Four questions about small businesses

¶ … Small Businesses

What is the difference between competitive advantage and competitive immunity? (Answer: 0.5-page)

A competitive advantage is one that is often based on the combination of a given industry's ability to innovate based on new process definition, favorability of a local climate to new venture creation, and an internal company culture that values knowledge sharing (Furman, Porter, Stern, 871, 872). All of these factors taken together can contribute to significant competitive, advantage, as the research completed by Dr. Michael Porter has shown for decades (Porter, 98, 99). The role of innovation at the process level is one of the most potent and powerful aspects of creating and sustaining a competitive advantage (Porter, Stern, 28, 29). According to the work completed by Dr. Michael Porter process-centric innovation, when combined with individual productivity at the country level, leads to exceptional competitive advantage over the long-term. In contrast to competitive advantage, competitive immunity is created when entirely new market segments are created through innovation and a unique perspective of the market. Competitive immunity often has a branded customer experience as well, as the research on blue ocean strategies has illustrated (Kim, Mauborgne, 23, 24). Creating new markets and attaining competitive immunity does not have to be costly, yet it does require exceptional insight and vision of customer needs and how to fulfill them so uniquely and from a differentiated standpoint, that lasting value is generated.

What is a balanced scorecard? What value does it offer entrepreneurs who are evaluating the success of their current strategies? (Answer 1 Page)

A balance scorecard is used for evaluating the performance of an organization over time and often includes measures of sales, profits, cost and pricing trending, in addition to customer-based metrics of performance (De Geuser, Mooraj, Oyon, 91 -93). The basis of balanced scorecards is the rapid adoption of analytics in each functional area of an organization and the development of enterprise performance management (EPM) strategies across entire enterprises (De Geuser, Mooraj, Oyon, 93). A balanced scorecard is invaluable for any entrepreneur because the key performance indicators (KPIs) and metrics of performance they include are like a compass that shows the direction the company is moving in. Often entrepreneurs are very concerned about the "burn rate' or the level of spending that is occurring over time for their start-ups. A balanced scorecard can be used for tracking not only this metric (burn rate) but also the level of spending by each functional area of the organization as well. The most critical functions within a start-up are revenues, potential new customers, and the sales pipeline as well. All of these factors can be captured on a scorecard and used for more effectively managing the growth strategies of a new business. In addition to all these elements, a balanced scorecard will often be used for measuring the progress of internal projects aimed at increasing operating efficiency. These include the development of more effective product development, production, services or support programs. Often balanced scorecards include metrics of performance related to Six Sigma process improvement as well (De Geuser, Mooraj, Oyon, 76, 77).

A friend asks you to invest in their new business. How will you evaluate their business plan? (Answer:1.5-Page)

First and most important I would want to understand very clearly what the new businesses' value proposition was and how defensible its market position is. I'd use the concepts of the Porter Five Forces Model (Porter, 95-98) to determine how effective the new venture would be in competing over the long-term. After looking at the level of competitive rivalry and the potential for long-term growth from this standpoint, I would next look at how effective the new venture would be at managing the creation of entirely new markets. The start-up would be worth investing in if it has the potential to create and dominate blue oceans or entirely new markets over time (Kim, Mauborgne, 24, 25). Having a clear understanding of the company's innate strengths and ability to compete over the long-term would be critical, as the Porter Determinants of Competitive Advantage would most definitely show (Porter, 96, 97). All of these factors together would provide insights into the top-line growth of the company, and its long-term prospects for gaining market share.

Just as critical are going to be the management team, the systems and processes put into place to ensure the entire organization functions well together. I would want to meet each senior executive and the board of directors if there was one. I'd also want to review the organizational structure of the company and go through scenarios of how the company would manage new product introductions, adding in services for key accounts, and how they would scale the production to meet market needs. I'd also want to review the sales pipeline to see not only the sales level but also understand how the company plans to meet market demand over time. In focusing on these areas of their company I'd also want to know how they are accounting for production costs, how they are managing inventories, and what their supplier relationships are like. Using the concepts from Dr. Porter's framework I would also want to know how strong or weak their suppliers are and what the risks are from a long-term standpoint of their supplier base raising prices.

Finally, I would concentrate on their value chain and see how it is going to shift in the next three to five years. I'd want to make sure the industry wasn't about to consolidate, and understand the dynamics behind its growth. From studying their value chain, I would also like to see how the company could grow through mergers and acquisitions over time as well. In short, I would want to have a complete picture of their short- and long-term threats and opportunities over time before investing at all.

What are the most commonly used methods to produce online using credit? What reasons can you give for consumer uncertainty when giving credit card information online as opposed to via the telephone? (Answer 2 Pages)

There are many approaches to completing credit card validation online, with one of the more common being the use of Application Programming Interfaces (APIs) that credit card companies have created to streamline the online payment process. These APIs however over time have been compromised, as have the databases that store thousands of credit card numbers. The fact that there have been so many breaches at online retailers despite these very sophisticated APIs and their security routines leads many consumers to not trust putting their credit card information into a form online to purchase products. This is the systemic problem and hackers go after, as if they can break into a database of credit cards, they can quickly resell blocks of them on the black market, making millions of dollars within hours or days. For online retailers, battling this type of security threat takes an investment in IT infrastructure and security programs on their servers and IT systems.

A second threat that has made many consumers wary of putting their credit card data into online forms is the existence of viruses and drive-by code that can steal personal financial data in seconds. In the first weeks of October, 2010 the LinkedIn professional networking site was hit with a very professionally done phishing attack that asked members to click on a friend request for follow-up, and it ended up becoming a downloadable Zeus virus that instantly put software on their PCs that transmitted every transaction with a financial institution. It was estimates that the group, spread across the UK and U.S., took in millions of dollars in stolen funds within the first two weeks of the scan. Online criminals and the hackers they work with are very sophisticated with implanting viruses in e-mails that once clicked on, infect people's PCs and transmit financial data including logins and passwords.

A third factor in consumer's reluctance to put their credit card information online is the lack of trust in the retailer themselves overcharging them or being unethical in their use of the financial information. The level of trust for online retailers varies widely, with Amazon.com and Southwest.com (Southwest Airlines) being the most trusted. The vast majority of sites however are not trusted, not matter how many logos or certifications they put on their sites. There is a large industry that concentrates just on the certification of websites as being capable of supporting secured transactions through a verification seal. MacAfee, Symantec and others offer this seal and a service to ensure a website can securely manage transactions. The validations these seals provide are only somewhat effective in driving additional sales online however.