05
Strategy and the Internet
Class 2: IT & Business Strategy
Michael E. Porter
Case Summary by: Michael Poirier
Main Takeaways

Overview
o Companies must distinguish themselves through strategy.
o The Internet, according to Porter, reduces the ability of companies to attain a sustainable
competitive advantage, due to its leveling effects.
o New technologies trigger experimentation that is often economically unsustainable.
o New, distorted success measures, such as “unique users”, “number of site visitors”, or
“click-through rates”, have historically allowed dot.com to “hide” their true financial
performance.
o Economic value is nothing more than the gap between price and cost, and it is reliably
measured only by sustained profitability.
o Industry structure is shaped in large part by the choices made by competitors.

First Mover Myths
o Myth: Internet would increase switching costs and create strong network effects, which
would provide first movers with competitive advantage & robust profitability. Reality:
Switching costs are lower, not higher, on the Internet, and the openness of the Internet
makes it difficult for any particular firm to capture benefits of network effects.
o Myth: Partnering with is a win-win means to improve industry economics. Reality:
Widespread partnering is just as likely to exacerbate an industry’s structural problems as
mitigate them.
o “Virtual enterprise” defined: a business creased largely out of purchased products,
components, and services.

The Future of Internet Competition
o In general, new Internet technologies will continue to erode profitability by shifting
power to customers.
o The ability to create barriers-to-entry will be critical because fragmentation will erode
profitability.

The Internet and Competitive Advantage
o Without strategic direction, speed and flexibility lead nowhere. It requires a focus on
profitability, defining a core value proposition, and a willingness to make tough tradeoffs.

The Internet & the Value Chain
o The set of activities through which a product or service is created and delivered to
customers.
o Internet applications must be integrated into the overall value chain.

The most successful dotcoms will focus on creating benefits that customers will pay for,
rather than pursuing advertising and click-through revenues from third parties.
–1–
05

Strategy and the Internet
Class 2: IT & Business Strategy
Michael E. Porter
Case Summary by: Michael Poirier
With support from IT staff and outside consultants, companies should use the technology
strategically to enhance service, increase efficiency, and leverage existing strengths.
Ultimately, strategies that integrate the Internet and traditional competitive advantages and
ways of competing should win in many industries.
More in-depth Summary

2 fundamental factors that determine profitability
o Industry structure: Determines profitability of average competitor
o Sustainable competitive advantage: Allows a company to outperform competitors over
time.

New industries created by the Internet
o On-line auctions
o Digital marketplaces

Internet’s greatest impact: Enable reconfiguration of existing industries that had been
constrained by high costs for communicating, gathering information, or accomplishing
transactions.

5 Forces Theory applied to “How the Internet Influences Industry Structure?”
o Intensity of rivalry among competitors – Internet reduces differences among
competitors, migrates competition to price, widens geographic market, and variable cost
relative to fixed, which increases pressures for price discounting.
o Barriers to entry for new competitors – Reduces barriers-to-entry by reducing required
overhead, hard to keep Internet applications proprietary, and a flood of new entrants have
come into new markets.
o Threat of substitute products or services – A positive for the Internet is that it expands
the size of the market, but the proliferation of Internet approaches creates new
substitution threats.
o Bargaining power of suppliers – Internet typically give a company a bargaining
advantage of its suppliers, but it also gives suppliers access to more customers, the role of
the middleman is significantly dwindled, reduces differentiation when procurement
gravitates to standardized products, and it reduces barriers to entry and shifts power to
suppliers.
o Bargaining power of buyers – Internet shifts bargaining power to end consumers, and it
reduces switching costs.

2 ways to achieve sustainable competitive advantage (higher prices or lower costs)
o Operational effectiveness: Doing similar things as your competitor, but doing them
better (technology, superior inputs, better-trained employees, more effective
management).
o Strategic positioning: Doing things differently from competitors, in a way that delivers
a unique value to customers. (different features, services, or logistics)

6 Principles of Strategic Positioning
o 1: Start with the right goal, which is superior long-term return on investment
–2–
05
Strategy and the Internet
Class 2: IT & Business Strategy
Michael E. Porter
Case Summary by: Michael Poirier
o 2: Deliver a value proposition, or set of benefits, different from those that competitors
offer.
o 3: Strategy needs to be reflected in a distinctive value chain.
o 4: A company must accept trade-offs in some product features, services, or activities in
order to be unique at others.
o 5: All of a company’s activities must be mutually reinforcing
o 6: Strategy requires continuity of direction
Prominent Applications of the Internet in the Value Chain
Firm Infrastructure
 Web-based, distributed financial and ERP systems
 On-line investor relations (e.g., information dissemination, broadcast conference calls)
Human Resource Management



Self-service personnel and benefits administration
Web-based training
Internet-based sharing and dissemination of company information
Electronic time and expense reporting

Technology Development


Collaborative product design across locations & among multiple value-system participant
Knowledge directories accessible from all parts of the organization
Real-time access by R&D to on-line sales and service information

Procurement



Internet-enabled demand planning; real-time available-to-promise/capable-to-promise and fulfillment
Other linkage of purchase, inventory, and forecasting systems with suppliers
Automated “requisition to pay”
Direct and indirect procurement via marketplaces, exchanges, auctions, and buyer –seller matching

Inbound Logistics
Real-time integrated
scheduling, shipping,
warehouse management,
demand management and
planning, and advanced
planning and scheduling
across the company and its
suppliers.
Dissemination throughout
the company of real-time
inbound and in-progress
inventory data
Operations
Outbound Logistics
Marketing & Sales After-Sales Service
Integrated
information
exchange,
scheduling, and
decision making in
in-house plants,
contract assemblers,
and components
suppliers.
Real-time availableto-promise and
capable-to-promise
information available
to the sales force and
channels
Real-time transaction of
orders whether initiated by
an end consumer, a sales
person, or a channel partner.
Automated customerspecific agreements and
contract terms
Customer and channel access
to product development and
delivery status.
Collaborative integration
with customer forecasting
systems.
Integrated channel
management including
information exchange,
warranty claims, and
contract management.
On-line sales channels
including web sites and
marketplaces.
Real-time inside and
outside access to customer
information, product
catalogs, dynamic pricing,
inventory availability, online submission of quotes,
and order entry.
On-line product
configurations.
Customer-tailored
marketing via customer
profiling.
Push advertising.
Tailored on-line access.
Real-time customer
feedback through web
surveys, opt-in/opt-out
marketing, and promotion
response tracking.
–3–
On-line support of customer
service representatives
through e-mail response
management, billing
integration, co-browse,
voice-over IP, and other uses
of video streaming.
Customer self-service via
web sites and intelligent
service request processing
including updates to billing
and shipping profiles.
Real-time field service
access to customer account
review, schematic review,
parts availability and
ordering, work-order update,
and service parts
management.
05
Strategy and the Internet
Class 2: IT & Business Strategy
Michael E. Porter
Case Summary by: Michael Poirier

Limits to the Internet
o Customers can’t physically examine, touch, and test products or get hands-on help in
using or repairing them.
o Knowledge transfer is restricted to codified knowledge, sacrificing the spontaneity and
judgment that can result from interaction with skilled personnel.
o The ability to learn about suppliers and customers is limited by the lack of face-to-face
contact.
o The lack of human contact with the customer eliminates a powerful tool for encouraging
purchases, trading off terms and conditions, providing advice and reassurance, and
closing deals.
o Delays are involved in navigating sites and finding information and are introduced by the
requirement for direct shipment.
o Extra logistical costs are required to assemble, pack, and move small shipments.
o Companies are unable to take advantage of low-cost, non-transactional functions
performed by sales forces, distribution channels, and purchasing departments.
o The absence of physical facilities circumscribes some functions and reduces a means to
reinforce image and establish performance.
o Attracting new customers is difficult given the sheer magnitude of the available
information and buying options.

Successful dotcoms will share the following characteristics
o Strong capabilities in Internet technology
o A distinctive strategy vis-à-vis established companies and other dotcoms, resting on a
clear focus and meaningful advantages
o Emphasis on creating customer value and charging for it directly, rather than relying on
ancillary forms of revenue
o 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
established.
–4–