“Strategy and the Internet” By Michael e. Porter

1. “Strategy and the Internet”ByMichael e. Porter Spring 2009 Group 4 MasimSuleymanov Chris Propst PanyaratUzob ChayudaChotcomwongse

2. Michael E. Porter • Bishop William Lawrence University Professor at Harvard Business School • Leading authority on competitive strategy • Author of 18 books and over 125 articles • His work is taught at virtually every business school in the world • Full biography can be found at: http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=bio&facEmId=mporter

3. Time Perspective • 1960’s and 70’s – ARPAnet • 1990 - The “World Wide Web” • 1995 - 0.4% of the World Population • 2000 – 5.0% of the World Population • 2000 - The Dot-Com Bubble bursts • 2001 – This article is written • 2008 – 23.5% of the World Population Source: http://www.webopedia.com/quick_ref/timeline.asp

5. The Internet • An important new technology • Provides opportunities for companies • Misconception: “The Internet changes everything” • Bad decisions • Eroded attractiveness of industries • Undermined competitive advantages • Clearer view • The Internet as a complement • “The Internet per se will rarely be a competitive advantage.” – Michael E. Porter

6. Distorted Market Signals • Revenues • Unreliable sales figures • Costs • Fuzzy, hidden and subsidized inputs • Share Prices • Unreliable signals from the stock market • Financial Metrics • Downplayed traditional methods • Proliferation of Dot-coms • Low barriers to entry

7. A Return to Fundamentals • 2 Broad Conclusions • Artificial businesses • Appears there are new rules • True economic value • Fundamental factors of profitability • Industry structure • Sustainable competitive advantage

8. The Internet and Industries • Created new industries • Enabled the reconfiguration of existing industries

9. Industry Structure: Five Forces (Continues)

10. Industry Structure (Continued) • 5 Forces determine: • Industry’s fundamental attractiveness • How economic value is shared among companies, customers, suppliers, distributors, substitutes, and potential new entrants • Underlying drivers of average industry profitability, even if forces change hands • How profitability will evolve in the future

11. How the Internet Influences Industry Structure? (Continues)

12. How the Internet Influences Industry Structure? (Continued) (Continues)

13. How the Internet Influences Industry Structure? (Continued)

14. Myth of the First Mover 1. The deployment of the Internet would • increase switching cost and • create strong network effect, • which would provide first movers with • competitive advantages and • robust profitability. (Continues)

15. Myth of the First Mover (Continued) Reality: • Switching costs: • Is lower on the Internet • Network effect: • Is displayed only in some Internet applications • Is hard to achieve • Can cause critical mass of customers • Requires huge investments (Continues)

16. Myth of the First Mover (Continued) 2. First movers will reinforce their advantages by • quickly establishing strong new-economy brands. • Reality: • It is hard to create strong brands on the Internet, because • The lack of physical presence and • The lack of direct human contact • Makes it less tangible. (Continues)

17. Myth of the First Mover (Continued) 3. Partnering is a win-win means to improve industry economics. • Reality: • Only a well-established partnering strategy can be beneficial. • A high number of partnerships reduces the individualities of companies within the industry • Two kinds of partnerships: • With Complements • Outsourcing

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

19. The Internet and Competitive Advantage Two Ways • Operational Effectiveness • To operate at lower cost • By doing the same things but doing them better. • Strategic Positioning • To command a premium price • By doing things differently from competitors. • However, Distinctive strategic positioning becomes more important.

20. The Six Principles of Strategic Positioning • The Right Goal • A Value Proposition • A Distinctive Value Chain • Trade-Offs • Fit Together • Continuity of Direction

21. The Absence of Strategy • Undermined the Structure of the Industries • Hastened Competitive Convergence • Reduced to Gain a Competitive Advantage • Price Competition • Internet architecture • A far more powerful tool for strategy • By providing IT platform across the value chain.

22. Internet in the Value Chain • The Value Chain • is a framework • for identifying all the activities • and analyzing how they affect • Advantages of the Internet • Ability to link one activity with others • Make real-time data • within company • with suppliers, channels, and customers • Provide a standardized infrastructure Make Cost Lower (Continues)

23. Internet Application in Value Chain (p.75)(Continued)

24. Internet as a Complement • Assumed -> Internet is cannibalistic • Reality -> A replacement of certain elements of industry value chains (Continues)

25. Internet as a Complement (Continued) • Walgreens: • Introduced a Web site for offering extensive information to customers • Order prescriptions • No cannibalization issues • Fully 90% of customers who order online prefer to pick up their prescriptions at a nearby store (Continues)

26. Internet as a Complement (Continued) • W.W. Grainger • Aggressive on-line efforts combined with traditional business • Estimates a 9% incremental growth in sale since introduction • Found that Web ordering increase the value of physical locations • Found that printed catalog support online operation (Continues)

27. Internet as a Complement (Continued) • 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

28. The End of the New Economy Internet means to the economy: • Demand side • Choice of Channels • Delivery option • Ways of dealing with companies • Supply side • Production & Procurement (Continues)

29. The End of the New Economy (Continued) • The ways for Business success • Established company • Deploy internet technology to reconfigure traditional activities • Dot-coms • Pursue own distinctive strategy • Break away from pricing strategy and focus on adding value • Differentiate themselves • The new economy appears less like a new economy then like and old economy that has access to new technology.

30. Conclusion • Companies shouldn’t rush to jump in the Internet business, • assuming that it will grow its size and profitability because of its features, • without having well-established long-term strategies. • Although the Internet transformed industries in some respect, • traditional sources of competitive advantages remain important. • Only by integrating the Internet into overall strategy • will this new powerful new technology become an equally powerful force for competitive advantage.

31. Limitations • Ignore the facts that doesn’t support his model. • Stuck with few traditional characteristics in evaluating company and industry attractiveness: • 5 forces • Growth • Profitability • Differentiation • The Internet today is just a new platform where competitors compete with slightly different strategies from traditional ones.

32. Questions? “It is better to know some of the questions than all of the answers.” James Thurber