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 / Third Quarter 2001 / Issue 24(originally published by Booz & Company)


Rethinking Strategy in a Networked World (or Why Michael Porter is Wrong about the Internet)

Compare this to Apple Computer Inc., which clung to the vertically integrated approach of designing and building everything from chips to applications. If it had licensed the Macintosh operating system to partners, Apple Computer would probably be more important today than Microsoft.

Remember, it was only 10 years ago that IBM’s rivals included half a dozen vertically integrated minicomputer companies such as the Digital Equipment Corporation, Prime Computer, and Data General. These companies failed to embrace partnering to deliver the best products to their customers and exploit industry standards. All but one, Hewlett-Packard Company, which adopted the partner model, failed.

The power of business-model innovation is just as evident in service companies. For example, eBay Inc. doesn’t just compete well against flea markets, auction houses, and classified ads. It has changed the rules of competition by creating a new type of service company that has become a leader in applying auction-based dynamic pricing. The most important contributors to eBay are its customers, who create the primary value of the business web; eBay is simply the provider of the business context. This b-web also includes companies such as Wells Fargo, Visa,, and others providing ancillary services that make buyers and sellers more confident and competent.

Operational Efficiencies. Around the world, the Internet is allowing companies to wring out waste from their operations, differentiate themselves, and reach new suppliers and customers. Jack Welch calls e-business initiatives “a game changer for GE” that are expanding “far beyond our original vision.” His company’s first step was to imitate Amazon and sell goods and services online. This initiative was an immediate success; the $8 billion in goods and services GE sold online in 2000 is expected to soar to $20 billion this year.

In procurement, reverse auctions alone are anticipated to save GE $600 million this year. The company runs global auctions daily — $6 billion worth last year, growing to an estimated $12 billion this year. The rewards are so great that rather than cutting back on IT spending because of the weak economy, the company will increase spending this year by 10 to 15 percent.

Customer Service and Relationships. When it comes to customers, many pundits view the Net as simply another channel. Professor Porter writes, “On the demand side, most buyers will value a combination of on-line services, personal services, and physical locations over stand-alone Web distribution. They will want a choice of channels…”. But the Net is more than a channel. It changes all channels. Effective competitors equip sales agents with Net-based information and tools in the customer’s living room. Call-center personnel with superior Net-based customer relationship management systems containing complete customer records deliver better customer service. And bricks-and-mortar stores that exploit emerging Location-Based Services will have more customers who find them through the Net.

No to Fundamentalism
Regrettably, many, including Professor Porter, lament the increased knowledge and power that customers are acquiring in this new world. In fact, much of the competition theorists’ language has disdain for customers. It’s best when customers are “locked in.” When they are ignorant or have no choice, profitability in an industry can be maintained and advantages can be achieved. Because the Net can undermine this, Professor Porter concludes this powerful communications technology “is not necessarily a blessing.” Indeed, he writes “it tends to alter industry structures in ways that dampen overall profitability, and it has a leveling effect on business practices, reducing the ability of any company to establish an operational advantage that can be sustained.”

Of course the Net creates efficiencies through the economy, intensifying rivalry between competitors and lowering barriers to market entry. It can arm consumers and suppliers with greater power because of their increased access to information, enhanced ability to communicate with each other, and greater freedom of choice. It increases the metabolism of the economy and reduces friction — as did, say, the telephone.

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  1. Don Tapscott, David Ticoll, and Alex Lowy, Digital Capital: Harnessing the Power of Business Webs, Harvard Business School Press, 2000
  2. Lawrence M. Fisher, “From Vertical to Virtual: How Nortel’s Supplier Alliances Extend the Enterprise,” s+b, First Quarter 2001; Click here.
  3. Keith Oliver, Anne Chung, and Nick Samanich, “Beyond Utopia: The Realist’s Guide to Internet-Enabled Supply Chain Management,” s+b, Second Quarter 2001; Click here.
  4. Michael E. Porter, “Strategy and the Internet,” Harvard Business Review, March 2001; Click here.
  5. David Ticoll, “Strategy and the Internet,” Letters to the Editor, Harvard Business Review, June 2001
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