Chapter 2 Identifying Competitive Advantages. 2 Learning Outcomes Explain why competitive advantages are typically temporary List and describe each of.

Chapter 2

Identifying Competitive Advantages

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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

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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

UAL was the first airline to offer a competitiveadvantage with its frequent flyer mileage

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

Sony had a competitive advantage withits portable stereo systems

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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

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Porter’s Five Forces Model

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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.

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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

An example of an organization with

“high” supplier power

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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

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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

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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

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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

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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

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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

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

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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?