Strategy and the Internet

1. Strategy and the Internet By Michael E. Porter

2. Strategy and the Internet Presented by: Kimbralee Brannan (Kim) Michelle Brenner Craig Mosman Sumitra Nilavatanakal Tarit Sribenjaplangkool (Richie) Teera Teevawechawong (Joe)

3. 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.

4. 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.

5. 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

6. Introduction • The Internet is an important technology. • Enabling Internet technology = powerful set of tools that can be used in almost any industry and strategy.

7. 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.

8. 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?

9. 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.

10. 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.

11. 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.

12. 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.

13. 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.

14. 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.

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

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

25. 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”.

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

27. 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”

28. Value Chain • The Value Chain • Set of activities

29. 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

30. 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.

31. 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

32. 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

33. 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.

34. 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

35. 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

36. 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.

37. 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

38. 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

39. 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”

40. 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

41. 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

42. 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

43. 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

44. Questions