Chapter 3: Strategic Initiatives for Implementing Competitive Advantages

Strategic Initiative

Organizations can undertake high-profile strategic initiatives including:

• Supply chain management (SCM)
• Customer relationship management (CRM)
• Business process reengineering (BPR)
•  Enterprise resource planning (ERP)

 Supply Chain Management (SCM)

Supply Chain Management involves the management of information flows between and among stages in a supply chain to maximize total supply chain effectiveness and profitability. Four basic components of supply chain management include:

1.  Supply Chain Strategy is the strategy for managing all the resources required to meet customer demand for all products and services.  
2. Supply Chain Partners are the partners chosen to deliver finished products, raw materials, and services including pricing, delivery, and payment processes along with partner relationship monitoring metrics.  
3. Supply Chain Operation is the schedule for production activities including testing, packaging, and preparation for delivery.
4.  Supply Chain Logistics is the product delivery processes and elements including orders, warehouses, carriers, defective product returns, and invoicing.

An organization will generate an efficient operation when it applies these steps and information flows among the members in the organizational.

Wal-Mart and Procter & Gamble (P&G) SCM

 

Wal-Mart and P&G implemented a tremendously successful Supply Chain Strategy (SCM). The system links Wal-Mart’s distribution centers directly to P&G’s manufacturing centers. Whenever, a Wal-Mart customer purchases a P&G product, the system will send a message directly to P&G’s factory for a reorder. 

The effective and efficiencies SCM systems for an organization

• Decrease the power of its buyers
• Increase its own supplier power
• Increase switching costs to reduce the threat of substitute products or services
• Create entry barriers thereby reducing the threat of new entrants
• Increase efficiencies while seeking a competitive advantage through cost leadership

The effective and efficiencies SCM systems effect on Porter’s Five Forces

 Customer Relationship Management (CRM)

Customer Relationship Management (CRM) involves managing in all aspects of a customer’s relationship with an organization to increase customer loyalty and retention and an organization's profitability. The systems help organizations understand and manage their customers well.

Many organizations, such as Charles Schwab and Kaiser Permanente, have obtained great success through the implementation of CRM systems.

For Charles Schwab, he had recouped the cost of a multimillion-dollar CRM system in less than 2 years. The system allowed Schwab to segment his customers in terms of serious and non-serious investors. The CRM system looked for customers that had automatic withdrawal from a bank account as a sign of a serious investor. The CRM system looked for stagnant balances as a sign of a non-serious investor. Charles Schwab could then focus efforts on selling to serious investors, and spend less time attempting to sell to non-serious investors. While for Kaiser, he used CRM to enforce more rigorous eye-screening for diabetic patients.

CRM is not just technology but a strategy, process and business goal that an organization must embrace on an enterprise wide level. Although CRM has many technical components, it is actually a process and business goal simply enhanced by technology. Organizations must first decide that they want to build strong customer relationships and then they determine how IT can support their goals.

CRM overview

Business Process Reengineering (BPR)

Business process is a standardized set of activities that accomplish a specific task such as processing a customer’s order. Business process reengineering (BPR) is the analysis and redesign of workflow within and between enterprises. The purpose of BPR is to make all business processes best-in-class. In the Reengineering the Corporation, the book that is written by Michael Hammer and James Champy there are seven principles for BPR that are recommended.

Finding Opportunity using BPR

(First Case) The diagram below shows the different ways to travel the same road.

A company could improve the way that it travels the road by moving from foot to horse and then from horse to car. However, true BPR would look at taking a different path. A company could forget about traveling on the same old road and use an airplane to get to its final destination. Companies often follow the same indirect path for doing business, not realizing there might be a different, faster, and more direct way of doing business.

(Second Case) Progressive Insurance Mobile Claims Process based on the diagram provided below.

 

Radical and fundamentally new business processes enabled Progressive Insurance to slash the claims settlement from 31 days to four hours. Typically, car insurance companies follow this standard claims resolution process: The customer gets into an accident, has the car towed, and finds a ride home. The customer then calls the insurance company to begin the claims process, which usually takes over a month (refers the left Figure). 

Progressive Insurance improved service to its customers by offering a mobile claims process. When a customer has a car accident he or she calls in the claim on the spot. The Progressive claims adjustor comes to the accident and performs a mobile claims process, surveying the scene and taking digital photographs. The adjustor then offers the customer on-site payment, towing services, and a ride home. (refers the right Figure).

A true BPR effort does more for a company than simply improve it by performing a process better, faster, and cheaper. Progressive Insurance’s BPR effort redefined best practices for its entire industry. The figure displays the different types of change an organization can achieve, along with the magnitude of change and the potential business benefit.

Enterprise resource planning (ERP)

Enterprise resource planning (ERP) integrates all departments and functions throughout an organization into a single IT system so that employees can make decisions by viewing enterprise wide information on all business operations. Keyword in ERP is “enterprise”.

The true benefit of an ERP system is its ability to collect the many different forms of data from across the different organizational systems and correlate, aggregate, and provide an enterprise wide view of organizational information. 

Sample data from a sales database

Sample data from an accounting database

These are the spreadsheets display, examples of differences in data that can be fixed by using an ERP system.

Past Year Questions on Chapter 1 & 2

MARCH 2013

Question 1

Describe five (5) primary value activities.

Five primary value activities are receive and store the raw materials, make the product or service, deliver the product or service, market and sell the product or service and service after sale. First, collect the raw materials and resources and distribute it to the manufacturing as needed . Then, the raw materials or inputs is transform to goods and services. Next, the goods and services will be distribute to the customers. Lastly, provide customers support after sale of goods and services. 

OCTOBER 2012

Question 1

a) Explain four (4) organizational information cultures
  
1. Information-Functional Culture
Employees use information as a means of exercising influence or power over others. For example,  a manager in sales refuses to share information with marketing. This causes marketing to need the sales manager's input each time a new sales strategy is developed.

2. Information-Sharing Culture
Employees across departments trust each other to use information (especially about problems and failures) to improve performance.

3. Information-Inquiring Culture
Employees across departments search for information to better understand the future and align themselves with current trends and new directions.

4. Information-Discovery Culture
Employees across departments are open to new insights about crisis and radical changes and seek ways to create competitive advantages.


Question 2

Describe three (3) Porter Generic Strategies. Support your answer with example.

1. Cost Leadership

• Becoming  a low-cost producer in the industry allows the company to lower their prices to customers.
• Competitors with higher costs cannot afford to compete with the low-cost leader on price.

2. Differentiation

• Create competitive advantage by distinguishing their products on one or more features important to their customers.
• Unique features or benefits may justify price differences or stimulate demand.

3. Focused Strategy

• Target  to a niche market.
• Concentrates on either cost leadership or differentiation.

 

MARCH 2012

Question 2

Porter's FIVE forces Model is a one of common tools used in industry to analyze and develop advantages. List and describe each of the five (5) forces in Porter's Five Forces Model.

• Buyer Power

Buyer power is the ability of buyers to affect the price they must pay for an item.  It is high when buyers have many choices of whom to buy from and low when their choices are few. One way to reduce buyer power is through loyalty programs. Loyalty program which rewards customers based on the amount of business they do with a particular organization.

• Supplier Power 

Supplier power is the suppliers’ ability to influence the prices they charge for supplies. Supplier power is high when buyers have few choices of whom to buy from and low when their choices are many. Supply chain consists of all parties involved in the procurement of a product or raw material or a product. Organizations that are buying goods and services in the supply chain can create a competitive advantage by locating alternative supply sources to decrease supplier power through B2B marketplaces.

•  Threat To Substitute Products 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. Switching cost is costs that can make customers reluctant to switch to another product or service.

• Threat of New Entrants

Threat of new entrants is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market. Entry barrier is a product or service feature that customers have come to expect from organizations in a particular industry and must be offered by an entering organization to compete and survive.

• Rivalry among Existing Competitors

Rivalry among existing competitors is high when competition is fierce in a market and low when competition is more complacent. Although competition is always more intense in some industries than in others, the overall trend is toward increased competition in just about every industry. Organizations typically follow one of Porter’s three generic strategies when entering a new market.

Chapter 2 : Identifying Competitive Advantages

In a company, leader have to ensure all participants are heading in the right decision and completing their goals and objectives. To do so, leaders should communicate effectively and execute business strategies.

A business strategy is a leadership plan that achieves a specific set of goals or objectives. Business strategies that match core company competencies to opportunities result in competitive advantages, a key to success! A competitive advantage is a feature of a product or service on which customers place a greater value than they do on similar offerings from competitors. When a company is the first to market with a competitive advantage, it gains a particular benefit, such as Apple did with its I Pod. This first-mover advantage occurs when an organization can significantly impact its market share by being first to market with a competitive advantage.

Organizations watch their competition through environmental scanning. Environmental scanning is the acquisition and analysis of events and trends in the environment external to an organization.  Three common tools used in industry to analyze and develop competitive advantages include: 

• Porter’s Five Forces Model
• Porter’s three generic strategies
• Value chains

The Five Forces Model – Evaluating Industry Attractiveness

Three common tools used in industry to analyze and develop competitive advantages.

Buyer Power

Buyer power is the ability of buyers to affect the price they must pay for an item. It is high when buyers have many choices of whom to buy from and low when their choices are few. One way to reduce buyer power is through loyalty programs. Loyalty program which rewards customers based on the amount of business they do with a particular organization.

Supplier Power

Supplier power is the suppliers’ ability to influence the prices they charge for supplies. Supplier power is high when buyers have few choices of whom to buy from and low when their choices are many. Supply chain consists of all parties involved in the procurement of a product or raw material or a product.

Organizations that are buying goods and services in the supply chain can create a competitive advantage by locating alternative supply sources (decreasing supplier power) through B2B marketplaces. Business-to-Business (B2B) marketplace is an Internet-based service that brings together many buyers and seller. Two types of business-to-business (B2B) marketplaces are private exchange and reverse auction. Private exchange is a single buyer posts its needs and then opens the bidding to any supplier who would care to bid. While, reverse auction is an auction format in which increasingly lower bids are solicited from organizations willing to supply the desired product or service at an increasingly lower price.

Threat of Substitute Products or 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. Switching cost is costs that can make customers reluctant to switch to another product or service.

Threat of New Entrants

Threat of new entrants is high when it is easy for new competitors to enter a market and low when there are significant entry barriers to entering a market. Entry barrier is a product or service feature that customers have come to expect from organizations in a particular industry and must be offered by an entering organization to compete and survive.

Rivalry among Existing Competitors

Rivalry among existing competitors is high when competition is fierce in a market and low when competition is more complacent. Although competition is always more intense in some industries than in others, the overall trend is toward increased competition in just about every industry. Organizations typically follow one of Porter’s three generic strategies when entering a new market.

Porter's 3 generic strategies

1. Cost Leadership

• Becoming  a low-cost producer in the industry allows the company to lower their prices to customers.
• Competitors with higher costs cannot afford to compete with the low-cost leader on price.

2. Differentiation

• Create competitive advantage by distinguishing their products on one or more features important to their customers.
• Unique features or benefits may justify price differences or stimulate demand.

3. Focused Strategy

• Target  to a niche market.
• Concentrates on either cost leadership or differentiation. 

 

Relationship Between Business Process and Value Chain

Value Creation

Once an organization chooses its strategy, it can use tools such as the value chain to determine the success or failure of its chosen strategy. Business process is a standardized set of activities that accomplish a specific task, such as processing a customer’s order. Value chain is views an organization as a series of processes, each of which adds value to the product or service for each customer. Combining Porter’s Five Forces and three generic strategies create business strategies for each segment.

Value Chain

Customers determine the extent to which each activity adds value to the product or service. The competitive advantage is to:

•  Target high value-adding activities to further enhance their value. 
•  Target low value-adding activities to increase their value.
• Perform some combination of the two.

Value chains with Porter’s Five Forces