BUSINESS DRIVEN TECHNOLOGY Identifying Competitive Advantages Chapter Two: Identifying Competitive Advantages CLASSROOM OPENER GREAT BUSINESS DECISIONS – Cyrus McCormick’s Reaper On a hot summer day in 1831, several dozen farmers and hired laborers gathered in a wheat field in Virginia to watch a horse-drawn wood-and-iron device mow down rows and rows of golden wheat. On this day, twenty-two-year-old Cyrus McCormick demonstrated the reaper that his father invented and changed history as the mechanization of farming began. Soon the process of industrialization began, which turned the nation’s economy into the world’s most productive workforce. As the historian William Hutchinson noted, “Of all the inventions during the first half of the nineteenth century which revolutionized agricultures, the reaper was probably the most important.” Interestingly, the McCormicks were not the only individuals to build and develop a reaper. In fact, many other companies and individuals developed similar technology; however, Cyrus McCormick invented the business of making reapers and selling them to the farmers of America and foreign countries. His real genius was in the area of gaining and protecting patents for his technology. McCormick turned the reaper into a commercially viable product and introduced many new business practices including free trials, money-back guarantees, and installment payment plans.

LEARNING OUTCOMES 2.1 Explain why competitive advantages are typically temporary 2.2 List and describe each of the 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 2.1 Explain why competitive advantages are typically temporary Competitive advantages are typically temporary because competitors often seek ways to duplicate the competitive advantage. In turn, organizations must develop a strategy based on a new competitive advantage 2.2 List and describe each of the forces in Porter’s Five Forces Model Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few, Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many, 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 – high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market, Rivalry among existing competitors – high when competition is fierce in a market and low when competition is more complacent 2.3 Compare Porter’s three generic strategies Organizations typically follow one of Porter’s three generic strategies when entering a new market. (1) Broad cost leadership, (2) broad differentiation, (3) focused strategy. Broad strategies reach a large market segment. Focused strategies target a niche market. Focused strategies concentrate on either cost leadership or differentiation 2.4 Describe the relationship between business processes and value chains A business process is a standardized set of activities that accomplish a specific task, such as processing a customer’s order. The value chain approach views an organization as a chain, or series, of processes, each of which adds value to the product or service for each customer. The value chain helps an organization determine the “value” of its business processes for its customers

CHAPTER TWO 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 Competitive advantages are important for an organization It is even more important to understand that competitive advantages are typically temporary since competitors are quick to copy competitive advantages Ask your students to try to list a few companies that achieved success through a competitive advantages Ans: United was the first airline to offer a competitive advantage with its frequent flyer mileage (this first-mover advantage was temporary) Sony had a competitive advantage with its portable stereo systems (this first-mover advantage was temporary) Microsoft had a competitive advantage with its unique Windows operating system Ask your students if Microsoft still has a competitive advantage with its Windows operating system Ans: Perhaps – primarily due to its first-mover advantage since it is difficult to switch operating systems and users face interoperability if they are using different operating systems at the same organization. How many students in your class are currently using Windows? What are the competitors to Windows? Ans: Linux and Macintosh Why are there only three primary competitors in this large operating system market?

Organizations watch their competition through environmental scanning CHAPTER TWO OVERVIEW 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 Review the Frito Lay environmental scanning example on page 15 Frito Lay sends its sales representatives into grocery stores to stock shelves with hand-held computers that record the product offerings, inventory, and even product locations of competitors.

THE FIVE FORCES MODEL – EVALUATING BUSINESS SEGMENTS Organizations use Porter’s Five Forces Model to determine the relative attractiveness of an industry Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many 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 – high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market Rivalry among existing competitors – high when competition is fierce in a market and low when competition is more complacent

Buyer Power Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few Loyalty programs – reward customers based on the amount of business they do with a particular organization Buyer power can also be called customer power Calling buyer power customer power sometimes helps students understand the difference between buyer power and supplier power To reduce buyer power (and create a competitive advantage), an organization must make it more attractive for customers to buy from them than from their competition One of the best IT-based examples is the loyalty programs that many organizations offer Ask your students what kind of different loyalty programs are they currently using Ans: Frequent-flyer miles Grocery store discounts – “Safeway Card” Restaurant discounts such as Subway’s get your 12th sandwich free Coffee clubs where you get your 10th cup of coffee free

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 Supplier power is the converse of buyer (customer) power A supplier organization in a market will want buyer (customer) power to be low The supplier wants to be able to set any price it wants for its goods, and if buyers (customers) have low power, then they do not have any choice but to pay the high price since there are only one or two suppliers Ask your students for an example of an organization with “high” supplier power Ans: Microsoft, Government regulated products such as energy markets and telecommunication markets in some countries Ask your students how an organization can be both a supplier and a buyer in a supply chain? Ans: Review Figure 1.12 for the answer and discuss how Dell computers is both a buyer and supplier in the supply chain Dell is a buyer (customer) of parts, and a supplier to its customers who buy computers

Supplier Power 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 Business-to-Business (B2B) marketplace – an Internet-based service which brings together many buyers and sellers Ask your students if they consider eBay to be a B2B marketplace Ans: If the auction is between two businesses then yes If the auction is between a customer and a business, or two customers, then no

Two types of Business-to-Business (B2B) marketplaces Supplier Power Two types of Business-to-Business (B2B) marketplaces Private exchange – 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 As the bids in a reverse auction become lower and lower, more and more suppliers drop out of the auction Ask your students what effect does this have on supplier power Ans: It reduces supplier power and creates a competitive advantage for the buyer organization since it is paying the lowest possible price for its goods and services

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 Switching costs – costs that can make customers reluctant to switch to another product or service Ideally, an organization wants to be in a market in which there are few substitutes for its products or services This is difficult to achieve, and most organizations create a competitive advantage through switching costs - the more painful it is for a customer to switch suppliers, the less likely they are to switch If a customer has to experience pain when switching to a different service provider, then they are unlikely to switch For example, switching doctors usually involves sending all medical records and explaining all past medical history to the new doctor. Insurance also has to be transferred, along with detailed forms that the customer will be required to complete (such as family history, personal history, HIPAA, etc.) For these reasons customers have to be extremely dissatisfied with a doctor before they will endure the pain of finding or switching to a new doctor

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 Ask your students to list industries that have high entry barriers Ans: Energy – the organization has to have the infrastructure to support energy Telecommunications – the organization has to invest in a telecommunications infrastructure prior to offering services Banking – the bank must offer its customers an array of IT-enabled services including ATMs and online account services Ask your students to list industries that have low entry barriers Ans: Restaurants – simply lease a space, obtain a license, and you can sell food Catering – simply offer food and deliver Movie rental – simply buy the movies, pay the licensing fee, and offer the movies for rental

Rivalry among Existing Competitors 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 Ask your students to list industries where competition is high Ans: restaurants, products, telecommunications, banking Ask your students to list industries where competition is low Ans: This is typically highly regulated industries such as energy markets and stock exchanges

THE THREE GENERIC STRATEGIES – CREATING A BUSINESS FOCUS 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

THE THREE GENERIC STRATEGIES – CREATING A BUSINESS FOCUS Three generic strategies in the auto industry It is important to explain to your students that organizations are encouraged to follow only one of the three strategies Ask your students what would happen to Hummer if it wanted to follow a broad cost leadership and a focused strategy Ans: Hummer would find itself facing the dilemma of attempting to market and sell a highly specialized and expensive product at a discounted price. It simply wouldn’t work!

VALUE CHAINS – TARGETING BUSINESS PROCESSES 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 create a competitive advantage, the value chain must enable the organization to provide unique value to its customers Examining the organization as a value chain determines which activities add value for customers The organization can then focus specifically on those activities

VALUE CHAINS – TARGETING BUSINESS PROCESSES Graphical Depiction of a Value Chain Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services Support value activities support the primary value activities Customers determine the extent to which each activity adds value to the product or service The competitive advantage is to: Target high value-adding activities to further enhance their value Target low value-adding activities to increase their value Perform some combination of the two

VALUE CHAINS – TARGETING BUSINESS PROCESSES This slide offers a brief introduction to the value chain When in Slide Show view, simply click on the Start button to play the presentation If you do not want to play the presentation, simply delete this slide There is another important concept that can help you identify opportunities for strategic information systems. The value chain was developed by Michael Porter. It views a firm as a chain of basic activities that add value to a product or service. In the value chain conceptual framework, some business activities are primary processes (processes that make, deliver, market and sell, and service your organization’s products or services); others are support processes (processes such as management, accounting, finance, legal, human resources, research and development, and purchasing). This framework can highlight where competitive strategies can best be applied in a business. Start

VALUE CHAINS – TARGETING BUSINESS PROCESSES Organizations find tremendous value in analyzing their value chains along with Porter’s Five Forces If an organization wants to decrease its buyer’s or customer’s power, it can construct its value chain activity of “service after the sale” by offering high levels of quality customer service. This will increase the switching costs for its customers, thereby decreasing their power (buyer power).

OPENING CASE STUDY QUESTIONS How Levi’s Got Its Jeans into Wal-Mart Develop a summary of the important elements of the case. 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? 1. How can Levi’s use environmental scanning to gain business intelligence? Environmental scanning is the acquisition and analysis of events and trends in the environment external to an organization. Levi’s can use environmental scanning to analyze everything from competitor strategies to understanding new and shifting market trends to determining the strategic placement of product locations. Without watching its environment and understanding what its competitors are doing and where the market is headed, Levi’s will have a difficult time setting its strategic direction. 2. Using Porter’s Five Force Model analyze Levi’s buyer power and supplier power Levi’s buyer power is high since there are so many different types of jeans that a customer can purchase Levi’s supplier power is low since buyers have many choices of whom to buy from 3. Which of the three generic strategies is Levi’s following? Levi’s partnership with Wal-Mart is following a cost leadership strategy in a broad market

CHAPTER TWO CASE Say “Charge It” with Your Cell Phone By associating a credit card with a cell phone, banks and credit card companies hope to convince consumers to buy products, such as soda, with their cell phones instead of pocket change A transaction fee will be charged for each transaction The ability to charge items to a cell phone has significant business potential Additional Case Material The race to build this technology is still going strong. Nokia is putting new technologies over cell phone covers, which can transmit data to any MasterCard-supporting device. Cell phone covers no longer serve as just mere removable facades or add-ons to personalize your phones, now they are your very own digital paying devices. Nokia is currently testing specially made cell phones in retail stores, restaurants, and other sales establishments in several U. S. cities. Soon we are going to see people waving their cell phones, not just to get somebody's attention, but also to pay up and shop as well. MasterCard, which has developed the technology that allows devices to communicate merely by tapping one device with the other, is taking the next step towards making cell phone covers and credit card readers communicate over the air. MasterCard is also developing new credit card technology that allows the credit card to be read without being swiped on a reading machine.

CHAPTER TWO CASE QUESTIONS Do you view this technology as a potential threat to traditional telephone companies? If so, what counterstrategies could traditional telephone companies adopt to prepare for this technology? Using Porter’s Five Forces describe the barriers to entry for this new technology Which of Porter’s three generic strategies is this new technology following? 1. Do you view this technology as a potential threat to traditional telephone companies? If so, what counterstrategies could traditional telephone companies adopt to prepare for this technology? Traditional telephone companies have lost a large part of their market share, and the associated revenues, to cell phone companies. If this new technology attracts even more customers to the cell phone market, the traditional telephone companies stand to lose additional market share and revenues. For this reason, this type of technology is a definite threat to the traditional telephone companies. The traditional telephone companies will have to find new ways to entice customers. One possibility would be to implement the ability for the home phone owner, who is also an ISP customer, to purchase online retail goods and have the charge applied to their home telephone bills. Here is a link to a company that allows customers to charge fitness training to their cell phone or landline “traditional telephone company” bills. http://www.nestacertified.com/cellcharge.html 2. Using Porter’s Five Forces describe the barriers to entry for this new technology. The barriers to entry include the new technology (special chip for the phone) required to support associating a cell phone with a credit card, partnership between the credit card company and the cell phone company, minimizing security issues associated with the technology, and gaining consumer trust. One of the biggest barriers to entry will be convincing cell phone users that the technology is secure. How will lost and stolen cell phone and credit card bills be handled? A person with a stolen cell phone could now purchase all kinds of goods on the credit card. Will this be the consumer’s responsibility? Would you be willing to associate your credit card with your cell phone? 3. Which of Porter’s three generic strategies is this new technology following? This technology is following a differentiation strategy for a broad market

Format Report The following HEADINGS must be in the report Summary 30 Environmental Scanning 20 Porter’s Five Forces 20 Levi’s Strategy 20 Language/Format 10