McGraw-Hill/Irwin © 2008 The McGraw-Hill Companies, All Rights Reserved

Chapter 2Chapter 2

Identifying Competitive Identifying Competitive AdvantagesAdvantages

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Learning Outcomes

2.1 Explain why competitive advantages are typically temporary

2.2 List and describe each of the five forces in Porter’s Five Forces Model

2.3 Compare Porter’s three generic strategies

2.4 Describe the relationship between business processes and value chains

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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 organization’s customers place a greater value on than similar offerings from a competitor (temporary)

– First-mover advantage – occurs when an organization can significantly impact its market share by being first to market with a competitive advantage

• United Airline, Sony, Microsoft

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Identifying Competitive Advantages

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

– Porter’s Five Forces Model– Porter’s three generic strategies– Value chains

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The Five Forces Model – Evaluating Business Segments• Porter’s 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,

• e.g. Frequent-flyer miles, coffee club, sandwich club, etc.

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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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• How an organization can be both a supplier and a buyer in a supply chain?

– how 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

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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 Ex. Polaroid, cell phone add-on

– Switching cost – costs that can make customers reluctant to switch to another product or service, e.g switching doctors

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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 – e.g. telecommunications and banks for low and restaurant, movie

rental is high. ( case of Netflix)

– 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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• 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

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The Three Generic Strategies – Creating a Business Focus

• Organizations typically follow one of Porter’s 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 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

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Value Creation

• Value Chain

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Value Creation

• Value chains with Porter’s Five Forces

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Value Creation

• Combining Porter’s Five Forces and three generic strategies create business strategies for each segment