Note

Chapter 2

Identifying Competitive Advantages

Introduction

Competitive advantage: product or services that an organization’s customers place a greater value on then similar offerings from a competitor. Unfortunately, competitive advantages are typically temporary because competitors often seek ways to duplicate the competitive advantage.

Environmental scanning: the acquisition and analysis of events and trends in the environment external to an organization. Information technology has the opportunity to play an important role in environmental scanning.

The Ways Develop Competitive Advantage In Industry

First Way: Porter’s Five Forces Model Evaluating Business Segment

·        This model is a useful tool to aid in this challenging decision. This model also help determine relative attractiveness of an industry and includes the following five forces namely buyer power, supplier power, threat of substitutes products or services,, threat of new entrants and also rivalry among existing competitors.

  

The Five Forces That Shape Industry Competitor

v  Rivalry Among Existing Competitor

·        Treat of New Entrants

·        Treat of Substitutes Product or Service

·        Bargaining Power of Suppliers

·        Bargaining Power of Buyers


Buyer power

Ø It is high when buyers have many choices from and low when their choices are few.

Ø To reduce buyer power and create competitive advantage, an organization must make it more attractive for customers to buy from it than from it than from its competitions.

Ø One of the best examples is the Loyalty programs that many organizations offer.

Ø A loyalty programs is reward customers based on the amount of business they do with a particular organization.

Supplier Power

Ø It is high when buyers have few choices of whom to buy from and low when their choices are many. It is also the converse of buyer power.

Ø A supplier organization in a market will want buyer power to be power.

Ø The example that we can see from supplier power is via power supply chain where it consists of all parties involved directly or indirectly in the procurement of a product or raw material. In a typical chain an organization will probably be both a supplier and a customer.

Ø Bidding will carried out through a reverse auction format in which increasingly lower bids are solicited from organizations willing to supply the desired product or services at an increasing lower price.

Treats of New Entrants

Ø It is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market.

Ø Entry barrier is a product or services feature that customers have come to expect from organizations in industry and must be offered by an entering organization to compete and survive.

Ø For example a new bank must offer its customers and array of IT enable services including ATM use, online bill paying, internet banking, sms banking and account monitoring.

Treat of Substitute Products or Services

Ø It is high when there are many alternatives to a product or services and low when there are few alternatives from which to choose. An organization would like to be in a market in which there are few substitutes for the products.

Ø The organization can create competitive advantage by using switching cost.

Ø Switching cost are that can make customers reluctant to switch to another products or services.

Rivalry among Existing Competitors

Ø It is high competition is fierce in a market and low when competition is more complement.

Ø The retail grocery industry for example is intensity competitive. Most of them have loyalty programs that give shoppers specials discounts. As a result customer will get lower price while the store gather valuable information on buying habits to craft pricing strategies.

Ø Since margins are quite low in the grocery retail market, grocers build efficiencies into their supply chains, connecting with their suppliers in IT enable information partnerships such as the one between Giant Supermarket and its suppliers.

Fundamental Competitive Strategies

Strategies

o   Cost leadership strategies

o   Innovation strategies

o   Differentiation strategies

o    Growth strategies

o   Alliance strategies

Cost strategies

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

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

Differentiation Strategies

§  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.

Innovation Strategies

§  Unique products or services or changes in business process can cause fundamental changes in the way industry does business.

Growth Strategies

§  Expanding production capacity

§  Entering new global markets

§  Diversifying into new areas

§  Integrating related products or services can all be a springboard to strong company growth.

Alliance Strategies

§  Establishing new business linkages and alliances with customers, suppliers, competitors, consultants, and other in order to create competitive advantage.

Second Way: The Three Generic Strategies

Cost leadership	§  Producing and marketing a good quality product service at a lower cost than your competitors.
Differentiation	§  Creating a product or service that is perceived as being unique “through the industry”
Focus	§  Addressing a “focused” segment of the marketplace, product form or cost management process.

                                                                                       I.        Broad Cost Leadership

§  This strategy involves the firm winning market share by appealing to cost-conscious or price-sensitive customers.

§  The first approach is achieving a high asset turnover. In services industries, this may mean for example a restaurant that turns tables around very quickly, or an airline that turns around flights very fast.

§  The second dimension is achieving low direct and indirect operating costs. This is achieved by offering high volume of standardized products, offering basic no-frills product and limiting customization and personalization of service.

§  The third dimension is control over the supply/procurement chain to ensure low costs. This could be achieved by bulk buying to enjoy quantity discounts, squeezing suppliers on price, instituting competitive bidding for contract, working with vendors to keep inventories low using methods such as Just-in-Time purchasing or Vendor-Managed Inventory.

                                                                      II.        Broad Differentiation Strategy

§  Differentiation is aimed at the broad market that involved the creation of a product or services that is perceived throughout its industry as unique. The company or business unit may then charge a premium for its product.

Variants on the Differentiation Strategy

§  The shareholder value model holds that the timing of the use of specialized knowledge can create a differentiation advantage as long as the knowledge remains unique. This model suggested that customers buy products or services from an organization to have access to its unique knowledge.

§  The unlimited resources model utilized a large base of resources that allows an organization to outlast competitors by practicing a differentiation strategy.

                                                                            III.        Focus or Strategic Scope

§  This dimension is not a separate strategy, but describe the scope over which the company should compete based on cost leadership or differentiation.

Third Way: Value Chain Analysis

Once an organization enters a new market using one Porter’s strategy, it must understand, accept and successfully execute its business strategy.

Value creation

§  A business process is a standardized set of activities that accomplish a specific task such as processing a customer’s order.

§  Chain approach views an organization as a series processes, each of which adds value to the product or services for each customers.

Using IS in the value chain

·  The value approach views an organization as a chain or series of processes each of which adds value to product and service for customer.

·   It also adds value to its products and services that support a profit margin for the firm.

GENERIC STRATEGIES

INDUSTRY FORCES	COST LEADERSHIP	DIFFERENTIATION	FOCUSED
Entry barriers	Ability to cut price in retaliation deters potential entrants.	Customer loyalty can discourage potential entrants.	Focusing develops core competencies that can act as an entry barrier.
Buyer power	Ability to offer lower price to powerful buyers	Large buyers have less power to negotiate because of few close alternatives	Large business have less power negotiate because of few alternatives
Supplier power	Better insulated from powerful suppliers	Better able to pass on supplier price increases to customers	Specialized  products and core competency protect against substitutes
Threat of substitutes	Can use low price to defend against substitutes	Customers become attached to differentiating attributes, reducing threat of substitutes	Rivals cannot meet differentiation focused customer needs.
Rivalry	Better able to compete on price	Brand loyalty to keep customers from rivals

What is system?

·         A system is a group of interrelated components working together toward a common goal by accepting inputs and producing outputs in an organized transformation process.

·         Normally has subsystem and function within an organization.·Units within a system that share some or all of the characteristics of that system are called  subsystem.

·         ·Example, we can view an accounting department in the organization system because the department is a subsystem of the entire organization system.

The importance of information system

1.     Meeting Global Challenges

·         The competition faced by a business is no longer limited by national boundaries

·         Companies therefore strive to produce high quality goods and services that can complete in world markets.

·         Though globalization can bring more benefits, such as increased profit and market share.

·         If the company is to be successful, it must effectively coordinate and control products, people and procedure around the world.

2.    Capturing opportunities in the marketplace

·         Successful companies are those that can identify and take advantages of opportunities in the marketplace and can continue to do so over the long run.

·         IS  that allow a company to identify strategic  growth opportunities in the marketplace are known as Strategic Information System.

3.    Enables companies to monitor employees

·         A sophisticated computer information system enables companies to monitor employees, to keep managers and employees informed, to coordinate activities among divisions, or even to sell their products to customers via the internet.

·         Example, just like Human Resources and inventories.

4.    Reduce cost

·         Information system has become sophisticated it allows people to choose to work from home.

·         Teleconferencing and video conferencing enable employees to beam in whenever needed.

·         Information system also can allow a firm to reduce costs.

·         Example, Ernst & Young company, this company has successfully reduced its office space by 2 million square feet by allowing the employees to work from home.