Strategy and the Internet
By
Michael E. Porter
Group Members
• Lim Veron Nardy
• Rosa Situmorang
• Yanni Putri
• Vong Phung Kieu
• Chantharas Kanchanakool
• Martin Firdaus Siringoringo
(M987Z-210)
(M987Z-212)
(M987Z-225)
(M987Z-226)
(M987Z-258)
(M987Z-208)
Outline
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Introduction
Distorted Market Signals
A Return to Fundamentals
The Internet and Industry Structure
How the Internet Influences Industry Structure
The Future of Internet Competition
The Internet and Competitive Advantage
The Six Principles of Strategic Positioning
The Internet as Complement
The Internet and the Value Chain
Strategic Imperatives for Dot-Coms and Established Companies
The End of the New Economy
Main Issues to be Addressed
• Who will capture the economic benefits that the
Internet creates?
• What is the Internet’s impact on strategy?
• Will the Internet reinforce or erode a companies
ability to gain a strategic competitive advantage?
Distorted Market Signals
• Revenue Side – Sales figures have been
unreliable:
– Subsidized sales, such as no sales tax
– Curiosity shopping
– Some revenues from online commerce have been
received in the form of stock rather than cash
• Cost Side also fuzzy
– Subsidized procurement
– Understating the need for capital
Distorted Market Signals cont’d
• Stock Market – some companies made
decisions based on influencing near-term share
price or responding to investor sentiments
• Financial Metrics:
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Expansive definition of revenue
Number of customers
Number of unique users – “reach”
Number of site visitors
Click-through rates
Dot-Coms Key Performance Indicators
(1995 – 1999)
• Key Performance Indicators (KPIs):
– Hit: Number of browser requests for a single item
– Impression: Number of times a banner ad is seen by a
visitor
– Page Views: Number of times a page is displayed
– Unique Visitors: Number of different individuals visiting
the site
– Click-through Rate: Percentage of times responded to
advertisement by clicking on the ad
Dot-Coms KPIs (2000)
Source: McKinsey Quarterly
A Return to Fundamentals
• Creation of true economic value once again
becomes the final arbiter of business success
• Economic Value: Price – Cost
– Reliably measured only by sustained profitability
• Uses of Internet
– Selling toys
• Internet technologies:
– real-time communications services
– Can be deployed across many uses
• The uses of Internet technology ultimately create
economic value
How Can the Internet be Used to
Create Economic Value?
• Industry Structure: Determines the profitability of an
average competitor
• Sustainable Competitive Advantage: Allows a company to
outperform the average competitor
The Internet and Industry Structure
• Created some new industries
On-line auctions
Digital marketplaces
• Enable the configuration of existing industries
Competitive Forces
Five underlying forces of competitions :
• The intensity of rivalry among existing competitors,
• The barriers to entry for new competitors,
• The threat of substitutes products or services,
• The bargaining power of suppliers, and
• The bargaining power of buyers.
The strength of each of the five forces varies from industry
to industry; each industry is affected in different ways.
(+) Expand the sixe of the
market
(-) Creates new substitution
threats
Power of
Suppliers
(+/-) Raise bargaining
power over suppliers
(-) Provides a channel
for suppliers to reach
end users
(-) Give all companies
equal access to
suppliers, standardized
product
Threat of
Substitutes
Existing
Competition
(-) Reduces differences
among competitors
(-) Migrates competition to
price
(-) Widens the geographic
market
(-) Increasing pressure for
price discounting
Barriers to
Entry
(+) Improves bargaining
power over traditional
(-) Shift bargaining power
to customer
(-) Reduce switching cost
Power of
Buyers
(-) Reduces barriers to
entry
(-) Internet applications
are difficult to keep
proprietary from new
entrants
(-) Flood of new entrants
has come into many
industries
The Myth of The First Mover
The deployment of the internet would :
• Increase switching cost
switching cost encompass all the costs incurred by a
customer in changing to a new supplier
• Create strong network effects
Which would provide first movers with
competitive advantages and robust profitability.
The Future of Internet Competition
• To put pressure on the
profitability of many industries
• To be more competition
• And the ability to create barriers to
entry is critical, but there are a real
challenge to profitability
• To gain efficiency improvements
The Internet as a Complement
• Threat of Internet replacing all conventional ways
of doing business vastly exaggerated
• In many cases the Internet acts as a complement to
traditional activities
The Internet and Competitive Advantage
 Internet is more profitable than the average
performer for individual companies.
By : - operating at a lower cost
- commanding a premium price
- doing both
The Internet and Competitive Advantage
2 ways to achieve advantage :
- operational effectiveness :
• Doing the same things your competitors do but
doing them better
• By easing and speeding the exchange of real-time
information.
- strategic positioning:
Doing things differently from competitors
Six Principles of Strategic Positioning
1. Start with the
right goal
• Reaching economic
value
• Customers
willingness to pay >
cost of production
2. Delivering a
value proposition
different from
competitors
• Creating unique value
3. Distinctive value
chain
• Performing different
activities than rival, or
• Performing similar
activities in different ways
Six Principles of Strategic Positioning
The Absence of Strategy
•
Internet technology provides infrastructure for information
access and delivery
•
When it comes to reinforcing a distinctive strategy, tailoring
activities, and enhancing fit, the internet provides a better
technological platform than previous generations of IT
•
•
The packaged software applications have been a force for
standardizing activities and speeding competitive convergence
However, internet architecture +
improvements in software has turned IT into
more powerful tool for strategy
The Internet as Complement
• Internet complements
companies’ traditional ways of
competing.
• For example, Wallgreens’
website provides customers with
extensive information and allow
customers to order prescriptions
online. 90% of customers who
order over web prefer to pick
up their prescription at a nearby
store
The Internet as Complement
• Another example, W.W.
Grainger; Estimated 9%
incremental growth in sales for
customers who use the online
channel above the normalized
sales of customers who use only
traditional means.
• Web ordering increases the
value of its physical locations.
The Internet as Complement
• Virtual activities do not eliminate the
need for physical activities, but often
amplify their importance
– Internet application in one activity
often places greater demands on
physical activities elsewhere in the
value chain
– Internet applications enhance physical
activities that are often unanticipated
– Internet applications have limitation,
so the physical activities still can not be
replaced
Words for the Unwise:
The Internet’s Destructive Lexicon
Language used to discuss online business is also
a misguided approach.
- “business models”: Loose conception of how a company does business
and generates revenue. However, this term is neither enough to set for
building up a company, nor creating economic value.
- “e-business & e-strategy”: Managers should view their internet
operations in isolation from the rest of the business, which consequently
leads to competing using the internet and can increase the pressure for
competitive imitation. Interpret otherwise, some companies fail to
integrate internet into their strategies; thus never reach the most
advantage position.
The Internet and the Value Chain
Value chain:
-The set of activities through which a product or service
is created and delivered to customers.
- A framework for identifying value-creating activities and
analysing how they affect both a company’s costs and the
value delivered to buyers.
Information Technology:
- Has a pervasive influence on the value chain since its
advantage is the ability to link one activity with others and
make real-time data created in one activity.
- Provides a standardised infrastructure, an intuitive browser
interface for information access and delivery, bidirectional
communication, and ease of connectivity – all at much lower
cost than private networks and electronic data interchange
(EDI).
5 stages of the Evolution of
Information Technology in Business
Stage 1: It is the earliest IT systems; an automation of discrete
transactions such as order entry and accounting
Stage 2: The fuller automation and functional enhancement of
individual activities such as HRM, sales operation, etc.
Stage 3: Cross-activity integration (linking multiple activities; e.g. CRM,
SCM)
Stage 4: Integration of IT systems across the entire value chain that may
link suppliers, manufacturers and customers in a way that provides realtime information across the chain; at this stage, CRM and SCM are
starting to merge.
Stage 5: Truly optimise all workings such as product development with
real time information and communication across the chain
Prominent Applications of the
Internet in the Value Chain
• Firm Infrastructure
• Human Resources Management
• Technology Development
• Procurement
- Inbound Logistics
- Operations
- Outbound Logistics
- Marketing and Sales
- After- Sales Service
Strategic Imperatives for Dot-Coms and
Established Companies
• Dot-Coms must develop business strategies that create
economic value, while established companies must stop
deploying the internet as a primary tools and instead use it to
enhance the distinctiveness of their strategies.
• Successful Dot-Coms focus on creating benefits that
customers will pay for, rather than pursuing advertising and
click through revenues from third party.
• Don’t imitate established companies, create your own
strategies to give more value to your company.
More strategic imperatives…
• Dot-Coms should be used to seek out trade offs, concentrating on
segments where an Internet-only model offers real advantages.
• The characteristics of successful internet usages :
o Strong capabilities in internet technology
o A distinctive strategy resting on a clear focus and meaningful
advantages, relative to other companies
o Emphasis on creating customer value and charging for it
directly rather than relying for ancillary forms of revenue
o Distinctive ways of performing physical functions and
assembling non-internet assets that complement their strategic
positions
o Deep industry knowledge to allow proprietary skills,
information and relationships to be developed
Internet technology can create better traditional activities and
implement the combination of virtual and physical activities
to be possible.
The End of the New Economy
• Companies will not survive without internet but they will not
gain any advantage from it.
• Strategies that integrate the Internet and traditional
competitive advantages and ways of competing should win in
many industries.
• The value of integrating internet and traditional methods
creates potential advantages for established companies.
• Dot-Coms should have breakthrough rather than competing
solely on price or imitate established companies.
So…
• Both Dot-Coms and established companies will try to
adopt each other way and distinct their strategies so that
the combination strategies of both will create unique
value for the customers.
• Dot-Coms will try to give real values to the customer
while established companies use internet technology so
that customers will be easier to reach, so only by
integrating the internet into overall strategy will create
equal powerful force for competitive advantage.