CHAPTER 2 : IDENTIFYING COMPETITIVE ADVANTAGES

To survive and thrive an organization must create a competitive advantage.

THE FIVE FORCES MODEL - EVALUATING BUSINESS SEGMENTS

PORTER'S FIVE FORCES MODEL - determines the relative attractiveness of an industry.

Buyer Power - high when buyers have many choices of whom to buy from and low when their choices are few.

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.
• Switching costs - costs that can make customers reluctant to switch to another product or service.

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.

Way to reduce supplier power :

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.

• Switching cost - costs that can make customers reluctant to switch to another product or service.
• eg: water companies in every state

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 - 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 service.
• eg: fuel, bank

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.
• eg: telco company (celcom, maxis, digi, tune talk and umobile)

THE THREE GENERIC STRATEGIES - CREATING A BUSINESS FOCUS

Organizations typically follow one of Porter's three generic strategies when entering a new market.

Broad market and low cost : Walmart competes by offering a broad range of products at low prices. Its business strategy is to be the low-cost provider of goods for the cost-conscious consumer.

Broad market and high cost : Neiman Marcus competes by offering a broad range of differentiated products at high prices. Its business strategy offers a variety of specialty and upscale products to affluent consumers.

Narrow market and low cost : Payless competes by offering a specific product, shoes at low prices. Its business strategy is to be the low-cost provider of shoes. Payless competes with Walmart, which also sells low-cost shoes, by offering a far bigger selection of sizes and styles.

Narrow market and high cost : Tiffany & Co. competes by offering a differentiated product, jewelry, at high prices. Its business strategy allows it to be a high-cost provider of premier designer jewelry to affluent consumers.

VALUE CHAIN

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.

VALUE CREATION

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 chain with Porter's Five Forces