How Does the Internet Affect the International Strategy - Essay Example

?How does the internet affect the international strategy? Use Porter's 5 Forces and tell how internet shapes and changes the business environment. The advent of Information Technology in the 19th century has transformed the way enterprises conduct business today. Technology enables an automation of manual procedures and a faster processing of information. Another key innovation in the field of IT is the Internet. The internet has generated new communication channels and other business techniques that improve the organisational efficiency in handling financial and business information. Most companies in the modern business environment have executed some or the other form of Internet machinery into their business operations. While some enterprises faced a major conversion when emerging into an e-business function, others may have enjoyed an edge of this technology before the use of the Internet became pervasive to the present extent. (Kotler, 1997; Rainer, 2009) Internet creates economic value for business either by creating new industries such as online auctions and digital marketplaces, or by reconfiguring existing industries through reduced communication costs, easier transactions and faster information dissemination. Though catalogue retailers and toll free numbers have been always there, the internet provides a more efficient mode to order products and services. For instance, distance learning has been prevalent in the education sector for decades with almost a million students enrolling annually for various correspondence courses. But a modified and improvised version of distance learning is E-College. It is a full-service provider that works in collaboration with many universities and publishes their courses over the internet and operates the delivery network for a fee. The profitability of a business is influenced by the internet based on two main factors- industry structure and competitive advantage. While the former determines the profitability of an average competitor, the latter imparts the capacity to outperform an average competitor. (Castells, 2003; Chadwick, 2009) In today’s rapid pace of technological change in business environment, industrial analysis becomes all the more important. The structural attractiveness of an industry, whether old or new, is governed by five forces of competition. These forces, alternately known as Porter’s Five Forces, are existing rivalry among competitors, threat of substitutes, barriers to new entrants, bargaining power of suppliers and bargaining power of buyers. Though the nature of the five forces varies across industries, the profitability of an enterprise still depends of these. Due to the variable nature of the five forces, it is difficult to draw any general conclusion about the impact of the internet o business environment. But some dominant trends can be inferred through an inspection of a wide range of industries where the internet plays a vital role. Most of the industries show a positive trend owing to the expansion of markets, improved position compared to rivals and new channels to reach out to customers. (Porter, 1979; 2008; Karagiannopoulos, 2005) However some negative impacts of internet on businesses have also been in picture. It enables the buyers to have an easy access to information about products and services, thus strengthening their bargaining power. It helps in growth of new substitutes due to birth of new approaches to meets costumers’ needs. By reducing the need for an established sales force or affiliation to existing channels, it removes barriers to entry. It dissolves geographical borders and expands the geographical market, bringing more companies into competition with each other. The increase in fixed costs, accompanying the favourable decline in variable costs, leads to the promotion of destructive price competition amongst the existing industry rivals. (Seybold, 1998; Angell, 1994) The inherent paradox is that the benefits offered by the internet expand the market through reduced operational costs, enhanced communication and better access to information. But all this is at the expense of average profitability. It is very challenging for companies to extract these benefits as profits for their business. An example can be drawn from the automobile retailing industry. The internet provides extensive information related to model specifications, repair services, price for new cars, prices for used cars etc. in addition to the local dealers there are internet referral networks such as Autoweb and AutoVantage. Also there are online direct dealers like AutoNation and CarsDirect.com. All these reduce the importance of location by expanding the geographical market beyond local, regional and national barriers. In the resulting virtual market, all online dealers are mutual competitors with very limited scope for differentiation due to lack of showrooms, service centres and personal selling. A multitude of competitors with undifferentiated products lead to a price-oriented competition, which has negative implications for any industry. (Porter, 2001; Yip, 2004) A sharp contrast is offered by online auctions, which enjoy economies of scale in terms of infrastructure and access to buyers and sellers. Ebay was the only dominant player which offered an easy marketplace in comparison to its substitutes like classified ads and flea markets. But with the entry of Amazon and other competitors who launched free auctions. Ebay faced crisis. It then devised newer ways to attract and retain buyers rather than competing on price. Thus the chance of destructive price completion was ruled out. A very poor player in internet retailing is Buy.com which undermined its competitive advantage of customer service by over-investing in brand advertising and impulsively selling products below cost price to increase sales. Similarly Merrill Lynch, in its hasty effort to boost its value in the stock market, gave up its asset- its skilled workers- in blind imitation of its rivals in the market. (Porter, 1980; Felt, 1984; Afuah, 2000) The internet also provides a competitive edge by means of cost and price advantage which can be achieved either through operational effectiveness or through strategic positioning. The former refers to doing the same thing as rivals, but in a better way through better techniques, better inputs and efficient workforce. The latter refers to doing things differently and offering unique value to customers through differentiated features, services and logistics. With the internet, it is easy to create but harder to sustain operational effectiveness. The new practices employed by companies can be easily copied by the rivals. For instance, CVS, the drugstore chain, designed and implemented an internet based procurement system in 60 days. But today the availability of generic software packages like CRM, ERP and SCM from third party developers not only brings down fixed costs but also removes imitation barriers. Hence the best practices are today broadly shared due to the convergence of companies on the same applications and same benefits. (Cagliano, 2003; Hackbarth, 2000) Looking at the positive and negative impacts of internet on businesses, it is judicious to attain a synergy between traditional practices and online applications. Such a practice has been adopted by direct marketers like Vanguard, catalogue retailers like Land’s End and EDI service providers like General Electric. Managers must realise that though the internet is a new means of conducting business, the fundamentals of comp are still the same. Hence internet must be integrated into the overall structure of a business, so as to serve as a powerful strategic tool for gaining competitive advantage in a business environment. (Porter, 2001) REFERENCES Afuah, A., & Tucci, C. L. (2000). Internet business models and strategies: Text and cases. McGraw-Hill Higher Education. Cagliano, R., Caniato, F., & Spina, G. (2003). E-business strategy: how companies are shaping their supply chain through the internet. International Journal of Operations & Production Management, 23(10), 1142-1162. Seybold, P. B., & Marshak, R. T. (1998). Customers. com: how to create a profitable business strategy for the Internet and beyond. Times Business. Castells, M. (2003). The Internet galaxy: Reflections on the Internet, business, and society. New York: Oxford University Press. Yip, G. S. (2004). Using strategy to change your business model. Business Strategy Review, 15(2), 17-24. Hackbarth, G., & Kettinger, W. J. (2000). Building an e-business strategy. Information Systems Management, 17(3), 78-93. Porter, M.E. (2001). Strategy and the Internet, Harvard Business Review, March-2001, 63-78 Porter, M.E. (2008). The Five Competitive Forces that Shape Strategy, Harvard Business Review, January-2008, p.86-104. Werner Felt, B. (1984), A resource-based view of the firm, Strategic Management Journal, Vol. 5, pp. 171-180 Porter, M.E. (1979). How Competitive Forces Shape Strategy. Harvard Business Review, March-April, 1979. Porter, M.E. (1980) Competitive Strategy, New York: Free Press Rainer & Turban. (2009). Introduction to Information Systems (2nd edition), Wiley Kotler P. (1997). Marketing Management, Prentice-Hall Angell, D. F., & Heslop, B. (1994). The Internet business companion: growing your business in the electronic age. Addison-Wesley Longman Publishing Co. Chadwick, F., Mayer, R. E. & Johnston, K. J. (2009). Internet marketing: strategy, implementation and practice. Pearson Education. Karagiannopoulos, G.D. (2005). Fathoming Porter's five forces model in the internet era, Vol. 7, pp.66 – 76 Read More