CHAPTER 2

IDENTIFYING COMPETITIVE ADVANTAGES

WHAT IS COMPETITIVE ADVANTAGES ?

• Competitive Advantage - a product or service that an organization's customers place a greater value on 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

There are 3 common tools used in industry to analyze and develop :

1. Porter's Five Forces Model
2. Porter's 3 Generic Strategies
3. Value Chains

THE FIVE FORCES MODEL - Evaluating Business Segments

1. BUYER POWER

• Buyer Power - high when buyers have many choices of whom to buy from and low when their choices are few
• Way to reduce buyer power is through loyalty programs

             * Loyalty program - rewards customer 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 

2. 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 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 through B2B marketplace

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

• 2 types of B2B marketplace :

             # 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

3. 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 cost - costs that can make customers reluctant to switch to another product or                                                  service

4. 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 particular industry and must be offered by an entering                                                   organization to compete and survive 

5. 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

THE 3 GENERIC STRATEGIES - Creating a Business Focus

• Organizations typically follow one of Porter's 3 Generic Strategies when entering a new market

VALUE CREATION

• 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

• 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