NOTE: The following is an unpublished working paper. For a copy of the current version, complete with references and footnotes, please email the author at irv.nelson@usu.edu.

Long ago, the young shepherd boy, David, slew the armored warrior giant, Goliath, with nothing more than a sling and a few stones. Today, owners of small businesses face not just one, but armies of Goliaths, as they compete in an expanded marketplace. Sometimes, like David, they are faced with overwhelming odds. Giant-sized competitors have greater financial backing, more modern equipment, and economies of scale. Frustration is common as small businesses attempt to make a profit by offering products and services at competitive prices.

The worldwide marketplace has changed the nature of business competition. A generation ago, the primary competitors of a small business were other small businesses in the same city. Today, small businesses compete against unfamiliar companies located in parts of the world they have never seen.

The effects of worldwide competition devastate many small businesses. A small pet store goes out of business, as customers ask the proprietor for free advice, but purchase their pets at a national chain. A domestic manufacturer of electronic instruments suddenly finds that a Chinese-produced clone of its product is being offered to the public at half the price. A clothing retailer complains to his legislator that he cannot compete against national mail-order companies that are not required to charge state sales tax. A nursery, in the family for three generations, finds that its wholesale cost for fruit trees is greater than the retail price charged by the K-Mart store, across town. Entire sections of downtown are abandoned as shoppers flock to strip malls and discount stores. Some may wonder, "Is small business dead? Is it no longer possible for small businesses to compete with these industry Goliaths?"

On the contrary, small businesses can -- and do -- thrive in today's marketplace. But doing so takes a different kind of thinking than was required in the past. Business competition in today's marketplace is literally a struggle for survival, not unlike a war. In war, the difference between winning and losing is often attributable to strategy. Indeed, history is full of examples where, because of superior strategy, the smaller army has won the war. Perhaps small business owners can gain insight from military examples of strategy.

Military writers clearly distinguish between goals, strategies, and tactics. A goal is the overall objective (what you are trying to do), strategy is the scheme to attain the goal (how you will do it), and tactics are the specific actions that will accomplish the strategy. As one military strategist explained,

Tactics concerns the arrangement and conduct of single engagements while strategy is concerned with the use of engagement to attain the desired objectives... Strategy provides the aim for individual engagements...

He further explained that the effective strategist's true aim is "not so much to seek battle as to seek a strategic situation so advantageous that if it does not of itself produce the decision its continuation by a battle is sure to achieve this." The purpose of strategy then, is to attain an advantage. The pinnacle of strategy is achieving an advantage so clear as to render battle a formality, or, from the opposition's viewpoint, near-futile.

How can a small business attain such an advantage over a large corporation? Again, let us turn to studies of strategy in war to illustrate this principle. This excerpt on the battle of Hastings demonstrates how a good strategist can gain an advantage:

The issue at stake was the throne at Westminster. Harold of Wessex was elected king but not without opposition. His two challengers included Harold Hardrada, a Norseman, and William of Normandy. William prepared during the summer of 1066 to cross the Channel with about 8,000 men... The battle of Hastings was set (though neither leader knew it at the time) when Harold's forces dispatched those of Harold (the Norseman)... near York on 25 September. On 28 September William's troops landed in what is now East Sussex about 215 miles from York. Harold learned this news soon thereafter and marched to London, ahead of most of his men who, at the time, probably numbered fewer than 10,000. William landed unopposed near Hastings and began to lay waste to the countryside -- news which quickly found its way to Harold in London...

William knew that Harold was impetuous and would likely come straight to Hastings without resting his men or obtaining replacements [for] those lost at Stamford (he was right on both counts)... William... was aware of the military capabilities of his foe and made what turned out to be a correct assumption about what his opposite number might do. His objectives were to defeat Harold and proceed to Westminster. He did so after a daylong battle...

In retrospect we can see that William had a firm objective, knew his own and his adversary's capabilities, and made proper assumptions about what Harold was likely to do. He formulated a strategy of letting Harold come to him, thereby giving himself the luxury of facing troops tired from a two hundred-mile march and also facing a lesser number of men that would have been the case had he allowed Harold to regroup from his Stamford Bridge battle while William marched from Hastings to London.

William's goal was obvious: the throne at Westminster. His strategies were less obvious: he scrutinized his competitor, made reasonable assumptions about what he might do, analyzed the time frame, and devised a way to achieve a situational advantage so great as to virtually assure victory. By luring Harold's weary and depleted forces into a battle against his own rested troops, he maximized the effectiveness of his resources.

For a small business to achieve an advantage in its "battlefield" (the world market) requires a similarly clear distinction between goals and strategies. For a small manufacturer, the goal might be to gain a certain market share. (That is the "what.") One strategy to accomplish that goal might be to differentiate the product by including desirable features not found in the competitors' products. Strategy requires elements of ingenuity, resourcefulness, and cunning.

Components of Strategy

A good strategy is one which, in combination with other strategies, succeeds in accomplishing the goal. But how can such a strategy be identified in advance? While one can never be 100 percent sure of success (partly because the adversary may also be using good strategy), military writers suggest several factors that can increase the likelihood of success. These include:

Setting Clear Objectives (goals)

Understanding the Environment (external threats and opportunities)

Assessing Your Capabilities (internal strengths and weaknesses)

Making Reasonable Assumptions

Analyzing Costs

Setting Objectives

(An) objective is, first, what the strategy is designed to achieve. Second, (an objective) should be a measure of success, a way of knowing when the objective has been reached. Both must be clear and precise. They are often not.

Setting, articulating and measuring goals is not as straightforward a process as it might seem. To be useful in setting strategy, goals must be specific. For example, in a war, a goal of "winning the war" is far too general. What exactly does "winning" mean? Do you want to drive the enemy from the battlefield, or merely stop him from advancing any further? Do you want to destroy his army, or merely to cause him to want to negotiate? Do you want to remove him from power, or merely prevent him from using his forces against your vital interests? Any of these different goals might be considered "winning" the war.

Similarly, small business goals must be clearly defined and measurable. "Making money" is an example of a poorly defined goal for a small business. How will you know if you have achieved your goal? An example of a better-defined goal would be, "I want to clear $100,000 before taxes, each year for the next five years."

Be sure to take the time to identify and specify each of your main objectives. Normally, there will be more than one -- but not many -- and they must be ranked. Although every small business owner wants to make money, don't automatically assume that is your primary goal. Income is a secondary goal of many entrepreneurs. Ask yourself what it is you want to accomplish. Do you want to build a business to hand down to your children? Do you want to provide a valuable service to your community? Do you want freedom and independence? In short, why are you in business?

Without clearly defined and measurable objectives, strategy is paradoxical. The whole point of strategy is to accomplish a goal. Thus, defining goal(s) must be the first step in devising strategy.

Understanding the Environment

Devising strategies to achieve a successful outcome is impossible without first clearly understanding your strengths and weaknesses, as well as those of your competitors. In business, this process is commonly referred to as "SWOT" analysis ( an acronym for analyzing internal Strengths, internal Weaknesses, external Opportunities, and external Threats.) Understanding the environment comprises the "OT" portion of SWOT analysis. It involves carefully identifying and considering all factors external to the business -- the opportunities and threats created by the environment.

Strengths and weaknesses of competitors are one of the most obvious and important components of environment. For example, a small wallpaper retailer may find that its wholesale cost is greater than the retail price charged by a web-based or "800-number" wallpaper marketer. Because UPS can deliver in three days, the fact that this competitor is on the other side of the country is irrelevant to the customer. The strengths of the direct-order company are its purchasing power and high volume, which enable it to sell at very low prices. These strengths constitute a significant threat to the small wallpaper store. In such a situation, attempting to compete based on price will be futile. The store's strategies must exploit opportunities and minimize threats, by competing on bases which the direct-order company cannot match. Strategies such as providing installation services, emphasizing friendly service, specializing in specialty and hard-to-find wallpaper lines, and offering interior design services may be more successful than deep price discounting.

In addition to studying the physical capabilities of the competition, a good strategist will also learn all he or she can about the personal characteristics of its leaders. William of Normandy relied on his knowledge of Harold of Wessex's personality in order to make reasoned assumptions about what his adversary might do. Similarly, one of the great World War II generals, George S. Patton, Jr., carefully studied everything he could about the general of the opposing forces, Erwin Rommel, including a book that had been authored by Rommel. This information gave him insights that enabled him to predict how Rommel might act in given situations, which in turn facilitated devising a successful strategy against him. Like William of Normandy and General Patton, the small business owner is wise to study the leaders of the competition. How do they think? What are they likely to do?

The environment of a business includes much more than the personal and collective characteristics of competitors. Environment also encompasses all other external factors outside the control of the business that might affect the business, including the political climate, markets, economy, social and demographic trends, legal restrictions, liability issues, government regulations, environmental concerns, and the ethical climate of the community. Such environmental factors play an obvious role in certain businesses; for instance, weather patterns affect farmers and interest rates impact credit unions. However, the less obvious environmental factors can be the most dangerous -- or the most advantageous.

One example of an environmental factor that often goes unnoticed is that of social trends in society. For example, the women's sporting firearms market has increased significantly over the past decade, and gun makers have been slow to respond. A small gun manufacturer may be able to exploit this market and create a previously non-existent niche, while gaining a loyalty among these new customers. Another example: more women are working and have little time or energy to sew clothes for themselves and their children. These career women do, however, have money to spend, and are interested in stress-relieving hobbies. While fabric and sewing machine chains are struggling for survival, a small fabric store with a boutique decor and specialty fabrics, catering to fabric crafts such as quilting, and offering craft classes in the evening, could be successful.

Patton was a diligent student of the history of warfare, and could recite entire pages from books on Napoleon, the Civil War, Frederick the Great, and Rome. Similarly, a small business owner should become an expert in his or her field of business. Part of assessing the environment is attending trade shows, conventions, and continuing education seminars, as well as being involved with trade associations. Additionally, reading business books and periodicals helps the owner stay abreast of the rapidly changing environment.

Identifying all the relevant environmental factors can be difficult, but because only one seemingly minor omission can bring disaster, an accurate conception of the external business environment is essential.

Assessing Your Capabilities

Analyzing your internal capabilities comprises the "SW" in SWOT analysis. It involves assessing the business's resources and capacity to produce and compete, which will reveal its internal Strengths and Weaknesses. Specifically defining and measuring these elements of capacity is critical to formulating strategies to create and maintain a competitive edge.

What resources are important in your industry? Four main categories of resources that provide capabilities include finance, technology, information, and human resources. Financial resources provide the capital to build factories, purchase inventory, etc. In the 20th Century, financial capital was the single most important resource that provided the capabilities needed to compete successfully. The dawn of the "Information Age," however, has drastically altered the relative importance of capital. Size is no longer the advantage it once was, because huge sums of capital are no longer essential for success. Technology has leveled the playing field. Information has replaced capital as the most important source of capabilities. The skills, knowledge and connections of employees are also becoming more important sources of capabilities.

This trend is good news for small businesses. In general, small businesses have greater access to technology, information, and good employees than they do to financial resources. Thus, the capabilities needed to succeed in the future are those that favor strategically-oriented small businesses.

After defining the critical elements of capacity in your line of business, it is important to measure "how much you have" of each. Analyzing your capabilities in financial and technological resources is relatively straightforward. Information and human resources are more difficult to measure, but small businesses have an advantage over large corporations in this regard, because their owners are relatively close to their information and their employees. For this reason, they can more accurately assess the capabilities each brings to the business. This knowledge allows the owners to devise strategies that fully exploit those capabilities.

When analyzing the elements in your business, you will discover weaknesses as well as strengths. Military strategists remind us that it is not always necessary to have everything in place to be successful, because

...all (internal) elements are not equally important. Some are pivotal while others simply enhance or detract at the margin. Nor do elements stand alone, unaffected by other aspects of the strategy. They gain or lose strength by their relationship with other elements...

A successful strategy seldom depends on maximizing every internal element. Certainly that is sought, but rarely is it possible or even necessary. The leader never has everything he feels he needs to guarantee success.

It is important to recognize that capabilities alone do not ensure success. Many businesses with sufficient capabilities have failed. In fact, paradoxically, strengths can sometimes be threats to the objectives if they breed overconfidence or cause owners to not think strategically. Conversely, in some cases, limitations can become advantages if properly exploited. As an analogy, think of the numerous physically handicapped people who excel at art, computers or other disciplines. Because they are limited in mobility, they are able to concentrate their full energies on a specific discipline until they master it. Similarly, because it lacks the size to do everything well, a small business can channel its energies to a specific market segment or product characteristic.

The smaller force can gain strength by moving quickly, using unorthodox tactics, or surprising the enemy. By the same token, the larger force can lose strength as distance and supply needs increase...

Thus, your capabilities need to be analyzed within the context of the environment. Nevertheless, good strategy formulation is obviously dependent on possessing sufficient capabilities to execute the strategy.

Making Reasonable Assumptions

Assumptions must be uncovered in every part of the strategy. A risk is taken for every assumption made, but the truly dangerous assumptions are the ones everyone accepts as truths and so are not explicitly considered. Here again precision is vital.

Identifying your underlying assumptions is a critical element of strategy formulation. For every assumption made, there is an associated risk -- the assumption may turn out to be untrue. Because strategies based on faulty assumptions are likely to fail, assumptions are often "the killers."

However, assumptions are not inherently bad. They are necessary and important components of strategy. Remember that William of Normandy's strategy was based on an assumption that, because Harold was impulsive, he would march his troops to face William without resting or replenishing their ranks. This assumption was a gamble. William did not have a sure knowledge of the future. Harold might not have come. But William made a reasonable assumption, based on the information available.

While such reasoned, conscious assumptions carry inherent risks, the most dangerous assumptions are those that are never identified as such, and are, therefore, not consciously analyzed for reasonableness. A common mistake in business is to accept many things as facts, truths or givens. Such beliefs are difficult to isolate and specify. Frequently, they are overlooked and are not even recognized as assumptions because they seem obvious or inherent.

An example of disastrous unidentified assumptions is when the Mongols invaded Poland in 1241. The defending European knights wrongly assumed the battle would be similar to ones they had fought in the past, where large horses, heavy armor, long lances and massive broadswords would be advantageous. They were completely unprepared for the Mongols' fast ponies, light armor and composite laminate bows which could hurl arrows more than 300 yards.

In Europe, where honor was as important as victory, retreat was regarded as a sign of defeat. Again, the European knights wrongly assumed that their enemy embraced the same philosophy of war that they did. They were unaware that the Mongols had been taught to use retreat as a tactical move. In one battle, when the Mongols broke into what appeared to be a disorderly retreat, evidently unable to face a charge of European heavy horsemen, the encouraged knights pressed forward. In doing so, they fell victim to one of the oldest tricks in the Mongols' book: in feigning retreat, the Mongols drew the knights away from their infantry. They then swept to either side of the knights -- joined by other Mongols who had lain in ambush -- and showered the knights and their horses with arrows. Although the knights made a determined stand, they were killed to a man -- all because of bad assumptions. (Ultimately, the European army of 30,000 was decimated by the invading army of 20,000. By employing strategies which capitalized on their strengths and exploited the Europeans' weaknesses, the outnumbered Mongols successfully accomplished their objectives.)

Small businesses are particularly at risk for unchallenged assumptions. If an entrepreneur is planning strategy alone, there is no one with a different perspective to point out the individual's assumptions. In such a case, it may be helpful to ask a trusted associate or family member to provide another perspective. Even in a family-managed business, however, assumptions may be either inbred or unchallenged. Whereas an individual's assumptions can often be detected by a group, the assumptions of the collective may easily slip past the detection of each individual. Thus, the process of uncovering dangerous assumptions may require digging deep into values, beliefs, and attitudes. Asking someone to play "devil's advocate" in planning sessions can help remove group "blinders."

Analyzing Costs

Finally, the strategy must indicate what costs a nation will and is able to bear to achieve the objective. Is there a limit to the amount of money the government will spend, the amount of equipment it will lose, and the number of casualties it is willing to sustain?

Every strategy has a cost. Estimating the relative costs of alternative strategies is as important as is evaluating their relative likelihood of success.

Costs take many forms, some of which are more obvious than others. Financial costs are relatively easy to identify and can be budgeted. After estimating financial costs, various accounting analyses can be applied to alternative strategies to weigh their relative value. Substitutes must be found for strategies that are determined to be too expensive. If you can not afford a certain strategy, you can't use it -- even if you think it is the best strategy in the world.

Focusing too much on financial costs, however, may cause a small business owner to overlook other kinds of costs. For example, human costs are often ignored in the business world. (Most people have friends and acquaintances who have been "downsized" out of jobs.) However, like a good military strategist, a good business strategist is loath to treat people as expendable.

The cost of various strategies to the personal or family life of the owner should also be considered. Such costs should be evaluated based on personal values. In an interview, Donald Trump admitted the reason his marriage failed was because he was "married" first to his businesses and he did not devote sufficient time to his family. He had no regrets and felt his business success was worth the cost of losing his family. Others might not feel the same way. If one of the objectives of a business is to provide a livelihood for the owner's family, but the business ends up destroying that family, the strategy was not successful. Likewise, if one of the goals is to build a legacy to hand down to the next generation, but the business takes so much time that the children end up hating the parent and resenting the business, the strategy was a failure.

Costs in small businesses often involve trade-offs between family and business success. For example, a man purchased a business from his mother ten years ago. His mother still has a key. She lets herself into the store at night and helps herself to merchandise, meddles with displays, moves merchandise around, and generally makes a nuisance of herself. Her behavior angers the employees, degrades the appearance of the store, and sometimes irritates customers. But the owner refuses to address the issue because he is not willing to risk hurting his mother's feelings.

If our friend's refusal to kick his mother out of the store is a strategy that he forged after conscious consideration of its financial cost, that would simply mean that he places more value on one type of cost -- his mother's feelings -- than on another type of cost -- his business's financial results. However, it is likely that he has not strategically evaluated the costs and that his actions are the result of his own reluctance to confront his mother. His business is doing poorly, and he is frustrated. Ironically, since his mother also relies on the business as a source of retirement income, its failure would also be a cost to her -- potentially greater than hurt feelings.

Every business owner must make these kinds of decisions. If a certain strategy will alienate a close friend, make it impossible to enjoy a favorite hobby, involve significant out-of-town travel or relocation, or require numerous 80-hour weeks, those costs should not be ignored. The important thing is to consider them in advance, so that the consequences do not come as a surprise.

As one considers the strategy necessary to achieve certain objectives,... the objectives may very well have to be altered if the cost to meet the objectives is considered too high...

In military writings, strategy is tiered: "grand" strategy is very broad in scope, while "lower" strategy is more specific.

As tactics is an application of strategy on a lower plane, so strategy is an application on a lower plane of grand strategy.

David had several stones, but he only had to use one of them to down Goliath. Likewise, businesses can choose from three types of grand strategies to achieve success. Cost leadership involves becoming the low-cost producer in the industry. Generally, this is a good strategy for large businesses, which enjoy economies of scale. Many small businesses may find cost leadership difficult to achieve. Differentiation involves making the product or service unique in a dimension that is valued by the customer. This is often a good strategy for medium-sized businesses, which are small enough to be unique but are large enough to possess sufficient resources to accomplish such a strategy. Focus involves serving a narrow segment of the market, purposely excluding other segments. This is generally a good strategy for small businesses, because it can be accomplished with minimal capacity.

Like David, small businesses do not have to use all three "stones." Any one of these can be used as a "grand" (higher) strategy, upon which lower strategies can be built. Any business that fails to achieve either cost leadership, differentiation, or focus will suffer a disadvantage when competing against other businesses that do.

One of the most difficult aspects in formulating strategy is knowing when to give up something desirable in order to achieve a strategic advantage on another dimension. David, going against the advice of the "experts," went to face Goliath without any armor. While undoubtedly seeming foolish to skeptics, being unencumbered by heavy armor gave David the advantage of speed. It also made Goliath overconfident. In other words, David made a tough choice: he sacrificed one thing to gain an advantage in another.

Most people don't want to give up anything. We would all like to have speed without giving up the protection afforded by armor. Sometimes we try to believe we can have both, but this is usually not possible. Strategy requires us to make tough choices.

In small business, refusal to make tough choices can lead to lethargic sales and anemic profits that can sap the lifeblood out of the business. For example, being unwilling to give up certain product lines or services in which there is an emotional attachment, but where no strategic advantage exists, can divert attention and energy away from those which are profitable. The wallpaper store mentioned earlier must accept the fact that certain, price-conscious customers will hop on the Web or call the 800 number. Others will buy inexpensive, generic wallpaper at WalMart. That's reality. But a strategic analysis might reveal that these are not the customers the store should target. Perhaps the store's strategic advantage may lie in an upper-income niche, where the customers are more concerned with quality, uniqueness, trendy styles, and service, than with price. Being willing to give up the lower-income customers (even if they have been the "bread and butter" of the store for the last 50 years) is as much a part of strategy as is aggressively pursuing the upper-income customers.

Tactics are the actions taken on specific engagements. Each time a customer walks through the door, tactics are involved. When you decide how to deal with a customer query or complaint, you are dealing in tactics.

Tactics should always lead to the accomplishment of a strategy. If the strategy is getting rid of Mom's meddling in the store, some tactics might include changing the locks and talking to Mom. If the strategy is focusing on upper-income wallpaper customers, the tactics might be acquiring exclusive wallpaper lines and hiring an interior designer. If the strategy is to develop customer loyalty, one tactic might be employee training in customer satisfaction. The manner in which these specific actions are carried out can make or break the strategy.

A customer walked into a local motorcycle repair shop asking for a price on a tire. When the proprietor quoted a price of $100, the customer replied that he could purchase the same tire by mail order for $60. The shop owner responded, "Those dirty @#$% out-of-state ^&*! They're trying to put us local guys out of business. Those tires cost me $70, wholesale! I can't go any lower than $80." The customer then asked how much the shop would charge to mount and balance a tire if he were to buy it elsewhere. The owner responded, "I won't mount and balance a tire unless it is purchased here."

Obviously, reacting to environmental factors with anger and attempting to put the customer on a "guilt trip" seldom increases the chance of a sale. A strategic proprietor would realize the tire sale was lost, anyway. No rational customer is going to pay $40 or even $20 more for the tire. A better tactic might have been to charge a fair or even slightly exaggerated price for mounting and balancing.

Taking this example a step further, if it is a recurring scenario, the proprietor might consider the situation strategically. He might look around and discover that no other shop in town is willing to mount and balance motorcycle tires. By being the first to specialize in this service he might be able to establish a strategic advantage.

Strategy may be defined as the art of carefully devising plans and schemes to outwit an enemy, and employing these plans and methods toward accomplishing a goal. Strategy can make the difference between an organization succeeding or failing in its mission.

Strategy is particularly vital in small businesses. In fact, strategy is one of the greatest and only real tools available to small businesses in competing against their mighty foes in the marketplace. Because large businesses have natural advantages of scale, resources, and leverage, strategy may be the most important tool accessible to a small business.

Many small business owners get mired down in the details of day-to-day operations. Strategizing requires mentally breaking out of the four walls of the business and looking at the bigger picture. Devising successful strategy requires elements of cunning, ingenuity, resourcefulness, diligence, and instinct.

...a strategist... must be a compromiser and a balancer. He judges his capabilities, assesses his risks, and decides how to make the most of his strengths, compensate for his weaknesses, undermine the enemy's strengths, and take advantage of enemy weaknesses to gain his objective.

Returning to our original question, can a small business succeed against multinational corporations? The answer is a resounding "Yes!" No matter how formidable the foe might be, there is always a chink in the armor. Just as David found the only vulnerable part in Goliath's armor -- his forehead -- today's small business must look for and capitalize on the weaknesses of its larger competitors. David knew he could not compete with a sword (national advertizing), or based on brute force (price). Instead, David capitalized on his strengths -- his skill with a sling, developed from herding sheep. Likewise, a small business must identify and capitalize on its strengths.

Never be intimidated by big businesses, with their highly-paid professional managers. Remember, David was not an experienced warrior, either. But he turned this apparent weakness to his advantage. All the bets were on Goliath, but David used cunning. He used strategy. And that's how to slay your Goliath, too.

To read other articles by Irv Nelson, link here.