Riddell: Make a choice to survive the economic downturn

While it is not surprising that the recession continues to wreak its own brand of havoc on small companies, it is interesting to note that two specific mindsets are clearly emerging, both directly connected to a concept of competitive strategy.

Most students of business clearly understand the requirement for choice in the area of competitive strategy. Either a company will follow a low-cost strategy or a company will follow a path of added value. Traditionally many business leaders, the size of their business not withstanding, have professed to understand this requirement but in reality have attempted to do both. This attempt, known as being "stuck in the middle," has always been a recipe for failure, but in the past the failure could be significantly drawn out, hidden or even absorbed. Those days are gone.

As they have watched their market shares and margins and profitability continue to shrink, those business leaders finding themselves "stuck in the middle" are being forced to question the efficacy of every one of their expenses. Ultimately the question becomes which dollars of expense are generating the most dollars of profit. Analysis usually reveals that either low-cost investments or value-adding investments have the most impact and seldom if ever do both have an equal impact. Once an owner understands this reality then it is a rather simple intellectual decision as to which area to continue to invest and which

area to abandon. The problem or challenge for improvement resides in taking the substantive actions to make the change in focus.

Every company has a history. Within this history is a pattern of decisions leading to actions resulting in a focus.

Patterns exist in companies because of two primary reasons-they are effective or they are comfortable.

Comfort, of course, is often an emotional state, an atmosphere that is relatively free of stress, free of unknowns, perhaps even an illusion of controllability. In this current turmoil this has an understandable appeal but this appeal is a dangerous and fatal trap.

Consider for a moment the entrepreneur who has always told himself and his company that their goal was to be the cheapest while providing the most features to their customers. Intellectually this would appear to be a desirable approach, making it virtually impossible for a customer to say "No."

In reality, however, this trying to be all things to all customers must fail. It allows those dedicated to driving down costs (aka low cost producers) to bring their sustained focus to a point where they can always offer a cheaper price and still be profitable.

Those focusing on adding value understand that their approach can only work if a customer is willing to pay for the added value.

Subsequently they may sell fewer units but the ones they do sell have higher margins that they can protect based on the inherent value.

The poor entrepreneur trying to be all things gets killed on both ends of the buying spectrum.

Where in a robust economy, such strategic stupidity could be absorbed over time, today no such luxury exists.

To have even a modicum of hope of surviving and prospering requires a laser focus of purpose and this is simply another way of deciding and implementing a bona fide competitive strategy.

John F. Riddell Jr., director of the Center for Entrepreneurial Growth-Hamilton County, writes every other Tuesday about entrepreneurs and their impact on companies and the marketplace. Submit comments to his attention by writing to Business Editor John Vass Jr., Chattanooga Times Free Press, P.O. Box 1447, Chattanooga, TN 37401-1447, or by e-mailing him at business@times freepress.com