CHAPTER 2

IDENTIFYING COMPETITIVE ADVANTAGE

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

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 first-mover advantage was temporary)
2. Sony had a competitive advantage with its portable stereo systems (this first-mover advantage was temporary)
3. Microsoft had a competitive advantage with its unique Windows operating system

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

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.

The Five Forces Model – Evaluating Business Segments

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

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

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.

One of the best IT-based examples is the loyalty programs that many organizations offer.

Which kinds of loyalty programs are you currently using?

1. Frequent-flyer miles
2. Grocery store discounts – “Safeway Card”
3. Restaurant discounts such as Subway’s get your 12th sandwich free
4. 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 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.

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

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.

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 cost – costs that can make customers reluctant to switch to another product or service

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

What is an industry that has a high entry barrier?

1. Energy – the organization has to have the infrastructure to support energy
2. Telecommunications – the organization has to invest in a telecommunications infrastructure prior to offering services
3. 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?

1. Restaurants – simply lease a space, obtain a license, and you can sell food
2. Catering – simply offer food and deliver
3. 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)

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.

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

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.

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

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 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).