STRATEGY AND THE INTERNET - PORTER Group 3 Sergio Montero Frank Buell Michael Ibanez Author: Michael Porter Education •Harvard Business Professor •Mechanical Engineering from Princeton •MBA and PHD from Harvard Theories Developed • Competitive advantage •Five Forces Analysis •Strategic Groups •Value Chain •Generic Strategies •Product Differentiation •Market Positioning •Global Strategy •Clusters of competence for Economic Development •Diamond Model •Porter's Four Corners Model The Internet as a New Technology Assumptions qTechnology that will change everything qOld rules about companies and competition obsolete What is the Internet qAn Enabling Technology qA New Tool Available to Everyone qA Compliment to Traditional ways of competing qA Game Changer Distorted Market Signals Rampant Experimentation Subsidized inputs Payments made with equity, warrants, or stock options Downplay of traditional financial metrics Creative accounting A Return to Fundamentals True Economic Value Distinction of Uses of the Internet qOperating digital marketplace, selling toys, or trading securities qInternet Technologies ( Site-Customization tools or real-time communications services) Two Fundamental Factors qIndustry Structure qSustainable Competitive Advantage Industry Structure Reconfiguration qCommunication qGathering Information qAccomplishing Transactions The Integration of the Internet qPros qCons Influences Threats of substitutes Bargaining Power of Suppliers Rivalry among Existing Competitors Buyers qBargaining power of channels qBargaining power of end users Barriers to Entry Myth of the First Mover Myths qStrong Network Effects and Switching Cost qBuying Behavior Better Service Facts qEasier to Switch to Competitors (One Page) qLimited Network Effects qSelf Limiting Mechanism qNetwork Effects Expensive to Create Myth of the First Mover Partnerships and Compliments qProduces Network Effects qMay Raise Switching Cost qNo Relationship to Industry Profitability qOutsourcing Standardization qMay increase Rivalry qDepress Profitability Future of Internet Competition Internet increases Competition Power of Buyers increases New Formats of Service Increased Profits qFragmented Markets qDifferentiated Products qDirect Contact with Suppliers The Internet and Competitive Advantage Sustainable Competitive Advantage Operational Effectiveness qSpeeding Real Time Information qMust sustain to keep Competitive Advantage qBest Practices Strategic Positioning The Six Principles of Strategic Positioning 1. Right Goal 2. Value Proposition 3. Distinctive Value Chain 4. Trade-Offs 5. Fit 6. Continuity of Direction The Absence of Strategy Market Strategy qReduction of Competitive Strategy qCapturing the Market qReducing Differentiation qNot focusing on Core Competencies Past and Present qPast: Companies adapted to Software qPresent: Software adapts to Strategy The Internet as Compliment Internet applications qInforming customers qProcessing transactions qProcuring inputs Existing competitive advantages qSkilled personnel qProprietary product technology qEfficient logistical systems The Internet as Compliment The internet compliments rather than cannibalizes, companies’ traditional activities and ways of competing. The use of the internet represents only a modest shift from well-established practices in some industries. Internet activities and traditional activities Internet applications in one activity often place greater demands on physical activities elsewhere in the value chain Using the internet in one activity can have systemic consequences requiring new or enhanced physical activities that are often unanticipated Most internet activities have some shortcomings in comparison with conventional methods Internet limitations Lack of personal interaction with customers and suppliers Loss of product feel and sales force expertise Logistics increased expense in smaller order packaging and shipping Increased level of competition by the abundant availability of information Traditional Method Limitations Lack of real time information High cost of face to face interaction High cost of producing physical versions of information Internet fix qWeb sites supply product information and support direct ordering qResults: traditional sales force increase in value and productivity The Internet and the Value Chain Information technology pervasive influence on the value chain The internet links activities and makes real- time data widely available throughout the whole system: within the company and suppliers Increase in bidirectional interconnectivity V a l u e C h a i n Value Chain Implications Internet influence must be kept in perspective Not a dominant influence Conventional factors prominent roles Scale qPersonnel skills qProduct and process technology qInvestment in physical assets The End of the New Economy Strategies that integrate the internet and traditional competitive advantages and ways of competing should win in many industries The demand will be affected by the increasing availability of online services yet the service provided by physical locations will still be valued by customers The supply should improve regarding production and procurement with a combination of internet and traditional methods Traditional VS Dot Coms It is easier for traditional companies to adopt and integrate internet methods to their traditional operations creating potential advantages. Dot-coms have to pursue distinctive strategies more so than emulating one another; breakaway from competing solely on price and follow more traditional strategies regarding differentiation or market segmentation Critique of the Porter Model Porter Profit Focused Oilfield Industry Farming Consumer Focused/Backward Integration Wal-Mart Amazon Ebay IKEA Old Business Model with Integration Automotive Retail Real Estate Google’s mission is to organize the world’s information and make it universally accessible and useful. History qFounded in 1998 qIPO 2004 qGoogle.org 2004 qLaunch Google maps and Google earth 2005 qJoins S&P 500 2006 qAcquisition of YouTube 2006 qAndroid open platform for mobile devices 2007 qGoogle chrome 2008 qGoogle + 2011 Google Services qLaser pinpoint accuracy in targeting market sectors qFree online services integrated through the gmail domain name qLargest availability of information presented in a simple format supported worldwide qMobile information solutions Google Model Focus on the user and all else will follow It’s best to do one thing really, really well Fast is better than slow Democracy on the web works You don’t need to be at your desk to need an answer You can make money without doing evil There’s always more information out there The need for information crosses all borders You can be serious without a suit Great just isn’t good enough Products and Services 2011 qKindle Fire (Android Format) qDownloadable Movies qSoftware Affiliated Companies Affiliated Companies qZappos.com qShopbop.com qWoot "Facebook's mission is to give people the power to share and make the world more open and connected.” facebook use a similar model to Google in that the service is free of charge and the majority of its profits come from advertising facebook uses the info of its users to better target its consumers for advertising facebook is everywhere Business model: Build products that support our mission by creating utility for users, developers, and advertisers: Users. Enable people who use Facebook to stay connected with their friends and family, to discover what is going on in the world around them, and to share and express what matters to them to the people they care about. Developers. Enable developers to use the Facebook Platform to build applications (apps) and websites that integrate with Facebook to reach our global network of users and to build products that are more personalized, social, and engaging. Advertisers. Enable advertisers to engage with more than 950 million monthly active users (MAUs) on Facebook or subsets of our users based on information they have chosen to share with us such as their age, location, gender, or interests. They offer advertisers a unique combination of reach, relevance, social context, and engagement to enhance the value of their ads. Article 5: Strategy and the Internet—Porter How does Internet influence the industry structure? Explain using Porter’s model on competition. Can Internet create sustainable competitive advantage? How? Explain. “The winners will be those that view the Internet as a complement to, not a cannibal of traditional ways of competing.” Explain.
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