26 The CFA Digest November 2001

Strategy and the Internet

Michael E. Porter
Harvard Business Review
March 2001:6378
Although the Internet provides an ideal architecture for leveraging opportunity in new and existing markets, a company can
achieve a competitive advantage only by creating products or
services of unique value. An Internet stake, by itself, provides
no advantage, but when the Internet is used as part of an overall
strategy, it can be effective in achieving distinction for a
company and its products. The author analyzes the impact of
the Internet on traditional business strategy within the framework of what he defines as the five forces of competition.

In the rush to launch their Internet businesses, companies, both old

and new, have abandoned the principles of competitive advantage.
Far from creating real economic value out of obscure revenues and
fuzzy costs, the Internet, as deployed by most enterprises, has
instead led whole industries away from traditional competition and
become, in effect, a great equalizer, or even perhaps an artifice.
Confused by market distortions of their own devices (offering steep
discounts, subsidizing sales, concocting accounting gimmicks, and
accrediting foolish valuation metrics), executives have found the
payoffs rather elusive. But as before e-business proliferated, actual
profits accrue to businesses distinguished by sustainable advantages
within a receptive industry structure. The five forces that influence
an industrys potential profitability are (1) rivalry among competitors,
(2) barriers to entry, (3) threat of substitutes, (4) supplier bargaining
power, and alternately, (5) buyer bargaining power.
Porter surmises that the Internet need not be inhospitable to industry
profitability. The Internet does expand markets and readily finds new
links to customers, but it also reduces barriers and informs buyers. It
stirs up rivalries, offers substitutes, and increases fixed costsall of
Michael E. Porter is at Harvard Business School. The summar y was prepared by
Christo pher J. S ullivan, CFA, United Nations Federal Credit Union.

2001, AIM R

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which conspire to push competition toward price. The paradox Porter

reveals, however, is that the Internets openness, ease of use, and
transactional efficiencies are benefits that companies fail to convert
to their advantage and, subsequently, into profits.
Early Internet enthusiasts assumed that high switching costs and
powerful network effects (value created from a products growing use)
would clear the playing field to one or two first movers. But
switching costs have turned out to be low, and network effects, subject
to diminishing returns, have proven difficult to achieve. The natural
resulttrue new-economy brandshas failed to appear. Even the
mutual-benefit expectations built into partnering alliances, an
assumed antidote to zero-sum competition, have fallen short. These
miscalculations, and other poor practices, have set in motion a
desperate spiral toward competitive convergence. What many companies using the Internet have lacked is a plan for distinction, or
strategy, that creates a value proposition that transcends simple
operational efficiency, shuns imitation, and forces trade-offs.
Strategically positioned companies, or those offering unique products
through integrated research, design, manufacturing, and delivery systems (Porters value chains), are able to extract returns from difficult
markets. These companies best efforts then become proprietary, or
hard to copy, and create real advantage. When used throughout the
value chain, todays Internet offers a superior information-technology
framework for enhancing fit, position, and the flow of activity.
Survival demands that companies move away from price as the
primary source of competitive advantage toward distinctive, valuedriven trade-offs that meld a companys traditional activities with
its Internet-related activities. Rather than perceiving the Internet as
a strategy unto itself, Porter envisions a return to a single, unifying
strategy that encompasses the tenets of e-business throughout the
company structure. Porter believes that as all businesses adopt the
Internet, the competitive force of e-business capability will be
neutralized; in his words, the new economy appears less like a new
economy than like an old economy that has access to a new
technology.
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