Chapter 2 : IDENTIFYING COMPETITIVE ADVANTAGE

Identifying Competitive Advantage 

"What is competitive advantage?"

Competitive advantage (CA) product or service that an organization's customers place a greater value on than similar offerings from a competitor. Unfortunately, CA is temporary competitors keep duplicating the strategy. Then, the company should start the new competitive advantage. 

We will learn about namely three tools in this chapter namely The Five Forces Model, The Three Generics Strategies and The Value Chains. 

THE FIVE FORCES MODEL

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

The Five Forces are : -

1. Buyer Power
2. Supplier power 
3. Threat of substitute products or services
4. Threats of new entrants
5. Rivalry among existing companies

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 ) 

The Competitive Environment

Bargaining Power of Customers./Buyer power

• Customers can grow large and powerful as a result of their market share. 
• Many choices of whom to buy from
• Low when comes to limited items
• E.g. : used loyalty programs (Jusco card, Tesco card, - being a members to get the discount)

b

       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. Business to Business 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. 

       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    -  E.g. Electronic product -same function different brands

The Competitive Environment

 Threat of Substitutes 

•           To the extent that customers can use different products to fulfill the same need, the threat   of substitutes exists.
•            E.g: electronic product -same function different brands
•            Switching cost- costs can make customer reluctant to switch to another product or              service
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       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 
•            E.g. new bank must offers online paying bills, acc monitoring to compete.
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The Competitive Environment

          

         Threat of New Entrants 

•            Many threats come from companies that do not yet exist or have a presence in a given      industry or market. 
•            The threat of new entrants forces top management to monitor the trends, especially in        technology, that might give rise to new competitors.
•             E.g. new bank (online paying bills, acc monitoring)

    RIVALRY AMONG EXISTENCE COMPETITOR

•              High – when competition is fierce in a market
•              Low – when competition is more complacent
•              Best Practices of IT
•              Walmart and its suppliers using IT-enabled system for communication and track        
       product at aisles by effective tagging system. 
•               Reduce cost by using effective supply chain.

       The Competitive Environment

          

       Rivalry Among Existing Firms 

•               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 .
•               E.g: the airline industry faces serious threats from airlines operating in bankruptcy,
        who do not pay on the debts while slashing fares against those healthy airlines who
        do pay on debt. (MAS & AIR ASIA)
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• THE THREE GENERIC STRATEGIES 

The three generic strategies are :

1. Cost Leadership
2. Differentiation
3. Focused Strategy 

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.

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.
• Ex: i-care by Proton 

FOCUSED STRATEGY

• Target to a niche market
• Concentrates on either cost leadership or differentiation.

• THE VALUE CHAINS
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SUPPLY CHAIN is a chain or series of processes that adds value to product and service for customer. Add value to its products and services that support a profit margin for the firm

SUPPLY CHAIN DIAGRAM