Strategy and the Internet. By Michael E. Porter. Strategy and the Internet. Presented by: Kimbralee Brannan (Kim) Michelle Brenner Craig Mosman Sumitra Nilavatanakal Tarit Sribenjaplangkool (Richie) Teera Teevawechawong (Joe). Who is Michael E. Porter?.
Strategy and the Internet By Michael E. Porter
Strategy and the Internet Presented by: Kimbralee Brannan (Kim) Michelle Brenner Craig Mosman Sumitra Nilavatanakal Tarit Sribenjaplangkool (Richie) Teera Teevawechawong (Joe)
Who is Michael E. Porter? • Father of the modern strategy field • World’s most influential thinker on management and competitiveness • Porter’s work is taught at virtually every business school in the world.
Author: Michael E. Porter Personal History and Education • Born in Ann Arbor, Michigan. • 1969 - Received a B.S. with high honors in aerospace and mechanical engineering from Princeton University • 1971 - Received an M.B.A. with high distinction from the Harvard Business School • 1973 – Received a Ph.D. in Business Economics from Harvard University. • Currently resides in Brookline, Massachusetts.
Author: Michael E. Porter Professional Achievements • Bishop William Lawrence University Professor, based at Harvard Business School • Author of 18 books and over 125 articles: • Competitive Strategy: Techniques for Analyzing Industries and Competitors(been translated into 19 languages.) • Competitive Advantage: Creating and Sustaining Superior Performance(published in 1985) • On Competition(published in 2008) • Received multiple honors & awards • Holds many advisory/civic roles including govt. roles
Introduction • The Internet is an important technology. • Enabling Internet technology = powerful set of tools that can be used in almost any industry and strategy.
Misconceptionabout Strategy and the Internet • Idea that Internet changes everything, “rendering all old rules about company and competition obsolete” • Leads to bad decisions that erode attractiveness within industry & weaken competitive advantage • e.g. Internet Technology to shift competition toward price & away from quality, features, & service.
Fundamental Questions to ask: • Who will capture economic benefits that Internet creates? • Will all the value end up going to customers, or will companies be able to reap a share of it? • What will be the Internet’s impact on industry structure? • Will it expand or shrink the pool of profits? • What will be its impact on strategy? • Will Internet bolster or erode ability of companies to gain sustainable advantages over competitors?
Introduction (cont.) • Key Question: “Not whether to deploy Internet technology, but how to deploy it.” • Internet technology provides better opportunities for companies to establish distinctive strategic positioning. • Competitive advantage requires building on proven principles of effective strategy. • Successful Companies use the Internet as complement to traditional ways of competing.
Distorted Market Signals • Market Signals, Interpret with Caution. • Early stage of new technology unreliable. • Experimentation unsustainable. • Unclear Revenue. • Unclear Cost. • Stock Market Fluctuation. • Undependable Financial Measures.
Distorted Market Signals • Revenue. • Subsidized purchases for customer base. • Discounts cause false high demand. • Curiosity of internet business. • Revenue in stock. • Cost • Suppliers discount. • Payment through equity or stock options. • Misinterpretation of capital needs.
Distorted Market Signals • Stock Market Fluctuation. • Investor eagerness. • Volatile growth vs. business fundamentals. • Short term share price. • Financial Measures. • Number of unique website visitors. • Total number of visitors. • Site click through rates.
A Return to Fundamentals • Real Economic Value. • Sustained profitability. • Shareholder value. • Internet vs. Internet technology uses. • Internet – sell products or services. • Internet tech – site tools or communications. • Experimentation and short term gains.
A Return to Fundamentals • How can the internet create long term value? • Industry Structure – average profitability. • Sustainable Competitive Adv – above average. • Varies by industry. • Compare companies in single industry.
The Internet and Industry Structure • The Internet creates new industries • On-line auctions and digital marketplaces • The Internet impact enables the reconfiguration of existing industries • The existing industries had been constrained by high costs for communicating, gathering information, or accomplishing transactions
Industry Structure: Five Forces Bargaining power of suppliers Bargaining power of buyers Rivalry among existing competitors Barriers to entry Threat of substitute products or services
Industry Structure (Continued) • 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
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 (-) A lot of new entrants
How the Internet Influences Industry Structure? (Continued) • Bargaining Power of Suppliers (+) Raises bargaining power over suppliers (-) Gives suppliers access to more customers (-) Reduces need for intervening companies. (-) Reduces barriers to entry • Bargaining Power of Buyers (+) Eliminates powerful channels (-) Shifts bargaining power to end consumers (-) Reduces switching costs
How the Internet Influences Industry Structure? (Continued) • Rivalry among competitors (-) Reduces differences among competitors (-) Migrates competition to price (-) Widens the geographic market (-) Lowers variable cost relative to fixed cost
The Myth of the First Mover • The deployment of the Internet would • increase switching cost and • create strong network effects In reality: • Switching costs: • are lower on the Internet • Network effects: • are displayed only in some Internet applications • are difficult to achieve
The Myth of the First Mover • First movers will take advantages by • quickly establishing strong new-economy brands In reality: • It is hard to create strong brands • The lack of physical presence and direct human contact
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
The Future of Internet Competition • Industry Structure • Lower Entry Barrier • More Competitors • Company • Lower Profitability • Customers • More Bargaining Power • Low Switching Cost
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. “As operational advantages are easy to imitate by competitors, strategic positioning becomes the more important”.
The Six Principles of Strategic Positioning • The Right Goal • A Value Proposition • A Distinctive Value Chain • Trade-Offs • Fit Together • Continuity of Direction
The Absence of Strategy • Maximize revenue and market share rather than focus onprofit. • Focus on indirect revenues (advertising, click- through fees) rather than deliver real value. • Offer everythingrather than make trade-offs. • Imitatefrom competitors rather than create unique way. • Seek partnerships and outsourcing rather than build their proprietary asset. These had been eroding the “Structure of their Industries”
Value Chain • The Value Chain • Set of activities
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
The Internet as Complement • Assumed Internet is cannibalistic • on-line music distribution would reduce the need for CD-manufacturing assets. • Reality A replacement of certain elements of industry value chains • finding and promoting new artists, producing and recording.
Internet as a Complement • 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
Internet as a Complement • The complementarities between Internet activities • and Traditional activities. • Introducing Internet applications places greater • demands on physical activities in the value chain. • Ex. Direct ordering • Systematic consequences that require new • physical activities. • Ex. Internet-based job-posting services
Short-coming of Internet application VS conventional methods • Lack of physically examining, touching and testing products. • Limitation of knowledge transfer. • Lack of human contact that eliminates a powerful tool for encouraging purchases. • Extra logistical costs for small shipments. • Undermine sales forces, distribution channels and purchasing power. • Reduce a means to reinforce image because of lack of physical facilities. • Difficult to attract new customers.
Discussion Questions • How does Internet influence the industry structure? Explain using Porter’s model on competition. • Porter’s model on competition uses five categories: • Threat of substitute products or services • Bargaining power of suppliers • Rivalry among existing competitors • Buyers (bargaining power of buyers) • Barriers to entry
Discussion Questions (cont.) • Can Internet create sustainable competitive advantage? How? Explain. • Yes. Internet can create sustainable competitive advantages. • Operational effectiveness side • enables improvements throughout the entire value chain • The openness of the Internet • easier for companies to design and implement applications. • Powerful tool in implementing business strategy • integrates, customizes, and reinforces the fit among activities in companies
Discussion Questions (cont.) • The winners will be those that view the Internet as a complement to, not a cannibal of traditional ways of competing? Explain. • Internet activities are not stand-alone technologies. • They must be integrated into the overall value chain. • Companies should combine the Internet as part of its strategy • Companies should use the Internet to enhance its services to their customers.
The End of the New Economy • Companies utilizing the Internet • Basic Internet vs Robust Competitive advantages • Demand side • Online services, personal services, and physical locations • Choice of channels and delivery options • Supply • Production and procurement
The End of the New Economy • Integrating traditional and Internet methods • Dot-coms • Focus on: • Product selection • Product design • Service • Image • Differentiation • Others • Market segments
The End of the New Economy • Industries effected by change • Brokerage industry • Commercial banking • The “New Economy” • “Powerful new technology becomes an equally powerful force for competitive advantage”
Porter’s: Five Competitive Forces That Shape Strategy (Harvard Business Review, 2008) • Forces that Shape Competition • Threat of entry • The power of buyers • The power of suppliers • The treat of substitutes • Rivalry among existing competitors
Porter’s: Five Competitive Forces That Shape Strategy (Harvard Business Review, 2008) • Factors, Not Forces • Industry growth rate • Technology and innovation • Government • Complementary products and services • Change in Industry Structure • Shifting threat of new entry • Changing supplier or buyer power • Shifting threat of substitution • New bases of rivalry
Porter’s: Five Competitive Forces That Shape Strategy (Harvard Business Review, 2008) • Implications for Strategy • Positioning the company • Exploiting Industry change • Shaping Industry structure • Defining the Industry • Competition and Value
Article Critique • Overall the author was on the right track. • Author does not distinguish distorted market signals between young and older generations. Younger generations more prone to resemble the internet market signals. • Many of the companies that succeed will be ones that use the Internet as a complement to traditional ways of competing; e.g. such as Car Dealerships, Best Buy, Banks, IRS/Governental agencies