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E-strategyE-strategyRahul AranhaRahul AranhaKathleen BellKathleen BellQuan ChenQuan Chen

Daniel OlmosDaniel OlmosTodd RiggsTodd Riggs

4th October, 2001

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AgendaAgenda

Analysis of Porter’s ViewAnalysis of Porter’s View

Tapscott’s critique of Porter’s perspectiveTapscott’s critique of Porter’s perspective

The GE ModelThe GE Model

The Yahoo ModelThe Yahoo Model

Team E-Strategy’s TakeawaysTeam E-Strategy’s Takeaways

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Strategy and the InternetStrategy and the Internet

Michael PorterMichael Porter

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Why firms have been Why firms have been overvalued in the Internet overvalued in the Internet era…era… Valuations have been based on :Valuations have been based on :

• SalesSales• Projected reductions in costProjected reductions in cost• Share pricesShare prices

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Porter’s Framework for Porter’s Framework for analyzing market profitabilityanalyzing market profitability Key drivers of market profitabilityKey drivers of market profitability

• Power of BuyersPower of Buyers• Power of SuppliersPower of Suppliers• Threat of substitutionThreat of substitution• The ability to erect Barriers of EntryThe ability to erect Barriers of Entry• Industry RivalryIndustry Rivalry

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Focus on low price as the Focus on low price as the main competitive advantagemain competitive advantage The impact of the Internet this far…The impact of the Internet this far…

• Reduction in company profit marginsReduction in company profit margins• Fiercer rivalryFiercer rivalry• Reduction in Switching CostsReduction in Switching Costs

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If profitability is under If profitability is under pressure, then what can pressure, then what can

I do or how can I go I do or how can I go around it?around it?

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Sustainable competitive advantage comes from… Operating at a lower costOperating at a lower cost

• Through higher operational effectivenessThrough higher operational effectiveness

Choosing a strategic positioningChoosing a strategic positioning• Differentiates the product or service from the Differentiates the product or service from the

rest of the packrest of the pack

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Dotcoms have violated every Dotcoms have violated every precept of good strategyprecept of good strategy

How can the internet be leveraged to move forward?

From the Dotcom legacy…

• Maximize revenue and market share growths

• Focus on profitability

• Pursue all kind of revenues • Deliver real value to customer

• Offer every possible service • Make thoughtful trade-offs

• Imitate rivals • Tailor value chain

• All kind of partnerships and outsourcing strategies

• Maintain control over assets and channels

To the new Path Forward

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The Net as a complement to The Net as a complement to company strategycompany strategy Internet apps demand more of traditional activitiesInternet apps demand more of traditional activities

• Direct ordering applications require an adaptation in Direct ordering applications require an adaptation in warehousing and shipping systemswarehousing and shipping systems

Internet has systemic consequences in other areasInternet has systemic consequences in other areas• Flow of order requests may saturate the department Flow of order requests may saturate the department

handling those requestshandling those requests The internet has limitationsThe internet has limitations

• Lack of physical assets (logistical systems, warehouses, …)Lack of physical assets (logistical systems, warehouses, …)• No supplier-customer contact (selling jet-engines over the No supplier-customer contact (selling jet-engines over the

Net?)Net?)• How to attract new customers in an ocean of information?How to attract new customers in an ocean of information?

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The Internet is here to stay!The Internet is here to stay!

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Rethinking Strategy in a Rethinking Strategy in a Networked WorldNetworked World

Don TapscottDon Tapscott

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The InternetThe Internet

““Deep rich publicly available Deep rich publicly available communication technology”communication technology”

Enables a new business Enables a new business architecture: the business webarchitecture: the business web

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Business Web Business Business Web Business ModelModel SuppliersSuppliers

DistributorsDistributorsService ProvidersService ProvidersInfrastructure ProvidersInfrastructure ProvidersCustomersCustomers

All using Internet to transact and All using Internet to transact and communicatecommunicate

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Biz Web PartnershipsBiz Web Partnerships

Porter: Lower barriers to entry; Porter: Lower barriers to entry; Companies lose controlCompanies lose control

Tapscott: Firms focus on core Tapscott: Firms focus on core competencies; outsource; see competencies; outsource; see performance advantagesperformance advantages

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Structural ChangesStructural Changes

Porter: Superficial changesPorter: Superficial changes CommunicationCommunication

Tapscott: Deep structural changesTapscott: Deep structural changes Infrastructure for wealth creation Infrastructure for wealth creation

changingchanging Evolution: Tomorrow’s Internet will be Evolution: Tomorrow’s Internet will be

entirely different from today’sentirely different from today’s

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Business Model InnovationBusiness Model Innovation

Porter dislikes term: murkyPorter dislikes term: murky Focused on generating revenueFocused on generating revenue

Tapscott: core architectureTapscott: core architecture Deployment of resources to create Deployment of resources to create

distinct valuedistinct value Retain old measures; New means to Retain old measures; New means to

create valuecreate value

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Competitive AdvantageCompetitive Advantage

1001 ways to employ the Internet Not all equal: Some better than othersNot all equal: Some better than others Porter: Competitive Advantages neutralized, Porter: Competitive Advantages neutralized,

like a light switchlike a light switch WRONGWRONG Continuum of Business transformationContinuum of Business transformation

New applications and technologiesNew applications and technologies Greater richness and depthGreater richness and depth

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Areas ripe for Areas ripe for change/improvementchange/improvement Unique Products: IBMUnique Products: IBM Operational efficienciesOperational efficiencies Customer service and relationshipsCustomer service and relationships

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Customer EmpowermentCustomer Empowerment

SmarterSmarter More activeMore active More powerfulMore powerful Is this bad?Is this bad?

Porter: Yes; Tapscott: NoPorter: Yes; Tapscott: No Leads to more real valueLeads to more real value

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Tapscott’s View of InternetTapscott’s View of Internet

““Connect every business and business Connect every business and business function and a majority of humans on function and a majority of humans on the planet”the planet”

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Strategy and InternetStrategy and Internet

Static v. dynamicStatic v. dynamic Optimism v. pessimismOptimism v. pessimism Embrace v. eschewEmbrace v. eschew

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Overview of GE’s Overview of GE’s BusinessesBusinesses

• Lighting

• Appliances

• Industrial Systems

• NBC

• Plastics

“Short-cycle”

~25% of Net Income

• Aircraft Engines

• Power Systems

• Medical Systems

• Transportation Systems

• Information Services (now eXchange Services)

“Long-cycle”

~35% of Net Income

• Consumer Services (e.g. credit cards & insurance)

• Equipment Management (aircraft, trailers, railcars)

• Mid-Market Financing

• Specialized Financing (e.g. real estate, private equity) and Specialty Insurance (e.g. reinsurance)

CapitalServices

~40% of Net Income

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GE’s Early Internet FoiblesGE’s Early Internet Foibles 1980s & early 1990s: GE Information Systems sells 1980s & early 1990s: GE Information Systems sells

Electronic Data Interchange (EDI) networks to other large Electronic Data Interchange (EDI) networks to other large corporationscorporations

1994: GE launches first web site, an exercise in ‘brochure-1994: GE launches first web site, an exercise in ‘brochure-ware’ware’

1995: I had to get my plant manager’s authorization to get 1995: I had to get my plant manager’s authorization to get Netscape installed on my PCNetscape installed on my PC

1997-98: Joint venture launched with Microsoft 1997-98: Joint venture launched with Microsoft (MSNBC.com); NBC launches NBCi.com and the portal (MSNBC.com); NBC launches NBCi.com and the portal Snap.comSnap.com

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GE Gets a Wakeup Call Christmas 1998: GE CEO Jack Welch “gets it”Christmas 1998: GE CEO Jack Welch “gets it”

January 1999: Welch launches e-Business as his fourth January 1999: Welch launches e-Business as his fourth and last company-wide initiativeand last company-wide initiative ““Destroy Your Business” teamsDestroy Your Business” teams Assigns “Stuart”-esque mentors to top 1000 managersAssigns “Stuart”-esque mentors to top 1000 managers Destroy Your Business becomes “Grow Your Business”Destroy Your Business becomes “Grow Your Business”

2000-2001: initiative gains more clarity with introduction of 2000-2001: initiative gains more clarity with introduction of “e-Sell,” “e-Make,” and “e-Buy” approaches“e-Sell,” “e-Make,” and “e-Buy” approaches

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GE Caselets Summary

• Reverse auctions & straight purchasing (GE Medical Systems)

– Direct savings

– Reduction in cost and errors

• Collaborative design online (GE Appliances)

• Online customer reports vs. paper-based (GE Fleet Services)

• Online mortgage origination process (GE Mortgage Services)

• Online Travel & Living processes for GE employees (Travel Center, expense reimbursement)

• Online wizards to assist in the design process (GE Plastics)

• Remote monitoring and related services (GE Medical Systems)

• Leverage existing channel partners (GE Appliances)

e-Buy e-Make e-Sell

Moving purchasing transactions online

Moving businessprocesses online

Moving customer relationships online

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GE’s Outlook on Benefits

'00 '01 '02 '00 '01 '02'00 '01 '02

e-SellOnline Sales

e-BuyAuction Savings

e-MakeSavings

$8

~$13

~$19

$0

~$1.1

~$2.5

$0.1

~$0.6~$1.0

Auctions Volume$2.3 $10-11 $12-15

(Pre Tax $ in Billions)

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Jack Welch on e-Business ““I was afraid of it, because I couldn’t type”I was afraid of it, because I couldn’t type”

““I don’t think there’s been anything more important or more I don’t think there’s been anything more important or more widespread in all my years at GE. Where does the Internet rank in widespread in all my years at GE. Where does the Internet rank in priority? It’s number one, two, three, and four.”priority? It’s number one, two, three, and four.”

On advantages for old-line companies: “They have the business On advantages for old-line companies: “They have the business processes. They have the fulfillment capabilities. They have the processes. They have the fulfillment capabilities. They have the brand recognition, and they often have the technology. The brand recognition, and they often have the technology. The disadvantages are that they’re fighting an existing model. They’ve disadvantages are that they’re fighting an existing model. They’ve got to break the mold.”got to break the mold.”

““Old companies thought this was Nobel Prize-type work. This is Old companies thought this was Nobel Prize-type work. This is not rocket science. It’s just like breathing.”not rocket science. It’s just like breathing.”

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Yahoo! Success

Market value $30 billion

Up 2,600% since IPO (1998)

“We’ve set out to make Yahoo the only place anyone needs to go to get connected to anything.”

- Tim Koogle

AO

L

Yahoo

MS

NLY

CO

S

Excite

eBay

Unique Visitors (Aug/2001)

Yahoo!: 119,878,591

Msn: 103,187,561

AOL: 94,863,873

Lycos: 69,492,163

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Yahoo!’s Business Model

Brokerage ModelVirtual Mall:

Advertising ModelGeneralized Portal:

Advertising Model Personalized Portal:

The method of doing business by which a company can sustain itself. -- Michael Rappa

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Yahoo! Partnership and Alliance

Technology Providers:

Google HP

TIBCO Net2Phone

L&H Novell

SAP

SONY Ford

FIFA 2002

Latin Grammy Awards

Wetfeet Career service

H&R Block Tax advisory

Vertical One Personal finance

Headhunter.net Yahoo!Career

Online Advertisement:

AT&T Reuters

ABCNews CNN

The Wall Street Journal

Barron’s

Infrastructure & Content Provider providers

Expertise Service Provider:

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e-Strategy Leads to the Success

• First mover.

• Strategically move from sole online directory search service to full range service.

• Increase customer awareness – to build brand equity through aggressive marketing activities

• Building partnership with content providers and retailers. – flexibility

• Avoid ISP model – to extend the reach-ness

• Adopt globalization strategy – to extend the reach-ness

• Personalization – to increase customer loyalty

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The Fall of Yahoo!

• Deteriorated market environment

• Stock price crashed

• Continuous revenue and profit warning

• 12% Staff layoff

• CEO - Tim Koogle stepped down

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Does Yahoo! have New Strategy?

Surely, the strategy of selling advertising and also doing different types of partnerships with other content providers and retailers and such is very sound at this point . … but we will go more heavily toward the top 200 advertisers in the world. …On the other hand, we will also begin the process of some premium services and price it.

-- Terry Semel

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•The overall strategy has not changed – “Pure online player”

•Focus on traditional companies to sell Yahoo’s online space.

Build long term partnership with Sony

•Strengthen its business enterprise service by allying with HP, SAP etc

What Yahoo! is doing now?

0

10

20

30

40

50

60

70

80

90

100

1996 1997 1998 1999 2000 2001/July

Co

un

t

•Start to charge fees on premium service to

internet users.

•Acquired Broadcast.com and build YAHOO!

Broadcast to strengthen its broadband service

Yahoo! Partnerships

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Vertical Integration v. PartneringVertical Integration Deals

Partnering:

+

+

Rank By Unique

AudienceProperty Unique Audience

1 Yahoo! 119,878,591

2 MSN 103,187,561

3 AO L Time Warner 94,863,873

4 Lycos Network 69,492,163

5 Microsoft 67,428,499

6 Excite@Home 34,680,635

7 About The Human Internet

27,925,037

8 InfoSpace 23,780,504

9 Google 23,455,940

10 CNET Networks 23,356,005

11 eBay 23,188,879

12 Go.com 22,654,364

13 Amazon 22,546,123

14 AltaVista 20,911,280

15 NBC Internet 20,139,953

16 FortuneCity 19,236,295

17 Napster 16,431,597

By Nielson/eRating 2001. Aug

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How should one leverage the potential of the Internet?How should one leverage the potential of the Internet? Who will capture the economic benefits that the Internet Who will capture the economic benefits that the Internet

creates?creates?• Will all the value end up going to customers?Will all the value end up going to customers?• Will companies be able to reap a share of it?Will companies be able to reap a share of it?

Are my operations processes Internet-ready?Are my operations processes Internet-ready? What will be its impact on industry structure/profitability?What will be its impact on industry structure/profitability? So what’s the firm’s true competitive advantage, and does it So what’s the firm’s true competitive advantage, and does it

lead to sustained profitability?lead to sustained profitability?

Our view (Porter)

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Our view (Porter)

• Is the 5 Forces framework sufficient to evaluate an industry in Is the 5 Forces framework sufficient to evaluate an industry in the Internet era?the Internet era?

• Competing on price is imperative in emerging economiesCompeting on price is imperative in emerging economies• Partnerships and alliances are goodPartnerships and alliances are good

Does the Internet add more value to service Does the Internet add more value to service businesses than product businesses which are more businesses than product businesses which are more physical asset dependent?physical asset dependent?

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Our view (Tapscott)

The Internet and our use and The Internet and our use and understanding of it continues to evolve.understanding of it continues to evolve.

How measuring value?How measuring value? Change is good; embrace itChange is good; embrace it