CHAPTER 2 : IDENTIFYING COMPETITIVE ADVANTAGES

Learning Outcomes

• Explain why competitive advantages are temporary.
• Describe Porter's Five Forces Model and explain each of the five forces.
• Compare Porter's three generic strategies.
• Demonstrate how a company can add value by using Porter's value chain analysis.

COMPETITIVE ADVANTAGE

• A product or service that an organisation's customers place a greater value on the similar offerings from a competitor.
• Unfortunately, competitive advantage is temporary because competitors keep duplicate the strategy.
• Then, the company should start the new competitive advantage.
• The first-mover advantage occurs when a company can significantly increase its market share by being first with a new competitive advantage.

COMPETITIVE INTELLIGENCE

• The process of gathering information about the competitive environment, including competitor's plans, activities, and products, to improve a company's ability to succeed.
• It means understanding and learning as much as possible about what is occurring outside the company to remain competitive.

Managers use three common tools to analyze competitive intelligence and develop competitive advantages including :

1. The Five Forces Model (for evaluating industry attractiveness).
2. The three generic strategies (for choosing a business focus).
3. Value chain anlysis (for executing business strategies).

THE FIVE FORCES MODEL - Evaluating Industry Attractiveness

The pressures that can hurt potential sales :

• Knowledgeable customers can force down prices by pitting rivals against each other.
• Influential suppliers can drive down profits by charging higher prices for suppliers.
• Competition can steal customers.
• New market entrants can steal potential investment capital.
• Substitute products can steal customers.

Porter's Five Forces Model

1. BUYER POWER

The ability of buyers to affect the price they must pay for an item.

Factors used to assess buyer power :

• Number of customers.
• Customers sensitivity to price.
• Size of orders.
• Differences between competitors.
• Availability of substitute products.

When buyer power is high,

• Buyers have many choices of whom to buy.
• Buyers can force a company and its competitors to compete on price, which typically drives prices down.

When buyer power is low,

• Buyers have few choices of whom to buy.

Ways To Reduce Buyer Powers

1. Switching Costs

• Manipulating costs that make customers reluctant to switch to another product or service.

2. Loyalty Programs

• Reward customers based on their spending.

2. SUPPLIER POWER

• The supplier's ability to influence the prices they charge for supplies (including materials. labor and services).

Factors used to appraise supplier power :

• Number of suppliers.
• Size of suppliers.
• Uniqueness of services.
• Availability of substitute products.

When the supplier power is high,

1. The supplier can influence the industry by :

• Charging higher prices.
• Limiting quality or services.
• Shifting costs to industry participants.

2. Buyers have few choices from whom to buy.

3. Buyers lose revenue because they cannot pass on the raw 

   material price increase to their customers.

Way To Reduce Supplier Power

1. Best practices of IT to create competitive advantage.

• Use internet to make purchases , research medications and practices, something that was next to impossible just a few decades ago.

 When the supplier power is low,

• Buyers have many choices of whom to buy from.
  

3. THREAT OF SUBSTITUTE PRODUCTS OR SERVICES

When threat of substitute products or services is high,

• There are many alternatives to a product or service.

When threat of substitute products or services is low, 

• There are few alternatives from which to choose.

Way To Reduce The Threat Of Substitute Products Or Services  

   

1. Offering additional value through wider product distribution.

• For example, soft-drink manufacturers distribute their products through vending machines, gas stations and convenience stores, increasing the availability of soft drink relative to other beverages. 

2. Offer various add-on services, making the substitute product 

   less of a threat.

• For example, iPhones include capabilities for games, videos, and music, making a traditional cell phones less of a substitute. 

3. Customers can use different products to fulfill the same need.

• For example, electronic product-same function different brands. 

4. Switching Costs

• Costs can make customer reluctant to switch to another product or service.

4. THREAT OF NEW ENTRANTS

Entry Barrier

A feature of a product or service that customers have come to expect and entering competitors must offer the same for survival.

When threat of new entrants is high,

• It is easy for new competitors to enter a market.

When threat of new entrants is low,

• There are significant entry barriers to entering a market.

Example,

• A new bank must offer its customers an array of MIS-enabled services, including ATMs, online paying bills, and online account monitoring. These are significant barriers to new firms entering the banking market.
• The first bank to offer such services gained a valuable first-mover advantage, but only temporarily, as other banking competitors developed their own MIS services.

5. RIVALRY AMONG EXISTING COMPETITORS

When the rivalry among existing competitors is high,

• Competition is fierce in a market.

When the rivalry among existing competitors is low,

• Competition is more complacent.

Way To Reduce Rivalry Among Existing Competitors

• Wal-mart and its suppliers using IT-enabled system for communication and track product at aisles by effective tagging system.
• Reduce cost by using effective supply chain.

Product Differentiation

• Occurs when a company develops unique differences in its products or services with the intent to influence demand.
• Companies can use differentiation to reduce rivalry.

STRONG AND WEAK EXAMPLES OF PORTER'S FIVE FORCES

THE THREE GENERIC STRATEGIES - CHOOSING A BUSINESS FOCUS

1. Broad Cost Leadership
2. Broad Differentiation

• Broad strategies reach a large market segment.

  3. Focused Strategy

• Focused strategies target a niche or unique market with either cost leadership or differentiation.

PORTER'S THREE GENERIC STRATEGIES

Examples of Porter's Three Generic Strategies

• Broad market and low cost : Walmart competes by offering a broad  range of products at low prices. Its business strategy is to be the low-cost provider of goods for the cost-conscious consumer.
• Broad market and high cost : Neiman Marcus competes by offering a broad range of differentiated products at high prices. Its business strategy offers a variety of specialty and upscale products to affluent consumers.
• Narrow market and low cost : Payless competes by offering a specific product, shoes, at low prices. Its business strategy is to be the low-cost provider of shoes. Payless competes with Walmart, which also sells low-cost shoes, by offering a far bigger selection of sizes and styles.
• Narrow market and high cost : Tiffany & Co. competes by offering a differentiated product, jewelry, at high prices. Its business strategy allows it to be a high-cost provider of premier designer jewelry to affluent consumers.

VALUE CHAIN ANALYSIS - EXECUTING BUSINESS STRATEGIES

Business Process

A standardized set of activities that accomplish a specific task, such as processing a customer's order.

Value Chain Analysis

• A useful tool for determining how to create the greatest possible value for customers.
• The goal of value chain analysis is to identify processes in which the firm can add value for the customer and create a competitive advantage for itself, with a cost advantage or product differentiation.
• The value chain groups a firm's activities into two categories, primary value activities and support value activities.

Primary value activities, acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services.

1. Inbound logistics : Acquires raw materials and resources and distributes to manufacturing as required.
2. Operations : Transforms raw materials or inputs into goods and services.
3. Outbound logistics : Distributes goods and services to customers.
4. Marketing and sales : Promotes, prices and sells products to customers.
5. Service : Provides customer support after the sale of goods and services.

Support value activities, include firm infrastructure, human resource management, technology development, and procurement.

1. Firm infrastructure : Includes the company format or departmental structures, environment and systems.
2. Human resource management : Provides employee training, hiring and compensation.
3. Technology development : Applies MIS to processes to add value.
4. Procurement : Purchases inputs such as raw materials, resources, equipment, and supplies.