Chapter 02

1. Chapter 02 Identifying Competitive Advantages 2-1

2. LEARNING OUTCOMES • Explain why competitive advantages are temporary • Describe Porter’s Five Forces Model and explain each of the five forces • Compare Porter’s three generic strategies • Demonstrate how a company can add value by using Porter’s value chain analysis 2-2

3. IDENTIFYING COMPETITIVE ADVANTAGES • Business Strategy – A leadership plan that achieves specific set of goals or objectives such as: • Developing new products or services • Entering new markets • Increasing customer loyalty • Attracting new customers • Increasing sales 2-3

4. Apple Company and Strategy • Apple company had its ups and downs due to leadership issue. Steve Jobs was co-founder, chairman, and CEO of Apple Inc., and left Apple due to lack of strategy and came back to rescue the company. • Watch the movie “Jobs”

5. IDENTIFYING COMPETITIVE ADVANTAGES • Competitive advantage – A product or service that an organization’s customers place a greater value on than similar offerings from a competitor • Competitive advantages are temporary b/c competitors often quickly seek ways to duplicate them. • Ex. Apple’s iTunes & iPod • First-mover advantage – Occurs when an organization can significantly impact its market share by being first to market with a competitive advantage • Ex. FedEx customer self-service 2-5

6. IDENTIFYING COMPETITIVE ADVANTAGES • Competitive intelligence –The process of gathering information about the competitive environment to improve the company’s ability to succeed • Competitive intelligence tools • Porter’s Five Forces Model • Porter’s Three Generic Strategies • Porter’s Value Chain Analysis 2-6

7. THE FIVE FORCES MODEL – EVALUATING INDUSTRY ATTRACTIVENESS Porter’s Five Forces Model Michael Porter is a Harvard Business Professor 2-7

8. Buyer power – high when buyers have many choices of whom to buy from and low when their choices are few • Supplier power – high when buyers have few choices of whom to buy from and low when their choices are many • 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 • 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 • Rivalry among existing competitors – high when competition is fierce in a market and low when competition is more complacent

9. Buyer Power • Buyer power – The ability of buyers to affect the price of an item- high when buyers have many choices of whom to buy from and low when their choices are few • Factors: # of customers, order size, availability of subs. products – Higher buyer power force the company & competitors to drive the price down. Companies reduce buyer power by: • Switching cost – Manipulating costs that make customers reluctant to switch to another product • Ex. Cost of switching doctors, switching phone plans • Loyalty program – Rewards customers based on the amount of business they do with a particular organization • e.g. Frequent-flyer miles, AirMiles, coffee club, sandwich club, etc. Using MIS is an example of reducing buyer power. 2-9

10. Supplier Power • Supplier power – The suppliers’ ability to influence the prices they charge for supplies • high when buyers have few choices of whom to buy from and low when their choices are many • Supply Chain (CS) – Consists of all parties involved in the procurement of a product or raw material • In CS a company is both a supplier and a customer 2-10

11. Supplier Power • How an organization can be both a supplier and a buyer in a supply chain? • Exmaple: Dell computers is both a buyer and supplier in the supply chain. • Dell is a buyer (customer) of parts, and a supplier to its customers who buy computers

12. 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 • Low for pharmaceutical companies • High for airline transportations • Virtual meeting and videoconferencing has decreased the need for in-person meetings 2-12

13. Threat of Substitute Products or Services • Polaroid missed the threat of substitute (digital cameras) and went bankrupt. • Large availability decreases the threat. • Soft drinks are available everywhere • Various add-on services lowers the threat. • iPhone’s game, video & music capabilities vs. traditional cell phones.

14. 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 Entry barrier – A feature of a product or service that customers have come to expect and entering competitors must offer the same for survival • Eg. A new bank must offer all features other banks offer 2-14

15. Threat of New Entrants • 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 like Netflix the entry barrier is high because you have to have the facilities and systems to mimic their movie supply chain)

16. Rivalry Among Existing Competitors • Rivalry among existing competitors – High when competition is fierce in a market and low when competitors are more complacent • Product differentiation – Occurs when a company develops unique differences in its products or services with the intent to influence demand- e.g. Amazon offers product tailored to customers 2-16

17. Rivalry • What are a few industries where competition is high? • Restaurants, telecommunications, banking • What are a few industries where competition is low? • This is typically highly regulated industries such as energy markets and stock exchanges

18. An Example: Analyzing the Airline Industry • Perform a Porter’s Five Forces analysis of each of the following for a company entering the commercial airline industry • Buyer power ( high or low?) • Supplier power ( high or low?) • Threat of substitute products/services ( high or low?) • Threat of new entrants ( high or low?) • Rivalry among competitors ( high or low?) 2-18

19. Video Porter’s Five Forces Model Video

20. THE THREE GENERIC STRATEGIES Once managers determined what industry to enter the firm must typically follow one of Porter’s three generic strategies when entering a new market organizations are encouraged to follow only one of the three strategies

21. THE THREE GENERIC STRATEGIES CHOOSING A BUSINESS FOCUS 2-21

22. THE THREE GENERIC STRATEGIES CHOOSING A BUSINESS FOCUS - Examples 2-22

23. Video Generic Strategies Mini-Lecture

24. VALUE CHAIN ANALYSIS – EXECUTING BUSINESS STRATEGIES • 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

25. VALUE CHAIN ANALYSIS – EXECUTING BUSINESS STRATEGIES Porter’s Value Chain 2-25

26. VALUE CHAIN ANALYSIS – EXECUTING BUSINESS STRATEGIES • Primary value activities • Inbound logistics - Acquires raw materials and resources, and distributes • Operations - Transforms raw materials or inputs into goods and services • Outboundlogistics - Distributes goods and services to customers • Marketing and sales - Promotes, prices, and sells products to customers • Service - Provides customer support 2-26

27. VALUE CHAIN ANALYSIS – EXECUTING BUSINESS STRATEGIES • Support value activities • Firm infrastructure – Includes the company format or departmental structures, environment, and systems • Human resource management – Provides employee training, hiring, and compensation • Technology development – Applies MIS to processes to add value • Procurement – Purchases inputs such as raw materials, resources, equipment, and supplies 2-27

28. Value Chain • Examining the organization as a value chain determines which activities add value for customers • The organization can then focus specifically on those activities • Customers determine the extent to which each activity adds value to the product or service (as percentage % in previous figure)

29. 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

30. VALUE CHAIN ANALYSIS – EXECUTING BUSINESS STRATEGIES Value Chain and Porter’s Five Forces Model 2-30

31. Video Coke Value Chain Analysis