Michael E. Porter Harvard Business Review March 2001:6378 Although the Internet provides an ideal architecture for leveraging opportunity in new and existing markets, a company can achieve a competitive advantage only by creating products or services of unique value. An Internet stake, by itself, provides no advantage, but when the Internet is used as part of an overall strategy, it can be effective in achieving distinction for a company and its products. The author analyzes the impact of the Internet on traditional business strategy within the framework of what he defines as the five forces of competition.
In the rush to launch their Internet businesses, companies, both old
and new, have abandoned the principles of competitive advantage. Far from creating real economic value out of obscure revenues and fuzzy costs, the Internet, as deployed by most enterprises, has instead led whole industries away from traditional competition and become, in effect, a great equalizer, or even perhaps an artifice. Confused by market distortions of their own devices (offering steep discounts, subsidizing sales, concocting accounting gimmicks, and accrediting foolish valuation metrics), executives have found the payoffs rather elusive. But as before e-business proliferated, actual profits accrue to businesses distinguished by sustainable advantages within a receptive industry structure. The five forces that influence an industrys potential profitability are (1) rivalry among competitors, (2) barriers to entry, (3) threat of substitutes, (4) supplier bargaining power, and alternately, (5) buyer bargaining power. Porter surmises that the Internet need not be inhospitable to industry profitability. The Internet does expand markets and readily finds new links to customers, but it also reduces barriers and informs buyers. It stirs up rivalries, offers substitutes, and increases fixed costsall of Michael E. Porter is at Harvard Business School. The summar y was prepared by Christo pher J. S ullivan, CFA, United Nations Federal Credit Union.
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which conspire to push competition toward price. The paradox Porter
reveals, however, is that the Internets openness, ease of use, and transactional efficiencies are benefits that companies fail to convert to their advantage and, subsequently, into profits. Early Internet enthusiasts assumed that high switching costs and powerful network effects (value created from a products growing use) would clear the playing field to one or two first movers. But switching costs have turned out to be low, and network effects, subject to diminishing returns, have proven difficult to achieve. The natural resulttrue new-economy brandshas failed to appear. Even the mutual-benefit expectations built into partnering alliances, an assumed antidote to zero-sum competition, have fallen short. These miscalculations, and other poor practices, have set in motion a desperate spiral toward competitive convergence. What many companies using the Internet have lacked is a plan for distinction, or strategy, that creates a value proposition that transcends simple operational efficiency, shuns imitation, and forces trade-offs. Strategically positioned companies, or those offering unique products through integrated research, design, manufacturing, and delivery systems (Porters value chains), are able to extract returns from difficult markets. These companies best efforts then become proprietary, or hard to copy, and create real advantage. When used throughout the value chain, todays Internet offers a superior information-technology framework for enhancing fit, position, and the flow of activity. Survival demands that companies move away from price as the primary source of competitive advantage toward distinctive, valuedriven trade-offs that meld a companys traditional activities with its Internet-related activities. Rather than perceiving the Internet as a strategy unto itself, Porter envisions a return to a single, unifying strategy that encompasses the tenets of e-business throughout the company structure. Porter believes that as all businesses adopt the Internet, the competitive force of e-business capability will be neutralized; in his words, the new economy appears less like a new economy than like an old economy that has access to a new technology. Keyw ords: Equity Investments: industry analysis