CHAPTER 2 : IDENTIFYING COMPETITIVE ADVANTAGE

CHAPTER 2: IDENTIFYING COMPETITIVE ADVANTAGES

LEARNING OUTCOME

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

• Competitive advantages are important for an organization
• It is even more important to understand that competitive advantages typically temporary since competitors are quick to copy competitive advantages
• Can you list a few companies that achieved success through competitive advantages?                        1) United was the first airline to offer a competitive advantage with its frequent flyer                       mileage (this is first-mover advantage was temporary)                                                              2) Sony had competitive advantage with its portable stereo systems(this is first-mover                     advantage was temporary)                                                                                                          3) Microsoft had a competitive advantage with its unique Windows operating system

• Technology has the opportunity to play an important role in environmental scanning

• 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 the their choices are many
• Threat  of substitute products or services-high when there are many alternative to a product or service and low when there are few alternatives from which to choose
• Threat of new entrants-high when it 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 can also be called customer 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

• 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 good,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

• As the bids in a reverse auction become lower and lower,more and more suppliers drop out of the action
• What effect does this have on supplier power?

             *It reduces supplier power and creates a competitive advantages for the buyer organization

               since it is paying the lowest possible price for its good and services

• 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

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 customer an array of IT-enabled service including ATMs and online account services

What is an industry that has lower 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 barriers is high because you have to have the facilities and systems to mimic their movie supply chain)

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

• 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 

• 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

• 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 services
• 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

• 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)