How the Internet Can Jeopardize Competitive Advantage

by James T. Berger , April 2006

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Several years ago when the Internet had exploded on the scene, Michael Porter, the famous Harvard University professor and business strategist, developed an article for the Harvard Business Review entitled “Strategy and the Internet.” While everybody else was extolling the virtues of the Internet as the great communications breakthrough and facilitator of marketing communications and strategy, Porter took the opposite approach and saw the Internet as a force that jeopardizes competitive advantage.

As time has gone on, Porter’s observations in 2001 appear to be even more significant in 2006.

Pressure on Profitability

Porter saw, in 2001, that profitability was under intense pressure. The logical next thought is one of the key assumptions in marketing — to be more profitability and to obtain “sustainable competitive advantage” a company must differentiate itself from competitors through either or both operating at a lower cost or by commanding a premium price.

Porter’s next premise is that cost and price advantages can be obtained by “operational effectiveness” which he defines as doing the same things competitors but do them better. Under the umbrella of operational effectiveness are things like developing better technologies, superior inputs, better trained people or a more effective management structure.

A second way to achieve competitive advantage, according to Porter, is “strategic positioning,” which he defines as “doing things differently from competitors in a way the delivers a unique type of value to customers.” This concept has been bundled into the marketing buzz words “value added.”

Enter the Internet

While the Internet is has become a powerful communications vehicle, it has some very dangerous side-effects with respect to sustainable competitive advantage.

Porter writes: “The Internet is arguably the most powerful tool available today for enhancing operational effectiveness. By easing and speeding the exchange of real-time information, it enables improvements throughout the entire value chain, across almost every company and industry. And because it is an open platform with common standards, companies can often tap into its benefits with much less investment than what was required to capitalize on past generations of information technology.”

Porter goes on to say that 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.”

He adds the nature of Internet applications make it more difficult to sustain competitive advantage. He points that in past eras IT application development was complex, time consuming and hugely expensive and such an investment in these applications made it difficult for competitors to imitate and copy these applications. However, he writes, “The openness of the Internet, combined with advances in software architecture, development tools and modularity, makes it much easier for companies to design and implement applications.”

Strategic Position Key to Competitive Advantage

With operational effectiveness harder to achieve, strategic position takes a more important role in achieving competitive advantage, according to Porter. And, the key to strategic positioning is “having a strong focus on profitability rather than growth, an ability to define a unique value proposition, and a willingness to make tough trade-offs in choosing what not to do.”

Porter points out how this lack of commitment to profitability cost many of the dot coms dearly in their formative years. “Many of the pioneers of Internet business, both dot coms and established companies, have competed in ways that violate nearly every precept of good strategy. Rather than focus on profits, they have sought to maximize revenue and market share at all costs, pursuing customers indiscriminately through discounting, giveaways, promotions, channel incentives and heavy advertising.”

He points out that these tactics have undermined the structures of industries and hastened competitive convergence and reduce the probability of anybody gaining competitive advantage. However, he sees the Internet as having the potential to become a more powerful tool for strategy.

“To gain these advantages, companies need to stop their rush to adopt generic ‘out of the box’ packaged applications and instead tailor their deployment of Internet technology to their particular strategies,” he says. “Although it remains more difficult to customize packaged applications, the very difficulty of the task contributes to the sustainability of the resulting competitive advantage.”

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Author
James T. Berger, Managing Editor of The Wiglaf Journal, specializes in both finance and marketing and has spent a number in both the investor relations field as well as an account manager and officer at several Chicago advertising agencies.

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