The Strategic The Strategic Potential Potential of the Internet of the Internet (Part (Part One)One)

Presented by Derek LeePresented by Derek LeeCIS 590 Spring 2008CIS 590 Spring 2008

Agenda

Background of Michael E. Porter

Background of the Internet

Purposes of the Chapter

Structure of the Chapter

Questions and Comments

2

Background of Michael E. Porter Author: Dr. Michael Eugene Porter

Is a Harvard professor teaching management & economics

Academic objectives focus on competitive advantage & strategy

Has made important contributions to strategic management & strategy theory

“The Godfather of organization strategy”

MBA students should know who he is!3

Agenda

Background of Michael E. Porter

Background of the Internet

Purposes of the Chapter

Structure of the Chapter

Questions and Comments

4

Background of the Internet

After its expansion into popular use in 1990s, the Internet has had a drastic impact on culture and commerce

The Internet has become an extremely important technology worldwide

Many companies nowadays know that they need to deploy Internet technology, but don’t know how to utilize it to lead their business more profitable 5

Agenda

Background of Michael E. Porter

Background of the Internet

Purposes of the Chapter

Structure of the Chapter

Questions and Comments

6

Purposes of the Chapter

The Internet …

is an enabling technology

has caused negative effects on industries

reduces the ability to establish and sustain a competitive advantage

Emphasis that strategy is critical 7

Agenda

Background of Michael E. Porter

Background of the Internet

Purposes of the Chapter

Structure of the Chapter

Questions and Comments

8

Structure of the Chapter

Distorted market signals Return to fundamentals The Internet and industry structure The myth of the first mover The future of Internet competition The Internet and competitive advantage The absence of strategy The Internet as complement The end of the new economy

Presented byPresented byJay KrishnaJay Krishna

9

Why distorted market signals?

Revenues are unreliable

Companies subsidize the purchase of their products and services, so do the governments on sales taxes

Buyers are willing to conduct transactions online even when the benefits are uncertain or limited

Some revenues from online commerce are received in the form of stock rather than cash

Distorted Market Signals

10

Distorted Market Signals Other reasons?

Masking true costs Suppliers learn from dot-com leaders, providing

heavy discounts on products and services

They accept equity or stock options from Internet-related ventures in payment for products or services

Even more unreliable stock market Stock valuations become separated from business

fundamentals, so no longer provide an accurate guide

These companies put themselves at risk! 11

Distorted Market Signals

Conclusions of distorted market signals by Internet-related companies: Executives downplay traditional measures of

profitability and economic value Creative accounting approaches are developed

Consequences of distorted market signals True financial performance of many Internet-

related businesses is worse than it is stated Dot-coms can easily raise capital without having to

demonstrate viability 12

Return to Fundamentals

The creation of true economic value turns to be the final judge of business success, as only old rules can regain prevalence

13

Is a company’s current stock price necessarily an indicator of true economic value?

No!

Economic value of an Internet-related company can be determined by:

The uses of the Internet

So how can the Internet be used to create economic value?

Two fundamental factors determining profitability

1. Industry structure – determines the profitability of the average competitors

2. Sustainable competitive advantage – allows a company to outperform the average competitors

Return to Fundamentals

14

How Internet benefits to the industries: The Internet has created some new industries

Online auctions (Ebay.com)

Digital marketplaces (Craigslist.org)

Allowed existing industries to be reconfigured Expand distance learning or meeting (Webex.com)

Provide efficient means to order products (Pizzahut.com)

Benefits vary widely by industry and company (Less benefit on local dentistry)

The Internet and Industry Structure

15

The Internet and Industry Structure How to determine the profitability of

the average competitors? By five underlying forces of competition

Porter’s five forces model

These forces determine how the economic value created by any product, service, technology, or way of competing is divided between companies and their stakeholders or competitors 16

The Internet and Industry Structure Porter’s Five Forces Model

17

The Myth of the First Mover Everyone tends 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 is that: the Internet would release from forces

that would enhance industry profitability

General assumptions that Internet would: increase switching costs create strong network effects 18

The Myth of the First Mover Switching costs

Include all the costs incurred by a customer in changing to a new supplier

Switching costs Customer’s bargaining power Barriers to entry into an industry

Myth: Internet switching costs Able to collect knowledge of buying behavior

Reality: Internet switching costs Buyers can switch suppliers with just a few

mouse clicks 19

The Myth of the First Mover Conclusion of Switching costs

Switching costs Customer’s bargaining power Barriers to entry into an industry

Example: Widespread adoption of PayPal and XML PayPal The Internet currency enables customers

to shop at different Websites without providing personal information and credit card or bank account numbers

XML The XML standards will free companies from the need to reconfigure order systems and to create new protocols when changing suppliers

20

Network Effects A number of important Internet applications display

network effects, such as email, instant messaging, auctions, and online message boards or chat rooms

Myth: Network effects are significant They can create demand-side economies of sales and

raise barriers to entry

Reality: It is not enough for Network effects to provide barriers to entry The openness of the Internet, with it common

standards and protocols and its eases of navigation, makes it difficult for a single company to capture the benefits of a network effects 21

The Myth of the First Mover

Other myths for the Internet include: Internet brands could be easily built

Partnering is a win-win means to improve industry economics due to the complements

In reality: Internet brands have proven difficult to build

Lack of physical presence and direct human contact

Complements affect industry profitability indirectly through their influence on the five competitive forces

If a complement works to standardize the industry’s product offering, it will increase rivalry and depress profitability

22

The Myth of the First Mover

The Future of Internet Competition The deployment of Internet technology will

likely continue to put pressure on the profitability of many industries

Under the intensity of competition, many dot-coms are going out of business

The power of customers will also tend to rise Example: Customers appear to be losing interest in

reverse auctions such as Priceline.com

Customers’ loyalty to their initial suppliers will decline Because they realize that the switching cost is low 23

The Future of Internet Competition

But not all about the Internet are bad!But not all about the Internet are bad! Some technological advances will provide

opportunities to enhance profitability Streaming video Low-cost bandwidth

Benefits: Easier for customer service reps to speak

directly to customers through their computers Internet sellers are able to better differentiate

themselves and shift buyers’ focus away from price Auto bill pay by banks may modestly boost up their

customers’ switching costs24

The Future of Internet Competition Longer-term structural consequences of the

Internet:

25

But the new Internet technologies still continue to wear down companies’ profitability by shifting

power to customers

The Internet and Competitive Advantage

26

Operational Effectiveness Internet is claimed to be the most powerful tool for

enhancing operational effectiveness Easing and speeding the exchange of real-time information

An open platform with common standards

But simply improving operational effectiveness does not provide a competitive advantage Only if the companies can sustain higher levels of

operational effectiveness than competitors, which is very difficult

Even if it can achieve, it is still easy for competitors to imitate

The result is: Customers end up making decisions based on price, undermining industry profitability 27

Strategic Positioning As it becomes harder to sustain operational

advantages, strategic positioning becomes more important

Without a distinctive strategic direction … No unique competitive advantages are create

Improvement are generic and cannot be sustain

Requires a strong focus on profitability rather than just growth Value chain must be highly integrated enables a

company to offer unique value during production and delivery of a product or service

28

You may ask … Can competitors also imitate the company’s distinctive strategy, just like how to imitate the operational effectiveness?

Answer is still yes, but is much harder! Competitors wishing to imitate a strategy must replicate the whole system rather than just copy one or two product features.

Strategic Positioning

To establish and maintain a distinctive strategic positioning, a company should follow six fundamental principles: Start with the right goal long-term ROI Deliver a unique value proposition Develop a distinctive value chain Make trade-offs forgo something Ensure all elements fitting together Have continuity of direction

29

Agenda

Background of Michael E. Porter

Background of the Internet

Purposes of the Chapter

Structure of the Chapter

Questions and Comments

30

31