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Marketing Hints for Clients of Alpha Associates

The Internet Changes Everything - Doesn't It?

With the current precipitous fall of the NASDAQ and the subsequent evolution of many dot.coms into dot.dust, it seems like an appropriate time to begin to reflect on the impact of the fabulous technology known as the Internet and its effect on the business environment. Up to now very few of the business gurus have taken on the broad question of the Internet's impact. Instead, they have been satisfied to deal with some of its affects and the opportunities it has created. Finally, one of the experts has decided to step up to bat.

Michael E. Porter, of the Harvard Business School, has published an article in a recent issue of Harvard Business Review entitled, "Strategy and the Internet." In this article he squarely takes on the premise that the Internet has created a "new economy" with new rules based on new technology. New terms have been added to our lexicon like e-commerce, e-business and now e-strategies. But has the Internet changed all the rules? Au contraire, according to Mr. Porter who states that the Internet "tends to alter industry strategies 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." In his article, he has truly crafted a very logical and well documented argument in favor of using the Internet technology as a complement to traditional ways of competing, rather than changing all the rules. The implementation of Internet technology also has added confusion by distorting market signals that defy traditional interpretation. He feels that this new technology has followed the same path as other technologies that have created widespread experimentation in the marketplace and created economic business models that are unsustainable. He documents this argument in some detail using examples such as: artificially low pricing to create demand, interpreting curiosity as a demand trend and quantifying revenues on other than a cash basis. As a famous public figure once said, "It depends on what the meaning of ‘is’ is."

Porter asks the question, “Has Internet technology made competitive strategy obsolete?” Or stated another way, “Does the Internet change everything?” He comes to two basic conclusions. "First, many businesses active on the Internet are artificial businesses competing by artificial means and propped up by capital that until recently had been readily available." "Second, in periods of transition such as the one we have been going through, it often appears as if there are new rules of competition. But as the market forces play out, as they are now, the old rules regain their currency." In the end, the new technology must create solid economic value. Recently, this appears to have been the Achilles' heal of the Internet based dot.com business.

It's interesting that in approaching a question this large, Porter has reduced the ultimate measurement to dollars and cents. His definition of economic value is "nothing more than the gap between price and cost, and it is reliably measured only by sustained profitability." Again and again he sites examples of new and exciting business models on the Internet that ultimately have been unable to meet the measure of establishing solid economic value. In his very complete article, Mr. Porter logically measures the impact the Internet has on the key elements of industry structure and the ability to create a sustainable competitive advantage. There is a powerful and well documented argument to synthesize the exciting possibilities of Internet technology with traditional strategic methods of establishing and sustaining a competitive advantage. If your business is undergoing some examination of these strategic issues, I would strongly advise you to read and study this excellent and lengthy article by Michael Porter.

In closing, I would like to briefly list Porter's six principles for strategic positioning for your consideration:

  1. It must start with the right goal: superior long-term return on investment.
  2. Deliver a value position different than those competitors offer.
  3. It must reflect a "distinctive value chain," key activities that strongly differentiate you from the competition.
  4. An effective competitive strategy includes some key elements and excludes others.
  5. A successful strategy integrates all of the key elements that defines a company into an understandable and sustainable implementation program.
  6. A successful strategy involves "continuity of direction." Conversely, "renewal" exercises sometimes indicate a flawed corporate strategy.

A thorough review of this article quickly convinces the reader that Mr. Porter has a new book in the works. Without a doubt, it will provide clear direction on integrating Internet technology into a traditional business model sustained by strategic competitive positioning in the marketplace. Be on the lookout for it. It deserves a place in your business library.