Strategy and the Internet

ByBy

Michael E. Michael E. PorterPorter

Group Members

• Lim Veron NardyLim Veron Nardy (M987Z-210) (M987Z-210)• Rosa Situmorang Rosa Situmorang (M987Z-212) (M987Z-212)• Yanni PutriYanni Putri (M987Z-225) (M987Z-225)• Vong Phung KieuVong Phung Kieu (M987Z-226) (M987Z-226)• Chantharas KanchanakoolChantharas Kanchanakool (M987Z-258) (M987Z-258)• Martin Firdaus Siringoringo (M987Z-208)Martin Firdaus Siringoringo (M987Z-208)

Outline• IntroductionIntroduction• Distorted Market SignalsDistorted Market Signals• A Return to FundamentalsA Return to Fundamentals• The Internet and Industry StructureThe Internet and Industry Structure• How the Internet Influences Industry StructureHow the Internet Influences Industry Structure• The Future of Internet CompetitionThe Future of Internet Competition• The Internet and Competitive AdvantageThe Internet and Competitive Advantage• The Six Principles of Strategic PositioningThe Six Principles of Strategic Positioning• The Internet as ComplementThe Internet as Complement• The Internet and the Value ChainThe Internet and the Value Chain• Strategic Imperatives for Dot-Coms and Established Strategic Imperatives for Dot-Coms and Established

CompaniesCompanies• The End of the New EconomyThe End of the New Economy

Main Issues to be Addressed

• Who will capture the economic benefits that the Internet creates?

• What is the Internet’s impact on strategy?

• Will the Internet reinforce or erode a companies ability to gain a strategic competitive advantage?

Distorted Market Signals

• Revenue Side – Sales figures have been unreliable:– Subsidized sales, such as no sales tax– Curiosity shopping– Some revenues from online commerce have

been received in the form of stock rather than cash

• Cost Side also fuzzy– Subsidized procurement– Understating the need for capital

Distorted Market Signals cont’d

• Stock Market – some companies made decisions based on influencing near-term share price or responding to investor sentiments

• Financial Metrics:– Expansive definition of revenue– Number of customers– Number of unique users – “reach”– Number of site visitors– Click-through rates

Dot-Coms Key Performance Indicators (1995 – 1999)

• Key Performance Indicators (KPIs):– Hit: Number of browser requests for a single item– Impression: Number of times a banner ad is

seen by a visitor– Page Views: Number of times a page is

displayed– Unique Visitors: Number of different individuals

visiting the site– Click-through Rate: Percentage of times

responded to advertisement by clicking on the ad

Dot-Coms KPIs (2000)

Source: McKinsey Quarterly

A Return to Fundamentals

• Creation of true economic value once again becomes the final arbiter of business success

• Economic Value: Price – Cost– Reliably measured only by sustained profitability

• Uses of Internet– Selling toys

• Internet technologies:– real-time communications services – Can be deployed across many uses

• The uses of Internet technology ultimately create economic value

How Can the Internet be Used to Create Economic

Value?

• Industry Structure: Determines the profitability of an average competitor

• Sustainable Competitive Advantage: Allows a company to outperform the average competitor

The Internet and Industry Structure

• Created some new industriesOn-line auctionsDigital marketplaces

• Enable the configuration of existing industries

Competitive Forces

Five underlying forces of competitions :• The intensity of rivalry among existing competitors,• The barriers to entry for new competitors,• The threat of substitutes products or services,• The bargaining power of suppliers, and• The bargaining power of buyers.

The strength of each of the five forces varies from industry to industry; each industry is affected in different ways.

Power of Suppliers

Threat of Substitut

es

Power of

Buyers

Existing Competiti

on

Barriers to Entry

(+/-) Raise bargaining power over suppliers(-) Provides a channel for suppliers to reach end users(-) Give all companies equal access to suppliers, standardized product

(-) Reduces differences among competitors(-) Migrates competition to price(-) Widens the geographic market(-) Increasing pressure for price discounting

(-) Reduces barriers to entry(-) Internet applications are difficult to keep proprietary from new entrants(-) Flood of new entrants has come into many industries

(+) Improves bargaining power over traditional(-) Shift bargaining power to customer(-) Reduce switching cost

(+) Expand the sixe of the market(-) Creates new substitution threats

The Myth of The First Mover

The deployment of the internet would :• Increase switching cost

switching cost encompass all the costs incurred by a customer in changing to a new supplier

• Create strong network effectsWhich would provide first movers with

competitive advantages and robust profitability.

The Future of Internet Competition

• To put pressure on the profitability of many industries

• To be more competition

• And the ability to create barriers to entry is critical, but there are a real challenge to profitability

• To gain efficiency improvements

The Internet as a Complement

• Threat of Internet replacing all conventional ways of doing business

vastly exaggerated

• In many cases the Internet acts as a complement to traditional activities

The Internet and Competitive Advantage

Internet is more profitable than the average performer for individual companies.

By : - operating at a lower cost - commanding a premium price - doing both

The Internet and Competitive Advantage

2 ways to achieve advantage : - operational effectiveness :• Doing the same things your competitors

do but doing them better• By easing and speeding the exchange of

real-time information.

- strategic positioning: Doing things differently from

competitors

Six Principles of Strategic Positioning

Six Principles of Strategic Positioning

The Absence of Strategy

• However, internet architecture + improvements in software has turned IT into more powerful tool for strategy

• Internet technology provides infrastructure for information access and delivery

• When it comes to reinforcing a distinctive strategy, tailoring activities, and enhancing fit, the internet provides a better technological platform than previous generations of IT• The packaged software applications have been a

force for standardizing activities and speeding competitive convergence

The Internet as Complement

• Internet complements companies’ traditional ways of competing.

• For example, Wallgreens’ website provides customers with extensive information and allow customers to order prescriptions online. 90% of customers who order over web prefer to pick up their prescription at a nearby store

The Internet as Complement

• Another example, W.W. Grainger; Estimated 9% incremental growth in sales for customers who use the online channel above the normalized sales of customers who use only traditional means.

• Web ordering increases the value of its physical locations.

The Internet as Complement

• Virtual activities do not eliminate the need for physical activities, but often amplify their importance– Internet application in one

activity often places greater demands on physical activities elsewhere in the value chain

– Internet applications enhance physical activities that are often unanticipated

– Internet applications have limitation, so the physical activities still can not be replaced

Words for the Unwise:

The Internet’s Destructive LexiconLanguage used to discuss online

business is also a misguided approach.

- “business models”: Loose conception of how a company does business and generates revenue. However, this term is neither enough to set for building up a company, nor creating economic value.

- “e-business & e-strategy”: Managers should view their internet operations in isolation from the rest of the business, which consequently leads to competing using the internet and can increase the pressure for competitive imitation. Interpret otherwise, some companies fail to integrate internet into their strategies; thus never reach the most advantage position.

The Internet and the Value Chain

Value chain:

-The set of activities through which a product or service is created and delivered to customers.

- A framework for identifying value-creating activities and analysing how they affect both a company’s costs and the value delivered to buyers.

Information Technology:

- Has a pervasive influence on the value chain since its advantage is the ability to link one activity with others and make real-time data created in one activity.

- Provides a standardised infrastructure, an intuitive browser interface for information access and delivery, bidirectional communication, and ease of connectivity – all at much lower cost than private networks and electronic data interchange (EDI).

5 stages of the Evolution of Information

Technology in Business Stage 1: It is the earliest IT systems; an automation of discrete transactions such as order entry and accounting

Stage 2: The fuller automation and functional enhancement of individual activities such as HRM, sales operation, etc.

Stage 3: Cross-activity integration (linking multiple activities; e.g. CRM, SCM)

Stage 4: Integration of IT systems across the entire value chain that may link suppliers, manufacturers and customers in a way that provides real-time information across the chain; at this stage, CRM and SCM are starting to merge.

Stage 5: Truly optimise all workings such as product development with real time information and communication across the chain

Prominent Applications of the

Internet in the Value Chain

• Firm Infrastructure

• Human Resources Management

• Technology Development

• Procurement

- Inbound Logistics

- Operations

- Outbound Logistics

- Marketing and Sales

- After- Sales Service

Strategic Imperatives for Dot-Coms and Established

Companies• Dot-Coms must develop business strategies that create

economic value, while established companies must stop deploying the internet as a primary tools and instead use it to enhance the distinctiveness of their strategies.

• Successful Dot-Coms focus on creating benefits that customers will pay for, rather than pursuing advertising and click through revenues from third party.

• Don’t imitate established companies, create your own strategies to give more value to your company.

More strategic imperatives…• Dot-Coms should be used to seek out trade offs,

concentrating on segments where an Internet-only model offers real advantages.

• The characteristics of successful internet usages :o Strong capabilities in internet technologyo A distinctive strategy resting on a clear focus and

meaningful advantages, relative to other companieso Emphasis on creating customer value and charging for it

directly rather than relying for ancillary forms of revenueo Distinctive ways of performing physical functions and

assembling non-internet assets that complement their strategic positions

o Deep industry knowledge to allow proprietary skills, information and relationships to be developed

Internet technology can create better traditional activities and implement the combination of virtual and physical activities to be possible.

The End of the New Economy

• Companies will not survive without internet but they will not gain any advantage from it.

• Strategies that integrate the Internet and traditional competitive advantages and ways of competing should win in many industries.

• The value of integrating internet and traditional methods creates potential advantages for established companies.

• Dot-Coms should have breakthrough rather than competing solely on price or imitate established companies.

So…

• Both Dot-Coms and established companies will try to adopt each other way and distinct their strategies so that the combination strategies of both will create unique value for the customers.

• Dot-Coms will try to give real values to the customer while established companies use internet technology so that customers will be easier to reach, so only by integrating the internet into overall strategy will create equal powerful force for competitive advantage.