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58. Michael Porter and Competitive Advantage for Small Business (part 8)

Having looked at the five forces Michael Porter identifies in Competitive Advantage, Porter goes on to develop a theory of  what he calls the Value Chain in business. This looks at the elements in any business (some of which will not be very applicable to certain types of business) including processes:  inbound logistics, operations, marketing and sales, services and outbound logistics. In addition there are infrastructure elements and costs for the business including facilities, IT, finance  etc. These have costs associated with them, and the business process should add value for the customer.  Some of Porter’s thinking has very much affected the trend for outsourcing – Porter’s view was to outsource wherever there was no real value added in that operation in the business and to focus the business activities on where it added the greatest value.

Some of the key ideas that are associated with Porter’s concept are those of “drivers” of the business including “cost drivers”. Thus in the mobile phone business there is a high degree of ‘churn’ – people change provider and equipment frequently so this is a heavily sales & marketing driven market and these both drive competitive position and costs: the need for heavy advertising, an expensive high street presence etc. Looking at how these drivers work and understanding what value they add for the business and for its customer become critical.

Is this all about giant corporations then? well, not necessarily. Understanding the customer and the cost drivers can lead to new solutions and these often come from small businesses. The High Street retailers have a strong presence to add value for their customers. If you are a clothes shop then that added value might be enabling customers to see and feel your product – and to try it on.  But if you are selling DVDs or insurance, then perhaps this value added is not very great. Thus in these areas internet businesses have been able to change the Value Chain for a large proportion of customers in the market to deliver better added value for the customer in the form of a better deal.

Small businesses can often take advantage of the structural situation in a market to develop an alternative Value Chain which better delivers for some customers at least.

And if a business does not add value, what is its purpose – and its long-term chances of survival? In today’s competitive markets, those businesses not adding enough value are likley not to survive. Make sure you enhance your chances of surviving and prospering: look at maximising the value you create for your customer and minimising the costs to create it; drive costs down, cut out processes that do not add value. Now is the best time to have a good hard look at your business.