Chapter 2: Identifying Competitive Advantages

Identifying Competitive Advantages

• Competitive advantage - a product or service that an organization's customer's 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.

Organizations watch their competition through:
Environmental scanning - the acquisition and analysis of events and trends in the environment external to an organization.

Three common tools used to analyze and develop competitive advantages include:

• Porter's Five Forces Model
• Porter's Three Generic Strategies
• Value Chains

THE FIVE FORCES MODEL - Evaluating Business Segments

- Porter's Five Forces Model determines 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.  

Way to reduce buyer power is through:- Loyalty program: reward 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.

Supply chain- consists of all parties involved in 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:
-Business-to-Business (B2B) marketplace - an Internet-based service that brings together many buyers and sellers.

2 types of 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

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

• 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 enter a marke

- 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.

• Rivalry Among Existing Competitors- high when competition is fierce in a market and low when competition is more complacent

  
THE THREE GENERIC STRATEGIES - Creating A Business Focus
- Organization typically follow one of Porter's three generic strategies when entering a new market.

• Cost Leadership Strategy
• Differentiation Strategy
• Broad Markets
• Focused Markets

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.  

Support Value activities:

• Firm infrastructure
• Human resource management
• Technology development 
• Procurement

Primary Value activities:

• Receive and store raw materials
• Make the product or service
• Deliver the product or service
• Market and sell the product or service
• Service after the sale

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