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54. Michael Porter and Competitive Advantage for Small Business (Part 4)

Michael Porter’s book, Competitive Advantage, identified 5 forces that determine the likely profitability of a business, and we have discussed four of these in previous blogs, namely the Rivalry of Customers, of Suppliers and the level of internal market competition, representing forces internal to the market and then the threat of new entrants as the first outside force. The fifth force is the Threat of Substitute Products.

In times when technology is changing rapidly and new  possibilities are opening up at a faster rate than ever before, the threat of substitute products is greater than ever – and likely to have a significant impact more quickly than ever – so the opportunity to make adjustments to cope with these changes is also more restricted.

If we look at the way technological and other changes have made massive impacts on markets in recent years, it is possible to understand how small businesses as much as large ones may be affected. The web, for instance, has had a tremendous impact on a whole raft of industries. One of the most significant is the insurance industry where a large proportion of domestic insurance is now being done on-line. As a result, many small insurance brokers have closed down, and those that are left have seen a lot of consolidation into large groups.

The music industry we have discussed before: the potential for on-line purchase of hard copy and then for downloads has not only killed off the independent retailer and made it inceasingly difficult for the record publishing companies to make money out of either new bands or classical artists and orchestras on disc; it has also opened up new opportunities for music creators to find an audience. This has changed the dynamics of the popular music industry from one where live events were used to promote recordings which were the profit generators to one where reputation is built by web presence and recordings, and profit comes inceasingly from live events. An example of a successful band totally created via its web presence would be Enter Shakiri.

So the changes are a threat but also present opportunities to businesses aware of the changes. And these changes may sometimes be happening outside the area that you may define as your industry.  For instance, the music industry did not initially perceive how the social networks on the web, and U Tube in particular, were going to change the way musicians promoted themselves and developed their careers – but the web is now very much a music publishing alternative to record labels – they were far more conscious of the web as a new route to market for recorded materials. And when the capability of downloading whole pieces of music to individual computers was developed, there was little evidence that the key players in the music industry were ready to exploit it, or had understood the drastic changes that could come about.

And if you are a small manufacturer of CD storage units, the fact that music is increasingly being held on computer drives and not in physical cabinets is already having some impact, and as a generation develops who see disc storage as the norm, demand for physical cabinets is likely to evaporate.

So over a very few years the computer has become the vehicle for replacing some high street retailers, some ‘professional service’ providers and even some manufactured product.

And these are just the technology changes, which are mostly likely to offer a substitute product. There are also social changes, such as the increasing prominence of green issues; changes of law such as the smoking ban in public places, demographic changes such as the ageing population and so on which may all mean that products which you might not have seen as direct competition (because they were seen as specialist niche products not directly in ‘your market’) have now become mainstream competitors.

A business downturn adds another dimension. In some areas it will slow up the implementation of new ideas; but in others it will act as the stimulus for change – the harsh economic realities sometimes drive businesses to take new paths to overcome other pressures which, in easier times, would be delayed or tested at a much slower pace. How might your business be affected by changes in technology, or other changes that potentially bring you into competition with products and services which you would not have previously seen as competition in your market place? . Staying abreast of developments is never easy when you are busy running a business, but not finding time to keep connected with other thinking can be an expensive mistake – read, meet people, stay stimulated and remember to keep some thinking time.

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