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SECTION 1.2
BUSINESS STRATEGY
This section discusses how an organization can identify competitive
advantages using tools such as Porter’s Five Forces, three generic strategies,
and value chains. Gaining competitive advantages are critical for
organizations. Organizations also must understand that competitive
advantages are typically temporary since competitors are quick to copy
competitive advantages. For example:
United was the $rst airline to o%er a competitive advantage with its
frequent &yer mileage (this $rst-mover advantage was temporary)
Sony had a competitive advantage with its portable stereo systems (this
$rst-mover advantage was temporary)
Microsoft had a competitive advantage with its unique Windows operating
system
Ask your students if Microsoft still has a competitive advantage with its
Windows operating system
Ans: Perhaps – primarily due to its $rst-mover advantage since it is
di0cult to switch operating systems and users face interoperability
issues if they are using di%erent operating systems at the same
organization.
How many students in your class are currently using Windows?
What are the competitors to Windows? Ans: Linux and Macintosh
Why are there only three primary competitors (Microsoft, Macintosh,
and Linux) in this large operating system market?
LEARNING OUTCOMES
Learning Outcome 1.3: Explain why competitive advantages are
temporary.
A competitive advantage is a feature of a product or service on which
customers place a greater value than they do on similar o%erings from
competitors. Competitive advantages provide the same product or service
either at a lower price or with additional value that can fetch premium prices.
Unfortunately, competitive advantages are typically temporary, because
competitors often quickly seek ways to duplicate them. In turn, organizations
must develop a strategy based on a new competitive advantage. Ways that
companies duplicate competitive advantages include acquiring the new
technology, copying business processes, and hiring away employees.
Learning Outcome 1.4: Identify the four key areas of a SWOT
analysis
A SWOT analysis evaluates an organization’s strengths, weaknesses,
opportunities, and threats to identify signi$cant in&uences that work for or
against business strategies. Strengths and weaknesses originate inside an
organization or internally. Opportunities and threats originate outside an
organization or externally and cannot always be anticipated or controlled.
Learning Outcome 1.5: Describe Porter’s Five Forces Model and
explain each of the 4ve forces.
Porter’s Five Forces Model analyzes the competitive forces within the
environment in which a company operates, to assess the potential for
pro$tability in an industry.
Buyer power is the ability of buyers to a%ect the price they must pay for
an item.
Supplier power is the suppliers’ ability to in&uence the prices they charge
for supplies (including materials, labor, and services).
Threat of substitute products or services is high when there are many
alternatives to a product or service and low when there are few
alternatives from which to choose
Threat of new entrants is high when it is easy for new competitors to
enter a market and low when there are signi$cant entry barriers to
entering a market
Rivalry among existing competitors is high when competition is $erce in a
market and low when competition is more complacent
Learning Outcome 1.6: Compare Porter’s three generic strategies.
Organizations typically follow one of Porter’s three generic strategies when
entering a new market: (1) broad cost leadership, (2) broad di%erentiation,
(3) focused strategy. Broad strategies reach a large market segment.
Focused strategies target a niche market. Focused strategies concentrate on
either cost leadership or di%erentiation.
Learning Outcome 1.7: Demonstrate how a company can add value
by using Porter’s value chain analysis.
To identify competitive advantages, Michael Porter created value chain
analysis, which views a $rm as a series of business processes that each add
value to the product or service. The goal of value chain analysis is to identify
processes in which the $rm can add value for the customer and create a
competitive advantage for itself, with a cost advantage or product
di%erentiation. The value chain groups a $rm’s activities into two categories
—primary value activities and support value activities. Primary value
activities acquire raw materials and manufacture, deliver, market, sell, and
provide after-sales services. Support value activities, along the top of the
value chain in the $gure, include $rm infrastructure, human resource
management, technology development, and procurement. Not surprisingly,
these support the primary value activities.
CLASSROOM OPENER
GREAT BUSINESS DECISIONS – Cyrus McCormick’s Reaper
On a hot summer day in 1831, several dozen farmers and hired laborers
gathered in a wheat $eld in Virginia to watch a horse-drawn wood-and-iron
device mow down rows and rows of golden wheat. On this day,
twenty-two-year-old Cyrus McCormick demonstrated the reaper that his
father invented and changed history as the mechanization of farming began.
Soon the process of industrialization began, which turned the nation’s
economy into the world’s most productive workforce. As the historian William
Hutchinson noted, “Of all the inventions during the $rst half of the
nineteenth century which revolutionized agricultures, the reaper was
probably the most important.”
Interestingly, the McCormicks were not the only individuals to build and
develop a reaper. In fact, many other companies and individuals developed
similar technology; however, Cyrus McCormick invented the business of
making reapers and selling them to the farmers of America and foreign
countries. His real genius was in the area of gaining and protecting patents
for his technology. McCormick turned the reaper into a commercially viable
product and introduced many new business practices including free trials,
money-back guarantees, and installment payment plans.
CLASSROOM OPENER
GREAT BUSINESS DECISIONS – Henry Luce Decides to Rank
Companies in the Fortune 500
Henry Luce founded Time magazine in 1923 and Fortune magazine in 1929.
Luce decided to create a ranking of America’s top 500 companies, called The
Fortune 500, which has served as the corporate benchmark for the twentieth
century – as well as being a clever marketing tactic for the magazine. The
Fortune 500 remains a powerful barometer of who’s up and down in the
corporate world. It is also a brilliant marketing tool since every single time its
name is mentioned, so is the name of the magazine. However, being ranked
on the Fortune 500 does not guarantee that the organization will achieve
future success, and its measures of current achievement can also be limited
and a bit confusing.
BusinessWeek magazine created a similar ranking by introducing its biannual
ranking of business schools. The issue routinely outsells all other issues of
the magazine in the year.
CLASSROOM EXERCISE
Porter Video on YouTube
Great YouTube video with Michael Porter on The Five Competitive Forces that
Shape Strategy.
http://www.youtube.com/watch?v=5R81uCoGby4
The article that Michael refers to in this video can be found online...
http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?
_requestid=190696&ml_subscriber=true&ml_action=get-article&ml_issueid=
BR0801&articleID=R0801E&pageNumber=1
Michael Porter – The Five Forces that Shape Strategy (10 Mins)
http://www.youtube.com/watch?v=mYF2_FBCvXw
Michael Porter - Global Competitiveness Report 2007 (15 Mins)
http://www.youtube.com/watch?v=kzn9-M2umFQ
Michael Porter with Charlie Rose (2 Mins)
http://www.youtube.com/watch?v=q8NZfbcNMrM
Michael Porter: Long-term strategies in a down turn (13 Mins)
http://www.youtube.com/watch?v=mwc073nNl3Q
Institute for Strategy and Competitiveness
Ask your students to visit Michael Porter’s Institute for Strategy and
Competitiveness. There are numerous articles, videos, book excerpts, etc.
for the students to dig into Porter. http://www.isc.hbs.edu/
Strategy and the Internet
Discuss Porter’s HBS article Strategy and the Internet by Michael Porter.
http://hbswk.hbs.edu/item/2165.html
CLASSROOM EXERCISE
Strategy and the Internet
Ask your students to visit Michael Porter’s Institute for Strategy and
Competitiveness. There are numerous articles, videos, book excerpts, etc. for
the students to dig into Porter. http://www.isc.hbs.edu/
Strategy and the Internet
Discuss Porter’s HBS article Strategy and the Internet by Michael Porter.
http://hbswk.hbs.edu/item/2165.html
Have your students discuss the importance of technology on business
strategy.
oSince this article was written in 2001 ask your students the
following:
oWhat can be extrapolated to today's competitive environment?
oWhat has become obsolete about the Internet and strategy?
CLASSROOM EXERCISE
Analyzing Porter’s Five Forces
Porter's Five Forces is an easy framework to understand and o%ers a quick
way to analyze a market. Porter’s Five Forces was introduced in the text and
you can review the below examples to ensure you have a solid
understanding of each force. For this assignment, choose a product from the
following list and perform a Porter’s Five Forces analysis. Feel free to use the
below Porter’s Five Forces template for your assignment.
Desktop Computer
Address Book
Walkman
VHS Player
Polaroid Camera
Telephone
Textbook
Be sure to add in examples of loyalty programs or switching costs you could
implement to help retain your market share.
Sample Analysis for Airline Industry
Sample Analysis for Milk
CLASSROOM EXERCISE
Debate Carr’s Does IT Matter
DOES IT MATTER DEBATE: Ask your students to read both of the below
articles and debate if IT matters.
Nicholas Carr - IT Doesn’t Matter
http://www.nicholasgcarr.com/articles/matter.html A great way to start
o% your course is to discuss Carr’s famous article: IT Doesn’t Matter –
which can be read on his blog.
http://www.roughtype.com/archives/2007/01/it_doesnt_matte.php
IT Does Matter – by McFarlan and Nolan
http://hbswk.hbs.edu/item/3637.html The rebuttal to Carr’s article.
Create a classroom debate by breaking your students into groups and have
them create an argument for or against Nicholas Carr’ statement “IT Doesn’t
Matter.”
CORE MATERIAL
The core chapter material is covered in detail in the PowerPoint slides. Each
slide contains detailed teaching notes including exercises, class activities,
questions, and examples. Please review the PowerPoint slides for detailed
notes on how to teach and enhance the core chapter material.
