AC310 Module 1 Topic 2 Reading: Porter 2001 – Strategy and the Internet – Harvard Business Review March 2001

Summary: A critical analysis of the internet and its impact on traditional business. Discusses the ways in which traditional business can take advantage of the internet, whilst dismissing the notion of the ‘new economy’ and so-called ‘e-business’ and ‘e-strategy’.

Introduction

“many have assumed that the internet changes everything”

Porter dismisses the notion that the internet is a real game changer. He believes it is dangerous to make this assumption and has led to the misguided focus on dot-com businesses.

“Internet technology to shift the basis of competition away from quality, features and service and toward price, making it harder for anyone in their industries to turn a profit”

Porter explains how the internet has led to a damaging focus on lowering prices at the expense of quality and any real competitive advantage.

“move away from the rhetoric about ‘internet industries’, ‘e-business strategies’ and a ‘new economy’ and see the internet for what it is”

Porter believes that such words are distorting and unwise. Instead, he believes the internet should be seen as a powerful set of tools which are ‘a complement to traditional ways of competing’

Distorted Market Signals

“New technologies trigger rampant experimentation, by bother companies and customers, and the experimentation is often economically unsustainable”

Porter says that too much focus has been made on the initial successes of the internet and that traditional businesses should not be too quick to move solely to ‘e-business’ structures. He says that in this experimentation phase, many suppliers have offered subsidized prices which have masked true costs.

“emphasized expansive definitions of revenue, numbers of customers, or even more suspect, measures that someday correlate with revenue, such as numbers of unique users (“reach”), numbers of site visitors, or click-through rates”

“Buyers have been able to purchase goods at heavy discounts, or even obtain them for free, rather than pay prices that reflect true costs”

The markets have focused on creative accounting approaches that have moved away from traditional economic drivers. Porter argues, that the internet has not removed the need for these traditional measures, but instead have emphasized their importance. Too many businesses have focused on initial successes and extrapolated such results for forecasts of future performance, and unwisely have altered corporate strategies as a result.

A Return to Fundamentals

“many businesses active on the Internet are artificial businesses competing by artificial means and propped up by capital that until recently had been readily available”

“…often appears as if there are new rules of competition. But as market forces play out, as they are now, the old rules regain their currency.”

Porter explains how deploying Internet technology is not enough to create value. He argues that it is the way in which these new technologies are deployed that ultimately create economic value. He said the two fundamental factors still determine profitability:

1. Industry structure

2. Sustainable competitive advantage

The Internet and Industry Structure

“greatest impact has been to enable the reconfiguration of existing industries that had been constrained by high costs for communication, gathering information, or accomplishing transactions”

Porter argues that the ‘internet only changes the front end of the process’ and that the five underlying forces of competition still hold:

1. The intensity of rivalry among existing competitors

2. Barriers to entry for new competitors

3. Threat of substitute products or services

4. Bargaining power of suppliers

5. Bargaining power of buyers

“It is more difficult, moreover, for on-line dealers to differentiate themselves, as they lack potential points of distinction such as showrooms, personal selling and service department”

Porter explains how the internet also brings disadvantages, which help to explain why competition is shifting ever more toward price. Without physical businesses, it is much harder to differentiate and so the ‘net effect on the industry’s structure is negative’.

The Myth of the First Mover

“…everyone tended to focus on what the Internet could do and how quickly its use was expanding rather than on how it was affecting industry structure”

“…widespread belief that the Internet would unleash forces that would enhance industry profitability.”

“Outsourcing also usually lowers barriers to entry”

Porter discusses some of the miss-notions of the internet, explaining that some thought that switching costs would increase, customers’ bargaining power would fall and the barriers to entry into an industry would rise. He explains how these initial beliefs were flawed, and that we are now seeing the opposite.

The Future of Internet Competition

“…deployment of Internet technology will likely continue to put pressure on the profitability of many industries”

“Many dot-coms are...

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