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51. Michael Porter and Competitive Advantage for Small Business (Part 1)

Porter is the strategic planning and strategic marketing guru of the late eighties and nineties. He is very much one of the acedemic business gurus but his ideas – and even his vocabulary – have become part of the fabric of how we talk about business and marketing. His terms competitive advantage and the value chain have entered every day business language. That all sounds a bit grand for small businesses – having a basic business plan is not as common as it should be, let alone getting into strategic planning. That is just for corporates, right? Well, no. Small businesses are just as likley to get it wrong because they misunderstood the large scale strategic issues as a large business.

Porter, in his Harvard Business Review article How Competitive Forces Shape Strategy in 1979 and his books Competitive Strategy, and, in 1985, Competitive Advantage, built a thoery of how to look at markets and understand whether it is possible to develop a profitable business in the those markets. He identified five key forces which need to be understood to determine the attractiveness of a market.

These are:

1. The Bargaining Power of Customers

2. The Bargaining Power of Supplies

3. The Level of Competitive Rivalry in the Industry

4. The Threat of New Entrants and

5. The Threat of Substitute Products

Let’s look at the recorded music industry and see how these forces have changed over time, for each of the forces. Today we will look at the Bargaining Power of Customers and Suppliers. In the early 1960s Retail Price Maintenance was still in force in the UK and consumer prices were set by the record labels (Decca, EMI etc). So the consumer had virtually no bargaining power; the retailer differentiated itself by location, the range offered and any special focus, knowledge and facilities. As retail prices were fixed there was no room to negotiate with the record labels so these also faced no real buying power. Margins were high, and all were able to prosper as the industry grew.

Retail Price Maintenance was abolished in 1964 (except on books) and very slowly things changed. But vinyl records were awkward things to handle, display and store, and specialist music shops provided listening rooms and experienced guidance when there were not many places to hear music or find out more. These were ‘barriers to entry’ for new competitors. As radio stations multiplied, and in the 1980s when the CD came in, it became increasingly possible and attractive to other businesses. New entrants decided they could now make profit in this market: these included Woolworths and W. H. Smith as well as the major grocery retailers who, by this time, in their larger stores especially, were offering a wide range of non-food items. Many of these retailers had massive market coverage, and could therefore offer high volume sales and so negotiate better prices. Consumers now had much more buying power: they could choose where to buy for price and convenience. Generally from this time the retailers commanded a much lower margin. The few large volume retailers were, however, able to negotiate very good volume-related terms with the record distributors – these products were not essential to them, so they would only stock those where they got a good enough deal to satisfy their need to be seen as the consumer’s price-cutting friend. Suddenly the major record labels were finding that their customers had more buying power than in the past.

The artists who supply the recorded music industry with their product have traditionally had very little power (unless and until they were phenomenally successful – e.g. the Beatles or Herbert von Karajan in two different segments of the industry). But when the internet began to play a major role, the dynamics changed once again. The artists could now market directly to their audience, so the record labels had less power at the upstream end of the market as well as the downstream. Meanwhile, although a new breed of volume players such as Amazon and E-bay entered the industry, the internet also provided a way of developing a business on lower overhead for some of the specialist retailers and there are many specialist suppliers focusing mostly on niches in the overall market. At the same time the internet has enabled new small niche record labels to develop – for instance in the classical music market, the London Symphony Orchestra has its own label marketing recordings of its live concerts.

You can see how changes in the buying power of customers in any industry can have very profound effects on the nature and attractiveness of an industry, to both small and large players. The small high street record retailer is a thing of the past, but there is an explosion of niche record labels; a very attractive industry for large corporate record companies has become one of a struggle to make profit and constant cut-backs in the cost structure.

What is the buying power of your customers and what buying power do you have with your suppliers? Are there things happening that will change this? Is an impending receession likely to change this situation?

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