Monday, March 08, 2021

9. Strategy and the Internet (management series)

The next article is a 2001 HBR article by Michael Porter called, "Strategy and the Internet." I am mindful that this article came out around the time of the bursting of the bubble. 

1. The internet is "an enabling strategy--a powerful set of tools that can be used wisely or unwisely, in almost any industry and as part of almost any strategy" (64).

"The key question is not whether to deploy Internet technology--companies have no choice if they want to stay competitive--but how they deploy it." The internet itself is not a competitive advantage (I might add that he is assuming a smart company will be engaged with the internet. This is a less certain assumption in the world of higher ed, I would say). "Many of the companies that succeed will be ones that use the Internet as a complement to traditional ways of competing, not those that set their Internet initiatives apart from their established operations."

With regard to the last statement, places like IWU did well in that period precisely because they cordoned off their online initiatives from traditional forces that would almost certainly have sabotaged them.

"The Internet actually makes strategy more essential than ever" (64).

2. Distorted Market Signals

"In the early stages of the rollout of any important new technology, market signals can be unreliable." "When prices are artificially low [because of leveraged buy-in, no government sales tax, etc], unit demand becomes artificially high."

By the way, Amazon has smashed this part of the article to smithereens. It was just wrong. Borders no longer exists. The CEO of Amazon is the richest person in the world.

"The sheer number of dot-coms in many industries often revealed nothing more than the existence of low barriers to entry, always a danger sign" (65).

3. A Return to Fundamentals

"Many businesses active on the Internet are artificial businesses competing by artificial means and propped up by capital that until recently had been readily available."

In transition periods, it may appear that there are new rules of competition, but as market forces play out, old rules regain their currency. "The creation of true economic value once again becomes the final arbiter of business success."

Economic value is the difference between price and cost. A company's current stock price is not necessarily an indicator of economic value. 

"In periods of heavy experimentation, even sellers of flawed technologies can thrive."

Two fundamental indicators of profitability:

  • industry structure (which indicates the profitability of the average competitor)
  • sustainable competitive advantage 

4. Industry Structure

The internet has changed the front-end of some businesses, but not so much the businesses themselves. 

The structural attractiveness of an industry is five-fold:

  • intensity of rivalry among existing competitors
  • barriers to entry for new competitors
  • threat of substitute products or services
  • bargaining power of suppliers
  • bargaining power of buyers
The very benefits of the internet make it more difficult for companies to capture those benefits as profit.

5. The Myth of the First Mover

He argues that switching costs (the cost of switching from one service provider to another) did not go up with the internet. He argues that network effects (accumulating a customer base because of combined services) have not made getting on the internet first important. Partnering is not a win-win means to improve industry economics (e.g., product complements, outsourcing).

6. The Future of Competition 

"The most important determinant of a marketplace's profit potential is the intrinsic power of the buyers and sellers in the particular product area."

A competitive advantage can be achieved by a lower cost, commanding a premium price, or both. Cost and price advantages can be achieved in two ways--operational effectiveness or strategic positioning. Porter thinks that operational effectiveness will rarely provide a big advantage in the internet age.

7. Six fundamental principles of strategic positioning

  • have the right goal -- superior return on long-term investment
  • must deliver a value proposition
  • must deliver something distinctive
  • robust strategies involve trade offs. "Trying to be all things to all customers almost guarantees that a company will lack any advantage" (71).
  • strategy makes sure everything fits together
  • Strategy involves continuity of direction. "Frequent corporate re-invention... is usually a sign of poor strategic thinking."
8. Lack of Strategy

Acquisition of customers is not the same as the building of profitability.

I will say I think history has proven some of this article wrong, although it has many helpful features. A company like Merrill Lynch wouldn't stand a chance without online options. CDs don't exist any more. Take this ridiculous comment: "Online music distribution may reduce the need for CD-manufacturing assets." You think? Blockbuster is long gone. And Grainger is currently in major jeopardy from Amazon Business. I also smile at how often he compliments AOL. Who?

9. The Internet and the Value Chain

"The Internet does not represent a break from the past; rather it is the latest stage in the ongoing evolution of information technology" (74).

evolution of IT:

  • automation of discrete transactions (entry)
  • functional enhancement of individual activities (hr, sales...)
  • cross-activity integration (CRM, SCM, ERP)
  • entire system integration
  • integrated product development

Virtual activities do not replace the need for physical activities:

  • "Introducing Internet applications in one activity often places greater demands on physical activities elsewhere."
  • "Using the Internet in one activity can have systemic consequences, requiring new or enhanced physical activities that are often unanticipated."
  • "Most Internet activities have shortcomings in comparison with conventional methods."

He doesn't see the internet as a new economy but an old economy that has access to new technology.


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