1. BUSINESS DRIVEN TECHNOLOGY Identifying Competitive Advantages
Chapter Two:
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 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 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. CHAPTER TWO 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
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
Ask your students to try to list a few companies that achieved success through a competitive advantages
Ans: 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
Ask your students if Microsoft still has a competitive advantage with its Windows operating system
Ans: 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? Ans: Linux and Macintosh
Why are there only three primary competitors in this large operating system market?

4. Organizations watch their competition through environmental scanning
CHAPTER TWO OVERVIEW
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
Review the Frito Lay environmental scanning example on page 15
Frito Lay sends its sales representatives into grocery stores to stock shelves with hand-held computers that record the product offerings, inventory, and even product locations of competitors.

5. THE FIVE FORCES MODEL – EVALUATING BUSINESS SEGMENTS
Organizations use Porter’s Five Forces Model to determine 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
Loyalty programs – reward customers based on the amount of business they do with a particular organization
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
Ask your students what kind of different loyalty programs are they currently using
Ans: 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, directly or indirectly, 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
Ask your students for an example of an organization with “high” supplier power
Ans: Microsoft, Government regulated products such as energy markets and telecommunication markets in some countries
Ask your students how an organization can be both a supplier and a buyer in a supply chain?
Ans: Review Figure 1.12 for the answer and 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. 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 which brings together many buyers and sellers
Ask your students if they consider eBay to be a B2B marketplace
Ans: If the auction is between two businesses then yes
If the auction is between a customer and a business, or two customers, then no

9. Two types of Business-to-Business (B2B) marketplaces
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
Ask your students what effect does this have on supplier power
Ans: 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

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

11. 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
Ask your students to list industries that have high entry barriers
Ans: 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
Ask your students to list industries that have low entry barriers
Ans: 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

12. 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
Ask your students to list industries where competition is high
Ans: restaurants, products, telecommunications, banking
Ask your students to list industries where competition is low
Ans: This is typically highly regulated industries such as energy markets and stock exchanges

13. 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 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

14. 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
Ask your students what would happen to Hummer if it wanted to follow a broad cost leadership and a focused strategy
Ans: 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!

15. VALUE CHAINS – TARGETING BUSINESS PROCESSES
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
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

16. VALUE CHAINS – TARGETING BUSINESS PROCESSES
Graphical Depiction of a 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

17. VALUE CHAINS – TARGETING BUSINESS PROCESSES
This slide offers a brief introduction to the value chain
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There is another important concept that can help you identify opportunities for strategic information systems. The value chain was developed by Michael Porter. It views a firm as a chain of basic activities that add value to a product or service. In the value chain conceptual framework, some business activities are primary processes (processes that make, deliver, market and sell, and service your organization’s products or services); others are support processes (processes such as management, accounting, finance, legal, human resources, research and development, and purchasing). This framework can highlight where competitive strategies can best be applied in a business.
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18. VALUE CHAINS – TARGETING BUSINESS PROCESSES
Organizations find tremendous value in analyzing their value chains along 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).

19. OPENING CASE STUDY QUESTIONS How Levi’s Got Its Jeans into Wal-Mart
Develop a summary of the important elements of the case.
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?
1. How can Levi’s use environmental scanning to gain business intelligence?
Environmental scanning is the acquisition and analysis of events and trends in the environment external to an organization. Levi’s can use environmental scanning to analyze everything from competitor strategies to understanding new and shifting market trends to determining the strategic placement of product locations. Without watching its environment and understanding what its competitors are doing and where the market is headed, Levi’s will have a difficult time setting its strategic direction.
2. Using Porter’s Five Force Model analyze Levi’s buyer power and supplier power
Levi’s buyer power is high since there are so many different types of jeans that a customer can purchase
Levi’s supplier power is low since buyers have many choices of whom to buy from
3. Which of the three generic strategies is Levi’s following?
Levi’s partnership with Wal-Mart is following a cost leadership strategy in a broad market

20. CHAPTER TWO CASE Say “Charge It” with Your Cell Phone
By associating a credit card with a cell phone, banks and credit card companies hope to convince consumers to buy products, such as soda, with their cell phones instead of pocket change
A transaction fee will be charged for each transaction
The ability to charge items to a cell phone has significant business potential
Additional Case Material
The race to build this technology is still going strong. Nokia is putting new technologies over cell phone covers, which can transmit data to any MasterCard-supporting device. Cell phone covers no longer serve as just mere removable facades or add-ons to personalize your phones, now they are your very own digital paying devices. Nokia is currently testing specially made cell phones in retail stores, restaurants, and other sales establishments in several U. S. cities. Soon we are going to see people waving their cell phones, not just to get somebody's attention, but also to pay up and shop as well.
MasterCard, which has developed the technology that allows devices to communicate merely by tapping one device with the other, is taking the next step towards making cell phone covers and credit card readers communicate over the air. MasterCard is also developing new credit card technology that allows the credit card to be read without being swiped on a reading machine.

21. CHAPTER TWO CASE QUESTIONS
Do you view this technology as a potential threat to traditional telephone companies? If so, what counterstrategies could traditional telephone companies adopt to prepare for this technology?
Using Porter’s Five Forces describe the barriers to entry for this new technology
Which of Porter’s three generic strategies is this new technology following?
1. Do you view this technology as a potential threat to traditional telephone companies? If so, what counterstrategies could traditional telephone companies adopt to prepare for this technology?
Traditional telephone companies have lost a large part of their market share, and the associated revenues, to cell phone companies. If this new technology attracts even more customers to the cell phone market, the traditional telephone companies stand to lose additional market share and revenues. For this reason, this type of technology is a definite threat to the traditional telephone companies. The traditional telephone companies will have to find new ways to entice customers. One possibility would be to implement the ability for the home phone owner, who is also an ISP customer, to purchase online retail goods and have the charge applied to their home telephone bills.
Here is a link to a company that allows customers to charge fitness training to their cell phone or landline “traditional telephone company” bills.
2. Using Porter’s Five Forces describe the barriers to entry for this new technology.
The barriers to entry include the new technology (special chip for the phone) required to support associating a cell phone with a credit card, partnership between the credit card company and the cell phone company, minimizing security issues associated with the technology, and gaining consumer trust. One of the biggest barriers to entry will be convincing cell phone users that the technology is secure. How will lost and stolen cell phone and credit card bills be handled? A person with a stolen cell phone could now purchase all kinds of goods on the credit card. Will this be the consumer’s responsibility? Would you be willing to associate your credit card with your cell phone?
3. Which of Porter’s three generic strategies is this new technology following?
This technology is following a differentiation strategy for a broad market

22. Format Report
The following HEADINGS must be in the report
Summary 30
Environmental Scanning 20
Porter’s Five Forces 20
Levi’s Strategy 20
Language/Format 10