This document provides an overview of key concepts for developing competitive advantages and strategies. It defines competitive advantage and discusses Porter's Five Forces model for evaluating industry attractiveness based on supplier power, threat of substitutes, threat of new entrants, rivalry among existing competitors, and bargaining power of buyers. It also describes Porter's three generic strategies of cost leadership, differentiation, and focus. Additionally, it explains value chain analysis for executing business strategies through primary and support activities. The learning outcomes cover explaining why competitive advantages are temporary, describing Porter's Five Forces model, comparing Porter's three generic strategies, and demonstrating value chain analysis.

1. Identifying Competitive
Advantages
CHAPTER 02
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
McGraw-Hill/Irwin

2. LEARNING OUTCOMES
1. Explain why competitive advantages are
temporary.
2. Describe Porter’s Five Forces Model and
explain each of the five forces.
3. Compare Porter’s three generic strategies.
4. Demonstrate how a company can add value
by using Porter’s value chain analysis.
2-2

3. IDENTIFYING COMPETITIVE
ADVANTAGES
• Business Strategy—A leadership plan that
achieves a specific set of goals or objectives
such as:
 Developing new products or services
 Entering new markets
 Increasing customer loyalty
 Attracting new customers
 Increasing sales
2-3

4. IDENTIFYING COMPETITIVE
ADVANTAGES
• Competitive Advantage—A product or service that an
organization’s customers place a greater value on than
similar offerings from a competitor
• First-Mover Advantage—Occurs when an organization
can significantly impact its market share by being first to
market with a competitive advantage
• Competitive Intelligence—The process of gathering
information about the competitive environment to
improve the company’s ability to succeed
2-4

5. THE FIVE FORCES MODEL
EVALUATING INDUSTRY ATTRACTIVENESS
• Pressures that can hurt potential sales:
– Knowledgeable customers can force down prices by
pitting rivals against each other
– Influential supplies can drive down profits by charging
higher prices for supplies
– Competition can steal customers
– New market entrants can steal potential investments
capital
– Substitute products can steal customers
2-5

7. SUPPLIER POWER
• Supplier Power—The suppliers’ ability to
influence the prices they charge for supplies
• Supply Chain—Consists of all parties involved
in the procurement of a product or raw material
2-7

8. THREAT OF SUBSTITUTE PRODUCTS OR
SERVICES
• Threat of Substitute Products or
Services—High when there are many
alternatives to a product or service and low
when there are few alternatives
2-8

9. THREAT OF NEW ENTRANTS
• Threat of New Entrants—High when it is
easy for new competitors to enter a
market and low when there are significant
entry barriers
– Entry Barrier—A feature of a product or service that
customers have come to expect and entering
competitors must offer the
same for survival
2-9

10. RIVALRY AMONG EXISTING
COMPETITORS
• Rivalry Among Existing Competitors—High
when competition is fierce in a market and low
when competitors are more complacent.
– Product Differentiation—Occurs when a company
develops unique differences in its products or
services with the intent to influence demand.
2-10

11. Business-level strategy: an
integrated and coordinated set of
commitments and actions the firm
uses to gain a competitive
advantage by exploiting core
competencies in specific product
markets
11
Business-Level Strategy

12. 12
Core Competencies and
Strategy
The resources and capabilities that have
been determined to be a source of
competitive advantage for a firm over its
rivals
An integrated and coordinated set of
actions taken to exploit core competencies
and gain a competitive advantage
Actions taken to provide value to customers
and gain a competitive advantage by
exploiting core competencies in specific,
individual product markets
Business-level
strategy
Strategy
Core
competencies

13. Fundamental constraints
• Scope
–What good or service to offer, to which
customers
• Value chain
–How and where to create the good or service
–How to distribute the good or service in the
marketplace(s)
13
Strategy

14. • Strategies create differences between the
firm’s position and its rivals
• Sources of differences? - perform activities
differently; perform different activities
• Two value-adding configurations (Porter,
1985)
–Low cost
–Differentiated
14
Source of competitive
advantage - Value chains

15. 15
Comparing Scope and Source of
Advantage
Competitive Advantage
Competitive
Scope
Cost Uniqueness
Broad
target
Narrow
target
Cost Leader Differentiator
Focused
Cost
Focused
Differentiator
Integrated
Cost
Leader/
Differentiator

16. An integrated set of actions designed to
produce or deliver goods or services at the
lowest cost relative to competitors
with features that are acceptable to
customers
–relatively standardized products
–features acceptable to many customers
–lowest competitive price
16
Cost Leadership Strategy

17. Cost saving actions required by this strategy:
–building efficient facilities
–tightly controlling production costs and
overhead
–minimizing costs of sales, R&D and service
–building efficient manufacturing facilities
–monitoring costs of activities provided by
outsiders
–simplifying production processes
17
Cost Leadership Strategy

18. 18
Cost Drivers
Discretionary decisions
 Product features,
performance
 Mix & variety of
products
 Service levels
 Small vs. large buyers
 Process technology
 Wage levels
 Product features
 Hiring, training,
motivation
Major Cost Drivers
 Economies of scale
 Learning/Spillovers
 Capacity utilization
 Integration
 Vertical Linkages
 Timing
 Location
 Political/regulatory
 Interrelationships
(corporate)
Implications?

19. 19
Value-Chain example:
Cost Leader

20. 1. How can an activity be performed
differently, eliminated, externalized?
2. How can linked value activities be
regrouped or reordered?
3. How can upstream/downstream
collaboration lower costs?
20
Questions Leading to
Lower Costs

21. • Exclusive focus on Mfg
• Misunderstand drivers (ABC useful)
• Failure to recognize/exploit linkages
(e.g., across the board cost reductions)
• Contradictions – (e.g., gain mkt share
through ES but allow product clutter; cross
subsidies)
21
Implementation Pitfalls

22. • Rivalry - competitors avoid price wars with
cost leaders
• Buyers – shift demand to you, increase
market power
• Suppliers – increased market power,
absorb cost increases (low cost position)
• Entrants – entry barriers (scale, learning)
• Substitutes – reinvest econ profit to
maintain advantage
22
Cost Leadership and the
Five Forces

23. • There can only be one cost leader
• Technological change can eliminate
cost advantage
• Spillovers lead to imitation
• Efficiency focus may create blind
spots re: customer preferences
23
Major Risks of Cost
Leadership Strategy

24. An integrated set of actions designed by a
firm to produce or deliver goods or services
that customers perceive as adding
value
–price may exceed what the firm’s target
customers are willing to pay
–Non-commodity products
–customers value differentiated features more
than they value low cost
24
Differentiation Strategy

25. 25
Some Differentiation Themes
• Unique taste
– Dr. Pepper
• Multiple features
– Microsoft Windows and Office
• Wide selection and one-stop shopping
– Home Depot and Amazon.com
• Reliable, superior service
– FedEx, Ritz-Carlton
• Spare parts availability
– Caterpillar

26. 26
Themes
• Prestige
– Rolex
• Quality manufacturing, few defects
– Honda, Toyota
• Technological leadership
– 3M Corporation, Intel
• Top-of-the-line image
– Ralph Lauren, Kiton

27. • Add downstream value
–lower buyer cost
–raise buyer performance
• Cost
–Add value to buyer’s value: reduce downstream
processing time, search time, transaction costs,
defect rates, direct costs, learning curves,
labor, space, installation, etc. (e.g., CRM
software)
27
Differentiation Strategy

28. Value: Increase performance of buyer’s
value chain (or consumer perception)
• Unique features, performance
• Downstream channels (e.g., Catepillar dealer
network)
• New technologies
• Quality of inputs
• Skill or know-how
• Information
28
Factors That Drive
Differentiation

29. Some differentiation actions required by
this strategy:
–develop new “systems” and processes
–signal and shape buyer perceptions
–quality focus
–capability in R&D
Implication - maximize human capital
contributions
29
Differentiation Strategy

30. 30
Value-Chain example:
Differentiation

31. 31
Differentiation and the
Five Forces
• Rivalry - brand loyalty to differentiated
products reduces price competition
• Buyers – differentiated products less price
elastic
• Suppliers – absorb price increases (higher
margins), pass along higher prices (buyer
loyalty)
• Entrants – must surpass proven products or
be equivalent at lower price
• Substitutes – diff raises switching costs

32. 32
Pitfalls of Differentiation
Strategies
• Differentiating on characteristics not
valued by buyers (e.g., HP)
• Over-differentiating
• Price premium is too high
• Failing to signal value
• Focusing on product instead of entire
value chain

33. A focus strategy must exploit a narrow
target’s differences from the balance of
the industry by:
–isolating a particular buyer group
–isolating a unique segment of a product
line
–concentrating on a particular geographic
market
–finding their “niche”
33
Focused Business-Level
Strategies

34. • Large firms overlook small niches
• Firm may lack resources to compete in
the broader market
• May be able to serve a narrow market
segment more effectively than can larger
industry-wide competitors
• Focus may allow the firm to direct
resources to certain value chain activities
to build competitive advantage
34
Factors Driving
Focus Strategies

35. • Firm may be “outfocused” by competitors
• Large competitor may set its sights on
your niche market
• Preferences of niche market may change
to match those of broad market
35
Major Risks of Focused
Strategies

36. A firm that successfully uses an integrated cost
leadership/differentiation strategy should be in a
better position to:
–adapt quickly to environmental changes
–learn new skills and technologies more quickly
–effectively leverage its core competencies while
competing against its rivals
36
Advantages of Integrated
Strategy

37. • Successful firms using this strategy have
above-average returns
• Firm offers two types of values to
customers
–some differentiated features (but less
than a true differentiated firm)
–relatively low cost (but now as low as
the cost leader’s price)
37
Benefits of Integrated
Strategy

38. • An integrated cost/differentiation business
level strategy often involves compromises
(neither the lowest cost nor the most
differentiated firm)
• The firm may become “stuck in the
middle” lacking the strong commitment
and expertise that accompanies firms
following either a cost leadership or a
differentiated strategy
38
Major Risks of Integrated
Strategy

39. 39
Rate of Profit
in Excess of the
Competitive Level
Industry
Attractiveness
Competitive
Advantage
Differentiation
Advantage
Cost
Advantage
Vertical Power
(buyer/seller)
Rivalry
Barriers to Entry
Brands
Product technology
Marketing
capabilities
Process technology
Plant size
Low-cost inputs
Firm size
Financial resources
Substitutability
Patents
Brands
Retaliatory
capability
Summary: Industry and Firm Effects on
Profit

40. ANALYZING THE AIRLINE INDUSTRY
• Perform a Porter’s Five Forces analysis of each
of the following for a company entering the
commercial airline industry:
– Buyer power
– Supplier power
– Threat of substitute products/services
– Threat of new entrants
– Rivalry among competitors
2-40

41. THE THREE GENERIC STRATEGIES
CHOOSING A BUSINESS FOCUS
• Broad cost leadership
• Broad differentiation
• Focused strategy
2-41

42. VALUE CHAIN ANALYSIS
EXECUTING BUSINESS STRATEGIES
• Business Process—A standardized set of
activities that accomplish a specific task, such
as a specific process
• Value Chain Analysis—Views a firm as a
series of business processes that each add
value to the product or service
2-42

43. VALUE CHAIN ANALYSIS
EXECUTING BUSINESS STRATEGIES
• Primary Value Activities:
– Inbound Logistics—Acquires raw materials and resources, and
distributes
– Operations—Transforms raw materials or inputs into goods and
services
– Outbound Logistics—Distributes goods and services to
customers
– Marketing and Sales—Promotes, prices, and sells products to
customers
– Service—Provides customer support
2-43

44. VALUE CHAIN ANALYSIS
EXECUTING BUSINESS STRATEGIES
• Support Value Activities:
– Firm Infrastructure—Includes the company format
or departmental structures, environment, and
systems.
– Human Resource Management—Provides
employee training, hiring, and compensation.
– Technology Development—Applies MIS to
processes to add value.
– Procurement—Purchases inputs such as raw
materials, resources, equipment, and supplies.
2-44

45. • Is an organization that uses computers and
IS to perform or support its activities eg.
IBM, Nike, AirAsia, FedEx, etc
• Digital Enterprise uses IT to accomplish
these objectives:
– Reach and engage customers more effectively
– Boost employee productivity
– Improve operating efficiency

46. • Information & entertainment products that are
digitized:
– E-book, graphics, audios, video, software
– Symbols, tokens & concepts.
• Tickets and reservations in airlines, hotels.
• Finacial instruments such as credit cards, stock and share
transactions.
– Processes & services. Eg: e-goverment, e-auctions,
bidding in e-bay, social network, virtual communites

47. New Economy vs.
Old Economy
Example Old New
Buying and selling textbook Visit the bookstore Visit web site for publishers
and retailers
Registering for classes Walk around campus to
Departments, Registrar’s
office, etc.
Access campus web site
Photography Buy film, use camera, take
picture, take it for processing
Use digital camera
Paying for Gasoline Fill up your car, go inside,
pay cash or credit card
Use speed pass token; wave
over the sensor and go
Paying for Transportation Pay cash, metal tokens Metro cards; electronic cards
Paying for goods Visit store, select item, pay,
go
Use self-service kiosks
Supplying commercial photos Use newspapers, paper,
catalog, or online
Use hub-like supply chain
with digitized picture

49. • Competitive Advantage: An advantage over
competitors in some measure such as cost, quality,
or speed, leads to control of a market and to larger-
than average profits.
• Competitive Strategy: A statement that identifies a
business’s approach to compete, its goals, and the
plans and policies that will be required to carry out
those goals.
• Strategic Information Systems (SIS) provide a
competitive advantage by helping an organization to
implement its strategic goals and to increase its
performance and productivity.

51. • The Five Forces Model helps business
people understand the relative
attractiveness of an industry and the
industry’s competitive pressures in terms of
1. Buyer power
2. Supplier power
3. Threat of substitute products or services
4. Threat of new entrants
5. Rivalry among existing competitors
1-51

53. Threat of New Entrants: New firms that may
enter a companies market.
• Threat of entry of new competitors is high
when it is easy to enter a market and low
when significant barriers to entry exist.
• Some industries have low barriers to
entry:
• E.g., food industry versus microchip
industry
Porter’s Five Forces (1)

54. Bargaining Power of Buyers: Can
customers easily switch to competitor’s
products?
• The bargaining power of buyers is high
when buyers have many choices from whom
to buy and low when buyers have few
choices.
Porter’s Five Forces (2)

55. Bargaining Power of Suppliers: The more
suppliers a firm has, the greater control it can
exercise over suppliers.
• The bargaining power of suppliers is high
when buyers have few choices from whom to
buy and low when buyers have many choices.
1-55
Porter’s Five Forces (3)

56. Threat of Substitutes: Substitutes
customers can purchase if your prices too
high.
• E.g., Internet music service versus CDs.
• The threat of substitute products or
services is high when there are many
substitutes for an organization’s products or
services and low where there are few
substitutes.
Porter’s Five Forces (4)

57. Rivalry of competitors: current competitors for
the same product.
• The rivalry among firms in an industry is high
when there is an intense competition among
many firms in a n industry and is low when the
competition is among fewer firms and is not as
intense
Porter’s Five Forces (5)

58. Competitive Force IT Influence on Competitive Force
Threat of New Entrants
(low)
Zara’s IT supports its tightly-knit group of designers, market specialists, production managers and production
planners. New entrants are unlikely to provide IT to support relationships that have been built over time. Further it
has a rich information repository about customers that would be hard to replicate.
Bargaining Power of
Buyers (low)
With its constant infusion of new products, buyers are drawn to Zara stores. Zara boasts more than 11,000 new
designs a year, whereas competitors typically offer only 2,000 – 4,000. Further, because of the low inventory that
the Zara stores stock, the regulars buy products they like when they see them because they are likely to be gone
the next time they visit the store. More recently Zara has employed laser technology to measure 10,000 women
volunteers so that it can add the measurements of ‘real’ customers into its information repositories. This means
that the new products will be more likely to fit Zara customers.
Bargaining Power of
Suppliers (low)
Its computer-controlled cutting machine cuts up to 1000 layers at a time. It then sends the cut materials to
suppliers who sew the pieces together. The suppliers’ work is relatively simple and many suppliers can do the
sewing. Thus, the pool of suppliers is expanded and Zara has greater flexibility in choosing the sewing companies.
Further, because Zara dyes 50% of the fabric in its plant, it is less dependent on suppliers and can respond more
quickly to mid-season changes in customer color preferences.
Threat of Substitute
Products (low)
Industry competitors long marketed the desire of durable, classic lines. Zara forces on meeting customer
preferences for trendy, low-cost fashion. It has the highest sales per square foot of any of its competitors. It does
so with virtually no advertising and only 10% of stock is unsold. It keeps its inventory levels very low and offers
new products at an amazing pace for the industry (i.e., 15 days from idea to shelves). Zara has extremely efficient
manufacturing and distribution operations.
Industrial Competitors
(high)
Zara offers extremely fashionable lines that are only expected to last for approximately 10 wears. It offers trendy,
appealing apparel at a hard-to-beat price.
Figure 2.4 Application of five competitive forces model for Zara.

59. Strategies
Operational effectiveness
Niche
Customer-
orientation
Growth
Entry barrier strategy
Strategies for competitive
advantage
Innovation
Alliance
Lock in customers or suppliers
Increase switching costs
Cost Leadership Differentiation
Alliance
Cost Leadership
Alliance
Cost Leadership
Alliance
Cost Leadership
Strategies
Differentiation
Strategies
Niche
Differentiation
Strategies
Increase switching costs
Niche
Differentiation
Strategies
Innovation
Increase switching costs
Niche
Differentiation
Strategies
Entry barrier strategy
Innovation
Increase switching costs
Niche
Differentiation
Strategies
Growth
Entry barrier strategy
Innovation
Increase switching costs
Niche
Differentiation
Strategies
Lock in customers or suppliers
Growth
Entry barrier strategy
Innovation
Increase switching costs
Niche
Differentiation
Strategies
Lock in customers or suppliers
Growth
Entry barrier strategy
Innovation
Increase switching costs
Niche
Differentiation
Strategies
Operational effectiveness
Lock in customers or suppliers
Growth
Entry barrier strategy
Innovation
Increase switching costs
Niche
Differentiation
Strategies
Alliance
Operational effectiveness
Lock in customers or suppliers
Growth
Entry barrier strategy
Innovation
Increase switching costs
Niche
Differentiation
Strategies
Cost Leadership
Alliance
Operational effectiveness
Lock in customers or suppliers
Growth
Entry barrier strategy
Innovation
Increase switching costs
Niche
Differentiation
Strategies
Alliance
Operational effectiveness
Customer or supplier lock-in
Growth
Entry barriers
Innovation
Increase switching costs
Niche
Differentiation
Customer
orientation

60. 1. Cost Leadership – Produce products and/or
services at the lowest cost in the industry. Help
suppliers or customers reduce costs.
2. Differentiation – Offer different products,
services or product features.
3. Niche strategy – Select a narrow-scope
segment (niche market) and be the best in
quality, speed, or cost in that market.
Competitive Strategies

61. 4. Growth Strategy – Increase market share,
acquire more customers, or sell more types of
products.
5. Innovation – Introduce new products and
services, add new features to existing products
and services or develop new ways to produce
them.

62. 6. Entry-barriers – Create barriers to entry. By
introducing innovative products or using IT to
provide exceptional service, companies can create
barriers to entry from new entrants. A competing
organization must offer this feature in order to
survive in the marketplace (e.g., legal requirements
such as admission to the bar to practice law).
7. Customer-orientation – Concentrate on making
customers satisfaction. Web-based systems are
particularly effective in this area because they can
create a personalized, one-to-one relationship with
each customer

63. 8. Alliance Strategy – Establish linkages and alliances
with customers, suppliers, competitors, consultants,
and other companies includes mergers, acquisitions,
joint ventures, virtual companies.
9. Operational effectiveness strategy – Improve the
manner in which internal business processes are
executed so that a firm performs similar activities
better than rivals. Such improvements increase
quality, productivity, and employee and customer
satisfaction while decreasing time to market.

64. 10. Time strategy – Treat time as a resource, then
manage it and use it to the firm’s advantage.
11. Customer or supplier lock-in – Encourage
customers or suppliers to stay with you rather than
going to competitors. Reduce customers’
bargaining power by locking them in.
12. Increase switching costs strategy – Discourage
customers or suppliers from going to competitors
for cost reasons.in money and time, imposed by a
decision to buy elsewhere (e.g., contracts with
smartphone providers

65. • View the firm as a chain of basic activities that add value
to its products and services
– Primary processes directly relate to manufacturing or
delivering products
– Support processes support the day-to-day running of
the firm and indirectly contribute to products or
services
• A sequence of activities through which the
organization’s inputs, whatever they are, are
transformed into more valuable outputs, whatever they
are

66. Through the intelligent use of IT, a business can
increase its competitive advantage.
The Value Chain and
Strategic IS

67. Value chain analysis
• Determine where value is created along the
value chain and further increase its competitive
strengths.
• Understand the key activities within an industry
or company and how technologies might help in
supporting them.
• Make sure that the whole process in the value
chain is smooth, effective, efficient and does not
waste cost.

68. Primary Activities

69. Using IT/IS in the Value Chain

70. A sample of an Airline company’s value chain

71. Organization that respond in a timely manner to
environmental changes.
Process of becoming an adaptive organization
1. Recognize environmental and organizational
changes as quickly as they occur or even
before they occur
2. Deal with changes properly and correctly
3. Not wait for competitors to introduce changes
4. Have a scalable and appropriate IT architecture
5. Develop an innovation culture.

72. • IT function directly supports the business objectives of
the organization through the tight integration of the IT
function with the organization’s strategy, mission, and
goals.
• Six characteristics of excellent Business-IT Alignment:
– Organizations view IT as an engine of innovation that
continually transforms the business, often creating new
revenue streams.
– Organizations view their internal and external customers and
their customer service function as supremely important.
– Organizations rotate business and IT professionals across
departments and job functions.

73. – Organizations provide overarching goals that are
completely clear to each IT and business employee.
– Organizations ensure that IT employees understand
how the company makes (or loses) money.
– Organizations create a vibrant and inclusive
company culture.
• However, many organizations failed:
– Business managers and IT managers have different
objectives
– The business and IT departments are ignorant of the
other group’s expertise
– A lack of communication