Chapter 2 Identifying Competitive Advantages

McGraw-Hill/Irwin

2008 The McGraw-Hill Companies, All Rights Reserved

Learning Outcomes
2.1

Explain why competitive advantages are typically temporary List and describe each of the five forces in Porters Five Forces Model Compare Porters three generic strategies Describe the relationship between business processes and value chains
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2.2

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Identifying Competitive Advantages

To survive and thrive an organization must create a competitive advantage
Competitive advantage a product or service that an organizations 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
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Identifying Competitive Advantages

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:
Porters Five Forces Model Porters three generic strategies Value chains
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The Five Forces Model Evaluating Business Segments

Porters Five Forces Model determines the relative attractiveness of an industry

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

One way to reduce buyer power is through loyalty programs

Loyalty program rewards customers based on the amount of business they do with a particular organization
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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 in the procurement of a product or raw material

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Supplier Power
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

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Supplier Power
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
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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

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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 a particular industry and must be offered by an entering organization to compete and survive
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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
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The Three Generic Strategies Creating a Business Focus

Organizations typically follow one of Porters three generic strategies when entering a new market

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The Three Generic Strategies Creating a Business Focus

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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 customers order Value chain views an organization as a series of processes, each of which adds value to the product or service for each customer
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Value Creation
Combining Porters Five Forces and three generic strategies create business strategies for each segment

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Value Creation
Value Chain

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Value Creation
Value chains with Porters Five Forces

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OPENING CASE STUDY QUESTIONS Apple Merging Technology, Business, and Entertainment 1. How can Apple use environmental scanning to gain business intelligence? 2. Using Porters Five Forces Model, analyze Apples buyer power and supplier power

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OPENING CASE STUDY QUESTIONS Apple Merging Technology, Business, and Entertainment 3. Which of the three generic strategies is Apple following? 4. Which of Porters Five Forces did Apple address through the introduction of the iPhone?

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CHAPTER TWO CASE Say Charge It with Your Cell Phone

By associating a credit card with a cell phone, banks and credit card companies hope to convince consumers to buy products, such as soda, with their cell phones instead of pocket change A transaction fee will be charged for each transaction

The ability to charge items to a cell phone has significant business potential
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Chapter Two Case Questions

1. Do you view this technology as a potential threat to traditional telephone companies? If so, what counterstrategies could traditional telephone companies adopt to prepare for this technology?

2. Using Porters Five Forces describe the barriers to entry for this new technology
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Chapter Two Case Questions

3. Which of Porters three generic strategies is this new technology following? 4. Describe the value chain of the business of using cell phones as a payment method 5. What types of regulatory issues might occur due to this type of technology? 6. How could Apples iPhone use this technology to 2-23 gain a competitive advantage?