Strategy and the Internet[note]

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The following is the reading note of Michael E. Porter’s Strategy and the Internet. The full article was published at Harvard Business Review, March 2001.

 

We need to see the Internet for what is: an enabling technology—a powerful set of tools that can be used, wisely or unwisely, in almost any industry and as part of almost any strategy. We need to ask fundamental questions: Who will capture the economic benefits that the Interment creates?

 

Internet technology provides better opportunities for companies to establish distinctive strategic positions than did previous generation of information technology.

 

In the early stages of the rollout of any important new technology, market signals can be unreliable. The true financial performance of many Internet-related businesses is even worse than has been stated. Dot-com multiplies so rapidly for one major reason: they were able to raise capital without having to demonstrate viability.

 

Economic value for a company is nothing more than the gap between price and cost, and it is reliably measured only by sustained profitability, shareholder value is a reliable measure of economic value only over the long run. In thinking about economic value, it is useful to dram a distinction between the use of Internet ( such as operating digital market places, selling toys, or trading securities) and Internet technologies (such as site-customization tools or real-time communications services), which can be deployed across many users. It’s the use of the Internet that ultimately creates economic value.

 

To find how the Internet can be used to create economic value, we need to look beyond the immediate market signals to the two fundamental factors that determine profitability: Industry structure, which determines the profitability of the average competitor; and Sustainable competitive advantage, which allows a company to outperform the average competitors.

 

Whether an industry is new or old, its structural attractiveness is determined by five underlying forces of competition. Analyzing the forces illuminates an industry’s fundamental attractiveness, exposes the marketing drivers of average industry profitability, and provides insight into how profitability will evolve in the future.

 

While deploying the Internet can expand the markets, then, doing so often at the expense of average profitability.

 

Because the strength of each of the five forces varies considerably from industry to industry, it would be a mistake to draw general conclusions about the impact of the Internet on long-term industry profitability; each industry is affected in different ways. Industry structure is not fixed but rather is shaped to a considerable degree by the choice made by competitions. But most of the trends are negative. In general, new Internet technologies will continues to erode profitability by shifting power to customers.

 

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. It makes it harder for companies to sustain operational advantages, but it opens new opportunities for achieving or strengthening a distinctive strategic positioning.

 

Having a strategy is a matter of discipline. It requires a strong focus on profitability rather than just growth, an ability to define a unique value proposition, and a willingness to make tough trade-offs in choosing what not to do (see “What is Strategy?).

 

IT has been a force for standing activities and speeding competitive convergence. Internet architecture and development tools, has turned IT into a far more powerful tool for strategy. The basic tool for understanding the influence of information technology on companies it the value chain.

 

To gain advantage, companies need to step their rush to adopt generic, “out of the box” packaged applications and instead tailor their deployment of Internet technology to their particular strategies.

 

In many cases, the Internet complements, rather than cannibalizes, companies’ traditional activities and ways of competing. Virtual activities don’t eliminate the need for physical activities, but often amplify their importance. The complementarities between Internet activities and traditional activities arise fro a number of reasons.

 

Strategies that integrate the Internet and traditional competitive advantages and ways of competing should win in many industries.