Strategy and the Internet

1. Strategy and the Internet Present by JenjiraBoonyingyongstit Xiaoling Huang Novinialiady TanapongWorakasemsuk

2. The Context • Written in 2001 • Internet availability in US: • 2001 ---- 51% • 2011----- 97% About the Author (Michael E. Porter) • Bishop William Lawrence University Professor at Harvard University • Current Research • Competitive advantage of Nations and Regions • Capital Markets, Investment, and Competition • Competitive Strategy

3. Introduction How to use the Internet: Traditional companies have to include Internet as a complement to traditional approaches of competing Dot-coms need to understand the trade-offs between internet and traditional approaches Internet: blessing or downfall?

4. Distorted Market Signals 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 Market signals are unreliable in the early stages of any important technology surging rapid growth = low barriers to entry = danger sign

5. 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

6. Industry Structure

7. Industry Structure (cont.) • Five Forces determine • Industry’s fundamental attractiveness • How economic value is shared among companies, customers, suppliers, distributors, substitutes, and potential new entrants • How profitability will evolve in the future

8. How the Internet Influences Industry Structure? • Threat of Substitute (+) Expands the size of the market (-) Creates new substitution threats • Barriers to Entry (-) Reduces barriers to entry (-) Difficult to keep proprietary from new entrants (-) many new entrants

9. How the Internet Influences Industry Structure? (Cont.) • Bargaining Power of Suppliers (+) Raises bargaining power over suppliers . (-) Gives suppliers access to more customers (-) Reduces the leverage of intervening companies. (-) Gives all companies equal access to suppliers and reduces product differentiation (-) Reduces barriers to entry

10. How the Internet Influences Industry Structure? (Cont.) • Bargaining Power of Buyers (+) Eliminates powerful channels (-) Shifts bargaining power to end consumers (-) Reduces switching costs • Rivalry among competitors (-) Reduces differences among competitors (-) Migrates competition to price (-) Widens the geographic market (-) Lowers variable cost relative to fixed cost

11. The Myth of the First Mover • The deployment of the Internet would • increase switching cost and • create strong network effects In reality: • Switching costs • Network effects

12. The Myth of the First Mover • 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

13. The Myth of the First Mover • Partnering is a win-win means to improve industry economics In reality: • Only a well-established partnering strategy can be beneficial. • A high number of partnerships reduces the individualities of companies within the industry.

14. The Future of Internet Competition • Industry Structure • Lower Entry Barrier • More Competitors • Company • Lower Profitability • Customers • More Bargaining Power • Low Switching Cost

15. The Internet and Competitive Advantage Two ways for Cost and price advantages Operational Effectiveness “ Doing the same thing your competitors do but doing them better” Strategic Positioning “ doing things differently from competitors”

16. The Internet and Competitive Advantage • Operational Effectiveness • To operate at lower cost • Real-time information • Less investment

17. The Internet and Competitive Advantage • Strategic Position • Deliver a ‘unique’ type of value • Stay one step ahead of competition • Focus on profitability rather than just growth Since operational advantages are easy to imitate by competitors, strategic positioning becomes more important.

18. The Six principals of strategic Positioning The Right Goal A Value Proposition A Distinctive Value Chain Trade-Offs Fit Together Continuity of Direction

19. The Absence of Strategy 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.

20. Value Chain

21. Internet Application in Value chain • Advantages of using Internet in the Value Chain • Connect the various activities and players in the value system • Real-time data • inside organization • outside organization • Influence on the cost and quality of activities

22. Internet as a Complement • Is Internet cannibalistic? • A replacement of certain elements of industry value chains • Ex. on-line music distribution

23. Internet as a Complement • The Internet complements rather than cannibalizes • Ex. Walgreens: • Web site for providing extensive information to customers. • Order prescriptions on-line. • No cannibalization Fully 90% of on-line customers prefer to pick up their prescriptions at a nearby store

24. Internet as a Complement • Ex. W.W. Grainger • Coordinate on-line efforts with traditional business. • Sale increase 9% for on-line customers . • Increase the overall value to customers • Reduce cost • Found that printed catalog support online operation

25. Internet as a Complement • Short-coming of Internet application VS conventional methods • Lack of tangible product • No skilled explanation by sale personnel • Lack of face-to-face contact • Extra logistical costs for small shipments • Delay in navigation website • Hard to reinforce image without physical facilities • Hard to attracting customers among many choice

26. The End of the New Economy (1)Internet is NOT an advantage. It is a basic medium. Unchanged Fundamental Competitive Advantages: Unique products Proprietary content Superior quality Strong personal service Relationships Linked by internet Traditional firms have advantage over dot-coms. Dot-coms need to pursue distinctive differentiation.

27. The End of the New Economy (2) The difference between Internet and traditional companies are blurring e-College • Companies and governments subsidize e-sales to gain market base • Market curiosity E-strategy Strategy

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