CHAPTER 2

CHAPTER 2 M.G.T.300

IDENTIFYING COMPETITIVE ADVANTAGE   

Competitive Advantage 

• A product or service that am organizations customers place a greater value on than similar offerings from a competitor.
• BUT , Competitive Advantage temporary due to competitors will duplicate it. THUS , the organization need a new competitive advantage.

Michael E. Porter is a professor at Harvard Business school and is the author of many of the most authoritative works in business strategy and competitive analysis. THE Five Forces Model is a aid tool for organization in challenging decision whether to join a new industry or industry segment. 

The Five Forces Model

1. The Bargaining Power of Buyers

2. The Bargaining Power of Suppliers

3. The Threat of Substitute Product

4. The Threat of New Entrants

5. The Rivalry Among the Existence Competitors

The Bargaining Power of Buyers

• HIGH~when the buyers have many choices whom to buy from
• LOW~when they have few choices

The Bargaining Power of Suppliers

• HIGH~when buyers  have few choices of whom to buy from\
• LOW~ when the buyers have many choices

The Threat of Substitute Product

• HIGH~when there are many alternatives to a product or service
• LOW~when there are few alternative

The Threat of New Entrants

• HIGH~when it is easy for new competitors enter the market
• LOW~when there are significant barrier entry to enter the market

The Rivalry Among the Existence Competitors

• HIGH~when competition is fierce in the market
• LOW~when competition is complacent

New entrants can enter the industry and compete away profits. 

The threat of substitutes forces a ceiling on prices and thus profit margins. 

The bargaining power of buyers means that the value will be captured by buyers rather than the companies. 

The bargaining power of suppliers means that value will be captured by the suppliers. 

The rivalry between competitors means that the value that is created will be competed away by either passing it on to buyers through lower costs or by increasing the cost of competition.

The Generic Strategies

In order to maintain and improve the position within the industry, a company must have a sustainable competitive advantage which is Generic Strategy

There are two basic types of competitive advantage, low cost and differentiation and three strategies for achieving above average position, cost leadership, differentiation and focus. Focus can be either cost focus or differentiation focus.

When choosing a  strategy, it’s important to make a choice about which competitive advantage you are looking to create. 

Cost leadership and differentiation require very different strategies. Not choosing a strategy means you won’t have any competitive advantage at all and you will achieve below average performance.

Cost Leadership

Cost Leadership is the company aims to become the low-cost provider in the industry. Usually there is not room for more than one low-cost provider, and so if this strategy is going to work, you need to ensure you are the winner.

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

The cost leader needs to ensure that their product sufficiently meets the demand of the market. If the product does not, the cost leader could lose market share to a competing product that does meet that minimum requirement or be forced to reduce prices even further.

Differentiation

A Differentiation strategy requires a company to pick a certain attribute of a product or service that is valued by the customer. By positioning to meet the specific needs of the differentiation, the company can charge premium prices to people who value that attribute.

In a differentiation strategy, you must also be aware of your costs. The advantages of a well differentiated product will be nullified if you can’t charge more than it costs you to produce it.

Differentiation can vary widely by industry depending on what attributes are valued by the customer. Unlike Cost Leadership, it’s also possible for many differentiation products to co-exist within the same industry.

Focus

A focus strategy is where you focus on a niche within an industry by either cost leadership or differentiation. This opportunity arrises when a segment of an industry is underserved the existing competitors. 

For example, a market leader might offer a generic product that meets the majority of the market’s requirements. 

A focus strategy would pick out a segment of the market that is underserved by the market leader and focus on satisfying their requirements.A focus strategy can involve either cost leadership or differentiation and many focus strategies can co-exist within the same industry.

An important aspect of a focus strategy is to ensure that your product is focused enough. If your target segment can be equally served by a competitors generic product, you will achieve below average returns.

The Value Chains

• Supply Chain~ a chain or series of processes that adds value to the product and service for customer.
• Add value to its product and services that supports the profit margin for the firm.