Chapter 2: Identifying Competitive Advantage

Introduction

• Competitive advantage is a product or service that an organization's customers place a greater value on than similar offerings from a competitor. Unfortunately, competitive advantage is temporary because competitors keep duplicate the strategy. Then, the company should start the new competitive advantage.
• Michael Porter's Five Forces Model is useful tool to aid organization in challenging decision whether to join a new industry or industry segment.

The Five Forces Model

1. Buyer Power

• High - when buyers have many choices of whom to buy.
• Low - when their choices are few.
• To reduce buyer power (and create competitive advantage), an organization must make it more attractive to buy from the company not from the competitors.
• Best practices of IT-based.
• Loyalty program in travel industry

The Competitive Environment

Bargaining Power of Customers or Buyer Power.

• Customers can grow large and powerful as a result of their market share.
• Many choices of whom to buy from.
• Low when comes to limited items.
• Example; used loyalty programs (jusco card, tesco card - being a members to get a discount)

2. Supplier Power

• High - when buyers have few choices of whom to buy from.
• Low - when their choices are many.
• Best practices of IT to create competitive advantage.

An organization within the Supply Chain

Supplier power is the converse of buyer power.

 

3. Threat of Substitute products & Services

• High - when there are many alternatives to a product or service.
• Low - when there are few alternatives from which to choose.
• Ideally, an organization would like to be on a market in which there few substitutes of their product or service.
• Best practices of IT.
• Example: Electronic product - same function different brands.

The competitive Environment

Threat of Substitutes:

• To the extent that customers can use different products to fulfill the same need, the threat of substitutes exists.
• Example: electronic product - same function different brands.
• Switching cost - costs can make customer reluctant to switch to another product or service.

4. Threat of new entrants

• High - when competition is easy for new competitors to enter a market.
• Low - when there are significant entry barriers to entering a market.
• Entry barriers is a product or service feature that customers have come to expect from organizations and must be offered by entering organization to compete and survive. 
• Best practices of IT.

The Competitive Environment

Threat of New Entrants

• Many threats come from companies that do not yet exist or have a presence in a given industry or market.
• The threat of new entrants forces top management to monitor the trends, especially in technology, that might give rise to new competitors.

5. Rivalry among existence competitors

• High - when competition is fierce in a market.
• Low - when competition is more complacent.
• Best practices of IT.
• Wal-mart and suppliers using IT-enabled system for communication and track product at aisles by effective tagging system.
• Reduce cost by using effective supply chain.

The Competitive Environment

Rivalry Among Existing Firms.

• Existing competitors are not much on the threat.
• However, changes in management, ownership, or "the rules of the game" can give rise to serious threats to long term survival from existing firms.
• Example: the airline industry faces serious threats from airlines operating in bankruptcy, who do not pay on the debts while slashing fares against those healthy airlines who do not pay on debt. (MAS&AIR ASIA) 

The Three Generics Strategies

1. Cost Leadership

• Becoming a low-cost producer in the industry allows the company to lower prices to customers.
• Competitors with higher costs cannot afford to compete with the low-cost leader on price.

2. Differentiation

• Create competitive advantage by distinguishing their products on one or more features important to their customers.
• Unique features or benefits may justify price differences and/or stimulate demand.

3.Focused Strategy

• Target to a niche market.
• Concentrates on either cost leadership or differentiation.

The Value Chains- Targeting Business Processes

• Supply Chain - a chain or series of processes that adds value to product & service for customer.
• Add value to its products and services that support a profit margin for the firm.

END OF CHAPTER TWO