Identifying Competitive Advantage

What is competitive advantage?

• 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.
• Then, the company should start the new competitive advantage.

Managers use three common tools to analyze competitive intelligence and develop competitive advantages including : 

1. The Five Forces Model - Evaluating Industry Attractiveness

Michael Porter's Five Forces Model is useful tool to aid organization in challenging decision whether to join a new industry or new segment. 

Porter's Five Forces Model

Micheal Porter's

BUYER POWER

• The ability of buyers to affect the price they must pay for an item.
• High - When buyers have many choices of whom to buy.
• Low - When their choices are few. 
• To reduce buyer power is by manipulating switching costs, costs that make customers reluctant to switch to another product or services.
• Using loyalty programs, which reward customers based on their spending. For example, in travel industry by rewarding them with free airline tickets or hotel stays.

SUPPLIER POWER

• The ability to influence the prices they charge for supplies (including materials, labor, and services)
• Supplier power is high when buyers have few choices of whom to buy from.
• For example, patient who need to purchase cancer-fighting drugs have no power over price and must pay because there are few available alternatives.
• Supplier power is low when their choices are many.

THREAT OF SUBSTITUTE PRODUCTS OR SERVICES 

• High - When there are many alternatives to a product or service
• Low -  There are few alternatives from which to choose.
• For example, travelers have numerous substitutes for airline transportation including automobiles, trains, and boats.  

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.
• An entry barrier is a feature of a product or service that customers have come to expect and entering competitors must offer the same for survival.
• For example, a new bank must offer its customers an array of MIS- enabled services, including ATMs, and online bill paying ( Maybank and CIMB) 

      

       2. The Three Generic Strategies - Choosing A Business Focus

Porter's Three Generic Strategies

COST 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. 

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.

FOCUSED STRATEGY

• Target to a niche market.
• Concentrates on either cost leadership or differentiation.

      3. Value Chain Analysis - Executing Business Strategies

The Value Chain 

SUPPLY CHAIN 

• A chain or series of processes that adds value to product & service for customer.
• Add value to its products and services that support a profit margin for the firm.