Identifying Competitive Advantages Chapter 2 Identifying Competitive Advantages

Learning Outcomes Explain why competitive advantages are typically temporary List and describe each of the forces in Porter’s Five Forces Model Compare Porter’s three generic strategies Describe the relationship between business processes and value chains

Overview To survive and thrive an organization must create a competitive advantage Competitive advantage – a product or service that an organization’s customers value more highly than similar offerings from a competitor First-mover advantage – occurs when an organization can significantly impact its market share by being first to market with a competitive advantage

UAL was the first airline to offer a competitive advantage with its frequent flyer mileage

Customer self-service software on the Internet from FedEx was an example of first-mover advantages

Sony had a competitive advantage with its portable stereo systems

Overview (continued) Organizations watch their competition through environmental scanning Environmental scanning – the acquisition and analysis of events and trends in the environment external to an organization Three common tools used in industry to analyze and develop competitive advantages include: Porter’s Five Forces Model Porter’s three generic strategies Value chains

Porter’s Five Forces Model

Buyer (Customer) Power Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few To reduce buyer power, an organization must make it more attractive for customers to buy from them than from their competition Loyalty programs – reward customers based on the amount of business they do with a particular organization Examples: Frequent-flyer programs are a good example of using IT to reduce buyer power.

Supplier Power Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many Supply chain – consists of all parties involved, directly or indirectly, in the procurement of a product or raw material

An example of an organization with “high” supplier power

Supplier Power (continued) Organizations that are buying goods and services in the supply chain can create a competitive advantage by locating alternative supply sources (decreasing supplier power) through B2B marketplaces Private exchange (a variation of the B2B marketplace) – a single buyer posts its needs and then opens the bidding to any supplier who would care to bid Reverse auction – An auction format in which increasingly lower bids are solicited from organizations willing to supply the desired product or service at an increasingly lower price

Threat of Substitute Products/ Services high when there are many alternatives to a product or service and low when there are few alternatives from which to choose Switching costs – costs that can make customers reluctant to switch to another product or service Examples Switching Doctors

Threat of New Entrants high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market Entry barrier – a product or service feature that customers have come to expect from organizations in a particular industry and must be offered by an entering organization to compete and survive Examples of high entry barriers Examples of low entry barriers

Rivalry among Existing Competitors high when competition is fierce in a market and low when competition is more complacent Although competition is always more intense in some industries than in others, the overall trend is toward increased competition in just about every industry

Porter’s Three Generic Strategies Organizations typically follow one of Porter’s three generic strategies when entering a new market Broad cost leadership Broad differentiation Focused strategy Broad strategies reach a large market segment Focused strategies target a niche market Focused strategies concentrate on either cost leadership or differentiation

Value Chains - Targeting Business Process Once an organization chooses its strategy, it can use tools such as the value chain to determine the success or failure of its chosen strategy Business process – a standardized set of activities that accomplish a specific task, such as processing a customer’s order Value chain – views an organization as a chain, or series, or processes, each of which adds value to the product or service for each customer

To decrease customer’s power, an organization can construct its value chain activity of “service after the sale” by offering high levels of quality customer service

How Levi’s Got Its Jeans into Wal-Mart How can Levi’s use environmental scanning to gain business intelligence? Using Porter’s Five Forces Model, analyze Levi’s buyer power and supplier power Which of the three generic strategies is Levi’s following?