Strategic Management - Porters Ideas on Strategy and the Internet - Article Example

Article Review Porter, M.E., (2001). "Strategy and the Internet," Harvard Business Review, Vol. 79, No. 3. 1. Key arguments and findings Michael E. Porter is known as an author and a management consultant, besides being professor at Harvard Business School's Institute for Strategy and Competitiveness. Porter is a leading authority on the economic and competitive development of regions, states and nations. In this journal paper, Strategy and the Internet, published in Harvard Business Review in 2001, Porter touches the very important topic of whether or not Internet has rendered strategy obsolete. Contrary to what many would say, he believes just on the opposite. Porter argues that industry profitability is weakened by Internet and while doing so it does not provide any advantage to the industry that could be termed as proprietary. Porter argues for companies to sustain it is important for them to stay a cut above the rest through their strategy, and not rest solely on the bandwagon of Internet to sell products. Strategy enables industries to stick to the time-tested traditional ways of competing, and undermining the same and passing the whole onus to sell to Internet will only be colossal. An important point that he raises is that Internet should be considered as merely a medium to sell and not taken as a substitute for strategy. It is a complementing tool for traditional ways of competing. Porter, apparently want to stress the importance of strategic management theory (Andrews, 1999; Collis, 1995; Mintzberg and Lampel, 1999). Porter's worry on how Internet has manipulated the importance of strategy is explicit from his observation that even the best pioneers of Internet business, which include established companies and dot-coms, have since the proliferation of Internet into businesses indulged in such Internet-marketing pursuits that have, in reality, violated the revered precept of good strategy (Rumely, 2011). Internet, according to Porter, has sort of sidelined strategy and given companies indiscriminate powers to sell their products whichever unethical way they want. There is a mad rush to chase customers no more through strategy but through indirect revenues such as click-through fees and advertising. This has reduced companies desire to transmit value to the customers or make trade-offs. Porter rues that this shouldn't have happened and this shouldn't happen in future too. Internet, argues Porter, should not be taken as more than an advanced technological platform to reinforce strategy in a distinctive manner than how strategy was communicated previously through other forms of information technology or even in absence of it. Saying this Porter opines that a very important point is that there has to be strategy; one can't do without a strategy, however one may use multiple platforms to disseminate it. Internet is, and should be taken, as one of these platforms. That is the characteristics of this platform; it is not disruptive, it is complementing. Proven principles of strategy (Goold et al, 1994; Sekulić, 2002), argues Porter, in combination with the powers of Internet can help gain competitive advantage. Competitive advantage, he adds in this journal article, does not necessarily mean new and radical approach to doing business or staying afloat in the market. Another significant argument that the article provides is that Internet, by default, is not disruptive in nature. It does not intend to nullify age-old business principles; it can even make them more valuable. But what matters is that how companies introduce Internet in their businesses. It also stands the risk of being ceased as an advantageous source as the whole industry embraces it and everyone uses it the way everyone else does. Porter states that in order to gain competitive advantage that is robust; the same will continue to be vested in traditional strengths of a product, its distinctive physical features and proprietary content. Internet cannot be granted the freedom of supplanting them, It, however, can fortify the advantages of a product. In this regard it is worthwhile to mention here about the strength of Porter's five forces of business strategy development, which continue to be the benchmark that many top-most business leaders of today follow (Porter, 1985). It is these forces that determine the market attractiveness and competitive intensity, where attractiveness means an industry’s overall profitability. When, according to Porter, an industry approaches "pure competition" it can be deduced that the industry is entering a difficult phase and sooner or later its available profits are going to plummet to normal profits. When Porter postulated these five forces, Internet was nowhere on the scene. These forces were embraced by world business leaders as ones to act as pillars in terms of creating strategies. Three of these five forces are determined by competition which is external in nature and two are considered as internal threats. These five forces are threat of new entrants, threat of substitute services or products, customers' bargaining powers, suppliers' bargaining powers, and intensity of competitive rivalry. All these are physical in nature, Internet is virtual. That is perhaps why Porter does not mind debunking the concept of virtual companies. or what he terms as first-mover advantage or even network effects yielding multiplication of rewards. He repeats that Internet is meant to complement businesses and not cannibalize their existing ways of doing the same. As if to enrich his statements, he even puts forward strategic imperatives for traditional companies and dot-coms. Talking of the virtuality of Internet, he succinctly explains why it is difficult to build Internet brands. One basic reason could be their lack of physical presence. Direct human contact with customers, he argues, makes them more reliant on a business that they are dealing with than one where there is no human contact. Despite innumerable number of advertising inputs going into building of Internet businesses, which include discounts, advertising and incentives, virtual businesses have not appeared so tangible to customers and not many brands appear to have been build thanks to Internet. Internet may remove a barrier to entry and elevate impact of loyalty but that is all. Similar is the myth about partnering on which Porter remarks that Internet has just made it widespread but not improved industry economics. Partnering here refers to one of two forms: one product (like computer) complementing another product (hardware) and both existing because one of them does. But when companies partner with Internet it tends to exacerbate their structural problems instead of mitigate them. Also, as Internet grows, its partnering ceases to ceases to be unique. Every other company is partnering with it; a process in which one company tends to become like any other, heating up rivalry without foreseeing any apparent gains through the cycle. Lot of time is wasted by companies in countering what other companies are dong through their partnerships. It shifts away the focus of these companies from their own strategies and evolves a totally new paradigm for them which is not profit-making in nature or directly related with their business objective. Rivalries arise more on account of partnering than product selling and that is a dangerous trend. A very good shift though in Porter's article is that he does not portray only dismal picture of Internet vis-a-vis strategy. He says the news cannot be bad on all fronts since Internet can enhance profitability if technological advances from it can be used effectively. He makes a mention of streaming videos and states that slight improvements in the same can make it widely accessible at low-cost bandwidth. People can use this feature of Internet to communicate with their company bosses or representatives in real time to save costs incurred on transportation. In one section of the article, porter discusses the future of internet competition. he states that industry profitability will be under pressure as Internet will continue to be deployed. As an example he mentions of dot-coms that have already gone extinct. But, quite wittily he states that might prove to be a boon as some level of consolidation will take place and the unnecessary clutter of rivalry will be reduced. 2. Analysis in terms of clarity This is a scholarly-written journal article that offers an actively engaging discussion on strategy as seen in the wake of Internet. The article creates an informed engagement from the very beginning and as one jumps compellingly from para to para thoughtful reasoning is all that one comes across. Each idea is representative of a strong opinion based on clarity of judgement, thought and evidence. An authority like Porter could not have been anything less on this one as he has been elsewhere. The article gives a step-by-step account of rich pool of information interspersed with in-depth research, ideas and knowledge. The article is a piece of engrossing academic work that has the power to influence both highly-learned and novice scholars in the field of management and marketing. The best thing about the article is that it neither attempts to condemn strategy nor does it rubbish Internet; it treads a balanced path and wherever necessary it does not mince words in accepting the sweeping powers that Internet has given to businesses or advantages that it has provided to strategy. The article supports Porter's reasoning and claims as his statements are quoted in connection with small examples, which seem to be very anecdotal and interesting. The article seems to anticipate in the next portion what the reader anticipates or seems to ask in the current one. There are coherent connections running through length and breadth of the article; all by well-established reasoning rather than imaginative alternative theories, positions or claims. 3. Effects of Internet in the Australian retail banking sector Banks in Australia are governed by the Banking Act 1959. Foreign banks can operate here by opening a branch after seeking prior necessary permissions. The Australian banking system is well-developed, competitive and liquid and on the world popularity index banks such as Commonwealth Bank, Westpac Bank, national Australian bank and ANZ bank. On a historical note the first bank that was to open in Australia was Bank of New South Wales in 1917 in Sydney. These are major Australian banks, which are being competed by many regional banks engaged in retail banking. These include the Bank of Queensland, Suncorp-Metway, Bendigo and Adelaide Bank, Bankwest and ME Bank. Internet is already an established part in Australian retail banking sector. In fact banks in Australia were very quick to adopt Internet technologies in their retail work and they have, despite banks' staid image, been a perfect pair together. It is very interesting to note that Australian bank websites amongst 25 most websites in the country rank at number four and as many as 75 percent bank customers prefer to use online banking as against 25 percent who prefer to walk into the banks. The banks have now begun to offer personal financial management (PFM) tools and payment app's to their customers as value-added services. No wonder then that bank customers are frequently talking about their online banking experiences on social media platforms. It has been seen that there has been an increase in online customer-to-bank interactions pertaining to retail banking. Given the enormity of use of Internet in Australian banking sector, some analysts believe that the country has reached a 'digital tipping point' in this segment; though it cannot be refuted that still a pool of untapped opportunity exists in this Internet-retail banking partnership (Pwc.com.au, nd). At the moment, it is held that Australian banking sector has already reached a digital tipping point; yet it is one of the major keys that will steer retail banking profitability to new heights. Retail banking sector is doing its best to maximise returns on its digital investments since it expects to rope in more 'main bank' customers. The idea is to move from having simply a 'digital capability' to becoming a digital enterprise on its own. On the customers' front, online capability and online security feature among top two priorities. On a scale of 1 to 10 customers, online security is prioritised by 9.1, online capability by 8.6, branch hours by 6.9, 24-hour contact centre phone service by 6.9, bank proximity by 7.3 and ATM coverage by 8.2. The first two have been measured on the digital side of retail banking, and the rest on its physical side. Internet has brought about drastic transformation in the Australian retail banking sector among all generations; contrary to the popular notion that it is Gen Y only who are more inclined towards Internet banking. It has been seen that high earning customers are as much in line for this revolution as are Gen Y people. That is a good news because it is the high income segment that matter in retail banking in terms of profitability. Gen Y customers - those falling between age group of 18 to 34 years - matter in the sense that they are choosing Internet-enabled banking sector as their primary partner in financial services. Baby Boomers - those who are 45 plus years of age - are shifting to digital banking for the ease that it offers. Retail banks are using this shift towards full profitability by synchronising their business level strategy with Internet. It is because of the realisation that adoption of this sort of digital banking helps these banks undertake higher customer interactions, lower customer effort score, higher customer product holdings calculated on an average, and more importantly lower cost to either serve or sell – thus bring about the best experience in relationship marketing (Gummesson, 1999). Customer effort score refers to the amount of effort a customer needs to put in to avail a service or make a sale. Lower score is indicative of better standing. Lower costs incurred are advantageous for the banks in terms of profitability and in terms of improving customer experience; thus leveraging all aspects of proper service marketing and management (Gronroos,, 2000). As a result of this, retail banking sector in Australia finds it worth to invest in efforts that can enable customers to migrate to this non-physical form of banking. References Andrews, K. (1999). The Concept of Corporate Strategy. Australian and New Zealand Strategic Management: concepts, context and cases. G. Lewis, Morkel, A., Hubbard, G., Davenport, S., and Stockport, G. (Eds). Sydney, Prentice-Hall pp.37-45. Collis, D. J., and Montgomery, C.A. (1995). Competing on Resources: Strategy in the 1990's, Harvard Business Review, 73(4): 118-128. Goold, M et al (1994). Corporate-level Strategy: Creating Value in Multibusiness Company, John Wiley & Sons, Inc. Gronroos, C., (2000). Services Management and Marketing: A Customer Relationship Management Approach, Chichester: John Wiley & Sons. Gummesson, E., (1999). Total Relationship Marketing Management: From 4Ps to 30Rs. Oxford: Butterworth Heineman. Mintzberg, H., and Lampel, J. (1999). Reflecting on the Strategy Process. Sloan Management Review, 40 (3): 21-30. Porter, M E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance, New York: The Free Press. Sekulić, V. (2002). The Importance of Corporate Strategic Process in Managing Efficiency of Enterprise, The Scientific Journal "Facta Universitatis", Series "Economics and Organization", Vol 1, No 10, pp. 67-74. Pwc.com.au. (nd). The new digital tipping point Using digital to drive future retail banking profitability. Available: http://www.pwc.com.au/industry/banking-capital-markets/assets/Digital-Tipping-Point-Jun12.pdf. Last accessed April 20, 2014. Rumely, R. P. (2011). Good Strategy Bad Strategy. Available: http://goodbadstrategy.com/wp-content/downloads/GoodStrategyBadStrategy_Preview.pdf. Last accessed April 20, 2014. Read More