Articles by Michael E. Porter and Don Tapscott ‘Strategy and the Internet’ vs. ‘Rethinking Strategy in a Networked World’ Articles by Michael E. Porter and Don Tapscott

Strategy and the Internet: Fundamental Questions Who will capture the economic benefits that the Internet creates? Where will the value end up? With the customers? Will companies be able to reap a share of it? What will be the Internet’s impact on industry structure? Expand or shrink profit?

Distorted Market Signals Revenue Side – Sales figures can be 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: Expanded definition of revenue Number of customers Number of unique users – “reach” Number of site visitors Click-through rates

Dot Com 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 Com 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: Site-customization tools 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

Porter’s Model of Competitive Rivalry

Competitive Rivalry Model, cont’d. The model is supposed to help a firm identify threats to its competitive position and to lay plans and derive average profitability and attractiveness of industry The model recognizes 5 major forces that could endanger a company’s position in a given industry

Porter’s 5 Competitive Forces The rivalry among existing firms in the industry The threat of potential new entrants to the sector The threat of substitute products or services The bargaining power of suppliers The bargaining power of buyers

Porter’s Model – New Entrants The ease with which a company can enter a given trade sector Barrier to entry include the need for: Capital Knowledge Skills Government regulations, e.g. online sales tax Market leadership and switching costs, e.g. Microsoft

Porter’s Model – Substitution A new product or service that becomes available and supplies the same function as the existing product E-Commerce substitution: Online banking, MP3, movies, software, games, airline ticket booking, books, newspapers, magazines, post cards, etc.

Porter’s Model – Bargaining Power of Suppliers Suppliers have bargaining power where: There are few or no competitors There is a shortage of supply

Porter’s Model – Bargaining Power of Buyers Buyers have bargaining power where: There are a number of competitors There is a surplus of supply Customers: more sellers online, unbiased information access, increased information processing, the competitor is just a click away, etc.

Porter’s Model – Existing Players The competition between existing players is won on the basis of generic competitive advantage of price, differentiation, or focus

Competitive Advantage 3 basic strategies: Cost leadership: Prices lower than the competition Differentiation: Products with some quality that makes them more attractive than the competition Focus: Concentration on a single aspect of the market (a niche)

How Can IT Help Provide a Competitive Advantage? Cost Leadership: Reduce administrative costs, e.g. supply chain Differentiation: Quality of service (QoS) Responsiveness to customer requirements Focus: Target information on the selected segment Gather customer data from that segment Quick Response and JIT: Evolve new products and services Facilitate customization

First Mover Advantage The first organization to implement a new type of systems/businesses can gain the price advantage or differentiation while competitors are still operating with traditional methods E-Commerce first movers include: Amazon eBay

First Mover Advantage, cont’d. First movers take a big risk: New unproven business models New expensive technologies Second/late movers can copy proven ideas and technological applications

First Mover Advantage, cont’d. To gain competitive advantage using IS and IT usually needs an element of surprise; the system needs to be out in the market place before competitors make a start in copying the idea Sustaining that competitive advantage requires either: Converting the technical advantage into brand advantage Sustaining the technical lead by continuous product and service development The development of many e-Commerce systems, cannot be entirely private – customers had to become involved and competitors can copy

First Mover Myth Deployment of Internet technologies would increase switching costs and create strong network effects which would provide first movers with a competitive advantage  MYTH Switching costs: All cost incurred by a customer in changing to a new supplier As switching costs go up, customers’ bargaining power goes down and barriers to entry into a industry increase

Internet and Value Chain: 5 Overlapping Stages Automated discrete transactions: order entry and accounting Functional enhancement of individual activities: sales force operations and HR management Cross-activity integration: CRM, SCM, ERP Integration of value chain: end-to-end applications that connect CRM, SCM, ERP Real-time optimization

The Internet and Competitive Advantage Sustainable competitive advantage: Operating at a lower cost Commanding a premium price How to achieve it? Operational Effectiveness: Doing the same things as your competitors but doing them better Strategic Positioning: Doing things differently than your competitors

Operational Effectiveness Many companies doing the same thing the same way A lot of companies developing similar types of Internet applications, often with COTS Customer’s purchase decision is on the basis of price, undermining industry profitability

Six Principles of Strategic Positioning Start with right goal: long-term return on investment Deliver a value proposition different from competitors Have a distinctive value chain Robust strategies involve trade-offs Define how all elements of what a company does fit together Continuity of direction

The End of the New Economy New Economy = Old Economy + Access to Information Technology Business > e-Business >>> Business Strategy > e-Strategy >>> Strategy

Porter Summary Profitability still counts True economic value is measured by sustained profits To compete, companies must operate at a lower cost and/or command a premium price, either through operational effectiveness or by creating unique value for customers Being first mover does not guarantee competitive advantage over the long haul Traditional framework of strategies, like Competitive Forces, are still applicable

What Do Others Think? Don Tapscott’s article is sub-titled ‘Why Michael Porter is Wrong about the Internet’ Obviously disagrees with Porter at some fundamental level

Tapscott’s Article Business Web Any system composed of suppliers, distributors, service providers, infrastructure providers, and customers that uses the Internet for business communications and transactions

Tapscott, cont’d. Internet is an unprecedented, powerful, universal communication medium It will soon connect every business, business function, and the majority of human beings on the planet It is the only platform which converges all communication media and IT tools The internet of today will drastically change in near future

Tapscott, cont’d. Internet is not only the means to link computers, but the mechanism by which individuals and organizations exchange money, conduct transactions, communicate facts, express insight and opinion, and collaborate to develop new knowledge

Tapscott, cont’d. Three core areas ripe for business model innovations Unique Products Operational Efficiencies Customer Service and Relationships

Unique Products IBM shifted its mentality from proprietary hardware and software to partnering with other companies Now offering Linux and investing lots of $ in OSS projects Built the PC market based on Microsoft standard Only 15 years ago, IBM had rivals in Digital Equipment Corporation (DEC), Prime Computer, and Data General (DG). They have failed because they did not partner

Operational Efficiencies In procurement, GE used reverse auctions to save ~$600 million in 2001 Run these global auctions daily $6 billion worth of auctioning in 2000

Customer Service and Relationships The Internet is more than an added channel for customer service Sales agents have Internet-based information and tools that can be used at the customer site Call centers equipped with customer relationship management (CRM) systems can deliver better customer service because they have the full customer records Brick-and-mortar stores exploit location-based services to gain more customers that find them through the Internet

Tapscott, cont’d. In the Internet era, firms can profit enormously from resources that do not belong to them Example: Ebay  PayPal, UPS, FedEx Flight booking  Sabre

References Strategy and the Internet by Michael Porter appeared in the Harvard Business Review in March 2001 Rethinking Strategy in a Networked World by Don Tapscott appeared in Strategy + Business, Issue 24 (Third Quarter, 2001)