The Impact of Electronic Commerce on Corporate Strategic Planning in the Economic Environment - Assignment Example

1. Why do some observers believe that Michael Porter does not fully appreciate the impact of electronic commerce on corporate strategic planning in the current economic environment? Do you agree or disagree with the critique to which Porter and his five-force model have been subjected? Why or why not? (see “Beyond Porter” file & lecture notes) Michael Porter is arguably one of the most recognized economists of modern times. His theories in strategic management, five forces and porters generic strategies have influenced strategic management in diverse ways. However, his views and theories have been criticized by some scholars on the applicability of the model in a range of markets and in a changing global market currently dominated by information technology and specifically digital economy. On the other hand, Porter is adamant that his theories on how firms can develop their profitability are still relevant. I believe that Porter does not fully acknowledge the role technology has in modern world but his theory is still relevant. Porter’s ideas are largely based on economic laws which are still relevant. The law of demand and supply as suggested by Porter are still relevant in all industries irrespective of the technology in use. Larry Downes, one of Porters main critics, acknowledges that one of the greatest strength of Porters model is the sound economic basis. Nonetheless, Downes clearly states that the model was developed in the 80’s a period which presented different economic environment compared to now (Recklies 2001). The 80’s economic environment was dominated by stability and high government regulations. Porter did not factor in how dynamic changes in the economic environment would affect firms. In his views, Porter argued that firms are required to assess their five forces and take a position in the industry based on this. This position cannot be changed frequently at least not until 4-5 years. The digital economy does not support this. Porter’s theory of the industry is still relevant as no single one theory can discredit what he stands for. The fact that the theory has been criticized does not make it invalid or dead. Nonetheless, the theory is in need of being redeveloped to take stock of the current market environment dominated by dynamism. Porter viewed that firms can only adopt one of the competitive positions suggested by the 2x2 matrix i.e. broad cost, focus costs, broad differentiation and focus differentiation. This is one of the greatest weaknesses of the theory because the current industry structure is not clearly defined and easy to define given that the number of factors playing an influential role is growing by the day (Malecki & Moriste, 2007).. Porter’s theory does not recognize the growing network firm-ecosystem. In the case of suppliers, Porter noted that a higher number concentration of suppliers devalued their bargaining power because buyers had options. However, this seems to be the contrary in specific industries. For instance, the situation at Silicon Valley where technology companies have contracted their activities ha not negatively affected their power. In fact, they have been in able to grow their power by attracting a skilled labor force and specialized industry in the region. From a different angle, Porter views such competition and high a higher number of entrants in an industry as threatening. Empirical evidence from Silicon Valley proves otherwise and shows that competition has powered innovation rather than it only being an attempt at differentiation. such innovations have been traded to competitors or even given freely. Electric Car maker, Tesla is one firm that made a unique step of sharing with competitors its patent on electric cars. The five forces model also fails to recognize the fact that firms can occupy more than one cell simultaneously in this 2x2 matrix. Porter insists that firms need to take one competitive position in the industry at a time and pursue it continuously for 3-5 years before shifting to another position. In the modern world of rapid change in the industry, this idea is outdated. Hyper-competition and internet mean that firms are more informed and so are consumers. In so doing, firms are required to be readily responsive to changes in the industry such as utilizing consumer feedbacks which might require a shift in the organizational position in the market. The digital market has failed to adhere to the provisions of the five forces theory yet Porte does not address this despite its persistent growth. Amazon, Google, Facebook about other digital organizations continues to defy Porter’s Logic. Continuous changes being experienced by these firms in response to their industries are a blatant resistance to Porters notion that growth is forever. These organizations have resulted to rely more on consumer needs capitalizing on their psychology to drive sales as oppose to the idea of Porter who views higher buyer bargaining power as a negative issue to the growth of firms. Consumer needs has also given way to mass customization. Mass customization is a process where organizations are able to focus on a large mass market and at using a customization approach of focusing on a small market. Porter’s logic argued that organizations can focus on lowering costs to serve a mass market either serving a small market or thus customize goods and services at a premium price. This is not the case nowadays. Google, Facebook and other social sites are clear examples that customization in a mass market is possible. Amazon has also been at the forefront enabling consumers to contribute towards customizing the service or product offered on a global scale. Twitter allows users to set their Facebook appearance to suit personal ideas and even gives users the freedom to choose the news tens that they can access. This approach where firms occupy more than two slots is ignored by Porter despite the success registered by mass customization. Porter ignores the role resources to an organization. The resource based view of the firm articulates the role played by resource in the growth of firms. In some key industries, the initial capital outlay is a deterrent to new actors but that alone does not cement their place in the market. Network organizations have shown a high sense of awareness and interest I research, design and development. This develops intellectual property which is patented and not necessarily sold but used to improve user experience and drive in higher traffic. The organizations also invest billions of dollars in their human resource development. Porter ignores this approach is determining the competiveness of an organization but rather places focus on the external environment of the firm rather than the internal environment. I personal feel that Porter five forces analysis is still relevant today but it needs to be updated to factor in recent discoveries in technology and strategic management. Changes in the market occasioned by a technology change, change in lifestyle, globalization, climate change among others need to be factored in the new model. The model is still relevant because it has yet to be proven wrong by another model. New upcoming model are largely based on the views of five forces analysis. Therefore, unless a new theory is developed that proves Porter’s theory wrong, it is still relevant but in need of being revised to address some of the issues highlighted above. 2. Why are S-curves employed by forecasters to project the future of consumer demand in most industries? Why is the 10% market penetration point regarded as pivotal to successful forecasting when applying s-curves? (Lecture notes and three additional files-pay particular attention to “applying and interpreting s curves” pptx file) The S-curve has been is a graphical representation of technology life-cycle (TLC) over business gain and time. It is important because it depicts a different lifecycle to those of other products and services. The curve suggests that technological innovations such as the internet, computers and mobile phones follow a different lifecycle compared to other products such as a new line of soap or designer apparel. The S-curve is named after the shape of the trajectory in movement of the product over time. At the initial stages, growth is minimal as the number of clients is low and the number continues to grow as the users grow. This type of explanation follows the common bell-shaped growth curve of regular products. However, the S-curve depicts the cumulative growth in sales of a product of technology. This is because technology is adapted and utilized continuously but can never go beyond a certain point. Technology firms invest heavily and engage in tedious experimentation to ensure that their innovations meet the market needs and they are of superior quality. The growth and uptake of such technology assumes a logistical equation given that the uptake cannot surpass its limit in form of resources available. For instance, the uptake of mobile phones took a long time in research and development and eventual experimenting before they were readily accessible in the market following cost and efficiency improvements. The organizations itself is also limited by its capacity as it cannot develop infinite capacity to serve an infinite demand. The S-Curve thus predicts the growth in demand of an invention, up to a certain point where such growth reaches full potential before declining and eventual fade out. Type writers are a good example because they have been phased out. However, at the time of their invention, their use stuttered in the first few years before exponential growth and eventual fade out replaced by computers. The S-curve thus provides organizations at estimation of how much long their inventions can sustain acceptable growth before demise. To remain relevant they thus have to keep inventing new product. The 10% point marks the market penetration point which is a very important inflexion point in technology adoption. The inflection marks the change in the growth potential of a technology from a sluggish start to a robust growth up to a certain point where the technology is limited on improvement. This results into sluggish growth which potentially marks the demise of a technology. It is also where organizations reach critical mass and sets the trajectory for the entire lifecycle. This inflexion point market the product lifecycle as mature. It marks the start of hyper growth in sales where adaptation, use and acceptance are at the highest potential level. The standard trajectory on S-curve sees organization replicating their growth. To avoid the demise of technology predicted by the replication of the S-curve, organizations engage in what is called jumping the S-curve. This entails developing new versions or substitute to the incumbent product or service with the intention of keeping up sales. Some key examples of organizations that practice jumping the S-curve include Samsung and Apple. The introduction of the iPhone has seen the company substitute current versions almost one every year to counter dwindling sales. Samsung has also managed to achieve the same through their Galaxy line of smart phones with SI, SII all playing substituting each other gradually with very positive market response. From this it is clear that firms are not driven solely by the need to create better product versions but only to counter dwindling sales. The uptake of technology is limited by a number of actors. This is in the same sense the multiplication of species, which was the original application of the S-curve, is limited by the resources available to the species. As such a species or technology in this case is limited by resources available to its utilization such as population size and disposable income. As such, technology companies use the S-curve to estimate potential sales and time taken to reach a certain sales figure. Therefore, it can be presumed that Apple and Samsung use the S-curve to predict when to launch another version of their top-market models to avert reduced slump in sales following utilization of the available resources in terms of the market. Utilization of resources in marketing terms implies market saturation. 4. Define Metcalfe's Law. Why do firms in the high-technology and communications industries regard Metcalfe's Law as a critical tool in charting: a) the future strategic direction of their companies; b) their future market valuations? ( See Session 4,5,6,7 lecture notes) Metcalfe law is a law that was developed by Robert Metcalfe in 1980’s to explain the value of telecommunication networks specifically for Ethernet. The law makes two main statements: “The number of possible cross-connections in a network grows as the square of the number of computers in the network increases” and “The community value of a network grows as the square of the number of its users increase.” The law was formulated on the belief that the internet which is just basically a network of many interconnected computers can only grow in usefulness and value as the number of computers grow. The benefit to the community of users is higher than the benefit obtained by an individual who join the network. Value is created where there is continued use OF the network. This is simplified by a formula REACH x LOYALTY = MARKET VALUE. Firms in the technology industry such as amazon, e-Bay, and Facebook rely on their reach and continue used in the market to create value. E-Bay creates value by maintaining a huge reach in the market comprising of millions of users and by making ensuring that they use that platform only. While there are numerous online retailing platforms, eBay can only create market value by ensuring that loyalty is attained and a large number of users. To maximize loyalty, majority of these products and services are free of charge. Facebook does not charge registration or user fees, same as Twitter. However, they create value through sustained traffic in large numbers The Metlcalfe law is also useful in in predicting and charting the lifecycle of network organizations. To ensure that these organizations grow with time, they have to devise ways of achieving consumer loyalty to create market value. They achieve these by manipulating consumer feedbacks on various platforms. These favorable reactions lead to market dominance. Positive feedback acts as free marketing for the organizations in this age where consumers are more convinced by consumer reviews than they are by paid for advertisements. This has led to development unfair competition which is subject to legal proceedings. Network organizations actively pursue lock-in policies to retain substantive market share. This is done through patents and increasing switching costs for consumers. This is evident in a number of industries such as operating systems. Apple was locked in a duel with Microsoft with each developing systems incompatible with the other. This was until Apple relented and developed an OS that could be used by on PC but on macs only. This is another great example of how first mover advantage works and also the benefits of consumer feedback to create a strong market than can only grow stronger. Consumers, in recognition of the network effect are more inclined to join the larger community to enjoy the benefits that come along with a part of such a community. The Metcalfe law also informs network organizations about their potential in the market through first mover advantage. First mover advantage, such as the one enjoyed by Microsoft through its operating system, means that other players who enter the market later will play catch-up for a long time. First move advantage allows these firms to set standards in the market which are used as benchmarks to assess other organizations and their offerings. Where patents are held, network organizations use different means to protect their market value by restricting users from shifting to other platforms. A good example is Microsoft which has made some its OS incompatible with other systems in order to retain an exclusive market. First mover advantage also exists in transactions cost arising and help in future evaluations. There are two main human and three main environmental factors that determine transaction cost that can cement an organization’s future evaluation. The first human factor is bounded rationality. This means that individual will always assess the transaction cot that might arise out switching technology and choose the least costly alternative. Secondly is that humans will always act to protect t their own interests. The first mover advantage is largely perceived to protect the user interests due to familiarity and experience in use. The environmental factors include uncertainty over untested technology, small number in uptake in the initial stages as indicated by the S-curve and asset specificity (Harvard Business Lessons, 2006). Works cited Ambrosini, V. (2007). Advanced Strategic Management: A Multi-Perspective Approach. New York: Palgrave Macmillan. Harvard Business Lessons (2006). The S-Curve: A Concept and Its Lessons. Boston: Harvard Business School Press. Moore, K. (2011). Porter or Mintzberg: Whose View of Strategy Is the Most Relevant Today? http://www.forbes.com/sites/karlmoore/2011/03/28/porter-or-mintzberg-whose-view-of- strategy-is-the-most-relevant-today/ Malecki, E. & Moriste, B. (2007). The Digital Economy: Business Organization, Production Processes and Regional Developments. New York: Routlegde. Nunes, P. & Breene, T. (2009). Jumping the S-Curve: How to Beat the Growth Cycle, Get on Top, and Stay There. Shapiro, C. & Varian, H. (n.d.). Networks and Positive Feedback The Harvard Business Review (2011). "Understanding Michael Porter" published by HBR Press. Recklies, D. Beyond Porter – A Critique of the Critique of Porter Read More