STRATEGY AND THE INTERNET

BYFITSUM R. LAKEW

INTERNET AS A NEW TECHNOLOGY IN BUSINESSES• Internet technology provides better opportunities for

companies to establish distinctive strategic positioning.

• Many of the companies that succeed are ones that use the internet as a complement to traditional ways of competing

• Companies set their internet initiatives apart from their established operations.

*Dampen profitability *Leveling effects on business practices *Reduce the ability to establish operational

advantage• The solution-to build on proven principles of effective

strategy using the internet as a complement to traditional ways of competing.

DISTORTED MARKET SIGNALS • Companies deployed internet technology confused by

distorted market signals. * Sales figures distorted for three reasons 1.Prices for products placed for sale online heavily discounted, making demand for these goods artificially high. 2.Customer curiosity has prompted many online sales. 3.Some revenues received in the form of stock rather than cash.• Cost side of the equation is equally distorted. *Many suppliers offered products at a discount prices to

affiliate with online business or take stock instead of cash for payment.

• The main reason for the multitude of dotcoms, i.e., *Able to raise capital without demonstrate viability.

INTERNET AND ECONOMIC VALUE

• Economic value can be defined as the gap between price and cost, and it is reliably measured only by sustained profitability.

• Two fundamental factors that determine profitability:

1. Industry structure Threat of substitute product or services * (+) By making the overall industry more

efficient, the Internet can expand the size of the market

* (-) The proliferation of Internet approaches creates new substitution threats

INDUSTRY STRUCTURE

Bargaining power of suppliers

* (+/-) Procurement using the Internet tends to raise bargaining power over suppliers, though it can also give suppliers access to more customers

* (-) The Internet provides a channel for suppliers to reach end users, reducing the leverage of intervening companies

* (-) Internet procurement and digital markets tend to give all companies equal access to suppliers, and gravitate procurement to standardized products that reduce differentiation

* (-) Reduced barriers to entry and the proliferation of competitors downstream shifts power to suppliers

Rivalry among existing competitors *(-) Reduces differences among competitors

as offerings are difficult to keep proprietary * (-) Migrates competition to price * (-) Widens the geographic market,

increasing the number of competitors * (-) Lowers variable cost relative to fixed

cost, increasing pressures for price discounting

BUYERS

(+) Eliminates powerful channels or improves bargaining power over traditional channels

• (-) Shifts bargaining power to end consumers

• (-) Reduces switching costs

BARGAINING POWER OF CHANNELS

BARGAINING POWER OF END USERS

Barriers to entry

• (-) Reduces barriers to entry such as the need for a sales force, access to channels, and physical assets – anything that Internet technology eliminates or makes easier to do reduces barriers to entry

• (-) Internet applications are difficult to keep proprietary from new entrants

• (-) A flood of new entrants has come into many industries

2. Sustainable competitive advantage *Company must operate at a lower cost,

command a premium price, or both• Cost and price can be achieved in two ways, *Operational effectiveness *Strategic positioning• Companies must integrate the internet into

their value chain making difficult for competitors to copy their strategy.

To conclude that internet is a complement to rather than a cannibal of existing business practices

Only by integrating the internet into overall strategy will this powerful new technology become an equally powerful force for competitive advantage.