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Strategy and the Internet
Michael Porter
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Investment Opportunities for the 21st Century
•Shipping
•Railroads
•Automobiles
•Oil Industry
•Information Highways
•Information Content
•Information Appliances
Product
Transport
Personal
Transport
Information
Transport
1800s
1900s
21st
CENTURY
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INDIA INC. Where are we today ?
Practice of TQM 44Customer Orient 44Use of IT 44Time to Innovate 43Time to market 47Strategy Implement 43
(These are out of 49 Countries : 1996/w.e.f.)
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Overview
Enabling technologies
Emergence of the Marketspace
Value added by information
Theory of increasing returns
Implications for strategy
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What’s Happening to Information?
Convergence of information sources into medium of digital code
Capture – Organize – Select – Synthesize - Distribute
DigitalInfo
Data
Text
Voice
Video
Graphics
Audio
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Where and How Is It Happening?
Information infrastructure
Task Decision Company-wideAutomation Support Infrastructure
Infrastructure as utility functionTransports, stores, processes informationResources available to allIncreases speed of information accessFundamentally changes how people work
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The Changing Nature of IT
Cost: high low extremely low
Data types: simple complex voice, video, Image, symbols
Availability : narrow broad universal
Instrument: computer computer/ digital info TV/ phone appliances
Function : automate automate transform Beside through
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The Changing Nature of Information
Information : point to point network
Bandwidth: narrow broad
Access : exclusive universal
Scope of impact : simple complex
Location: internal internal/ External
Role in Orgn: support strategic
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From Marketplace to MarketspaceEmergence of a Parallel Universe of Business Activity
Products: compact disc to audio-on-demand Ex: MusicNet
Systems: Marketplace to Marketspace mgmt Ex: virtual vineyards
Markets: Physical auctions to electronic Exchg Ex: Aucnet
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Technology Perspectives
“There is a world market of about five computers”
- Thomas J Watson, founder of IBM
“While theoretically and technically television may be feasible, commercially and financially I consider it an impossibility, a development of which we need waste little time dreaming” - lee deforest, American inventor
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From Marketplace to Marketspace
Content
Context
Infrastructure
ContentKnowledge/Substance
ContextOperating Environment
Of Xaction
InfrastructureDelivery or Backbone
Exchange
Customer
Value PropositionTo Customer
Value Proposition
To Customer
Exchange
Customer
MARKETPLACE
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New Economics of Information
Connectivity is shattering the rules about how value is created
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The Old and the New
Encyclopaedia BritannicaSp= $ 1500Cost = $ 200
The way Britannica’s editors must have seen it, Encarta wasn’t an encyclopaedia, it was a toy
MS Encarta Sp = $ 50Cost = $ 1.5
(Funk & Wagnalls)
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Basic Elements of Information
Reach
Richness
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Definitions….
Reach means the number of people at home or at work exchanging information
Richness has three components:BandwidthCustomization Interactivity
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definitions
Bandwidth = amount of information that can be moved from sender to receiver in a given time
Customization = whether the information is tailored for the audience of a particular size
Interactivity = the extent to which the involved parties can converse
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Changing Times…..
Bargaining power shifts to consumers as it becomes increasingly difficult for companies to control access to information Example: car buyers
Existing value chains will fragment into multiple businesses that have their own sources of competitive advantage Example: speciality cos
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The Traditional Economics of Information
Reach (connectivity)
Richness
(Bandwitdh, Customization,
Interactivity) Traditional
Trade-off TV
Salesman
Telemarketing
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Implications for Competitive Advantage
Existing value chains will fragment into multiple businesses, each of which will have its own sources of competitive advantage
Some new businesses will benefit from network economies of scale, which can give rise to monopolies
As value chains fragment and reconfigure, new opportunities will arise for purely physical businesses
When a co. Focuses on different activities, the value proposition underlying its brand identity will change
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Implications for Competitive Advantage (…contd.)
New branding opportunities will emerge for third parties that neither produce a product nor deliver a primary service
-Bargaining power will shift as a result of a radical reduction in the ability to monopolize the control of information
-Customers’ switching costs will drop, and companies will have to develop new ways of generating customer loyalty
-Incumbents could easily become victims of their obsolete physical infrastructures and their own psychology
-
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Deconstruct Your Business….
How and where in your value chain does information reside?
Where are you making trade-offs between richness and reach?
How can these trade-offs be eliminated?
Which activities – especially informational activities – could function as stand alone businesses?
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The End of Channels and Hierarchies
Hierarchical Decision Tree
Hierarchical Organization
Hyperarchy
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IT Laws :
Moore’s Law :Semiconductor performance would doubleevery two years
Metcalfe’s Law :The value of a network increasesexponentially, as the number of usersincreases, while networking costs increaselinearly
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Dimensions of ITMicrominiaturisation
Networking
Intelligence
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Factors of ProductionLand, Labour, Raw Material, Capital - Finite
Information, knowledge - Inexhaustible-----------------------------------------------------------Unlike a single blast furnace or assembly line knowledge can be used in two places at the same time.-----------------------------------------------------------Application of appropriate information technology brings down the requirements of other factors of production
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The Net Way offers crystal-clear cost benefits
Old WayAverage Telephone Transaction
Cost$5.00
Traditional Bank Transaction Cost
$ 1.07
Traditional Airline Ticket Processing Cost
$ 8.00
New WayAverage Internet Transaction
Cost $ 0.01
Same Transaction on the Web$ 0.01
Same Transaction on the Web$ 1.00
Source : eMarketer(www.emarketer.com)
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“The quality and quantity of informationcomprehended per unit of time may now
determine who wins or losesa sales order or a war”
- Mel PhelpsVenture Capitalist
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Strategy and the Internet
The Internet powerfully influences :
Industry Structure, and
Sustainable Competitive advantage
These in turn affect profitability
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Industry Structure
Derives from basic forces of competition:
Competitor rivalryEntry barriers for new competitorsThreat of substitute offeringsBargaining power of suppliers, channels and buyers
How does internet affect these forces?
More rivalry, lower entry barriers due to leveling of playing fields because of open systemDramatically increases available information, shifting bargaining power to buyers
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Sustainable Competitive Advantage
Comes from:
Operational effectiveness
Strategic positioning
OE = doing what your competitors do, but better (speed, flexibility, efficiency)
Strategic Positioning: delivering unique value to customers by doing things differently than your competitors
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The Internet as Strategic Complement
Common IT platform for all activities, reinforcing strategic fit among the activities/ functions. Difficult to imitate
Complements traditional channels. Ex: Walgreen drug store, order over internet, pick up medicines from stores
Integrates virtual and physical activities. Ex: use Web site to attract customers and draw them to flesh and blood sales people to provide personalized advice and after sales service
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The Six Principles of Strategic Positioning
1. Right goal – superior long term return on investment
2. Value proposition – set of benefits, different from those that competitors offer
3. Distinctive Value Chain – perform different activities from rivals, or perform similar activities in different ways. Configure manufacturing, logistics, service delivery, marketing, HR management tailored to its unique value propsition
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The Six Principles of Strategic Positioning (contd)
4. Trade-offs – forgo some product features, services or activities in order to be unique at others
5. Fit – choices throughout the value chain that are interdependent.e.g product design, manufacturing, after sales service must reinforce each other
6. Continuity of direction – to be able to develop unique skills and assets in line with the value proposition
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Think of Prominent Applications of the Internet in the Value Chain
Primary activities
Inbound logisticsOperationsOutbound logisticsMarketing & salesAfter sales service
Secondary activities
Firm infrastructureHuman Resource ManagementTechnology developmentProcurement