The Strategic Potential of The Internet

Sartika Kurniali 0832200310
Celline Liawan 0832200430
The Strategic Potential of The InternetStrategy and the InternetM. E. Porter

Agenda
Distorted Market Signals
A Return to Fundamentals
The Internet and Industry Structure
The Myth of The First Mover
The Future of Internet Competition
The Internet and Competitive Advantage
Operational Effectiveness
Strategic Positioning
The Six Principles of Strategic Positioning
The Absence of Strategy
The Internet as Complement
Words for The Unwise: The Internet’s Destructive Lexicon
The Internet and The Value Chain
Strategic Imperatives for Dot-coms and Established Companies
The End of The New Economy

Many have argued that the Internet renders strategy obsolete. In reality, the opposite is true. Because the Internet tends to weaken industry profitability without providing proprietary operational advantages, it is more important than ever for companies to distinguish themselves through strategy. The winners will be those that view the Internet as a complement to, not a cannibal of, traditional ways of competing.

The Internet’s Effect
Internet changes everything, rendering all the old rules about companies and competition obsolete.
bad decisions that have eroded the attractiveness of their industries
shift the basis of competition away from quality, features, and service toward price, making it harder for anyone in their industries to turn a profit.

Fundamental Questions for Internet Business
Who will capture the economic benefits that the internet creates?
Will all the value end up going to customers, or will the companies be able to reap a share of it?
What will be the Internet’s impact on industry structure? Will it expand or shrink the pool of profits? And what will be the impact on strategy?
Will the internet bolster or erode the ability of companies to gain sustainable advantages over their competitors?

Reason for OptimismInternet Technology
Internet Technology provides better opportunities for companies to establish distinctive strategic positionings than did previous generation of IT.
Gaining such competitive advantage requires building on the proven principles of effective strategy.
Use internet as a complement to traditional ways of competing.
Understand the trade offs between Internet and traditional approaches

Distorted Market Signal
Companies that have deployed Internet technology have been confused by distorted market signals
New technology trigger rampant experimentation, by both companies and customers, and the experimentation is often economically unsustainable.
As a result, market behavior is distorted and must be interpreted with caution.

Distorted Market Signal (Continue)
Sales figures have been unreliable for three reasons:
Many companies have subsidized the purchase of their products and service in hopes of staking out a position on the Internet.
Many buyers have been drawn to the internet out of the curiosity
Some revenues from the online commerce have been received in the form of stock rather than cash.

A Return to Fundamentals
Two fundamental factors that determine profitability:
industry structure, which determines the profitability of the average competitor
sustainable competitive advantage, which allows a company to outperform the average competitor.

The Internet and Industry Structure

The Myth of The First Mover
General assumption that the deployment of the internet would increase switching costs and create strong network effects which would provide first movers with competitive advantages and robust profitability.

The Future of Internet Competition
Combination of new and old companies and generally lower entry barriers, most industries will likely end up with a net increase in the number of competitors and fiercer rivalry than before the advent of the internet.

Digital Market Place
Longer term structural consequences digital market
Benefits to buyers: low transaction costs, easier access to price and product information, convenient purchase of associates service.
Benefits to suppliers : lower selling costs, lower transaction costs, access to wider markets.

It’s all about setting yourself apart from the pack
a sustainable competitive advantage
Operating at a lower cost
Commanding a premium price, or both
Cost and price advantages:
Operational positioning
Doing the same things your competitors do, but doing them better
Strategic positioning
Doing things differently from competitors, in a way that deliver
a unique type of value to customers

Strategic positioning, the six principles:
it must start with the right goal
company’s strategy must enable it to deliver a value proposition, or set of benefits, different from those that competitors offer
strategy needs to be reflected in a distinctive value chain
robust strategies involve trade-offs—to choose what not to do
strategy defines how all the elements of what a company does fit together
strategy involves continuity of direction

Zero-sum form of competition, price has been defined as the primary if not the sole competitive variable, race to the bottom
In the past, IT worked against strategy
Internet actually provides a better technological platform. By providing a common IT delivery platform across the value chain, it also make it possible to build truly integrated and customized systems that reinforce the fit among activities
companies need to stop their rush to adopt generic, ‘out of the box’ packaged applications and instead tailor their deployment of Internet technology to their particular strategies

Rivals can easily copy your improvements in quality and efficiency.
But they shouldn’t be able to copy your strategic positioning—what distinguishes your company from all the rest.

There is no doubt that real trade-offs can exist between Internet and traditional activities  record industry
Frequently, in fact, Internet applications address activities that, while necessary, are not decisive in competition informing customers, processing transactions, and procuring inputs
In many cases, the Internet complements, rather than cannibalizes, companies’ traditional activities and ways of competing  Walgreens, W. W. Grainger

The Internet and The Value Chain
Value chain
The evolution of IT technology in business can be thought of in terms of five overlapping stages

Virtual activities do not eliminate the need for physical activities, but often amplify their importance.
Introducing internet applications in one activity often places greater demands on physical activities elsewhere in the value chain
Using the Internet in one activity can have systemic consequences, requiring new or enhanced physical activities that are often unanticipated
Internet applications have some shortcomings in comparison with conventional methods
The greatest threat to an established company lies in either failing to deploy the Internet or failing to deploy it strategically

The End of The New Economy
The most successful ones will be those that use Internet technology to make traditional activities better and those that find and implement new combinations of virtual and physical activities that were not previously possible
Demand side
Supply side
While a new means of conducting business has become available, the fundamentals of competition remain unchanged
Only by integrating the Internet into overall strategy will this powerful new technology become an equally powerful force for competitive advantage

Questions
‘Many have argued that the Internet renders strategy obsolete. In reality, the opposite is true.’ In what ways do you think that this statement from Michael Porter is appropriate? And how would you provide a counter argument?
There are strong echoes in this chapter of Porter’s seminal ‘5 forces’ analysis of two decades ago. What has changed and what remains the same 20 or so years on (both in relation to Information & Communication Technology and to the competitive environment)?
Porter concludes this chapter by stating ‘The next stage of the Internet’s evolution will involve a shift in thinking from e-business to business, from e-strategy to strategy’. Do you agree? Why?
‘Competitive analysis frameworks, such as the “5 forces” and “value chain” concepts propagated by Porter are ultimately redundant since competitor firms will draw the same conclusions as each other from their use and, in any event, strategy is “emergent” and the result of “tinkering” from the bottom-up.’ Discuss this view in the light of arguments Porter puts forward in this chapter.

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The Strategic Potential of The Internet

by Sartika Kurniali on Oct 01, 2009

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