Strategy and the Internet by Michael Porter

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Strategy and the Internet by Michael Porter

  1. 1. Strategy and the Internet Michael Porter HBR March 2001 p 63-78
  2. 2. Market signals <ul><li>Revenues are too high </li></ul><ul><li>Demand too high </li></ul><ul><ul><li>Companies subsidized products </li></ul></ul><ul><ul><li>Government subsidy – No tax </li></ul></ul><ul><li>Initial curiosity </li></ul><ul><li>Some revenues from online commerce have been in stock rather than cash. </li></ul>
  3. 3. Costs <ul><li>Subsidized inputs </li></ul><ul><li>Payments in equity </li></ul><ul><li>False premise about low capital intensity </li></ul>
  4. 4. Stock prices <ul><li>Stock prices unrelated to fundamentals </li></ul><ul><li>“Experts” jump on the bandwagon </li></ul><ul><li>Many businesses on internet are artificial businesses </li></ul><ul><li>Key idea – generate economic value </li></ul>
  5. 5. <ul><li>Profits are a function of </li></ul><ul><ul><li>industry structure, and </li></ul></ul><ul><ul><li>Sustainable competitive advantage </li></ul></ul><ul><li>Five forces of competition </li></ul><ul><ul><li>Intensity of rivalry </li></ul></ul><ul><ul><li>Barriers to entry </li></ul></ul><ul><ul><li>Threat of substitutes </li></ul></ul><ul><ul><li>Bargaining power of suppliers </li></ul></ul><ul><ul><li>Bargaining power of buyers </li></ul></ul>
  6. 6. Positive trends <ul><li>Internet dampens bargaining power of channels by providing direct access to customers </li></ul><ul><li>Internet improves efficiency </li></ul>
  7. 7. Negative trends <ul><li>Buyer bargaining power increased </li></ul><ul><li>Reduces barriers to entry – no need for sales force or access to channels </li></ul><ul><li>Creates new substitutes </li></ul><ul><li>Open system – difficult to maintain proprietary advantage – increases intensity of rivalry </li></ul><ul><li>Expands geographic market – but brings more competitors </li></ul><ul><li>Reduces variable costs – leading to price competition </li></ul>
  8. 8. <ul><li>Threat of substitutes </li></ul><ul><ul><li>Expands the size of market (+) </li></ul></ul><ul><ul><li>Creates new substitutes (-) </li></ul></ul><ul><li>Rivalry </li></ul><ul><ul><li>Reduces differences among competitors (-) </li></ul></ul><ul><ul><li>Competition focuses on price </li></ul></ul><ul><ul><li>Increases number of competitors </li></ul></ul><ul><ul><li>Lowers VC relative to fixed costs – increases discounting </li></ul></ul>
  9. 9. <ul><li>Bargaining powers of buyers </li></ul><ul><ul><li>Channel power reduced (-) </li></ul></ul><ul><ul><li>Consumer power increased (-) </li></ul></ul><ul><ul><li>Reduces switching costs (-) </li></ul></ul><ul><li>Bargaining power of suppliers </li></ul><ul><ul><li>Increases bargaining power - more suppliers </li></ul></ul><ul><ul><li>Reduces need for intermediaries </li></ul></ul><ul><ul><li>Suppliers have more buyers </li></ul></ul>
  10. 10. It’s the choices companies make <ul><li>Ebay.com – did not discount prices </li></ul><ul><li>Buy.com – always discounted </li></ul>
  11. 11. <ul><li>Will switching costs be higher? </li></ul><ul><ul><li>Network effects > pioneering advantages </li></ul></ul><ul><ul><li>Costs of registering and learning </li></ul></ul><ul><ul><li>Software will make switching costs to be lower </li></ul></ul><ul><ul><li>Network effects are not proprietary to any one company – diminishing returns after a set size </li></ul></ul>
  12. 12. <ul><li>Internet brands are difficult to build </li></ul><ul><ul><li>Lack of physical presence </li></ul></ul><ul><ul><li>Less tangible </li></ul></ul><ul><ul><li>Do not affect loyalty </li></ul></ul><ul><li>Partnering is good </li></ul><ul><ul><li>Complements </li></ul></ul><ul><ul><li>Assembly </li></ul></ul><ul><ul><li>outsourcing </li></ul></ul><ul><ul><li>If complement raises switching costs – good </li></ul></ul><ul><ul><li>If complement standardizes – bad for profits </li></ul></ul>
  13. 13. <ul><li>Consumers power is growing - moving away from Priceline.com </li></ul><ul><li>Advertisers are picky </li></ul><ul><li>Competition intensity will increase </li></ul><ul><li>Bandwidth will make it easy to provide customer service cheaply. </li></ul>

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