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CHAPTER 2

IDENTIFYING COMPETITIVE ADVANTAGES

·         Competitive advantage is a product or service that an organization’s customers place a greater value on that similar offerings from a competitor.

·         Unfortunately, competitive advantages is temporary because competitors keep duplicate the strategy.

·         The company should start the new competitive advantage.

THE FIVE FORCES MODEL – EVALUATING BUSINESS SEGMENTS

Michael Porter, a university professor at Hazard Business School,identified four competitive forces that can hurt potential sales :

1)      Knowledgeable customers can force down prices by pitting rivals against each another.

2)      Influential suppliers can drive down profits by charging higher prices for suppliers.

3)      New market entrants can steal potential investment capital.

4)      Substitute products can steal customers.

The five forces model helps determine the relative attractiveness of an industry and includes the following five forces :

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

·         Low – when their choices are few.

·         To reduce buyer power ( and create competitive advantage) an organization must make it more attractive to bur from the company not from the competitors.

·         Best ractices of IT – based.

·         Switching cost are cost that can make customers reluctant  to switch to another product or service.

·         For examples, switching doctors is difficult because the new doctor will not have the patient’s history and the relationship with the patient.

SUPPLIER POWER

·         High – when buyers have few choices of whom to buy from.

If supplier power is high the supplier can directly influencesthe industry by :

o   Charging higher prices

o   Limiting quality or services

o   Shifting costs to industry participants

·         E.g. B2B Marketplaces  - private exchange allow a single buyer to post it needs and then open the bidding to any supplier who would care to bids.

·         Reverse auction is an auction format in which increasingly lower bids.

THREAT OF SUBSTITUTE PRODUCTS OR SERVICES

·         The threat of substitute products or services is high when there are many alternatives to a product or service and low when there are few alternatives from which to choose.

·         For example, there are many substitute products in the airline industry.

·         Ideally,an organization would like to be on a market in which there are few substitutes of their product or services.

THREAT OF NEW ENTRANTS

·         The threat of new entrants is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market.

·         For example, a new bank must offer its customers an array of IT enabled services,including ATM’s,online bill paying, and online account monitoring.

REVALRY AMONG EXISTING COMPETITORS

·         Rivalry among existing among competitors is high when competition is fierce in a market and low when competition is more complacent.

·         Product differentiation occurs when a company develops unique differences in its products with the intent to influence demand.

·         For example , there are many companies that sell books and videos on the internet.

USING THE FIVE FORCES MODEL TO ANALYZA THE AIRLINE INDUSTRY

1.       Buyer power : Buyer  power is high as customers have many airlines to choose from and typically make purchases based on price, not carrier.

2.       Supplier power : Supplier power is high as there are limited plane and engine manufactures to chose from and unionized squeeza the airline’s profitability.

3.       Threat of substitute products or services : Threats of substitute products is high as there are numerous transportation alternatives including automobiles,trains and boats.

4.       Threat of new entrants : Threat of new entrants is high as nemw airlines are continuously entering the market including the new sky taxies which offer low cost on demand air taxi service.

5.       Rivalry among existing competitors : Rivalry in the airline industry  is high just searc Travelocity.com and see how many choices are offered.For this reason airlines are forced to compete on price.

THE THREE GENERIC STRATEGIES – CREATING A BUSINESS FOCUS

1)      BROAD COST LEADERSHIP

·         Becoming a low cost procuder in the industry allows the company to lower prices to customers.

·         Competitors wth higher costs cannot afford to compete with the low-cost leader on price.

2)      DIFFERNTIATION

·         Create competitive advantage by distinguishing their products on one or more feartures important to their  customers.

·         Unique features or benefits may justify price differences and stimulate demand.

·         Example : i-care by proton

3)      FOCUSED STRATEGY

·         Target to a niche market

·         Concentrates on either cost leadership or differentiation.