IT335
maria smith
BDT7eCH02InstructorPPT.pptxCHAPTER TWO
IDENTIFYING COMPETITIVE ADVANTAGES
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CLASSROOM OPENER
THE WORLD IS FLAT VIDEO
The MIT website offers a video lecture by Thomas Friedman. Try showing the video to your students or assign it as homework. Friedman is an entertaining speaker and your students will enjoy his lecture.
http://video.mit.edu/watch/the-world-is-flat-30-9321/
LEARNING OUTCOMES
Explain why competitive advantages are temporary along with y the four key areas of a SWOT analysis
Describe Porter’s Five Forces Model and explain each of the five forces
Compare Porter’s three generic strategies
Demonstrate how a company can add value by using Porter’s value chain analysis
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A detailed review of the learning outcomes can be found at the end of the chapter in the textbook
IDENTIFYING COMPETITIVE ADVANTAGES
Business strategy – A leadership plan that achieves a specific set of goals or objectives such as
Developing new products or services
Entering new markets
Increasing customer loyalty
Attracting new customers
Increasing sales
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Competitive advantage – a product or service that an organization’s customers place a greater value on than similar offerings from a competitor
First-mover advantage – occurs when an organization can significantly impact its market share by being first to market with a competitive advantage
Competitive advantages are important for an organization
It is even more important to understand that competitive advantages are typically temporary since competitors are quick to copy competitive advantages
Can you list a few companies that achieved success through competitive advantages?
United was the first airline to offer a competitive advantage with its frequent flyer mileage (this first-mover advantage was temporary)
Sony had a competitive advantage with its portable stereo systems (this first-mover advantage was temporary)
Microsoft had a competitive advantage with its unique Windows operating system
Does Microsoft still has a competitive advantage with its Windows operating system?
Perhaps – primarily due to its first-mover advantage since it is difficult to switch operating systems and users face interoperability if they are using different operating systems at the same organization.
How many students in your class are currently using Windows?
What are the competitors to Windows?
Linux and Macintosh
Why are there only three primary competitors in this large operating system market?
What would happen if you had 50 different operating systems to choose from?
Issues with interoperability
How many different types of Microsoft Office would be required to support all 50 different operating systems?
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IDENTIFYING COMPETITIVE ADVANTAGES
Stakeholders’ Interests
Explain each area and how difficult it can be to ensure all needs and requirements are met.
A business strategy is a leadership plan that achieves a specific set of goals or objectives as displayed in
This figure displays a number of business strategies that companies pursue
Ask your students to identify current companies and try to analyze their business strategies
Amazon
Wal-Mart
Target
iTunes
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IDENTIFYING COMPETITIVE ADVANTAGES
Competitive advantage – A product or service that an organization’s customers place a greater value on than similar offerings from a competitor
First-mover advantage – Occurs when an organization can significantly impact its market share by being first to market with a competitive advantage
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Competitive advantages are important for an organization
It is even more important to understand that competitive advantages are typically temporary since competitors are quick to copy competitive advantages
Can you list a few companies that achieved success through competitive advantages?
United was the first airline to offer a competitive advantage with its frequent flyer mileage (this first-mover advantage was temporary)
Sony had a competitive advantage with its portable stereo systems (this first-mover advantage was temporary)
Microsoft had a competitive advantage with its unique Windows operating system
Does Microsoft still has a competitive advantage with its Windows operating system?
Perhaps – primarily due to its first-mover advantage since it is difficult to switch operating systems and users face interoperability if they are using different operating systems at the same organization.
How many students in your class are currently using Windows?
What are the competitors to Windows?
Linux and Macintosh
Why are there only three primary competitors in this large operating system market?
What would happen if you had 50 different operating systems to choose from?
Issues with interoperability
How many different types of Microsoft Office would be required to support all 50 different operating systems?
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IDENTIFYING COMPETITIVE ADVANTAGES
The four competitive advantages discussed in this chapter include SWOT analysis, the Five Forces Model, the Three Generic Strategies, and the Value Chain Analysis.
Environmental scanning is the acquisition and analysis of events and trends in the environment external to an organization
Technology has the opportunity to play an important role in environmental scanning for competitive intelligence
For example, Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not just send its representatives into grocery stores to stock shelves—they carry handheld computers and record the product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain business intelligence on everything from how well competing products are selling to the strategic placement of its own products.
Ask your students why they would use a SWOT analysis
Ans: to evaluate a project position
Ask your students why they would use the five forced model
Ans: to evaluate the attractiveness of an industry
Ask your students why they would use the three generic strategies
Ans: to choose a business focus – example Wal-Mart uses a low-cost strategy
Ask your students why they would use a value chain analysis
Ans: to execute business strategies
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SWOT ANALYSIS
A SWOT analysis evaluates an organization’s strengths, weaknesses, opportunities, and threats to identify significant influences that work for or against business strategies
Ask your students to perform a SWOT analysis for an old product such as below or a VCR, Walkman, iPod.
CLASSROOM OPENER
GREAT BUSINESS DECISIONS – Cyrus McCormick’s Reaper
On a hot summer day in 1831, several dozen farmers and hired laborers gathered in a wheat field in Virginia to watch a horse-drawn wood-and-iron device mow down rows and rows of golden wheat. On this day, twenty-two-year-old Cyrus McCormick demonstrated the reaper that his father invented and changed history as the mechanization of farming began. Soon the process of industrialization began, which turned the nation’s economy into the world’s most productive workforce. As the historian William Hutchinson noted, “Of all the inventions during the first half of the nineteenth century which revolutionized agricultures, the reaper was probably the most important.”
Interestingly, the McCormicks were not the only individuals to build and develop a reaper. In fact, many other companies and individuals developed similar technology; however, Cyrus McCormick invented the business of making reapers and selling them to the farmers of America and foreign countries. His real genius was in the area of gaining and protecting patents for his technology. McCormick turned the reaper into a commercially viable product and introduced many new business practices including free trials, money-back guarantees, and installment payment plans.
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THE FIVE FORCES MODEL – EVALUATING INDUSTRY ATTRACTIVENESS
Porter’s Five
Forces Model
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CLASSROOM EXERCISE
Analyzing Porter’s Five Forces
Porter's Five Forces is an easy framework to understand and offers a quick way to analyze a market. Porter’s Five Forces was introduced in the text and you can review the below examples to ensure you have a solid understanding of each force. For this assignment, choose a product from the following list and perform a Porter’s Five Forces analysis. Feel free to use the below Porter’s Five Forces template for your assignment.
Desktop Computer
Address Book
Walkman
VHS Player
Polaroid Camera
Telephone
Textbook
Be sure to add in examples of loyalty programs or switching costs you could implement to help retain your market share.
BUYER POWER
Buyer power – The ability of buyers to affect the price of an item
Switching cost – Manipulating costs that make customers reluctant to switch to another product
Loyalty program – Rewards customers based on the amount of business they do with a particular organization
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Buyer power can also be called customer power
Calling buyer power customer power sometimes helps students understand the difference between buyer power and supplier power
To reduce buyer power (and create a competitive advantage), an organization must make it more attractive for customers to buy from them than from their competition
One of the best IT-based examples is the loyalty programs that many organizations offer
Which kinds of loyalty programs are you currently using?
Frequent-flyer miles
Grocery store discounts – “Safeway Card”
Restaurant discounts such as Subway’s get your 12th sandwich free
Coffee clubs where you get your 10th cup of coffee free
SUPPLIER POWER
Supplier power – The suppliers’ ability to influence the prices they charge for supplies
Supply chain – Consists of all parties involved in the procurement of a product or raw material
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A supplier organization in a market will want buyer (customer) power to be low
The supplier wants to be able to set any price it wants for its goods, and if buyers (customers) have low power, then they do not have any choice but to pay the high price since there are only one or two suppliers
What is an example of an organization with “high” supplier power?
Microsoft, Government regulated products such as energy markets and telecommunication markets in some countries
How an organization can be both a supplier and a buyer in a supply chain?
Discuss how Dell computers is both a buyer and supplier in the supply chain
Dell is a buyer (customer) of parts, and a supplier to its customers who buy computers
If supplier power is high, the supplier can influence the industry by:
Charging higher prices
Limiting quality or services
Shifting costs to industry participants
THREAT OF SUBSTITUTE PRODUCTS OR SERVICES
Threat of substitute products or services – High when there are many alternatives to a product or service and low when there are few alternatives
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Ideally, an organization wants to be in a market in which there are few substitutes for its products or services
This is difficult to achieve, and most organizations create a competitive advantage through switching costs - the more painful it is for a customer to switch suppliers, the less likely they are to switch
If a customer has to experience pain when switching to a different service provider, then they are unlikely to switch
For example, switching doctors usually involves sending all medical records and explaining all past medical history to the new doctor. Insurance also has to be transferred, along with detailed forms that the customer will be required to complete (such as family history, personal history, HIPAA, etc.) For these reasons customers have to be extremely dissatisfied with a doctor before they will endure the pain of finding or switching to a new doctor
Students typically confuse rivalry with substitute products so be sure to ask students for examples of substitute products
What would be a substitute product for Starbuck’s coffee?
Jamba Juice
Tea House
Vitamin drink
Soda
THREAT OF NEW ENTRANTS
Threat of new entrants – High when it is easy for new competitors to enter a market and low when there are significant entry barriers
Entry barrier – A feature of a product or service that customers have come to expect and entering competitors must offer the same for survival
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What is an industry that has a high entry barrier?
Energy – the organization has to have the infrastructure to support energy
Telecommunications – the organization has to invest in a telecommunications infrastructure prior to offering services
Banking – the bank must offer its customers an array of IT-enabled services including ATMs and online account services
What is an industry that has a low entry barrier?
Restaurants – simply lease a space, obtain a license, and you can sell food
Catering – simply offer food and deliver
Movie rental – simply buy the movies, pay the licensing fee, and offer the movies for rental (although if you want to be a Netflix the entry barrier is high because you have to have the facilities and systems to mimic their movie supply chain)
RIVALRY AMONG EXISTING COMPETITORS
Rivalry among existing competitors High when competition is fierce in a market and low when competitors are more complacent
Product differentiation – Occurs when a company develops unique differences in its products or services with the intent to influence demand
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What are a few industries where competition is high?
Restaurants, products, telecommunications, banking
What are a few industries where competition is low?
This is typically highly regulated industries such as energy markets and stock exchanges
Ask your students to provide a few examples of differentiation
Different brands of Coke, Ragu spaghetti sauce, Pepsi
Additional features on a cell phone
GREAT BUSINESS DECISIONS – Henry Luce Decides to Rank Companies in the Fortune 500
Henry Luce founded Time magazine in 1923 and Fortune magazine in 1929. Luce decided to create a ranking of America’s top 500 companies, called The Fortune 500, which has served as the corporate benchmark for the twentieth century – as well as being a clever marketing tactic for the magazine. The Fortune 500 remains a powerful barometer of who’s up and down in the corporate world. It is also a brilliant marketing tool since every single time its name is mentioned, so is the name of the magazine. However, being ranked on the Fortune 500 does not guarantee that the organization will achieve future success, and its measures of current achievement can also be limited and a bit confusing.
BusinessWeek magazine created a similar ranking by introducing its biannual ranking of business schools. The issue routinely outsells all other issues of the magazine in the year.
ANALYZING THE AIRLINE INDUSTRY
Perform a Porter’s Five Forces analysis of each of the following for a company entering the commercial airline industry
Buyer power
Supplier power
Threat of substitute products/services
Threat of new entrants
Rivalry among competitors
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Potential Answers Include:
Buyer Power – high, many airlines to choose from
Supplier Power – high, limited manufacturers, unions
Threat of Substitute products/services – high, many alternate transportation choices
Threat of new Entrants – high, new airlines enter market continuously
Rivalry among competitors – high, online sales
CLASSROOM EXERCISE
Porter’s Five Forces
Ask your students to name a few industries where competition is high?
Restaurants, products, telecommunications, banking
Ask your students to name a few industries where competition is low?
This is typically highly regulated industries such as energy markets and stock exchanges
Porter’s Five Forces is an easy framework to understand and offers students a quick way to analyze a business. Porter’s Five Forces is also reinforced throughout the text and it is important that your students have a solid understanding of each force. For this exercise, break your students into groups and ask them to choose two products to perform a Porter’s Five Forces analysis. The two products must compete in the same market.
Potential Products
Laptop Computer and Desktop Computer
PDA and Laptop Computer
iPod and Walkman
DVD Player and VCR Player
Digital camera and Polaroid Camera
Cell Phone and Blackberry PDA
Coca-Cola Plastic Bottle and Coca-Cola Glass Bottle
GPS Device and a Road Atlas
Roller skates and Rollerblades
Digital Books to Printed Books
Digital Paper to Paper
THE THREE GENERIC STRATEGIES CHOOSING A BUSINESS FOCUS
Porter’s Three Generic Strategies
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It is important to explain to your students that organizations are encouraged to follow only one of the three strategies
What would happen to Mercedes Benz if it wanted to follow a broad cost leadership and a focused strategy?
Mercedes Benz would find itself facing the dilemma of attempting to market and sell a highly specialized and expensive product at a discounted price. It simply wouldn’t work!
Organizations typically follow one of Porter’s three generic strategies when entering a new market
Broad cost leadership
Broad differentiation
Focused strategy
THE THREE GENERIC STRATEGIES CHOOSING A BUSINESS FOCUS
Porter’s Three Generic Strategies
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Broad strategies reach a large market segment
Focused strategies target a niche market
Focused strategies concentrate on either cost leadership or differentiation
Ask your students to choose an industry such as fast food or potato chips and perform a Porter’s Three Generic Strategies analysis
VALUE CHAIN ANALYSIS EXECUTING BUSINESS STRATEGIES
Business process – A standardized set of activities that accomplish a specific task, such as a specific process
Value chain analysis – Views a firm as a series of business processes that each add value to the product or service
To create a competitive advantage, the value chain must enable the organization to provide unique value to its customers
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Business process – a standardized set of activities that accomplish a specific task, such as processing a customer’s order
Value chain – views an organization as a series of processes, each of which adds value to the product or service for each customer
Value Chain Groups – Within a company separate the company’s activities into two categories: 1) primary value activities and 2) support value activities
To create a competitive advantage, the value chain must enable the organization to provide unique value to its customers
Examining the organization as a value chain determines which activities add value for customers
The organization can then focus specifically on those activities
VALUE CHAIN ANALYSIS EXECUTING BUSINESS STRATEGIES
Primary value activities
Inbound logistics - Acquires raw materials and resources, and distributes
Operations - Transforms raw materials or inputs into goods and services
Outbound logistics - Distributes goods and services to customers
Marketing and sales - Promotes, prices, and sells products to customers
Service - Provides customer support
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Organizations typically follow one of Porter’s three generic strategies when entering a new market
Broad cost leadership
Broad differentiation
Focused strategy
Broad strategies reach a large market segment
Focused strategies target a niche market
Focused strategies concentrate on either cost leadership or differentiation
VALUE CHAIN ANALYSIS EXECUTING BUSINESS STRATEGIES
Support value activities
Firm infrastructure – Includes the company format or departmental structures, environment, and systems
Human resource management – Provides employee training, hiring, and compensation
Technology development – Applies MIS to processes to add value
Procurement – Purchases inputs such as raw materials, resources, equipment, and supplies
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Organizations typically follow one of Porter’s three generic strategies when entering a new market
Broad cost leadership
Broad differentiation
Focused strategy
Broad strategies reach a large market segment
Focused strategies target a niche market
Focused strategies concentrate on either cost leadership or differentiation
VALUE CHAIN ANALYSIS EXECUTING BUSINESS STRATEGIES
Porter’s Value Chain
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Primary value activities acquire raw materials and manufacture, deliver, market, sell, and provide after-sales services
Support value activities support the primary value activities
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 ANALYSIS EXECUTING BUSINESS STRATEGIES
Value Chain and Porter’s Five Forces Model
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If an organization wants to decrease its buyer’s or customer’s power, it can construct its value chain activity of “service after the sale” by offering high levels of quality customer service
This will increase the switching costs for its customers, thereby decreasing their power (buyer power)
LEARNING OUTCOME REVIEW
Now that you have finished the chapter please review the learning outcomes in your text
Be sure to review the learning outcomes included in the end-of-chapter material
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