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.
•       Unfortunately, CA is temporary because competitors keep duplicate the strategy.
•       Then, the company should start the new competitive advantage.

v  First-mover advantage: occurs when a company significantly increase its market share by being first with new competitive advantage.

v  Competitive intelligence: the process of gathering information about the competitive environment, including competitor’s plans, activities, and products, to improve a company’s ability to succeed.

Managers use three common tools to analyse competitive intelligence and develop advantages including the five forces model, the three generic strategies, and value chain analysis.

THE FIVE 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.
•       Formally defined, Porter’s Five Forces Model analyses the competitive forces within the environment in which a company operates to assess the potential for profitability in an industry.
•       Its purpose is to combat these competitive forces by identifying opportunities, competitive advantages, and competitive intelligence.

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)

·         Bargaining power of customers / buyer power:

o   Customers can grow large and powerful as a result of their market share

o   Many choices of whom to buy from

o   Low when comes to limited items

o   E.g used loyalty programs (jusco card, tesco card, -being a members to get the discount)

SUPPLIER POWER

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

·         Low – when their choices are many.

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.

·         Supplier power is the converse of buyer power.

THREAT OF SUBSTITUTE PRODUCTS & 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 products or services.

Best practices of IT

·         E.g Electronic product – same function different brands

·         Threat of substitutes

o   To the extent that customers can use different products to fulfil the same need, the threat of substitute exists.

o   E.g: electronic product – same function different brands

o   Switching cost – cost can make customer reluctant to switch to another product or service

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 to compete and survive.

·         Best practices of IT

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

o   Many threats come from companies that do not yet exist or have a presence in a given industry or market.

o   The threat of new entrants forces top management to monitor the trends, especially in technology, that might give rise to new competitors.

o   E.g. new bank (online paying bills, acc monitoring)

RIVALRY AMONG EXISTENCE COMPETITORS

·         High – when competition is fierce in a market

·         Low – when competition is more complacent

·         Best practices of IT

o   Walmart and its suppliers using IT-enabled system for communication and track product at aisles by effective tagging system.

o   Reduce cost by using effective supply chain.

·         Rivalry among existing firms

o   Existing competitors are not much of the threat: typically each firm has found its “niche”.

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

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

THREE GENERIC STRATEGIC

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-costs leader on price.

DIFFERENTIATION

·         Create competitive advantage by distinguishing their product 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 – TARGETING BUSINESS PROCESSES

·         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.