The Strategic Potential of The Internet


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A presentation/summary from The Strategic Potential of The Internet , Strategy and the Internet by M. E. Porter. Published at Harvard Business Review

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The Strategic Potential of The Internet

  1. 1. Sartika Kurniali 0832200310<br />Celline Liawan 0832200430 <br />The Strategic Potential of The InternetStrategy and the InternetM. E. Porter<br />
  2. 2. Agenda<br />Distorted Market Signals<br />A Return to Fundamentals<br />The Internet and Industry Structure<br />The Myth of The First Mover<br />The Future of Internet Competition<br />The Internet and Competitive Advantage<br />Operational Effectiveness<br />Strategic Positioning<br />The Six Principles of Strategic Positioning<br />The Absence of Strategy<br />The Internet as Complement<br />Words for The Unwise: The Internet’s Destructive Lexicon<br />The Internet and The Value Chain<br /> Strategic Imperatives for Dot-coms and Established Companies<br />The End of The New Economy<br />
  3. 3. 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.<br />
  4. 4. The Internet’s Effect<br />Internet changes everything, rendering all the old rules about companies and competition obsolete.<br />bad decisions that have eroded the attractiveness of their industries<br />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.<br />
  5. 5. Fundamental Questions for Internet Business<br />Who will capture the economic benefits that the internet creates?<br />Will all the value end up going to customers, or will the companies be able to reap a share of it?<br />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?<br />Will the internet bolster or erode the ability of companies to gain sustainable advantages over their competitors?<br />
  6. 6. Reason for OptimismInternet Technology<br />Internet Technology provides better opportunities for companies to establish distinctive strategic positionings than did previous generation of IT.<br />Gaining such competitive advantage requires building on the proven principles of effective strategy.<br />Use internet as a complement to traditional ways of competing.<br />Understand the trade offs between Internet and traditional approaches<br />
  7. 7. Distorted Market Signal<br />Companies that have deployed Internet technology have been confused by distorted market signals<br />New technology trigger rampant experimentation, by both companies and customers, and the experimentation is often economically unsustainable. <br />As a result, market behavior is distorted and must be interpreted with caution.<br />
  8. 8. Distorted Market Signal (Continue)<br />Sales figures have been unreliable for three reasons:<br />Many companies have subsidized the purchase of their products and service in hopes of staking out a position on the Internet.<br />Many buyers have been drawn to the internet out of the curiosity <br />Some revenues from the online commerce have been received in the form of stock rather than cash.<br />
  9. 9. A Return to Fundamentals<br />Two fundamental factors that determine profitability:<br />industry structure, which determines the profitability of the average competitor<br />sustainable competitive advantage, which allows a company to outperform the average competitor.<br />
  10. 10. The Internet and Industry Structure<br />
  11. 11. The Myth of The First Mover<br />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.<br />
  12. 12. The Future of Internet Competition<br />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.<br />
  13. 13. Digital Market Place<br />Longer term structural consequences digital market <br />Benefits to buyers: low transaction costs, easier access to price and product information, convenient purchase of associates service.<br />Benefits to suppliers : lower selling costs, lower transaction costs, access to wider markets.<br />
  14. 14. The Internet and Competitive Advantage<br />It’s all about setting yourself apart from the pack<br /><ul><li>a sustainable competitive advantage
  15. 15. Operating at a lower cost
  16. 16. Commanding a premium price, or both</li></ul>Cost and price advantages:<br />Operational positioning<br />Doing the same things your competitors do, but doing them better<br />Strategic positioning<br />Doing things differently from competitors, in a way that deliver<br />a unique type of value to customers<br />
  17. 17. The Internet and Competitive Advantage<br />Strategic positioning, the six principles:<br />it must start with the right goal<br />company’s strategy must enable it to deliver a value proposition, or set of benefits, different from those that competitors offer<br />strategy needs to be reflected in a distinctive value chain<br />robust strategies involve trade-offs—to choose what not to do<br />strategy defines how all the elements of what a company does fit together<br />strategy involves continuity of direction<br />
  18. 18. The Absence of Strategy<br />
  19. 19. The Absence of Strategy<br /><ul><li>Zero-sum form of competition, price has been defined as the primary if not the sole competitive variable, race to the bottom</li></ul>In the past, IT worked against strategy<br />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<br />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<br />
  20. 20. The Absence of Strategy<br />Rivals can easily copy your improvements in quality and efficiency.<br />But they shouldn’t be able to copy your strategic positioning—what distinguishes your company from all the rest.<br />
  21. 21. The Internet as Complement<br />There is no doubt that real trade-offs can exist between Internet and traditional activities  record industry<br />Frequently, in fact, Internet applications address activities that, while necessary, are not decisive in competition informing customers, processing transactions, and procuring inputs<br />In many cases, the Internet complements, rather than cannibalizes, companies’ traditional activities and ways of competing  Walgreens, W. W. Grainger<br />
  22. 22. The Internet as Complement<br />The Internet and The Value Chain<br /><ul><li>Value chain
  23. 23. The evolution of IT technology in business can be thought of in terms of five overlapping stages</li></li></ul><li>The Internet as Complement<br />Virtual activities do not eliminate the need for physical activities, but often amplify their importance.<br />Introducing internet applications in one activity often places greater demands on physical activities elsewhere in the value chain<br />Using the Internet in one activity can have systemic consequences, requiring new or enhanced physical activities that are often unanticipated<br />Internet applications have some shortcomings in comparison with conventional methods<br />The greatest threat to an established company lies in either failing to deploy the Internet or failing to deploy it strategically<br />
  24. 24. The End of The New Economy<br />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<br />Demand side<br />Supply side<br />While a new means of conducting business has become available, the fundamentals of competition remain unchanged<br />Only by integrating the Internet into overall strategy will this powerful new technology become an equally powerful force for competitive advantage<br />
  25. 25. Questions<br />‘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?<br />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)?<br />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? <br />‘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.<br />