Strategy and the Internet by Porter - Article Example

Journal Article Analysis and Application Author’s Name Institutional Affiliation Abstract The internet has often been poorly judged on its impact upon use in business environments. Adopting internet technology has been the recent trend for most businesses across the world to effectively compete, and remain updated in the business trends. As the majority ventured in online businesses, some were reluctant in fear that internet would become cannibalistic and impair companies’ profitability. Porter argues that internet acts as a compliment to the traditional practices of competing, rather than render them invalid. He points out existence of few tradeoffs, but defends valuable changes that should not be confused with disruptive practices. Internet technology is presented as a tool that affects competitive advantage by influencing operational effectiveness and strategic positioning, besides altering the business structure to influence profitability and sustained growth. The document elaborates on these issues, and analyzes the article for adequacy of literature review, research goals and clarity of ideas, and finally internets impact on Australian retail banking industry. Keywords: Internet, Online Businesses, Competitive Advantage, Industry Structure, Suppliers, Customers, Technology, Compliment, Internet Banking, Profitability, Economic Value Introduction The internet has grown tremendously over the last decade in societies across the world. It is an enabling tool in the business environment, which depending on its use can yield different results; either profitability or undermine business competitive advantage. According to Porter, implementation of internet technology in businesses allow them to establish distinctive strategic positioning, which is a competitive advantage that can work on existing business approaches and strategy other than new practices (2001). Benefits of internet have failed to be realized by most companies because of the widespread myths. The aim of this paper is to correct these myths and change reluctant business managers’ perceptions. It clearly elaborates how internet influences industry’s structure through the underlying forces of competition, and how internet acts as a compliment of traditional business methods and strategies of competing. Its provides greater understanding how business can compete with both traditionally and online established companies through operational effectiveness and strategic positioning to gain competitive advantage, by creating value to customer and sustaining its growth and profitability. Also to criticize Porter’ work and how Porter’s arguments are reflected in integration of internet to Australian retail banking industry Porter’s Argument of the Role of Internet Technology How the internet influences the industry structure. Most organizations altered the way they conducted businesses when internet technology came in. Automation and enabled online services have reconfigured the existing industries to affect the players in the value chain. New companies and business models have emerged in different industries that are conducted in e-market places (Grove, 1999). Other existing companies have taken advantage of the internet to intensify and redefine relationships in business, and expand their market. Shin states that internet has the ability to “transform competition basis by thoroughly modifying industry’s cost structure, product/service offerings, and balance of power in relationships with buyers and suppliers” (2001:165). However, whether in new or existing businesses, the underlying forces of competition remain and act to determine the profitability by influencing how the economic value is generated. Bargaining power of buyers and suppliers. Previously, there had been numerous intermediaries between the sellers and customers, whom even to date, do exist. Internet established a direct connection to the buyers at a lower cost. The internet facilitated disintermediation from the distribution channel allowing firms that source the products or services to deal directly with the end customers (Gallaugher, 2002). The traditional channels hence become undervalued and the customers bargaining power improves because they have access to relevant quality, quantity and pricing information for what they need to purchase. Avlonitis and Karayani agree that the internet technologies approval by business organizations has been attributed to its “lower set up and operational costs and elimination of switching costs, which gives them an overwhelming advantage over other competitive information networks” (2000: 442). Though intermediation is reduced between supplies and customers, different business can access similar suppliers for their products, which produce low chances of differentiation. Where the supplies are limited and the resources become constrained it could lead to a monopoly, which give the supplies a higher bargaining power. However, if the suppliers are not limited, it yields the negative effect for most would be willing to place price discounts to market their products. Substitutes and competitors. Deployment of the internet technology in modern companies expands the reach of the businesses to larger share of the market, beyond previously constrained geographical conditions. Internet eliminates the market boundary and allows market competition for rival companies. Customers have wide choices to compare products offers and whom to shop from. The inability for the competitors to differentiate themselves in their products makes competition to incline towards pricing, which push for businesses’ discounted prices of products, necessary to attract customers and retain them. This is because competing companies in particular industry will have to adjust their variable costs to compete effectively. Products and services that in the past were accessible only within the local regions are more accessible in the wider market enabled by internet. Consumers have wide array of products to pick best quality and right quantity at affordable and prices. It’s possible for consumers to get substitute products that best meet their needs in the extensive online marketplace. Businesses that previously enjoyed a larger market share face a potential threat through substitute products or services enabled online, besides other better offers that new market entrants presents. The internet is a levelled playing field for competitors. Considering its most advantages it places by eliminating most intermediaries between businesses and their targets, and improving operational activities between them in communication, advertising, marketing and procurement activities, internet reduces most barriers to entering different business industry, and “allow small business entrants to operate nimbly but effectively” (Cardamone, n.d: 1). Despite the increasing business market entrants, it’s necessary they take caution and consider their competitive choices to avoid being pushed out of business. Role of technology in attaining competitive advantage. Every industry influenced by the internet strives to create a value that it can transfer to its customers and emerge marketable than its competitors. Porter argues that internet improve operational effectiveness to lower operational costs, and delivers unique values by facilitating strategic positioning to compete in distinctive ways that sustains competitive advantage through price premiums (2001). Influence operational effectiveness. Companies can gain certain advantages by outperforming others in their operations. Though most companies have gone online in doing business, and experience certain benefits from their use of technology. Using a particular advanced internet application can provide a business with a specific best practice, which if achieved and sustained can improve operational effectiveness to yield profitability. Better technologies like tailored programs /systems that enable real time transactions and exchange of data available, through the internet produce operational effectiveness by reducing delay times in dealing with clients. Note that these sales and marketing activities could already be enabled through the internet but not real time. A company with sustainable operational effectiveness can hence improve its economic value in its value chain to reap better benefits. Ashill, Casagranda and Stevens, believe that competitive advantage is achieved through the process of making effective and co-ordinating of linkages between business activities in a manner that eases transaction costs (n.d: 3). However, with the support of same internet and recent spread of software development, similar internet application can be developed and tailored for other rival businesses, which makes operational advantage difficult to sustain. Influence strategic positioning. Online retailers can distinguish its products and itself by providing valued differences to its customers, such that it creates more economic value by doing things differently compared to its competitors. Porter views distinctive strategic direction taken by businesses to be beyond best practices (2001), for it can be integrated with the internet to reconfigure the enterprise for a competitive advantage. Some companies like Wal-mart have chosen low cost leadership positions as a competitive advantage on online markets. With strategic positioning companies can choose to differentiate through their product line online and customize them to various needs, differentiate their services offered, channels of distribution, personnel or along image dimension, from rival brick and mortar and online businesses (Razak, Ilias & Rahman, 2009). For example, if a company decides to enhance e-marketing experience, then the strategic direction is kept on course with support of internet capabilities that gives customers shopping experience value. The customer experience is tailored to the value chain that gives the company competitive advantaged, which is difficult to replicate unless the general system of the business and its re-configuration by the internet are applied. The essence is that using internet to differentiate either the logistical arrangements or services of a business would enable it to charge premium prices for its meaningful and differentiated value created. Internet as a compliment. Some businesses have refrained from deploying internet for the fears of online channel cannibalization. Their pessimistic perception clogs their judgment with how the internet can disrupt the entrenched traditional channels, damage businesses’ way of doing things and its negative implication on the total value. Porter agrees that internet cannibalization can in certain circumstances occur, but changes brought about by trade-off between traditional activities and internet should not be considered disruption. Deleersnyder, Geyskens, Gielens and Dekimpe’s extensive study clarifies that“ cannibalization fear has extensively been overstated; its threat has tested to be lower than the broader perceptions, for it does not need bring disruption to existing business channels and structure, or invalidate business entrenched distribution channels (2001:14-15). The internet has made possible to integrate virtual and physical activities to enforce on the business services, offers or practices for a greater economic value. In certain cases internet could bring minimal changes to the traditional practices, but has often reinforced the business established strategy, and coordinated with established traditional practices to complement each other. The short comings of internet channels are covered through traditional physical activities, while majority of the latter are catered through internet capabilities, hence increasing business efficiency and sustained growth in the overall. Analysis of the Article in Terms of Inadequacy of literature review. Porter’s assumptions over the internet’s effects on the underlying traditional business approaches tends to favour changes and highly overlooks the slight chances of disruptions. The case of W W Grainger feels rather exceptional in the contemporary world, as businesses that adopted higher level technologies would dismiss the conception, due to the numerous re-organizations they brought to the older business methods. Often, the move to higher technology integration, require adoption of new systems and technologies: these processes require reengineering, reprogramming or retooling of business model, which is undoubtedly disruptive (Hamilton, 2007). There is also a constraint in the way Porter views internet technology. Instead of perceiving internet as a newly emerged infrastructure that changes economic activities, he’s convinced it’s the latest evolution in IT. His work brings out internet as another complimentary technology development. Porter’s work is limited to the businesses experience in using internet; he draws numerous examples in his research of the existing traditional and online companies to evaluate their effects on internet deployment. His literature investigation tends to justify his previous works or with other collaborated authors. It made use of contemporary businesses performances, but he failed to justify his work using others authors literature, which makes his work rather shallow. Clarity of ideas. Professionally, knowing whom you target audience is, Porter need to have clarified better certain terms used in the business context. The word ‘cannibalistic’ feels like an idiom the first time a reader encounters it. For clarity reasons, the article fails to outwardly produce a profound definition of its application in the context. The article provides extensive information to expound on specific points of underlying forces of competition. It’s commendable that porter integrates diagrams to elaborate further. However, the reason the diagram is produced in the midst of different texts rather than the immediate explaining paragraphs is questionable and creates ambiguity in comprehending what Porter intended. The article does not clearly provide for recommendations. They are scattered in certain subtopics, which is tiresome for the reader to spot. Clear subtopics on recommendations make it easier to trace information, since related information provides systematic flow of ideas. However, its incorporation of numerous examples improves clarification of a subtopics and paragraph ideas. Specification f research goals. Most articles take time to clearly specify their research objectives or goals, preferably under a sub heading. The article’s goal is to convince its audience that internet serves as a compliment to the traditional established approaches to competition rather than what most believe to render strategy obsolete. It recommends business to use internet to distinguish them through strategy, and beyond operational effectiveness. This can be deduced from its first few paragraphs though the body strives to bring out the argument all through. Explaining the Effects of the Internet in the Australian Retail Banking Sector With the growth of internet technology most cautious retail banks like HSBC, NAB and Bendigo among others introduced E-banking and mobile banking. This brought changes to some activities like account registration, convenient ways to manage individual’s financial assets from any location as long as there was internet connectivity, yet providing different electronic banking services faster and easily than traditionally performed. Online banking deployed by most retail banks has become a common operation, such that it no longer yields competitive advantage. This trend supports Porter’s argument that operational effectiveness is difficult to sustain; when NAB employed internet banking so did HSBC and other banks. As most retail banks facilitate both online and off line services, they provide consumers with a wider range of choice; first to compare different bank’ offers, and second to introduce the trade off concept between chosen online channel and commuting to the banks. Australian banking customers confirm to highly be motivated to internet banking by its convenience and familiarization with the internet banking application other than having risk concern (Lichtenstein & Williamson: 2006). This concurs with Porters argument of the increasing bargaining power for customers through various banking services offline and online. Similarly, customers can have various substitutes of services and products from various online and traditional banks. The options of not queuing for transactions are catered online. Competitions among rival retail banks of Australia who offer products online is stiff, and have to shift towards pricing and interest rates, one because they deal with difficult products to distinguish from one another and the increasing market entrants. Australian retail banking sector has numerous opportunities for new entrants. With the internet capability, new entrants can now develop and offer the society innovative products, and enhanced ways of distribution using tailored applications. Internet has widened retail banks’ scale of operation and made the industry to compete efficiently. Netbank is a CBA’s retail online banking service that provides real time benefits to retail customers, which gives the business a competitive advantage for its unique brand of service. Compared to its rival companies with similar operational effectiveness, Harte confirms that “over 50 thousands logins occur, about 27 thousand perform financial transactions, while others seek other services within every 20 minutes” (2012: 15). That does not mean that other traditional activities like account registration are invalid, rather both can occur and act to complement each other. It has basically changed the way services are offered to clients. Its capability facilitates “integration and transformation of traditional business model to that of e-commerce” (Subsorne &Limwiriyakul, n.d: 1). Most banks inclined towards improving operational effectiveness bring them to a convergence, due to tailored imitation. What most retail banks are currently doing is strive to differentiate themselves through various innovative payment options tailored to meet their customers need in line to the bank’s offered product/services. Digital banking in Australia is highly preferred; it yields wider customer-bank interaction, but also compliments other multichannel banking service upon integration to the traditional banking system, lead to lower customer effort score, reduce cost for banking and increase business customer through differentiated values (PWC, 2012). The rational for selecting business strategy lie in the services offered by retail banks in industry to pull other and maintain customers. Reference list Ashill, N.J., Casagranda, L., & Stevens, P.M. N.d. Creating Competitive Advantage using the Internet: Evidence from New Zealand Primary Sector Industries. . Viewed 20 April 2014 Avlonitis, G. J., & Karayani, D, A. 2000. The impact of internet use on business to business marketing: Examples from American and European companies. Industrial Marketing Management 29: 441–459. New York, NY: Elsevier Science Inc Cardamone, J.R. N.d. Tech lowers barriers to entry, and small businesses think big. Baltimore Business Journal, 24 (50):1. Deleersnyder, B., Geyskens, I., Gielens, K., & Dekimpe, M. G. 2001. How cannibalistic is the internet channel? (ERIM): Report series ERS- 2002-22- Mkt. Viewed 20 April 2014 Gallaugher, J. M. 2002. E-Commerce and undulating distribution channel. Communications of the Association for Computing Machinery (CACM), 45 (7): 89-95. Grove A. 1999.Within a few years, the internet will turn business upside down. Be    prepared—or die, says Matthew Symonds. Viewed 18 April 2014 Hamilton, J. 2007. Porter’s strategy and the internet revisited. Viewed 19 April 2014 Harte, M. 2012. Commonwealth bank technology update: Our competitive advantage. . Viewed 22 April 2014 Lichtenstein, S., & Williamson. K. 2006. Understanding consumer adoption of internet banking: An interpretive study in the Australian banking context. Journal of Electronic Commerce Research, 7 (2): 50-66. Porter, M. E. 2001. Strategy and the internet. Harvard Business Review, 79 (3). PWC. 2012. The new digital tipping point: Using digital to drive future retail banking profitability. Viewed 22 April 2014 Razak, M.Z.B.A., Ilias, A., & Rahman, R.A. 2009. Differentiation strategies of internet retailing (unique, value and return): A focused web evaluation into airline service provider. International Business Research, 2 (2): 40-47. Shin, N. 2001. Strategies for competitive advantage in electronic commerce. Journal of Electronic Commerce Research, 2 (4):164- 172. Subsorne, P., & Limwiriyakul, S. A comparative analysis of the security of internet banking in Australia: A customer perspective. Viewed 24 April 2014 Read More