IT and Competitive AdvantagesLEARNING OUTCOMES13-Min Porter’s Harvard Business School InterviewCOMPARATIVE ADVANTAGECOMPETITIVE ADVANTAGEGAINING COMPETITIVE ADVANTAGEPORTER’S FIVE FORCES MODELRivalry Among Existing competitorsBuyer PowerSupplier PowerThreat of SubstitutesThreat of New EntrantsGeneric Competitive Strategies5 Generic Competitive StrategiesFive-Forces Model VideosSUMMARY QUESTIONSREVIEW EXERCISESREVIEW EXERCICESSlide 19IT and Competitive AdvantagesSeptember 4, 2014LEARNING OUTCOMESUnderstand each of the five forces in Porter’s Five Forces ModelDetermine kind of IT that help deal with the 5 forces and gain competitive advantage213-Min Porter’s Harvard Business School InterviewMichael Porter: Long-term strategies in a down turn (13 mins)http://www.youtube.com/watch?v=mwc073nNl3Q Michael Porter – Innovation & Competitiveness P1 @ GCF 2011 (20 mins)http://www.youtube.com/watch?v=NZt6kUKE-88&feature=relatedMichael Porter – Innovation & Competitiveness P2 @ GCF 2011 (20 mins)http://www.youtube.com/watch?v=EijpXhrj8N8&feature=relmfuCOMPARATIVE ADVANTAGEDavid Ricardo (1817) On the Principles of Political Economy and Taxation introduced the theory of comparative advantage-Using machinery, an English worker can make 2 shoes and 2 shirts in an hour -A Portuguese worker can make either 2 shoes or 4 shirts in an hour without machinery The less industrialized country, Portugal, has a comparative advantage in shoes for trade purpose4COMPETITIVE ADVANTAGETo survive and thrive an organization must have a competitive advantagea strategic advantage one business has over its rivals within its competitive industry.an attribute (or combination of attributes) acquired or developed by a business allowing it to outperform its competitors.Examples: —distinctive product that customers place a greater value in—Unique service that stands out—Access to rare natural resources—highly skilled workers, etc.5GAINING COMPETITIVE ADVANTAGEOrganizations watch their competition through environmental scanninge.i., the acquisition and analysis of events and trends in the environment external to an organizationSocrates Technology-based Competitive Strategy system (1983-1990)SWOT analysis – Strengths, Weaknesses, Opportunities, Threats (Stanford Research Institute 1960-70)Porter’s Five-Force ModelPorter, M.E. (1979) How Competitive Forces Shape Strategy, Harvard business Review, March/April 1979Porter, Michael (1985) Competitive Advantage, Free Press, New York.6PORTER’S FIVE FORCES MODEL7Threat of New Entrants Entry barriers- Customers’ switching cost- Capital Requirements- Access to distribution channels- Economies of scale Industry Growth rateBuyers Power Buyers’ switching Cost Buyers concentration Threat of backward integration Threat of forward integration Buyers volumeSuppliers Power Suppliers concentration Cost of switching supplier Substitute inputs Threat of forward integrationThreat of Substitutes Relative quantity of substitutes Relative price of substitutes Buyers’ switching costRivalry # of competitors & industry concentration Buyers volume Market growth Exit barriers Buyers’ switching costRivalry Among Existing competitorsIndustry Concentration–% of market held by largest firms–Bureau of Census’ Concentration Ratios (CR)–CRs measure market share held by the 4, 8, 25, 50 largest firms in sector–High CR  Few competitors, less attractive industry, less rivalry(?)Market growth–Slow market growth  Increased rivalryExit barriers–High cost abandoning a product Firm must competeSwitching cost–Low buyer switching cost More intense rivalry8Rivalry # of competitors & Industry concentration Buyers volume Market growth Exit barriers Buyers’ switching costU.S wireless subscribers: 327M. What are the largest U.S cell phone carriers?Buyer PowerAssessed by analyzing the ability of buyers to directly impact the price they are willing to pay for an item.High Buyers’ switching cost Less Buyer powerBuyers concentrationFew buyers with large market  share More buyer powerBuyer’s Threat of backward integrationExample: Large automakers vs. Tire manufacturersSeller’s Threat of forward integrationExample: Movie producers vs. Movie theaters9Buyers Power Buyers’ switching Cost Buyers concentration Threat of backward integration Threat of forward integration Buyers volumeSupplier PowerAssessed by the suppliers’ ability to directly impact the price they are charging for suppliesHigh Supplier concentration  More supplier powerExample: Drug industry vs. HospitalsHigh cost to switch supplier  More supplier powerPresence of substitute inputs  Less supplier power10Suppliers Power Suppliers concentration Cost of switching supplier Substitute inputs Threat of forward integrationThreat of SubstitutesMore substitute products or services More demand elasticity  More competitionAffordable substitutes  More switchingLow switching cost  More intense competition11Threat of Substitutes Relative quantity of substitutes Relative price of substitutes Buyers’ switching costThreat of New EntrantsHigh when it is easy for new competitors to enter a market Low when entry barriers are highEntry barriers are high withsignificant capital requirementshigh switching costHard to access distribution channels12Treat of New Entrants Entry barriers- Customers’ switching cost- Capital Requirements- Access to distribution channels- Economies of scale Industry Growth rateGeneric Competitive StrategiesThree basic strategies for pursuing competitive advantageCost leadership–Exploiting all sources of cost advantage while complying with industry normsDifferentiation–Offering unique and distinctive product/service through innovationFocus–Targeting segments (niche markets) and exploiting the under-performance of broad competitors in the segments through cost leadership or differentiation135 Generic Competitive StrategiesTYPE OF COMPETITIVE ADVANTAGE THAT MAY BE PURSUEDLower Cost DifferentiationMARKET TARGETBroad buyersegmentNarrow buyer segmentOVERALL COSTLEADERSHIPSTRATEGYBROAD DIFFERENTIATIONSTRATEGYFOCUSEDDIFF.STRATEGYFOCUSEDLOW-COSTSTRATEGYBESTCOSTPROVIDERSTRATEGYPORTER, 1980.Best Cost Provider: Emphasis on low cost and