Strategy and the Internet

PORTER, MICHAEL E. (2001),

“STRATEGY AND THE INTERNET,”
HARVARD BUSINESS REVIEW, MARCH,
63-78.
 Michael Porter

 Article was written in 2001

 Internet availability in US:
 2001 ---- 51%
 2014----- 98%

About the Author

 Bishop William Lawrence University
Professor at Harvard University
 Research
 Competitive Advantage of Nations and Regions
 Capital Markets, Investment, and Competition
 Competitive Strategy
 Discussion Outline

 (The New) Role of Internet in business

 Distorted Market Signals-Internet can be misleading
 Return to fundamentals
 Internet and Industry Structure
 The Myth of First Mover
 The Future of Internet Competition
 The Internet and Competitive Advantage
 The Six Principles of Competitive Advantage
 The Internet and the Value Chain
 The Absence of Strategy
 The Internet as Complement
 Strategic Imperatives for Dot-Coms
 The End of the New Economy
 Quotes from the Article

 Consider the following statements from the article

 “We need to move away from the rhetoric about "Internet
industries," "e-business strategies," and a "new economy" and
see the Internet for what it is: an enabling technology - a
powerful set of tools that can be used, wisely or unwisely, in
almost any industry and as part of almost any strategy.” p. 64.
 “When seen with fresh eyes, it becomes clear that the Internet
is not necessarily a blessing. It tends to alter industry
structures in ways that dampen overall profitability, and it has
a leveling effect on business practices, reducing the ability of
any company to establish an operational advantage that can be
sustained.” p. 64.
 Quotes from the Article

 Consider the following statements from the article

 “Gaining such a competitive advantage does not require a
radically new approach to business. It requires building on the
proven principles of effective strategy. The Internet per se will
rarely be a competitive advantage. Many of the companies that
succeed will be ones that use the Internet as a complement to
traditional ways of competing, not those that set their Internet
initiatives apart from their established operations.” p. 64.
 “If revenue is an elusive concept on the Internet, cost is equally
fuzzy.” p. 64.
 Distorted Market Signals

Market signals are unreliable in the early stages of any important technology

Because of the following reasons:

 Companies and governments subsidize e-sales to gain
market base
 Market curiosity
 Revenue is in the form of stocks – unstable
 Overconfidence in e-business
 Distorted costs

surging rapid growth = low barriers to entry = danger sign

 The Internet and Industry Structure

 The internet created new industries

 On-line auctions and digital marketplaces

 The internet enabled the reconfiguration of

existing industries
 high costs for communicating, gathering information, or
accomplishing transactions
The Internet and Industry Structure
 The Myth of the First Mover

 Myth: “the deployment of the Internet would be expand the

market.”
 In reality, it increases switching cost and creates strong network effects
 Myth: “first movers will reinforce their advantages by
quickly establishing strong new-economy brands.”
 In reality it is hard to create strong brands on the Internet--the lack of
physical presence and direct human contact
 Myth: “partnering is a win-win means to improve industry
economics.”
 In reality, only well-established partnering strategy can be beneficial and
a high number of partnerships reduces the individualities of companies
within the industry.
 The Future of Internet Competition

1. Industry Structure
o Lower Entry Barrier
o More Competitors
2. Company
o Lower Profitability
3. Customers
o More Bargaining Power
o Low Switching Cost
 The Six Principles of Strategic Positioning

 Right Goal-gives return on superior long term investment.

 Value proposition-a set of beliefs that are different from
what the competitors offer.
 Distinctive value chain-must perform different activities
that rivals or perform similar activities in different ways.
 Tradeoffs-robust strategies involve trade offs.
 Fit-all elements of the company strategy must fit together
 Continuity of direction-involves defining the course of
action the company will take even if it involves forgoing
other opportunities.
The Internet and the Value Chain
 The Absence of Strategy

 Apparently, Dot.coms are missing in strategy. They

focus on wrong areas…
 Maximize revenue rather than focus on profit
 Focus on indirect revenues (advertising, click-through
free) rather than deliver real value.
 Offer every possible product rather than make trade-
offs.
 Seek partnerships and outsourcing rather than build
their own assets.
 Internet as a Complement

 “To capitalize on the Internet's strategic potential,

executives and entrepreneurs alike will need to
change their points of view.” p. 73.
 “In many cases, the Internet complements, rather
than cannibalizes, companies' traditional activities
and ways of competing.” p. 73. Example of Walgreen
and W. W. Grainger.
 “In some industries, the use of the Internet
represents only a modest shift from well-established
practices.” p. 74. Example of Lands’ End
 The End of the New Economy

 Strategies that integrate the internet and traditional

competitive advantages should win
 The demand will be affected by the increasing availability of
online services yet the service provided by physical
locations will still be valued by customers
 The supply should improve regarding production and
procurement with a combination of internet and traditional
methods
 Dot-coms have to pursue distinctive strategies than emulate
one another; breakaway from competing solely on price
and follow more traditional strategies regarding
differentiation or market segmentation
 Critique of the Porter Model
 Bound in his own thought process
 Industry structure

 Value chain

 Cannot see Internet as a new dimension in

business
 Google, Facebook, Twitter, Instagram, Social Media
 His examples are also of traditional industries
 Oilfield, Farming, Walmart, Automotive

 The “culture” of Internet, the new generation

 Globalization of knowledge, technology, culture,
etc.
Google’s mission is to organize the world’s information and make it
universally accessible and useful.
 History
 Founded in 1998

 IPO 2004

 Google.org 2004

 Launch Google maps and Google earth 2005

 Joins S&P 500 2006

 Acquisition of YouTube 2006

 Android open platform for mobile devices 2007

 Google chrome 2008

 Google + 2011
 Google

 Services
 Laser pinpoint accuracy in targeting market sectors

 Free online services integrated through the gmail

domain name
 Largest availability of information presented in a simple
format supported worldwide
 Mobile information solutions
 Google Model?

 Focus on the user and all else will follow

 It’s best to do one thing really, really well
 Fast is better than slow
 Democracy on the web works
 You don’t need to be at your desk to need an answer
 You can make money without doing evil
 There’s always more information out there
 The need for information crosses all borders
 You can be serious without a suit
 Great just isn’t good enough
 Discussion Questions

1. How does Internet influence the industry

structure? Explain using Porter’s model on
competition.
2. Can Internet create sustainable competitive
advantage? How? Explain.
3. “The winners will be those that view the Internet as
a complement to, not a cannibal of traditional ways
of competing.” Explain.