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
Potential
New Entrants

Bargaining Intra-Industry Bargaining

Power Rivalry Power
of Suppliers Strategic Business Unit of Buyers

Substitute
Products
and Services

Source: Michael E. Porter

“Forces Governing Competition in Industry
Harvard Business Review, Mar.-Apr. 1979 Figure 3-1
 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.
 Definitions
New 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 Options
According 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 products
and 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: Recruiting
hiring, 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 inform
strategic decisions about new technologies
and your industry.