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| Identifying Competitive Advantages |
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
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
service
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.
Supply chain consists of all parties involved in the procurement of a product or raw material
(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
service
(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
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
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
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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