1. Identifying Competitive Advantages
Chapter 2
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.

2. 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
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 five 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.

3. 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 (temporary)
First-mover advantage – occurs when an organization can significantly impact its market share by being first to market with a competitive advantage
United Airline, Sony, Microsoft
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
Can you list a few companies that achieved success through competitive advantages?
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
Does Microsoft still has a competitive advantage with its Windows operating system?
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?
Linux and Macintosh
Why are there only three primary competitors in this large operating system market?
What would happen if you had 50 different operating systems to choose from?
Issues with interoperability
How many different types of Microsoft Office would be required to support all 50 different operating systems? 50

4. Identifying Competitive Advantages
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
Technology has the opportunity to play an important role in environmental scanning
For example, Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not just send its representatives into grocery stores to stock shelves—they carry handheld computers and record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain business intelligence on everything from how well competing products are selling to the strategic placement of its own products.

5. The Five Forces Model – Evaluating Business Segments
Porter’s Five Forces Model determines 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

6. Buyer Power
Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few
One way to reduce buyer power is through loyalty programs
Loyalty program – rewards customers based on the amount of business they do with a particular organization,
e.g. Frequent-flyer miles, coffee club, sandwich club, etc.
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
Which kinds of loyalty programs are you currently using?
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

7. 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 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
What is an example of an organization with “high” supplier power?
Microsoft, Government regulated products such as energy markets and telecommunication markets in some countries
How an organization can be both a supplier and a buyer in a supply chain?
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

8. How an organization can be both a supplier and a buyer in a supply chain?
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

9. 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 that brings together many buyers and sellers
Do you consider eBay to be a B2B marketplace?
If the auction is between two businesses then yes
If the auction is between a customer and a business, or two customers, then no

10. 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
What effect does this have on supplier power?
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

11. 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 Ex. Polaroid, cell phone add-on
Switching cost – costs that can make customers reluctant to switch to another product or service, e.g switching doctors
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

12. 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
e.g. telecommunications and banks for low and restaurant, movie rental is high. ( case of Netflix)
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,
What is an industry that has a high entry barrier?
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
What is an industry that has a low entry barrier?
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 (although if you want to be a Netflix the entry barrier is high because you have to have the facilities and systems to mimic their movie supply chain)

13. 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
What are a few industries where competition is high?
Restaurants, products, telecommunications, banking
What are a few industries where competition is low?
This is typically highly regulated industries such as energy markets and stock exchanges
CLASSROOM EXERCISE
Porter’s Five Forces
Porter’s Five Forces is an easy framework to understand and offers students a quick way to analyze a business. Porter’s Five Forces is also reinforced throughout the text and it is important that your students have a solid understanding of each force. For this exercise, break your students into groups and ask them to choose two products to perform a Porter’s Five Forces analysis. The two products must compete in the same market.
Potential Products
Laptop Computer and Desktop Computer
PDA and Laptop Computer
iPod and Walkman
DVD Player and VCR Player
Digital camera and Polaroid Camera
Cell Phone and Blackberry PDA
Coca-Cola Plastic Bottle and Coca-Cola Glass Bottle
GPS Device and a Road Atlas
Roller skates and Rollerblades
Digital Books to Printed Books
Digital Paper to Paper

14. What are a few industries where competition is high?
Restaurants, telecommunications, banking
What are a few industries where competition is low?
This is typically highly regulated industries such as energy markets and stock exchanges

15. 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 strategies reach a large market segment
Broad differentiation: Focused strategies target a niche market
Focused strategy: Focused strategies concentrate on either cost leadership or differentiation

16. 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
What would happen to Hummer if it wanted to follow a broad cost leadership and a focused strategy?
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!

17. 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
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

18. Value Creation 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

19. Value Creation Value chains 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)

20. Value Creation
Combining Porter’s Five Forces and three generic strategies create business strategies for each segment
Review figure Generic Strategies and Industry Forces for an overview of the combination of Porter’s Five Forces and three generic strategies for each segment
This figure is probably too much for a slide, please feel free to delete and have your students review the figure in the text or expand the figure to the full size of the slide

21. Protecting your product
Copyright
Trademark
Patent

22. Copyright
Copyright ©
No formality; you just write © and the year on the document. Bit more complicated for art, music, etc.
Limited lifetime. So some books can be downloaded from the Internet free

23. Trademark Trademark is a sign used to identify a product.
Unregistered: symbol is TM
Registered: symbol is ®
Microsoft has registered Microsoft Excel®.
1875 The first registered trademark
McDonald’s Corporation has taken many people to court over its trademark

24. Patent You can patent a process not an idea
It must be new, practical, and not obvious
During the lifetime of the patent, no one can copy your design
Except if they purchase a licence from you.
Lab books – readable, singed, witnessed, dated
Bell’s telephone – importance of being first
Electric light bulb was invented by MacDonald at McGill University but Edison got a patent in first.