Competitive advantages is 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
Organizations watch their competition through environmental scanning.
Environmental Scanning is the acquisition and analysis of events and trends in the environment external to an organization.
There are three common tools used in industry to analyze and develope
competitive advantages include:
- Porter’s Five Forces Model
- Porter’s three generic strategies
- 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
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.
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
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 (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.
Low – when there are few alternatives from which to choose.
Ideally, an organization would like to be on a market in which there are few
substitutes of their product or services.
Best practices of IT
E.g. Electronic product -same function different brands
Threat of Substitutes.
*To the extent that customers can use different products to fulfill
the same need, the threat of substitute exists.
*E.g: electronic product same function different brands
*Switching cost- costs can make customer reluctant toswitch 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
entering a market)
Entry barrier - is 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
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
(high when competition is fierce in a market and low when competition is more complacent)
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)
