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

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

Transcript of Strategy and the Internet vs. Rethinking Strategy in a Networked World Articles by Michael E. Porter...

Page 1: Strategy and the Internet vs. Rethinking Strategy in a Networked World 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

Page 2: 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?

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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

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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

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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

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Dot Com KPIs (2000)

Source: McKinsey Quarterly

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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

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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

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Porter’s Model of Competitive Rivalry

Competitive

Rivalry

Entrants

Supplier

Buyers

Substitution

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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

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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

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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

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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.

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Porter’s Model – Bargaining Power of Suppliers Suppliers have bargaining power where:

There are few or no competitors There is a shortage of supply

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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.

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Porter’s Model – Existing Players The competition between existing players is

won on the basis of generic competitive advantage of price, differentiation, or focus

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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)

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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

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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

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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

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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

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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

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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

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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

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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

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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

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The End of the New Economy

New Economy = Old Economy + Access to Information Technology

Business > e-Business >>> Business Strategy > e-Strategy >>> Strategy

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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

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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

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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

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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

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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

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Tapscott, cont’d.

Three core areas ripe for business model innovations Unique Products Operational Efficiencies Customer Service and Relationships

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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

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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

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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

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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

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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)