Identifying Competitive Advantages CHAPTER 2 Identifying Competitive Advantages

LEARNING OUTCOMES 2.1 Explain why competitive advantages are typically temporary 2.2 List and describe each of the five forces in Porter’s Five Forces Model 2.3 Compare Porter’s three generic strategies 2.4 Describe the relationship between business processes and value chains

IDENTIFYING COMPETITIVE ADVANTAGES To survive and thrive an organization must create a competitive advantage Competitive advantage – a product or service that an organization’s customers place a greater value on 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

IDENTIFYING COMPETITIVE ADVANTAGES 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

THE FIVE FORCES MODEL – EVALUATING BUSINESS SEGMENTS Porter’s Five Forces Model determines the relative attractiveness of an industry

Buyer Power Buyer power – assessed by analyzing the ability of buyers to directly impact the price they are willing to pay for an item Ways to reduce buyer power include Switching costs – costs that can make customers reluctant to switch to another product or service Loyalty program – rewards customers based on the amount of business they do with a particular organization

Supplier Power Supplier power – assessed by the suppliers’ ability to directly impact the price they are charging for supplies (including materials, labor, and services) Supply chain – consists of all parties involved in the procurement of a product or raw material

Threat of Substitute Products or Services Threat of substitute products or services – high when there are many alternatives to a product or service and low when there are few alternatives from which to choose

Threat of New Entrants 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

Rivalry Among Existing Competitors Rivalry among existing competitors – high when competition is fierce in a market and low when competition is more complacent Product differentiation – occurs when a company develops unique differences in its products with the intent to influence demand Although competition is always more intense in some industries than in others, the overall trend is toward increased competition in just about every industry

Analyzing the Airline Industry Buyer power: high as customers have many choices Supplier power: high as there are limited plane and engine manufacturers to choose from and unionized workforces squeeze the airline’s profitability Threat of substitute products or services: high as there are numerous transportation alternatives

Analyzing the Airline Industry Threat of New Entrants: high as new airlines are continuously entering the market Rivalry among existing competitors: high –for this reason airlines are forced to compete on price

THE THREE GENERIC STRATEGIES – CREATING A BUSINESS FOCUS Organizations typically follow one of Porter’s three generic strategies when entering a new market

THE THREE GENERIC STRATEGIES – CREATING A BUSINESS FOCUS

Value Creation 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 series of processes, each of which adds value to the product or service for each customer

Value Creation Combining Porter’s Five Forces and three generic strategies create business strategies for each segment

Value Creation Value Chain

Value Creation Value chains with Porter’s Five Forces

OPENING CASE STUDY QUESTIONS Apple – Merging Technology, Business, and Entertainment How can Apple use environmental scanning to gain business intelligence? Using Porter’s Five Forces Model, analyze Apple’s buyer power and supplier power

OPENING CASE STUDY QUESTIONS Apple – Merging Technology, Business, and Entertainment Which of the three generic strategies is Apple following? Which of Porter’s Five Forces did Apple address through the introduction of the iPhone and customer developed iPhone applications?

CHAPTER TWO CASE BusinessWeek Interview with Michael Porter In an interview with BusinessWeek Senior Writer Pete Engardio, Michael Porter explains why he believes globalization has actually made industry clusters and local advantages even more important, rather than weakened them

CHAPTER TWO CASE QUESTIONS In today’s global business environment, does the physical location of a business matter? Why is collaboration among universities important?

CHAPTER TWO CASE QUESTIONS Is there a competitiveness problem in the United States? What are the big differences in the way communities approach development today compared to 1990, when Porter wrote The Competitive Advantage of Nations?