Strategy and the Internet By: Michael Porter

Many have argued that the internet renders strategy obsolete. There are two opinions about the influence of the internet on industries. Internet tends to weaken the industry profitability without providing advantages Many have argued that the internet renders strategy obsolete. The winner will be those that view the internet as a complement to, not a cannibal of, traditional ways of competing.

Fundamental questions should be asked. Who will capture the economic benefits that the internet creates? Will all the value end up going to customers, or will companies be able to reap a share of it? What will the internet’s impact on industry structure? Will it expand or shrink the pool of profits? What will be its impact on strategy? Will the internet bolster or erode the ability of companies to gain sustainable advantages over their competitors?

How to deploy Internet. The key question is not whether to deploy Internet technology. Internet technology provides better opportunities for companies to establish distinctive strategic positioning .

Succeeded companies are the ones who use Internet as a complement to traditional ways of competing. Losers whom will use the Internet apart from their established operations. This is good for established companies, which are often to meld Internet and traditional approaches in ways that buttress existing advantages.

If average profitability is under pressure in many industries influenced by the Internet, it becomes all the more important for individual companies to set themselves apart from the pack—to be more profitable than the average performer. The only way to do so is by achieving a sustainable competitive advantage—by operating at a lower cost, by commanding a premium price, or by doing both.

Cost and price advantages can be achieved in two ways. One is operational effectiveness, doing the same things your competitors do but doing them better. The other way to achieve advantage is strategic positioning, doing things differently from competitors, in a way that delivers a unique type of value to customers.

Operational Effectiveness v Strategic Positioning High Delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs. None price value delivered Low High Low Relative cost position

A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers or create comparable value at a lower cost, or do both.

Operational effectiveness ( doing the same things your competitors do but doing them better) The Internet is arguably the most powerful tool available today for enhancing operational effectiveness. By easing and speeding the exchange of real-time information, it enables improvements throughout the entire value chain, across almost every company and industry. But improving operational effectiveness isn’t enough to provide competitive advantage. Companies only gain advantages if they are able to achieve and sustain higher levels of operational effectiveness than competitors.

Where is the problem? Once a company establishes a new best practice, its rivals tend to copy it quickly. Best practice competition eventually leads to competitive convergence, with many companies doing the same things in the same ways. Customers end up making decisions based on price, undermining industry profitability.

How the Internet influences Industry Structure Whether the industry is new or old its structure attractiveness is determined by five underlying forces of competition:

la menace des produits de substitution le pouvoir de négociation des fournisseurs  le pouvoir de négociation des clients l'intensité de la concurrence intrasectorielle la menace d'entrants potentiels

la menace des produits de substitution +L’Internet peut élargir la taille du marché. - La prolifération de l’Internet peut créer des nouveaux menaces de substituion.

le pouvoir de négociation des fournisseurs +/- Achats par Internet tend à augmenter le pouvoir de négociation avec les fournisseurs, mais elle peut aussi donner aux fournisseurs un accès à plus de clients. L'Internet fournit un canal pour les fournisseurs d'atteindre les utilisateurs finaux, et cela va réduire l’effet de levier des sociétés intervenantes. Les marchés numériques ont tendance à donner toutes les entreprises un accès égal aux fournisseurs . - La réduction des barrieres a l’entrée .

le pouvoir de négociation des clients + Élimine les canaux puissants ou améliore le pouvoir de négociation sur les canaux traditionnels. Réduit les coûts de changement. le pouvoir de négociation des clients Internet can provide information about product and suppliers, thus bolstering buyer bargaining power.

la menace d'entrants potentiels - Réduction des barrières à l'entrée comme la nécessité d'une force de vente, l'accès aux canaux, et les biens matériels, tout ce que la technologie Internet élimine ou rend plus facile de faire réduit les barrières à l'entrée. Un flot de nouveaux arrivants est entré dans de nombreuses industries. la menace d'entrants potentiels

l'intensité de la concurrence intrasectorielle - Réduire les écarts entre les concurrents. migre vers la concurrence des prix. Elargir la surface du marché et cela va causer l'augmentation du nombre de concurrents. Il diminue les coûts variables par rapport aux coûts fixes et cela va se terminer par une pression de réduction des prix.

The great paradox of the Internet: Making information widely available. Reducing the difficulty of purchasing, marketing and distribution. Allow buyers and sellers to find and transact business with one another more easily.

Example: automobile retailing The Internet allows customers to gather extensive information about products easily (detailed specifications). Customers can also choose among many more options from which to buy. Like Autoweb and AutoVantage Customers can choose many options

Autoweb.com

The Future of Internet Competition Consider the intensity of competition, for example. Many dot-coms are going out of business, which would seem to indicate that consolidation will take place and rivalry will be reduced. many established companies are now more familiar with Internet technology and are rapidly deploying on-line applications. As customers becoming more familiar with technology, their loyalty to their initial suppliers will also decline, they will realize that the cost of switching is low.

A similar shift will affect advertising-based strategies. Even now, advertisers are becoming more discriminating and the rate of growth of Web advertising is slowing.

Digital Marketplace The most important determinant of a marketplace’s profit potential is the intrinsic power of the buyers and sellers in the particular product area. If either side is concentrated or possesses differentiated products, it will gain bargaining power over the marketplace and capture most of the value generated.

Suppliers and customers can begin to deal directly online without the need for an intermediary. And new technologies will undoubtedly make it easier for parties to search for and exchange goods and information with one another.

Expand E-commerce Competitive advantage options matrix

Zoran Slavkovic Zoran Slavkovic is an economist. Successful companies in the future will be those which develop and deploy Internet technologies for better performance of traditional activities, for their reshape, but also for performing new activities that until now were not possible and that should strengthen the personality and identity of the organization.

Les six principes de positionnement stratégique Premièrement, il doit commencer par un objectif spécifique. Deuxièmement, la stratégie d'une entreprise doit permettre de donner une proposition de valeur, ou un ensemble de prestations différentes que celles des concurrents. Troisièmement, la stratégie doit se traduire par une chaîne de valeur distinctive. En quatrième lieu, des stratégies robustes impliquent des compromis. Cinquièmement, La stratégie définie la manière dont tous les éléments de l’entreprise s’applique ensemble. Enfin, la stratégie implique la continuité de la direction

Premièrement, il doit commencer par un objectif spécifique. Une valeur économique est créée lorsque les clients sont prêts à payer un prix pour un produit ou un service qui dépasse le coût de production. Premièrement, il doit commencer par un objectif spécifique.

Deuxièmement, la stratégie d'une entreprise doit permettre de donner une proposition de valeur . elle définit un mode de concurrence qui offre une valeur unique dans un ensemble particulier d'utilisations ou pour un ensemble particulier de clients.

Troisièmement, la stratégie doit se traduire par une chaîne de valeur distinctive. Pour créer un avantage concurrentiel durable, une entreprise doit exercer des activités différentes de celles des rivaux ou exercer des activités similaires de différentes façons. Une entreprise doit configurer la manière dont elle mène la fabrication, la logistique, la prestation des services, marketing, gestion des ressources humaines, et ainsi de suite différemment de leurs rivaux et adaptée à sa proposition de valeur unique.

En quatrième lieu, des stratégies robustes impliquent des compromis. Une entreprise doit abandonner ou de renoncer à certaines caractéristiques des produits, services ou activités afin d'être unique aux autres. Le produit et la chaîne de valeur, sont ce qui rend une société vraiment distinctif.   Trying to be all things to all customers almost guarantees that a company will lack any advantage.

Cinquièmement, La stratégie définie la manière dont tous les éléments de l’entreprise s’applique ensemble. la conception des produits d'une entreprise, par exemple, devrait renforcer son approche du processus de fabrication. L’ajustement augmente non seulement un avantage concurrentiel, mais permet également une stratégie plus difficile à imiter. Il est facile de copier un produit ou une activité, mais il est difficile d’appliquer tout un système de concurrence. Without fit, discrete improvements in manufacturing, marketing, or distribution are quickly matched.

Enfin, la stratégie implique la continuité de la direction. Sans continuité de la direction, il est difficile aux entreprises de développer les compétences uniques et les actifs ou de construire une solide réputation avec les client. 

How information gives you competitive advantages By Michael Porter and Victor Millar

Technology impact on competition Three ways IT changes the game It changes industry structure and therefore the rules of competition It creates competitive advantage by giving companies new ways to outperform their rivals It spawns whole new businesses

The Internet and Competitive Advantage Operational Effectiveness: The Internet is arguably the most powerful tool available today for enhancing operational effectiveness. The nature of Internet applications makes it more difficult to sustain operational advantages than ever.

Technology and the Value Chain Every value activity has both a physical and an information-processing component IS component encompasses the steps required to capture, manipulate and channel the data necessary to perform the activity

Transforming the Value Chain IT is advancing faster than technologies for physical processing. IT is generating more data about activities and products, information that was not available before. There is a higher information content in products. IT enhances the ability to exploit linkages between activities both inside and outside the company. IT allows companies to coordinate activities in widely dispersed geographic locations. Often there is too much information, but IT can store and help analyze the flood of information.

Value Chain

The Internet and the Value Chain Multiple activities are being linked together through many tools as : CRM (Customer Relationship Management ) SCM ( Supply Chain Management ) ERP ( Enterprise Resource Planning )

CRM is a widely-implemented strategy for managing a company's interactions with customers Supply Chain Management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers  An Enterprise Resource Planning (ERP) system is an integrated computer-based application used to manage internal and external resources

Through analysis of the value chain and looking at how electronic communications can be used to speed up the process, manufacturers have been able to significantly reduce time to market from conception of a new product idea through to launch on the market. (Chaffey, 2002).

The impact of IT (Information Technology) on value chain Information technology is changing the way companies operate (Porter and Millar, 1985). Rayport and Sviokla (1995) state that every business today competes in two worlds, in a physical world of resources that managers can see and touch and in a virtual world made of information. Executives have to pay attention how their companies create value in both the physical and the virtual world. (Rayport and Sviokla, 1995).

The special advantage of the Internet is the ability to link one activity with others and make real time data created in one activity widely available, both within the company and with outside suppliers, channels, and customers.

Virtual Value Chain

Information in Value Chain

Impact of Internet technology on Value Chain

Overall Frame

Example Sam Walton to the CEO of P&G, November 1987 “Why do you (Procter & Gamble) have all those salesmen, making me have a bunch of buyers? Why not just connect your computers to our computers?” Sam Walton to the CEO of P&G, November 1987 Talk by Bob Herbold – Retired COO Microsoft, ex CIO Proctor & Gamble on October 28, 2004 about his new book – The Fiefdom Syndrome

The Internet as Complement It has been widely assumed that the Internet is cannibalistic, that it will replace all conventional ways of doing business and overturn all traditional advantages. for example, online music distribution may reduce the need for CD-manufacturing assets. In many cases, the Internet complements, rather than cannibalizes, companies’ traditional activities and ways of competing.

Ex: Walgreens, the most successful pharmacy chain in the United States. Walgreens introduced a Web site that provides customers with extensive information and allows them to order prescriptions on-line. Far from cannibalizing the company’s stores, the Web site has underscored their value. Fully 90% of customers who place orders over the Web prefer to pick up their prescriptions at a nearby store rather than have them shipped to their homes. Walgreens has found that its extensive network of stores remains a potent advantage, even as some ordering shifts to the Internet.

Limits of the Internet Customers cannot physically examine, touch, and test products or get hands-on help in using or repairing them. The ability to learn about suppliers and customers (beyond their mere purchasing habits) is limited by the lack of face-to-face contact. Extra logistical costs are required to assemble, pack, and move small shipments. Attracting new customers is difficult given the sheer magnitude of the available information and buying options.

Conclusion Porter explains that to be defensible, moreover, the value chain must be highly integrated. When a company’s activities fit together as a self-reinforcing system, any competitor wishing to imitate strategy must replicate the whole system rather than copy just one or two discrete product features or ways of performing particular activities.

Conclusion Porter (2001) repeats that the basic tool for understanding the influence of information technology on companies is the value chain. A firm, as a collection of activities, is a collection of technologies. Technology is embodied in every value activity in a firm, and technological change can affect competition through its impact on virtually any activity.