CHAPTER 2 : IDENTIFYING COMPETITIVE ADVANTAGES
Competitive advantage is a product or service that an organization’s customers place a greater value on that similar offerings from a competitor.
THE FIVE FORCES MODEL – Evaluating Business Segments
1) Buyer Power
- Buyer power is the ability of buyers to directly impact the price they are willing to pay for an item.
- Buyer power is high when buyers have many choices from whom to buy.
- Buyer power is 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 or by using switching costs.
- Switching costs are costs that can make customers reluctant to switch to another product or service.
- Best practices of IT based : loyalty program in travel industry. For example, give rewards on free airline tickets or hotel stays.
2) Supplier Power
- A supply chain consists of all parties involved directly or indirectly in the procurement of a product or raw material. Below are the diagram of the supply chain :
- Supplier power is high when buyers have few choices of whom to buy from.
- When supplier power is high, the supplier can influence the industry by charging higher price, limiting quality or services and shifting costs to industry participants.
- Supplier power is low when their choices are many where best apply of IT practices to create competitive advantage will conquer the supplier power.
3) Threat of substitute products or services
- High : when there are many alternativesto a product or service.
- Low : when there are few alternatives from which to choose.
- Ideally, an organization would like to be on market in which there are few substitutes of their product or
services.
services.
· Best practices of IT.For example, electronic product that have the same function but different
brands.
4) 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.
- 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.
- Best practices of IT : example, new bank must offers online paying bills, account monitoring to compete
5) Rivalry Among Existing Firms
- High : when competition is fierce in a market
- Low : when competition is more complacent
- Best Practices of IT : 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.
- Example, 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)
brands.
4) 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.
- 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.
- Best practices of IT : example, new bank must offers online paying bills, account monitoring to compete
5) Rivalry Among Existing Firms
- High : when competition is fierce in a market
- Low : when competition is more complacent
- Best Practices of IT : 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.
- Example, 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)
THE THREE GENERICS STRATEGIES
1) Broad costs 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) Broad 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 stimulate demand.
- For example, i-care by Proton.
3) Focused strategy
- Target to a niche market
- Concentrates on either cost leadership or differentiation.
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