A useful tool in gathering information about the competitive environment

1. .1. Explain why competitive advantages are temporary along with the four key areas of a SWOT analysis.

2. 2.2. Describe Porter’s Five Forces Model and explain each of the five forces.

3. 2.3. Compare Porter’s three generic strategies.

4. 2.4. Demonstrate how a company can add value by using Porter’s value chain analysis.

Identifying Competitive Advantages

LO 2.1 Explain why competitive advantages are temporary along with the four key areas of a SWOT analysis.

Running a company today is similar to leading an army; the top manager or leader ensures all participants are heading in the right direction and completing their goals and objectives. Companies lacking leadership quickly implode as employees head in different directions attempting to achieve conflicting goals. To combat these challenges, leaders communicate and execute business strategies (from the Greek word stratus for army and ago for leading).

A business strategy is a leadership plan that achieves a specific set of goals or objectives such as increasing sales, decreasing costs, entering new markets, or developing new products or services. A stakeholder is a person or group that has an interest or concern in an organization. Stakeholders drive business strategies, and depending on the stakeholder’s perspective, the business strategy can change. It is not uncommon to find stakeholders’ business strategies have conflicting interests such as investors looking to increase profits by eliminating employee jobs. Figure 2.1 displays the different stakeholders found in an organization and their common business interests.

Good leaders also anticipate unexpected misfortunes, from strikes and economic recessions to natural disasters. Their business strategies build in buffers or slack, allowing the company the ability to ride out any storm and defend against competitive or environmental threats. Of course, updating business strategies is a continuous undertaking as internal and external environments rapidly change. Business strategies that match core company competencies to opportunities result in competitive advantages, a key to success!

A competitive advantage is a feature of a product or service on which customers place a greater value than they do on similar offerings from competitors. Competitive advantages provide the same product or service either at a lower price or with additional value that can fetch premium prices. Unfortunately, competitive advantages are typically temporary, because competitors often quickly seek ways to duplicate them. In turn, organizations must develop a strategy based on a new competitive advantage. Ways that companies duplicate competitive advantages include acquiring the new technology, copying the business operations, and hiring away key employees. The introduction of Apple’s iPod and iTunes, a brilliant merger of technology, business, and entertainment, offers an excellent example.

In early 2000, Steve Jobs was fixated on developing video editing software when he suddenly realized that millions of people were using computers to listen to music, a new trend page 22in the industry catapulted by illegal online services such as Napster. Jobs was worried that he was looking in the wrong direction and had missed the opportunity to jump on the online music bandwagon. He moved fast, however, and within four months he had developed the first version of iTunes for the Mac. Jobs’s next challenge was to make a portable iTunes player that could hold thousands of songs and be completely transportable. Within nine months the iPod was born. With the combination of iTunes and iPod, Apple created a significant competitive advantage in the marketplace. Many firms began following Apple’s lead by creating portable music players to compete with the iPod. In addition, Apple continues to create new and exciting products to gain competitive advantages, such as its iPad, a larger version of the iPod that functions more as a computer than a music player.1

FIGURE 2.1 Stakeholders’ Interests.

When a company is the first to market with a competitive advantage, it gains a particular benefit, such as Apple did with its iPod. This first-mover advantage occurs when a company can significantly increase its market share by being first with a new competitive advantage. FedEx created a first-mover advantage by developing its customer self-service software, which allows people to request parcel pickups, print mailing slips, and track parcels online. Other parcel delivery companies quickly began creating their own online services. Today, customer self-service on the Internet is a standard feature of the parcel delivery business.

Competitive intelligence is the process of gathering information about the competitive environment, including competitors’ plans, activities, and products, to improve a company’s ability to succeed. It means understanding and learning as much as possible as soon as possible about what is occurring outside the company to remain competitive. Frito-Lay, a premier provider of snack foods such as Cracker Jacks and Cheetos, does not send its sales representatives into grocery stores just to stock shelves; they carry handheld computers and record the page 23product offerings, inventory, and even product locations of competitors. Frito-Lay uses this information to gain competitive intelligence on everything from how well competing products are selling to the strategic placement of its own products.2 Managers use four common tools to analyze competitive intelligence and develop competitive advantages as displayed in Figure 2.2.

FIGURE 2.2 Business Tools for Analyzing Business Strategies.

SWOT ANALYSIS: UNDERSTANDING BUSINESS STRATEGIES

A SWOT analysis evaluates an organization’s strengths, weaknesses, opportunities, and threats to identify significant influences that work for or against business strategies (see Figure 2.3). Strengths and weaknesses originate inside an organization, or internally. Opportunities and threats originate outside an organization, or externally, and cannot always be anticipated or controlled.

· Potential Internal Strengths (Helpful): Identify all key strengths associated with the competitive advantage including cost advantages, new and/or innovative services, special expertise and/or experience, proven market leader, and improved marketing campaigns.

· Potential Internal Weaknesses (Harmful): Identify all key areas that require improvement. Weaknesses focus on the absence of certain strengths, including absence of an Internet marketing plan, damaged reputation, problem areas for service, and outdated technology employee issues.

· Potential External Opportunities (Helpful): Identify all significant trends along with how the organization can benefit from each, including new markets, additional customer groups, legal changes, innovative technologies, population changes, and competitor issues.

FIGURE 2.3 Sample SWOT Analysis

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· Potential External Threats (Harmful): Identify all threats or risks detrimental to your organization, including new market entrants, substitute products, employee turnover, differentiating products, shrinking markets, adverse changes in regulations, and economic shifts.

The Five Forces Model—Evaluating Industry Attractiveness

LO 2.2 Describe Porter’s Five Forces Model and explain each of the five forces.

Michael Porter, a university professor at Harvard Business School, identified the following pressures that can hurt potential sales:

· Knowledgeable customers can force down prices by pitting rivals against each other.

· Influential suppliers can drive down profits by charging higher prices for supplies.

· Competition can steal customers.

· New market entrants can steal potential investment capital.

· Substitute products can steal customers.

Formally defined, Porter’s Five Forces Model analyzes 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. If the forces are strong, they increase competition; if the forces are weak, they decrease competition. This section details each of the forces and its associated MIS business strategy (see Figure 2.4).3

BUYER POWER

Buyer power is the ability of buyers to affect the price they must pay for an item. Factors used to assess buyer power include number of customers, their sensitivity to price, size of orders, differences between competitors, and availability of substitute products. If buyer power is high, customers can force a company and its competitors to compete on price, which typically drives prices down.

One way to reduce buyer power is by manipulating switching costs , costs that make customers reluctant to switch to another product or service. Switching costs include financial as well as intangible values. The cost of switching doctors, for instance, includes the powerful intangible components of having to build relationships with the new doctor and nurses, as well page 25as transferring all your medical history. With MIS, however, patients can store their medical records on DVDs or thumb drives, allowing easy transferability. The Internet also lets patients review websites for physician referrals, which takes some of the fear out of trying someone new.4

FIGURE 2.4 Porter’s Five Forces Model.

Companies can also reduce buyer power with loyalty programs , which reward customers based on their spending. The airline industry is famous for its frequent-flyer programs, for instance. Because of the rewards travelers receive (free airline tickets, upgrades, or hotel stays), they are more likely to be loyal to or give most of their business to a single company. Keeping track of the activities and accounts of many thousands or millions of customers covered by loyalty programs is not practical without large-scale business systems, however. Loyalty programs are thus a good example of using MIS to reduce buyer power.5