1. Identifying Competitive Advantages
Chapter 2
Identifying Competitive Advantages

2. Learning Outcomes
Explain why competitive advantages are typically temporary
List and describe each of the forces in Porter’s Five Forces Model
Compare Porter’s three generic strategies
Describe the relationship between business processes and value chains

3. 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

4. UAL was the first airline to offer a competitive
advantage with its frequent flyer mileage

5. Customer self-service software on the Internet from FedEx was an example of first-mover advantages

6. Sony had a competitive advantage with
its portable stereo systems

7. Overview (continued)
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

8. Porter’s Five Forces Model

9. Buyer (Customer) Power
Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few
To reduce buyer power, an organization must make it more attractive for customers to buy from them than from their competition
Loyalty programs – reward customers based on the amount of business they do with a particular organization
Examples: Frequent-flyer programs are a good example of using IT to reduce buyer power.

10. 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

11. An example of an organization with “high” supplier power

12. Supplier Power (continued)
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
Private exchange (a variation of the B2B marketplace) – 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

13. Threat of Substitute Products/ 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
Examples
Switching Doctors

14. 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
Examples of high entry barriers
Examples of low entry barriers

15. 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

16. Porter’s Three Generic Strategies
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

18. Value Chains - Targeting Business Process
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

20. To decrease customer’s power, an organization can
construct its value chain activity of “service after the sale”
by offering high levels of quality customer service

21. How Levi’s Got Its Jeans into Wal-Mart
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?