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55. Michael Porter and Competitive Advantage for Small Business (Part 5)

In Competitive Advantage, Michael Porter identified the five forces affecting market attractiveness and profitability which have been outlined in more detail in previous posts. These were Power of Customers, Power of Suppliers, Industry existing competition, the Threat of New Entrants and the Threat of Substitutes. From this analysis, Poter reasoned that there were only three viable and profitable generic strategies: Cost Leadership, Product Differentiation and Focus. Any other position in the market would be difficult to sustain profitably.

By Cost Leadership, Porter meant being the ‘lowest cost producer’ of the product or service. Porter is very clear that this does NOT mean the lowest priced. The lowest-cost producer could just as easily hold the highest price position in the market but use that advantage to spend more than competitors on promoting the brand.

Is a small  business ever likely to be the lowest-cost producer? Well, in manufacturing, probably not, unless of a very low volume specialised product. But in services the small company often has much lower overheads and can be lowest cost. And of course, lowest costs applies to your specific target market. So if it is only one small geographic area or market segment, then lowest cost refers to the comparison with  the local/segment competition.

If you are in this position in your market, you then need to decide how you can best take advantage. This might be doing as everyone else does but taking more profit; it may be by being the cheapest supplier of your product or service (which can put some people off as well as attracting others) and thius often taking the biggest volume (which may in turn help you keep your costs as the lowest in your market); or you might choose to advertise much more than competitors and dominate the minds of your potential customers. Which you should choose will depend on the nature of your market and your competitors. The ideas are simple but the application more difficult.

Some small businesses do have this position in their market place. Perhaps because of a particularly favourable relationship they can take advantage of deals usually only available to bigger companies. Or they have managed to operate effectively with no or less premises or other overhead costs than their competitors, perhaps by using better technology. For most small businesses, however, the lowest cost strategy will not be open. They will generally not have a significant cost advantage over all other suppliers. 

If this is you, you should consider the other two generic strategies – the alternative is likely to be failure or a struggle to survive, but is very unlikely to be a comfortable market position or dynamic growth – unless your market is one in which demand is always stretching the available supply. This is sometimes the case in professional services and some trades. But a recession is likely to take that comfort away unless your market position is very strong. Then weaknesses which have existed for some time but which have not had an obvious adverse effect become apparent.

So all businesses should take a long hard look at the strength of their strategic position in their market.