their brilliant competitive advantage of the “just in time” no inventory manufacturing system gave them such a huge cost advantage that they were able to focus on differentiation of quality and reputation as well.

Most online entrepreneurs are playing the differentiation game. In the next edition of this series I’ll try and apply these theories to blogging and other forms of online businesses. We’ll also get into the concept of a value chain and how that is applied to [or neglected by] most web entrepreneurs.

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