technical
strategy challenge: the internet
relevant to Professional Scheme Paper 3.5
and new ACCA Qualification Paper P3
building a new
vision
In March 2001, Michael Porter wrote
an article in the Harvard Business Review
on the challenge the Internet presented to
strategy making, and to the models he had
developed to help explain strategic decisions
and achieve competitive advantage. Six years
on, it seems useful to review his arguments,
understand the implications of the Internet
for today’s strategy makers and, in particular,
consider the impact of the Internet on small
business. This impact is examined through
a review of an excellent answer to an option
question from the December 2006 Paper 3.5,
Strategic Business Planning and Development
exam. Finally, the article concludes with some
thoughts on the significance of e-business to
Paper P3, Business Analysis – to be examined
for the first time in December 2007.
THE INTERNET AND PORTER’S FIVE
FORCES MODEL
Porter argues that two fundamental factors
52 student accountant March 2007
determine profitability. The first is the industry
structure within which a firm competes, which
determines the profitability of the average
competitor. The second is the sustainable
competitive advantage which a firm achieves
by its own strategic decisions and which
results in above average profits.
Porter argues that the Internet has
facilitated some new industries, such as online
auctions and digital marketplaces. Much
more significant, however, is the impact the
Internet has had on existing industries that
had been constrained by the high cost of
communications, information gathering, or
accomplishing transactions. He cites distance
learning and catalogue-based retailers as
examples of where the Internet has improved
customer access to a product or service that
has fundamentally stayed the same.
Porter states that the attractiveness of
any industry, be it young or old, is determined
by five underlying forces of competition:
the intensity of the rivalry between existing
competitors, barriers to entry for new
competitors, the threat from substitute products
or services, the bargaining power of suppliers,
and the bargaining power of customers.
The intensity of the rivalry between existing
competitors
Analysis suggests that for many industries,
rivalry will increase as a result of the Internet
and, as a consequence, will have a depressing
effect on prices. Competing within an open
system, firms have difficulty in preventing
rivals copying their products or services. The
heavy start-up investment associated with the
Internet increases fixed costs and increases
the likelihood of firms engaging in destructive
price competition. On the positive side, the
Internet may expand the size of the market
and provide more direct access to customers.
Overall, however, most industries have seen
competition intensify.
technical
Barriers to entry for new competitors
Porter argues that for many industries the
entry barriers are lowered, with no need to
invest in expensive sales forces, gain access to
traditional channels of distribution, or commit
to heavy marketing costs. The lowering of
such barriers saves both time and money for
new entrants.
Threat from substitute products or services
The Internet enables new approaches to be
used; think of the impact on traditional travel
agents of customers buying a holiday package
directly from a tour operator.
Bargaining power of suppliers
Suppliers can gain access to a greater number
of potential customers and, in so doing,
reduce their dependency on a particular
customer. Many firms have decided to
outsource activities that they used to perform
themselves; as a result, they increase both
their dependency on – and increase the
bargaining power of – their suppliers and
the likelihood of having to use the same
standardised inputs as their competitors. This
makes it increasingly difficult to be different
and gain a competitive advantage as a result.
Bargaining power of customers
It is here, for many industries, that the
Internet has had its greatest impact. It
‘provides buyers with easier access to
information about products and suppliers,
thus bolstering bargaining power’. Many firms
sought ‘first mover advantage’ by exploiting
Internet technology before their rivals. The
goal was to create significant switching costs
for customers and a network of dependent
customers. The reality is that customers using
the Internet are finding it easier to switch
suppliers, and the openness of the Internet
and its standards makes it difficult for a
company to maintain its customer network
intact. There is little evidence to suggest that
Internet brands, with the exception of Amazon
and eBay, have significantly affected customer
loyalty and buying behaviour. In general,
Porter believes that Internet technologies
will continue to erode profitability by shifting
power to the customers.
54 student accountant March 2007
THE VALUE CHAIN, VALUE NETWORK,
AND COMPETITIVE ADVANTAGE
Porter has consistently argued that at the
level of the individual firm, superior long-term
profitability is only gained through sustainable
competitive advantage. The links assessed
above, between the impact of the Internet
on the industry structure and the ways an
individual firm chooses to use it, are clear.
The collective impact of e-business decisions
taken by firms in many industries is tending to
reduce overall profitability of the industry as a
whole. Competition is increasingly price driven.
Amazon, although an outstanding example
of a new Internet-driven business, has yet to
achieve significant profits despite its huge
growth in sales revenues.
At the level of the individual firm
– regardless of size – sustainable competitive
advantage is gained by operating at a lower
cost, by commanding a price premium, or by
doing both. Such cost or price advantages
can be gained either by doing the same things
better than the competition (which Porter
terms operational effectiveness), or by better
strategic positioning – doing things differently
from competitors in a way that offers a unique
type of value to customers. This could be a
different set of product features, a different
range of services, or different logistical
arrangements. In Porter’s terms: ‘The Internet
affects operational effectiveness and strategic
positioning in very different ways. It makes it
harder for companies to sustain operational
advantage, but opens new opportunities
for achieving or strengthening a distinctive
competitive positioning.’
OPERATIONAL EFFECTIVENESS
‘The Internet is arguably the most powerful
tool available today for enhancing operational
effectiveness. By easing and speeding the
exchange of real-time information it enables
improvements throughout the entire value
chain, across almost every company and
industry.’ Unfortunately, the very openness
of the Internet makes it extremely difficult
to keep an operational advantage to oneself.
Applications developed by third parties are
increasingly easy to copy. Companies converge
on the same applications with the same
benefits – benchmarking and copying best
practice make any operational advantage
difficult to sustain.
STRATEGIC POSITIONING
Being different is, Porter argues, the only way
to achieve sustainable competitive advantage
and hence superior profitability. His six
principles of strategic positioning are:
1 Start with the right goal of superior
long-term return on investment. Choosing
to achieve maximum sales volume,
market share, or even website ‘clicks’,
and assuming profitability will follow, is a
recipe for disaster.
2 The strategy must offer a value
proposition or set of benefits different
from those that competitors offer. There
is no elusive ‘one best way’ of competing;
rather the firm should offer ‘unique
value’ in a particular set of uses or for a
particular set of customers.
3 Strategy needs to be reflected in a
distinctive value chain, performing and
linking activities in different ways to
its competitors, or performing similar
activities in different ways that allow it to
deliver more value to its customers.
4 Robust strategies require trade-offs. Porter
has always argued that in choosing a
particular strategy, managers need to be
aware of the options they can no longer
follow. The distinctive features that a firm
has chosen to offer its customers inevitably
mean it has chosen not to incorporate
others. If the firm can alter its products/
services or value chain with no trade-offs
then this means the changes will give no
sustained competitive advantage and they
will be ruthlessly copied by competitors.
5 ‘Strategy defines how all the elements of
what a company does fit together.’ Here
the firm needs to ensure that the different
activities carried out in the value chain
reinforce one another. Product design
should link with manufacturing operations
and carry through to innovative aftersales
service. In the UK, James Dyson would
be an excellent example of such linkages,
which has enabled him to take on, and
beat, rivals many times his size.

6 Finally, strategy involves continuity of
direction – having chosen a particular value
proposition, the firm must stick with it and
avoid the temptation to constantly change
its strategy with every threat or challenge.
Porter sees most firms looking to use the
Internet to achieve operational effectiveness,
despite evidence which suggests that such
advantages are easily copied. Sustained
competitive advantage, and resultant
profitability only comes from superior
strategic positioning and attention to the six
principles listed above. The Internet does
provide an IT platform for achieving this, but
needs to be linked to the ‘critical corporate
assets’ required to create a sustainable
competitive advantage such as skilled
personnel, proprietary product technology, or
efficient logistical systems. As a result, the
Internet complements rather than destroys
existing value chains and ways of competing.
He cites the example of Walgreens – ‘the
most successful pharmacy chain in the United
States’ – where 90% of customers who place
their orders online prefer to physically drive to
their local Walgreen pharmacy to pick up their
medicines, rather than have them delivered to
their homes. Here Walgreens has recognised
that it is more efficient to take customer orders
over the web, but equally more efficient to
make bulk deliveries to local pharmacies rather
than ship individual orders from a warehouse;
‘Virtual activities do not eliminate the need
for physical activities, but often amplify their
importance. For instance, using a website to
supply product information and support direct
ordering may make the traditional salesforce
more, not less, productive and valuable.
CONCLUSION TO PORTER’S INTERNET
ARTICLE
Porter concludes by saying that in the rush
to see how the Internet is different we have
failed to see how it is the same – and that the
fundamentals of competition are unchanged.
The next stage of Internet evolution will see a
shift in strategic thinking from e-business to
business and from e-strategy to strategy. ‘Only
by integrating the Internet into overall strategy
will this powerful new technology become
‘Only by integrating the
Internet into overall strategy
will this powerful new
technology become an
equally powerful force for
competitive advantage.’
an equally powerful force for competitive
advantage.’
EXCELLENCE IN AN E-BUSINESS ANSWER
– DECEMBER 2006 EXAM
The question concerned Good Sports – a small
sportswear retailer with just one retail shop,
facing increasing competition from national
chains of sportswear retailers. Good Sports
successful niche strategy had been to focus
on less popular sports and offer exceptional
personal service and advice. Its first attempt
to set up a website and online ordering had
met with little success. Candidates were
first asked to report on the advantages and
disadvantages of developing an e-business
strategy, and identify the processes most likely
to be affected by such a strategy. Second, they
were asked to assess the extent to which an
appropriate e-business strategy could support
Good Sports’ niche strategy. One of the best
answers I marked made the following points:
Advantages
An e-business strategy could enhance
Good Sports’ ability to differentiate itself.
Selling online could prevent the company
being drawn into direct price competition
with its larger competitors.
Good Sports could use its website to
increase the unique advice and support
given to customers.
New customers could be reached through
a successful e-business strategy.
Disadvantages
Development of the strategy could take
time and money, and larger competitors
were likely to do the same.
Attending to an e-business strategy might
divert and distract the business from
looking after its existing customers.
Processes
Selling processes would have to change
as there would be no face-to-face contact
with Internet customers.
Ordering online from suppliers would
improve the process.
Delivery to online customers would be
another process and would involve costs.
technical
Danger that focus on developing the
processes would change the direction of
the company to the detriment of existing
shop-based processes.
Supporting the niche strategy
Advertising online would enable many
more potential customers to become
aware of the company’s products.
New suppliers and specialist sportswear
products could be accessed.
More products equals more customers.
If it is the only company offering such
products and services – this will make it
more distinctive.
There are limits to the support it
can offer.
Finally, reflecting Porter’s conclusion, the
candidate argued: ‘The e-business strategy will
only help to a certain extent, as the company
already has a solid base and will find it difficult
to increase its size due to the competition and
range of products sold.’
Overall, this answer clearly explained the
potential of moving into an Internet-based
business, but also identified the real need to
integrate it with the existing business.
FROM STRATEGIC BUSINESS PLANNING
AND DEVELOPMENT TO BUSINESS
ANALYSIS
I have had the privilege of being examiner for
Paper 3.5 since December 2003, and am
already enjoying my new role as assessor for
the new Paper P3, Business Analysis. Strategy
and IT are, if anything, even more closely
linked in Paper P3. The use of models such
as those developed by Porter will continue
to be a core part of the new paper. It is in
understanding how the Internet and e-business
strategy can be usefully integrated within
existing strategy models that candidates for the
new paper will show their understanding of the
new syllabus.
Ralph Bedrock is examiner for Paper 3.5
REFERENCE
Porter M E, Strategy and the Internet,
Harvard Business Review, March 2001
March 2007 student accountant 55