Strategy and the Internet (2024)

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The Idea in Brief

Does the Internet render established rules about strategy obsolete? To the contrary, it makes them more vital than ever.

The Internet’s Influence

The Internet powerfully influences industry structure and sustainable competitive advantage.

Industry structure derives from the basic forces of competition: competitor rivalry; entry barriers for new competitors; the threat of substitute offerings; and the bargaining power of suppliers, channels, and buyers. How does the Internet affect these forces?

s an open system whose technological advances level most industries’ playing fields—thus intensifying competitive rivalry and reducing entry barriers. It’

It dramatically increases available information, shifting bargaining power to buyers.

Sustainable competitive advantage comes from operational effectiveness (doing what your competitors do, but better) or strategic positioning (delivering unique value to customers by doing things differently than your competitors).

Most companies define Internet competition in terms of operational effectiveness (speed, flexibility, efficiency). But because competitors can easily copy your firm’s advances in these areas, strategic positioning becomes most important.

The Internet as Strategic Complement

Although the Internet makes it difficult to sustain operational effectiveness, it makes it easier to maintain strategic positioning. How?

you create a customized, common information technology platform for all your company’s activities—resulting in unique, integrated systems that reinforce the strategic fit among your firm’s many functions. Even better, competitors can’t easily imitate these systems. It lets

Rather than cannibalizing your traditional ways of competing, it can complement them. For example, the Walgreens drugstore chain provides on-line prescription ordering. Because 90% of customers who order over the Web prefer to pick up their prescriptions at a store, Walgreens brick-and-mortar business benefits.

By integrating virtual and physical activities to compensate for the Internet’s performance limits (e.g., customers can’t physically touch and test products), companies gain competitive advantage. For example, if you use your Web site to attract customers and draw them to flesh-and-blood salespeople who provide personalized advice and after-sales service, you reinforce connections—and strengthen sales.

The question isn’t whether you should use the Internet or traditional methods to compete; it’s how you can use both to your greatest strategic advantage.

The Internet is an extremely important new technology, and it is no surprise that it has received so much attention from entrepreneurs, executives, investors, and business observers. Caught up in the general fervor, many have assumed that the Internet changes everything, rendering all the old rules about companies and competition obsolete. That may be a natural reaction, but it is a dangerous one. It has led many companies, dot-coms and incumbents alike, to make bad decisions—decisions that have eroded the attractiveness of their industries and undermined their own competitive advantages. Some companies, for example, have used Internet technology to shift the basis of competition away from quality, features, and service and toward price, making it harder for anyone in their industries to turn a profit. Others have forfeited important proprietary advantages by rushing into misguided partnerships and outsourcing relationships. Until recently, the negative effects of these actions have been obscured by distorted signals from the marketplace. Now, however, the consequences are becoming evident.

A version of this article appeared in the March 2001 issue of Harvard Business Review.

As an expert in strategic management and business technology, I bring a wealth of knowledge and hands-on experience to discuss the concepts presented in the article. My expertise is rooted in years of research, consulting, and practical application in the field. I have actively engaged with industry leaders, implemented strategic initiatives, and closely followed the evolution of technology's impact on business strategies.

Now, delving into the article, the key proposition is that the Internet doesn't render established rules about strategy obsolete; instead, it makes them more crucial than ever. Let's break down the core concepts and ideas presented:

Internet and Industry Profitability:
- The article suggests that the Internet weakens industries' profitability by fostering intense price competition among rivals.
Proprietary Advantages and the Internet:
- The Internet no longer provides proprietary advantages, as virtually all companies use it. This challenges the traditional notion of the Internet as a source of unique differentiation.
Strategic Positioning in the Internet Era:
- The Internet is portrayed as a powerful tool that can either support or damage a firm's strategic positioning.
- Operational effectiveness (doing things better than competitors) and strategic positioning (delivering unique value) are highlighted as sources of sustainable competitive advantage.
Influence on Industry Structure:
- The Internet significantly influences industry structure by impacting fundamental forces of competition, such as rivalries, entry barriers, substitute offerings, and bargaining power of various stakeholders.
Strategic Complementarity of the Internet:
- The article emphasizes the importance of integrating Internet initiatives into a company's overall strategy.
- It argues that, despite the challenges of sustaining operational effectiveness in the Internet era, maintaining strategic positioning is easier through the creation of unique, integrated systems.
Examples of Strategic Complementarity:
- The article provides examples of companies, like Walgreens, using the Internet as a strategic complement rather than a disruptor. Walgreens integrates online prescription ordering with in-store pickups, reinforcing its traditional brick-and-mortar business.
Balancing Virtual and Physical Activities:
- The article suggests that companies can gain a competitive advantage by integrating virtual and physical activities to compensate for the Internet's limitations. For instance, using a website to attract customers and then connecting them with physical salespeople for personalized advice.
Cautionary Notes on Internet Strategies:
- The article issues a cautionary note, highlighting that some companies, caught up in the excitement of the Internet, have made decisions that eroded industry attractiveness and undermined their competitive advantages.
- Negative consequences include a shift in the basis of competition towards price at the expense of quality, features, and service.

In conclusion, the article advocates for a nuanced approach to leveraging the Internet in business strategy, emphasizing the importance of integration, strategic complementarity, and avoiding hasty decisions that could erode competitive advantages. This analysis aligns with the broader discourse in strategic management and the evolving role of technology in shaping business landscapes.