Porter’s Strategy and the Internet

Here are some of my thought on Porter’s Strategy and the Internet

“When seen with fresh eyes, it becomes clear that the Internet is not necessarily a blessing. It tends to alter industry structures in ways that dampen overall profitability, and it has a leveling effect on business practices, reducing the ability of any company to establish an operational advantage that can be sustained.” –Porter

Though not an all encompassing natural law as Porter presented it, the internet does shift the power in favor of the consumer reducing retailers to compete on price and price alone. Therefore it forces some small locals companies to compete with companies around the world.  A great example of this is text books, WPI has its campus bookstore that serves a niche clientele (WPI students) and charges a premium for their selection and convenience.  In the past, they had the supply channels with the distributor and the logistics to get the right book into the students hand faster and more cost effective.  The internet has completely wiped out this strategic advantage, a student is now able to find the exact book they need via the ISBN # and get a cheaper copy shipped directly to their home from some place in Malaysia, all for a better total price! Take away the internet, and the student would have never found their book in warehouse on the other side of the world.

“The Internet per se will rarely be a competitive advantage. Many of the companies that succeed will be ones that use the Internet as a complement to traditional ways of competing, not those that set their Internet initiatives apart from their established operations. That is particularly good news for established companies, which are often in the best position to meld Internet and traditional approaches in ways that buttress existing advantages.” –Porter

I immediately thought of Barnes & Noble and Southwest Airlines, these companies have been able to weave the internet into their competitive strategies and flourished.  B&N leveraged the internet into its existing relationship with college bookstores and did not allow its website to cannibalize its stores sales by under cutting price.  Southwest maintained its high margins via its exclusive reservations, in the past the only way to book a flight on southwest was to call or visit one of their sales people, with the internet, the only site you can book southwest is the official southwest one, thereby strengthening their strategy by making it more efficient and cost effective by reducing labor to man the phones and airport booths.

“Dot-coms multiplied so rapidly for one major reason: they were able to raise capital without having to demonstrate viability.” –Porter

During the Dot-com bubble, I was just a pre-teen but even I knew that these companies’s weren’t making any real money

“America Online, which has managed to maintain borders around its on-line community, is an exception, not the rule.” –Porter

Hindsight is 20/20, in the past AOL was the premier online community, that was really what differentiated them from the other ISPs.  But as the internet matured, and more content became available and more innovated free online communities developed people weren’t willing to pay $40 a month for broadband and an additional $20 for AOL.  Today there’s free e-mail, instant messaging, profiles, online photo albums, better communities such a FB, rending AOL obsolete.

“Once a company establishes a new best practice, its rivals tend to copy it quickly. Best practice competition eventually leads to competitive convergence, with many companies doing the same things in the same ways. Customers end up making decisions based on price, undermining industry profitability.”- Porter

I immediately think of Myspace, webshots, & AOL, all of which had features that were quickly adopted by orkut & facebook for free.  

“The most successful dot-coms will focus on creating benefits that customers will pay for, rather than pursuing advertising and click- through revenues from third parties. To be competitive, they will often need to widen their value chains to encompass other activities besides those conducted over the Internet and to develop other assets, including physical ones.” -Porter

Defiantly Google & Facebook laugh at this statement, being two of the most successful dot-coms based on advertising and click-through revenue from third parties.

Overall he made some very great points about a having a clear value creating, profit generating strategy, but as every other economic expert he was only partly right.