Chapter 2 : Identifying Competitive Advantage

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 because competitors will keep duplicate the strategy. After then, the company should create a new competitive advantage.

Porter’s 5 Forces Model

Michael Porter’s Five Forces Model is useful tool to aid organization in challenging decision whether to join a new industry or industry segment.

1.      Rivalry among existing competitors.

·         High – when competition is fierce in a market

·         Low – when competition is more complacent

·         Best Practices of IT

a.      Wal-mart and its suppliers using IT-enabled system for communication and track product at aisles by effective tagging system.

b.      Reduce cost by using effective supply chain.

·         Existing competitors are not much of the threat:  typically each firm has found its "niche". 

·         However, changes in management, ownership, or "the rules of the game" can give rise to serious threats to long term survival from existing firms .

2.      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 buy from the company not from the competitors.

·         Best practices of IT-based :

Loyalty program in travel industry (e.g. rewards on free airline tickets or hotel stays )

3.      Supplier Power

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

·         Low – when their choices are many.

·         Best practices of IT to create competitive advantage.

·         E.g. B2B marketplace – private exchange allow a single buyer to posts it needs and then open the bidding to any supplier who  would care to bid. Reverse auction is an auction format in which increasingly lower bids.

4.      Threat of Substitute Products and 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 :

 Electronic product -same function different brands

5.      Threat of new entrants

·         High – when it is easy for new competitors to enter a market.

·         Low – when there are significant entry barriers to entering a market.

·         Entry barriers is a product or service feature that customers have come to expect from organizations and must be offered by entering organization to compete and survive.

·         Best practices of IT

new bank must offers online paying bills, acc monitoring to compete.

Porter’s  3 Generics Strategies

1.      Cost Leadership

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

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

2.      Differentiation

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

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

3.      Focused Strategy

·         Target to a niche market

·         Concentrates on either cost leadership or differentiation.

Relationship between business process and value chain

·         Supply Chain - a chain or series of processes that adds value to product & service for customer.

·         Add value to its products and services that support a profit margin for the firm

Supply chain diagram ; a chain or series of processes that adds value to product and services for customer.

That's all for chapter 2. Tata :)