Tuesday, 7 July 2015

Chapter Two Identifying Competitive Advantages

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Identifying Competitive Advantages

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What is competitive advantages?
Competitive advantages is a product or service
 that an organization’s customers place a greater
 value on than similar offerings from a competitor

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There are three common tools used in industry to analyze and develop competitive advantages include:
 - Porter’s Five Forces Model  
- Porter’s three generic strategies  
- Relationship between business process value chains

Porter’s Five Forces Model 
Porter’s Five Forces Model determines the relative attractiveness of an industry.
      1) Buyer power 
      2) Supplier power
      3) Threat of substitute products or services
      4) Threat of new entrants
      5) Rivalry among existing competitors

        Buyer Power 
(high when buyers have many choices of whom to buy from and low when their choices are few)

 There are two ways to reduce buyer which are through loyalty programs and switching cost.

 Loyalty program  - rewards customers based on the amount of business they do with a                                      particular organization

 Switching costs   - costs that can make customers reluctant to switch to another product or 

Supplier Power 
(high when buyers have few choices of whom to buy from and low when their choices are many)

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

Supply chain consists of all parties involved in the procurement of a product or raw material

 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 

 Business-to-Business (B2B) marketplace – an Internet-based service that brings together 
 many buyers and sellers

 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

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)

 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.

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 -  is 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?
  •    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
What is an industry that has a low entry barrier?
  • 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                             (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
  (high when competition is fierce in a market and low when competition is more complacent)

 Competition is always more intense in some industries than in others, the overall trend is             toward increased competition in just about every industry

 Porter’s Three Generic Strategies 

• 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 Chains
    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

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)

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