Competitive Strategy

• Thinking comes from Michael Porter of Harvard

• Late 70’s developed 3 models to help us think about strategy.

– 5 Force Model

– Value Chain

– Generic Strategies

Competitive Advantage

• Creating and sustaining superior performance.

• When a company can sustain profits that exceed the average for the industry.

• Example: Google’s

Awareness of competitive forces can

help a company stake out a position

in its industry that is less vulnerable

to attack.

Porter Competitive Model

Intra-Industry Rivalry

Strategic Business Unit

BargainingPower

of Buyers

BargainingPower

of Suppliers

Substitute Products

and Services

PotentialNew Entrants

Figure 3-1

Source: Michael E. Porter“Forces Governing Competition in IndustryHarvard Business Review, Mar.-Apr. 1979

5 Forces

• Bargaining Power of Buyers (customers): Ability of the customers to put the firm under pressure to reduce prices.

• Bargaining Power of Suppliers: Power of suppliers to control prices.

• Intra-Industry Rivalry: Competitiveness of a given industry. Threat of New Entrants: Profitable industries attract new competitors. (Amazon producing TV shows)

• Threat of substitute products and services: Other entities that consumers can use, instead of your product. (bike instead of car)

A Buyer Has Power If:

1. It has large, concentrated buying power that enables

it to gain volume discounts and/or special

terms or services.2. What it is buying is standard or undifferentiated and

there are multiple alternative sources.

3. It earns low profit margins so it has great incentive

to lower its purchasing costs.

4. It has a strong potential to backward integrate.

5. The product is unimportant to the quality of the

buyers’ products or services.

A Supplier Has Power If:

1. There is domination of supply by a few companies.

2. Its product is unique or at least differentiated.

3. It has built up switching costs.

4. It provides benefits through geographic proximity to

its customers.

5. It poses a definite threat to forward integrate into

its customers’ business.

6. A long time working relationship provides unique

capabilities.

DefinitionsNew Entrant:

An existing company or a startup that has not previously competed with the SBU in its geographic market. It can also be an existing company that through a shift in business strategy begins to compete with the SBU.

Substitute Product or Service:

An alternative to doing business with the SBU. This depends on the willingness of the buyers to substitute, the relative price/performance of the substitute and/or the level of the switching cost.

Possible Barriers to Entry

• Economies of scale.

• Strong, established cost advantages.

• Strong, established brands.

• Proprietary product differences.

• Major switching costs.

• Limited or restrained access to distribution.

• Large capital expenditure requirements.

• Government policy.

• Definite strong competitor retaliation.

Entry Barriers• Creating a barrier to entry to would be

competitors.

• Southern California Edison– Utility, captive market

– To open an electric company would require a massive infrastructure

• Bar– Liquor license is a cost that might prohibit entrants

• Online mega-store like Amazon– New entrants cannot compete with branding,

infrastructure and supply chain

Switching Costs

• Switching Cost – The cost of a customer to switch to another product or service.

• Used to reduce the threat of new entrants and substitute products.

• Increasing Switching Costs

– Deals for Staying with You (loyalty programs)

– Memberships

– Contracts

Substitute Threats

• Buyer propensity to substitute.

• Relative price/performance of substitutes.

• Switching costs.

Strategy OptionsAccording to Michael Porter

Primary Strategies

1. Differentiation

2. Least Cost

Supporting Strategies

1. Innovation

2. Growth

3. Alliance

Two Strategic Objectives

• Create effective links with customers and suppliers

• Create barriers to new entrants and substitute products

Strategies and Forces

Value Chain

• Developed by Michael Porter but different from competitive model because it focuses within the company.

• Analyzes the cross-functional flow of products or services within an organization that add value to customers.

The Value Chain

Value Chain (contd.)

• Inbound Logistics: raw materials brought into the company

• Operations: any part of the business that converts raw materials into products and services

• Outbound Logistics: Getting the productsand services to the customers.

Value Chain (contd.)

• Sales/Marketing: Entire buyers to purchase products and services.

• Service: Support of products and services that customers have purchased.

• Firm Infrastructure: All the organizational functions that support the business. Technology connected/supported.

• Human Resources Management: Recruitinghiring, and retaining employees.

Value Chain (contd.)

• Technology Development: Advances and innovations adopted to add value to the company.

• Procurement: Acquiring raw materials for production/operations.

Value Chain and IS

• The Value Chain can be used to determine where IS can strengthen the flow of primary and support activities within an organization.

• Every segment of an organization needs IT and IS to be competitive. So this model is essential to visualizing the flow of activities within segments through the use of IS and IT.

Using Information Systems for Competitive Advantage

• Business Process Management Systems – Control of processes gives competitive advantage

because ___.

• Electronic Data Interchange– Automation of the value chain gets products to

market quicker.

– Allows for integration of partners in the value chain.

– Allows for flexible value chain because of automation.

Competitive Advantage (contd.)

• Collaborative Systems – Easier ways for people to collaborate in work and processes.

– Google Drive

– MS SharePoint

– Cisco WebEx

– Atlassian Confluence

– IBM Lotus Notes

Competitive Advantage (contd.)

• Decision Support Systems

– Assist with decision making at all levels, particularly semi-structured.

– Data Analytics

– Internally: Having centralized data can give opportunities to see what the data is telling you.

– Externally: Data sources can informstrategic decisions about new technologiesand your industry.