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strategy challenge: the internet

relevant to Professional Scheme Paper 3.5
and new ACCA Qualification Paper P3

building a new
In March 2001, Michael Porter wrote determine profitability. The first is the industry the intensity of the rivalry between existing
an article in the Harvard Business Review structure within which a firm competes, which competitors, barriers to entry for new
on the challenge the Internet presented to determines the profitability of the average competitors, the threat from substitute products
strategy making, and to the models he had competitor. The second is the sustainable or services, the bargaining power of suppliers,
developed to help explain strategic decisions competitive advantage which a firm achieves and the bargaining power of customers.
and achieve competitive advantage. Six years by its own strategic decisions and which
on, it seems useful to review his arguments, results in above average profits. The intensity of the rivalry between existing
understand the implications of the Internet Porter argues that the Internet has competitors
for today’s strategy makers and, in particular, facilitated some new industries, such as online Analysis suggests that for many industries,
consider the impact of the Internet on small auctions and digital marketplaces. Much rivalry will increase as a result of the Internet
business. This impact is examined through more significant, however, is the impact the and, as a consequence, will have a depressing
a review of an excellent answer to an option Internet has had on existing industries that effect on prices. Competing within an open
question from the December 2006 Paper 3.5, had been constrained by the high cost of system, firms have difficulty in preventing
Strategic Business Planning and Development communications, information gathering, or rivals copying their products or services. The
exam. Finally, the article concludes with some accomplishing transactions. He cites distance heavy start-up investment associated with the
thoughts on the significance of e-business to learning and catalogue-based retailers as Internet increases fixed costs and increases
Paper P3, Business Analysis – to be examined examples of where the Internet has improved the likelihood of firms engaging in destructive
for the first time in December 2007. customer access to a product or service that price competition. On the positive side, the
has fundamentally stayed the same. Internet may expand the size of the market
THE INTERNET AND PORTER’S FIVE Porter states that the attractiveness of and provide more direct access to customers.
FORCES MODEL any industry, be it young or old, is determined Overall, however, most industries have seen
Porter argues that two fundamental factors by five underlying forces of competition: competition intensify.

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Barriers to entry for new competitors THE VALUE CHAIN, VALUE NETWORK, benefits – benchmarking and copying best
Porter argues that for many industries the AND COMPETITIVE ADVANTAGE practice make any operational advantage
entry barriers are lowered, with no need to Porter has consistently argued that at the difficult to sustain.
invest in expensive sales forces, gain access to level of the individual firm, superior long-term
traditional channels of distribution, or commit profitability is only gained through sustainable STRATEGIC POSITIONING
to heavy marketing costs. The lowering of competitive advantage. The links assessed Being different is, Porter argues, the only way
such barriers saves both time and money for above, between the impact of the Internet to achieve sustainable competitive advantage
new entrants. on the industry structure and the ways an and hence superior profitability. His six
individual firm chooses to use it, are clear. principles of strategic positioning are:
Threat from substitute products or services The collective impact of e-business decisions 1 Start with the right goal of superior
The Internet enables new approaches to be taken by firms in many industries is tending to long-term return on investment. Choosing
used; think of the impact on traditional travel reduce overall profitability of the industry as a to achieve maximum sales volume,
agents of customers buying a holiday package whole. Competition is increasingly price driven. market share, or even website ‘clicks’,
directly from a tour operator. Amazon, although an outstanding example and assuming profitability will follow, is a
of a new Internet-driven business, has yet to recipe for disaster.
Bargaining power of suppliers achieve significant profits despite its huge 2 The strategy must offer a value
Suppliers can gain access to a greater number growth in sales revenues. proposition or set of benefits different
of potential customers and, in so doing, At the level of the individual firm from those that competitors offer. There
reduce their dependency on a particular – regardless of size – sustainable competitive is no elusive ‘one best way’ of competing;
customer. Many firms have decided to advantage is gained by operating at a lower rather the firm should offer ‘unique
outsource activities that they used to perform cost, by commanding a price premium, or by value’ in a particular set of uses or for a
themselves; as a result, they increase both doing both. Such cost or price advantages particular set of customers.
their dependency on – and increase the can be gained either by doing the same things 3 Strategy needs to be reflected in a
bargaining power of – their suppliers and better than the competition (which Porter distinctive value chain, performing and
the likelihood of having to use the same terms operational effectiveness), or by better linking activities in different ways to
standardised inputs as their competitors. This strategic positioning – doing things differently its competitors, or performing similar
makes it increasingly difficult to be different from competitors in a way that offers a unique activities in different ways that allow it to
and gain a competitive advantage as a result. type of value to customers. This could be a deliver more value to its customers.
different set of product features, a different 4 Robust strategies require trade-offs. Porter
Bargaining power of customers range of services, or different logistical has always argued that in choosing a
It is here, for many industries, that the arrangements. In Porter’s terms: ‘The Internet particular strategy, managers need to be
Internet has had its greatest impact. It affects operational effectiveness and strategic aware of the options they can no longer
‘provides buyers with easier access to positioning in very different ways. It makes it follow. The distinctive features that a firm
information about products and suppliers, harder for companies to sustain operational has chosen to offer its customers inevitably
thus bolstering bargaining power’. Many firms advantage, but opens new opportunities mean it has chosen not to incorporate
sought ‘first mover advantage’ by exploiting for achieving or strengthening a distinctive others. If the firm can alter its products/
Internet technology before their rivals. The competitive positioning.’ services or value chain with no trade-offs
goal was to create significant switching costs then this means the changes will give no
for customers and a network of dependent OPERATIONAL EFFECTIVENESS sustained competitive advantage and they
customers. The reality is that customers using ‘The Internet is arguably the most powerful will be ruthlessly copied by competitors.
the Internet are finding it easier to switch tool available today for enhancing operational 5 ‘Strategy defines how all the elements of
suppliers, and the openness of the Internet effectiveness. By easing and speeding the what a company does fit together.’ Here
and its standards makes it difficult for a exchange of real-time information it enables the firm needs to ensure that the different
company to maintain its customer network improvements throughout the entire value activities carried out in the value chain
intact. There is little evidence to suggest that chain, across almost every company and reinforce one another. Product design
Internet brands, with the exception of Amazon industry.’ Unfortunately, the very openness should link with manufacturing operations
and eBay, have significantly affected customer of the Internet makes it extremely difficult and carry through to innovative aftersales
loyalty and buying behaviour. In general, to keep an operational advantage to oneself. service. In the UK, James Dyson would
Porter believes that Internet technologies Applications developed by third parties are be an excellent example of such linkages,
will continue to erode profitability by shifting increasingly easy to copy. Companies converge which has enabled him to take on, and
power to the customers. on the same applications with the same beat, rivals many times his size.

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

6 Finally, strategy involves continuity of an equally powerful force for competitive Danger that focus on developing the
direction – having chosen a particular value advantage.’ processes would change the direction of
proposition, the firm must stick with it and the company to the detriment of existing
avoid the temptation to constantly change EXCELLENCE IN AN E-BUSINESS ANSWER shop-based processes.
its strategy with every threat or challenge. – DECEMBER 2006 EXAM
The question concerned Good Sports – a small Supporting the niche strategy
Porter sees most firms looking to use the sportswear retailer with just one retail shop, Advertising online would enable many
Internet to achieve operational effectiveness, facing increasing competition from national more potential customers to become
despite evidence which suggests that such chains of sportswear retailers. Good Sports aware of the company’s products.
advantages are easily copied. Sustained successful niche strategy had been to focus New suppliers and specialist sportswear
competitive advantage, and resultant on less popular sports and offer exceptional products could be accessed.
profitability only comes from superior personal service and advice. Its first attempt More products equals more customers.
strategic positioning and attention to the six to set up a website and online ordering had If it is the only company offering such
principles listed above. The Internet does met with little success. Candidates were products and services – this will make it
provide an IT platform for achieving this, but first asked to report on the advantages and more distinctive.
needs to be linked to the ‘critical corporate disadvantages of developing an e-business There are limits to the support it
assets’ required to create a sustainable strategy, and identify the processes most likely can offer.
competitive advantage such as skilled to be affected by such a strategy. Second, they
personnel, proprietary product technology, or were asked to assess the extent to which an Finally, reflecting Porter’s conclusion, the
efficient logistical systems. As a result, the appropriate e-business strategy could support candidate argued: ‘The e-business strategy will
Internet complements rather than destroys Good Sports’ niche strategy. One of the best only help to a certain extent, as the company
existing value chains and ways of competing. answers I marked made the following points: already has a solid base and will find it difficult
He cites the example of Walgreens – ‘the to increase its size due to the competition and
most successful pharmacy chain in the United Advantages range of products sold.’
States’ – where 90% of customers who place An e-business strategy could enhance Overall, this answer clearly explained the
their orders online prefer to physically drive to Good Sports’ ability to differentiate itself. potential of moving into an Internet-based
their local Walgreen pharmacy to pick up their Selling online could prevent the company business, but also identified the real need to
medicines, rather than have them delivered to being drawn into direct price competition integrate it with the existing business.
their homes. Here Walgreens has recognised with its larger competitors.
that it is more efficient to take customer orders Good Sports could use its website to FROM STRATEGIC BUSINESS PLANNING
over the web, but equally more efficient to increase the unique advice and support AND DEVELOPMENT TO BUSINESS
make bulk deliveries to local pharmacies rather given to customers. ANALYSIS
than ship individual orders from a warehouse; New customers could be reached through I have had the privilege of being examiner for
‘Virtual activities do not eliminate the need a successful e-business strategy. Paper 3.5 since December 2003, and am
for physical activities, but often amplify their already enjoying my new role as assessor for
importance. For instance, using a website to Disadvantages the new Paper P3, Business Analysis. Strategy
supply product information and support direct Development of the strategy could take and IT are, if anything, even more closely
ordering may make the traditional salesforce time and money, and larger competitors linked in Paper P3. The use of models such
more, not less, productive and valuable. were likely to do the same. as those developed by Porter will continue
Attending to an e-business strategy might to be a core part of the new paper. It is in
CONCLUSION TO PORTER’S INTERNET divert and distract the business from understanding how the Internet and e-business
ARTICLE looking after its existing customers. strategy can be usefully integrated within
Porter concludes by saying that in the rush existing strategy models that candidates for the
to see how the Internet is different we have Processes new paper will show their understanding of the
failed to see how it is the same – and that the Selling processes would have to change new syllabus.
fundamentals of competition are unchanged. as there would be no face-to-face contact
The next stage of Internet evolution will see a with Internet customers. Ralph Bedrock is examiner for Paper 3.5
shift in strategic thinking from e-business to Ordering online from suppliers would
business and from e-strategy to strategy. ‘Only improve the process. REFERENCE
by integrating the Internet into overall strategy Delivery to online customers would be Porter M E, Strategy and the Internet,
will this powerful new technology become another process and would involve costs. Harvard Business Review, March 2001

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