Strategy and the Internet

In his piece, "Strategy and the Internet", Michael Porter included a breakdown of how the internet influences industry structure.  In that breakdown he listed five main areas of focus, also known as Porter's 5 Forces; rivalry among existing competitors, threat of substitute products and services, bargaining power of suppliers, barriers to entry, and buyers.  In this post I will discuss how the internet has influenced the power that each of these five forces has within industry.

"Many have argued that the internet renders strategy obsolete.  In reality, the opposite is true.  Because the internet tends to weaken industry profitability without providing proprietary operational advantages, it is more important than ever for companies to distinguish themselves through strategy.  The winners will be those that view the internet as a complement to, not a cannibal of, traditional ways of competing."

Rivalry Among Existing Competitors

When it comes to competition in the marketplace the internet has had a profound impact.  Prior to the existence of the internet, companies only had to compete against their neighbors within a given geographic area.  With the advent of internet technology these same companies are now competing in a global marketplace.  Not only are the local shops forced to compete with online giants such as Amazon.com, but a quick Google Shopping search for any given product can yield several results.  With so many options now out there many retailers are forced to offer increased price discounting in order to draw people to their product.  In this new, internet dominated, global marketplace competitors are sparring with one another mainly over the price of the product.  Those that are able to offer the best price will most likely win out in the hearts and wallets of consumers.

The internet has also greatly enhanced the flow of information to the point where it is often hard for competitors to keep things proprietary or maintain a certain level of secrecy.  A simple Google search allows many companies to glean information about what their competition is working on.

Threat of Substitute Products and Services

As has already been mentioned the internet laid the world flat, and created a global marketplace that is now available to almost anyone.  In this sense the internet has increased the efficiency of industry, but at the same time it has also made it easy for substitutes to enter the market.  While some industries are more prone to substitutes entering the market than others, the internet has none the less made the threat of substitution more tangible than it was prior to its existence.  Take for example the local machine shop.  In the past some people would might have explored using such a shop to have something made.  Now, such local shops are forced to compete against online machine shops such as eMachineShop.com, and internetMachineShop.com that provide customers with the tools necessary to design, create, and manufacture custom widgets.

Bargaining Power of Suppliers

One of the most profound impacts of the internet on the power of suppliers has been its ability to grant them instant access to the end users.  In the past many suppliers had to reach end users through a third party.  Now they can go directly to the end user.  Take a company like Sony for example.  Prior to the internet Sony products could be bought through several third party locations such as Best Buy or Walmart.  With the advent of internet technology Sony has gained the ability to reach the end user directly through the establishment of an online store.

Barriers to Entry

Because of the internet many industries have seen a flood of new entrants.  Anyone with something to sell can now start up a website and directly reach their desired customer.  There is no longer a need to have an effective sales force peddling the product from door-to-door.  Everyday new and interesting products are being developed and marketed on the internet.

Buyers

The internet has effectively put an end to some of the most powerful channels and also greatly improved the bargaining power that competitors now have over traditional channels.  At the same time, it has also created a shift in bargaining power to a model that is now more focused on the end user.  Customers (i.e. buyers or end users) are now flooded with product information, which allows them to make better decisions and also become more well informed.  Personally, I tend to do a great deal of research before making significant purchases such as televisions, cars, or other expensive electronic devices.  Sites such as Consumer Reports, CNET, or Cars.com can help educate buyers about products and provide them with valuable information before making costly decisions.