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Train to Succeed Blog

04/04/2013 11:26:00


By guest blogger, John McMahon

Business is simple. You add cost and you add value. If you happen to figure out how to add more value than cost you win.
That begs certain questions. How do you add value? How much of it do you add? What does that say about your competitiveness and its sustainability? And what does it say about your capacity to add further value?

Viewed from this perspective there are four fundamentally different types of business.

Labour intensive businesses add modest value. They compete heavily on cost which is hugely driven by wages. If a labour intensive business doesn’t have wage advantage over the competition it must compensate by adding additional value, perhaps through service or design, without adding significant further cost.

Material intensive businesses also add relatively little value albeit more than labour intensive ones. They too compete heavily on cost which in this case is driven by material cost. Much retail and wholesale activity is a case in point. If somebody else has lower material costs the response must offset their advantage by adding value they don’t add without adding much more cost. Choice, location, service and design, amongst other factors, all offer potential.

Machine/skill intensive businesses add higher value. They do so by simultaneously designing out cost while designing in customer value. Each year computer, mobile phone, car and appliance manufacturers and their suppliers, often SME’s, figure out how to give their customers even more for less. Whoever does it best wins. Such is the essence of machine/skill intensive businesses. The biggest trend in business these days is the extension of machine intensive cost reduction/value adding techniques to service businesses including low cost airlines, hotels, banking services, retail (online) and increasingly professional services of all types.

Knowledge intensive businesses add the most value and they do it in one or both of two ways. First are through innovation or design and the creation of “widgets with wings” i.e. unique products or services which because of their uniqueness command a price premium. Second is through sophisticated marketing which builds “brand power” i.e. the ability to command very significant price premia over the competition simply for the brand. An Apple laptop versus a Dell laptop is a good example of knowledge intensive versus machine intensive in the same product area. Innovation, design and brand power combine to command a large premium.

The irony of 21st century business is that regardless of where a business is in the labour to knowledge value chain increasingly value is added by activities traditionally viewed as “overheads” i.e. non value adding. Innovation, design, marketing to develop brand power, service, applications engineering etc are the most powerful and rewarding value adding capabilities we can develop.

Too many businesses don’t effectively manage their value adding capability and the competitiveness it can afford to the detriment of their competitiveness and their development potential.