Transcript Porter and Tapscott on Internet Strategy

NBA 600: Session 3
Strategy and the Internet
28 January 2003
Daniel Huttenlocher
Today’s Class
 Finish Thursday’s discussion on structure
of the Internet
– Clarification: Internet routers make local
decisions about where to send packets
• Packets just have addresses, not “active”
– Payment models
 Start discussion of Porter-Tapscott
“debate” on strategy and the Internet
– Porter argues the Internet is like any other IT
advance of the past 25 years
– Tapscott argues it is a fundamental change,
like electricity or railroads
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Recall: Internet Structure
 1: The Internet is a collection of networks
– Held together by standard “protocols” (TCP)
– Like road networks
• Local, county, state, national
• Agree on where to connect and how to drive
 2: Packed switched data
– Information broken up into small packets each
addressed separately to the recipient
• Unique addresses – “IP address”
– Like filling up envelopes and sending to same
address
• Each is routed separately, reassemble at end
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Payment Structure of the Internet
 End-users pay for bandwidth
– $20/mo 56kb dialup (consumer)
– $40/mo 128kb upstream - 768kb downstream
broadband (consumer)
– $900/mo 1.6mb T1 (commercial)
– $40k/mo 155mb OC3 (commercial)
 Commercial users tend make higher use
– Asymmetric broadband – market segmentation
– Some leases charge for usage over given level
 Each of these categories generates $100’s
millions of monthly revenue
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How Internet is Constructed
 Each network provider (ISP) builds its own
network
– Chooses what other network(s) to connect to
– Chooses what traffic to accept from connected
network(s)
 Pairwise peering arrangements govern
what inter-network traffic will be carried
– Sometimes involves charges, sometimes
involves trades – local decisions by two ISP’s
 Each ISP motivated to provide connectivity
needed by their customers
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Connectivity of Internet and Web
 Evolutionary rather than designed
– Shows many patterns similar to natural or
“organic” growth phenomena
• E.g., neurons, “six degrees of Kevin Bacon”
 Good routes evolve through needs of endusers
– Any two hosts about 15 hops (degrees) apart
 Aside: analogous structure in hyperlinks
between Web pages
– This structure is used for search engines, e.g.,
Google
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Geo-Location in Internet
 The cabling and “routers” (connections) of
the Internet are in physical locations
– Often in or near big cities where the traffic is
 These physical locations are not evident in
the IP addressing scheme
– Companies sell services that try to determine
geo-location from IP address
• For marketing, security, legal and other uses
 Large service providers need to combat
physical location
– Packet transit times in the network too slow
– Potential for congestion with single site
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Reflect: Conclusions We Can Draw
 Relentless, organic, drive to connectivity
– Services that do not connect to the Internet
are at risk
• Case of AOL’s free AIM client
• What does this say about text messaging
 Consider Blackberry/RIM or Bloomberg messaging
niche businesses
 Global, highly interactive services need
multiple physical locations in the network
– Simply slow if interacting users far apart
 Pricing models differentiate consumer and
commercial use
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Porter: Strategy and Internet
 Internet has been used as excuse to
ignore strategy – yielded bad decisions
– Forfeit proprietary advantage by rushing online
– Focus on price rather than quality/features
 Winners will use Internet as complement
to, not cannibal of, traditional competition
– Simply another step in IT evolution, like object
oriented programming or relational databases
 Internet not necessarily a blessing
– Tends to dampen profitability and have leveling
effect on business practices
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Porter: Internet Trends
 Rising power of customers
– Better informed, easier comparison/substitutes
– Lower switching costs, less loyalty
 Real value not just gimmicks
– E.g., Priceline model has limited appeal
• Note: PCLN reports selling price as revenue
(about $1B vs. EXPE $750M of commissions)
 First-mover not an advantage
 Dis-intermediation not much of a threat
 Enhancing operational effectiveness
– Decrease in communication/coordination costs
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Porter: On Business Models
 Destructive way of thinking
– Loose terminology, far cry from creating
economic value
– Invitation to faulty thinking and self delusion
 What matters is strategy
– Critical to consider competitive forces and
industry structure
 Notions of e-business and e-strategy
similarly problematic
– Encourage consideration of Internet in isolation
rather than as complement to existing business
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Tapscott: Internet Changes Things
 The Internet provides a fundamental
improvement in communication
– Improves outsourcing, contract manufacturing
– Enables true sales partnerships
– Challenges industrial age corporate structure
 Porter takes a truth and misapplies it
– The truth: profitability matters
• Not eyeballs, hits, stickiness, etc.
– But does not support false thesis that Internet
is simply another incremental change
• Business as usual; vertically integrated corp.
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Tapscott: Impact of Internet
 An added piece of the wealth creation
infrastructure
– Power grid, railroads/highways, telephone
– Now the Internet too
 Internet growing to take over or connect
to most other communication mechanisms
– Voice over IP, Internet radio, cell phones
– Distribution of content: print, audio, video
 Internet enables new business models
– Strategy has tended to ignore, because
traditionally each industry has a fixed model
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Tapscott’s “B Webs”
 Companies that draw on all resources to
create profitable business
– Deep partnerships
– Only possible through Internet communication
• E.g., coordinating joint sales efforts between two
companies
 Example of IBM customer relationship
management (CRM) business
– Dropped own software, partnered with Siebel
and others – joint selling services
• Now multi-billion dollar business for IBM
• Also driving hundreds of millions of DB2 sales!
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Analysis of the “Debate”
 Agree on some terminology
– Strategy: being profitable by choosing what to
do and what not to do
• Consistent direction; not all things to all people
• Based on analyzing structure of industry
 Competitors, suppliers, customers, new entrants,
substitutes
– Business model: where the revenue is going to
come from
• Who will pay, for what, when, why, how much?
– Operations: doing better at what doing
• Industry-wide best practices
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What do You Think?
 Have I mis-characterized Porter or
Tapscott’s positions?
– Missed something important?
 Have they mis-characterized each other?
 Where do they agree more than they
might initially appear to?
 Who or what do you think is right?
– What do you think is really going on regarding
strategy and the Internet?
• Support arguments with company examples or
your own experience
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Internet Changes Landscape
 Increases need for strategy
– Increases bargaining power of customers
– Can decrease bargaining power of suppliers
– Either lowers or raises switching costs
• Change to substitutes generally easier, except in
industries where “network effects”
– Less clear general effects on barriers to entry
or competitors
 Creates need to consider business models
– May enable new sources of revenue or
undermine current sources
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First Mover Myth
 Being there first does not by itself provide
much advantage
– E.g., Priceline was early in online travel
• But its model not what people wanted
– Even for business with network effects
• Where customers benefit from a single product
or service (e.g., computer software)
• Though eBay has exploited this
 Good strategy and execution what count
– Provide what customer wants, deliver more
effectively
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First Mover Myth: Beyond Internet
 Betamax vs. VHS videotape formats
– Huge network effect for rental market
– Started as on-air recording business; shifted
• Sony’s go-it-alone strategy lost to consortium
 Microsoft repeated dominance
– DOS vs. CPM, Windows vs. Mac or OS/2, IE vs.
Netscape, Excel vs. 123, Word vs. Wordperfect/
Winstar, …
 HP dominance of laser printer market
– Invented by Xerox but didn’t want to undercut
high end printing business
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Internet and Bargaining Power
 Provides vastly improved ability to search
and compare
– Uncensored public opinion
– Advertising and product descriptions
– Discounted pricing
 Empowers purchasers
– Both consumers and companies
 Tilts balance so that suppliers become
weaker and customers become stronger
– Exceptions where effective monopolies
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Internet and Industry Structure
 Fundamental changes to any content
creation or distribution business
– Music, movies, telephone, broadcasting, …
 Digital content opens totally new means of
distribution and protection
– Technologically possible to control the
experience of the content after purchase
• E.g., force watching previews on DVD’s
– Experts able to circumvent controls
• Possibility of unfettered illicit copying
 Raging battle over degree of control
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Internet Substitutes
 Newspaper industry major source of
revenue is classifieds (about $20B/yr)
 Web provides substitute for classifieds
– Arguably better once credible
 What is happening, where might it end up
– Collectibles already have moved to eBay
• But were low revenue for newspapers
– Employment moving to Monster, Yahoo
• Perhaps not yet replacing, but high revenue risk
– Real estate still strong, but online just starting
• Major revenue source
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Substitutes: Online vs. Offline
 Book sales
– Amazon dominates the online market
 Borders strategy is to supplement stores
– Outsourced online sales to Amazon
– Prominent link to stores site
– Provide access to store inventory
• Competitive advantages and disadvantages
 Does attraction of “in stock” over-ride
disadvantages of “out of stock”
 Barnes and Noble separates businesses
– Only offer online directions and in store returns
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Internet and Outsourcing
 Contract manufacturing
– Has become a large business
• Top 5 over $50B annual revenue
• Requires close interaction, facilitated by Internet
 Outsourcing of operations functions
– Travel, benefits management done on Web
 Joint sales
– IBM has been champion in this regard
• Solutions and business bundles hardware,
software, services
• Joint selling with other vendors
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Summing Up
 Importance of Internet to strategy
– Changes to industry structure require strategic
analysis that accounts for effects
 Internet does change the rules in many
industries
– But primarily changes that are well handled by
strategic analysis
• Customers, suppliers, competitors, substitutes,
new entrants
 First mover advantage does not exist
 Business models are more important now
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Next Time
 Discuss business models and the Internet
 What business models are, how they are
important
– Relationship to strategy
 Clear articulation of industry business
model(s) and potential alternatives
– Especially alternatives enabled or facilitated by
Internet
 New models are rare, but that doesn’t
make it any less important to consider
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