Strategy and the Internet
Author: Michael E. Porter
Published: Harvard Business Review - March 2001
The Internet Paradox – The Promise of Technology and the Reality of Profitability
When the internet began to gain commercial significance in the late 1990s, there was an atmosphere of almost boundless optimism. New companies were established at a rapid pace, capital poured in, and many believed that we were on the verge of a completely new economy – one in which established truths about competition, profitability, and strategy no longer applied.
The Internet was seen as a revolutionary force that would redefine how businesses created value. It was not just a new channel, but a new reality. In this atmosphere, a notion grew that technology alone could be enough to ensure success. Being digital became almost synonymous with being competitive.
But quite quickly, another reality began to emerge.
Despite increasing traffic, attention, and activity online, surprisingly few businesses were able to create lasting profitability. Many companies had significant revenues, yet weak or negative results. What initially looked like a growth revolution turned out to be a profitability challenge for many.
This is what can be described as the internet paradox.
Technology opened up new opportunities, but at the same time it intensified competition. It made it easier to establish yourself, easier to reach customers, and easier to distribute products and services. But it also made it easier for others to do the same. The result was increased competition, greater transparency, and continued pressure on margins.
The crucial point that emerges is that technology in itself does not create economic value. Value only arises when technology is part of a well-thought-out strategy that takes into account competitive conditions, cost structure and customer value. The Internet changes the rules of the game on the surface, but the underlying mechanisms for value creation remain.
The language that reveals the mindset
One of the most interesting observations from this period is not just about what businesses did, but how they talked about what they did. Instead of discussing strategy, competitive advantage, and positioning, many began to use the term “business model” as an overarching explanation of their operations.
This may seem like a minor linguistic nuance at first glance, but it actually represents a shift in how people thought about value creation. The term business model was often used as a loose description of how a business generates revenue. It could be subscription, advertising, or transaction-based solutions. But having a way to make money is not the same as having a sustainable strategy.
There is an important distinction here.
Generating revenue is not the same as creating economic value. A business can have high activity, high traffic and significant turnover – and yet lack profitability. Without a clear understanding of the competitive situation and how to create a sustainable competitive advantage, the business model becomes a weak management tool.
When the focus shifts from strategy to business model, there is a risk of underestimating the importance of industry structure and competitive dynamics. One begins to believe that it is enough to “find a model” that generates revenue, without asking the more fundamental questions of why customers should choose this particular business, and how to maintain profitability over time.
This opens up what can be described as self-deception. Activity is interpreted as progress, and income is interpreted as value, without seeing the whole picture.
The Internet as an amplifier of competition
A central belief during the dot.com era was that the internet would reduce competition and give new entrants a unique advantage. Many assumed that digital solutions would enable strong positions to be built quickly, and that early entry would provide lasting competitive advantages.
But when you look more closely at how the internet actually affects the market, a different picture emerges.
The Internet lowers the barriers to entry. It becomes easier to start a business, easier to reach customers, and easier to offer products and services digitally. At the same time, price transparency increases. Customers can compare offers across suppliers within seconds. Information that was previously difficult to access is now openly available to everyone.
This leads to an intensification of competition.
Customers are given more options, and loyalty is weakened. Suppliers must compete more on price, availability, and perceived value. Differentiation becomes more difficult to maintain, and margins are squeezed. In other words, the Internet does not create a new type of competition. It intensifies the existing one.
The myth of first out
In this context, a strong belief emerged that being first on the internet would provide a decisive competitive advantage. Terms like “first mover advantage” were used as a given. The idea was that the first players would establish strong relationships with customers, build network effects and thereby create high switching costs.
But this logic turned out to be weaker than many had assumed.
The Internet reduces friction. It makes it easy for customers to switch providers. With a few clicks, you can find alternatives, compare prices, and choose a new provider. Technology not only makes it easier to establish yourself – it also makes it easier for customers to move between providers.
This means that in many cases switching costs will be lower, not higher.
This also weakens the basis for lasting competitive advantage based on early establishment alone. It is not enough to be first. What is crucial is how the business positions itself, how it creates value, and how it builds a structure that is difficult to copy.
Back to basics
In times of technological change, it is easy to believe that old rules no longer apply. New opportunities create new expectations, and the market can appear unpredictable. However, over time, market forces tend to stabilize.
What appears revolutionary at the moment eventually becomes part of the norm.
The basic principle that remains is simple but powerful: economic value is crucial. Value creation is about the difference between what the customer is willing to pay and the cost of delivering the product or service. This difference – the margin – is what determines, over time, whether a business is sustainable.
The Internet does not change this principle.
It can affect how value is created, how costs are structured, and how customers are reached. But it doesn't eliminate the need for profitability. Rather, it makes it more apparent.
A first professional recognition
What emerges clearly from this first section is that the internet does not represent a break with strategy – but rather a reinforcement of the need for strategy. The more accessible technology becomes, the more important it becomes to understand how to create lasting
competitive advantage.
Digitalization is therefore not primarily about technology.
It's about choices.
Choice of position.
Choice of structure.
Choosing how value will be created and maintained over time.
Strategy and the Internet – Norwegian version - Part 2
The Internet and competitive forces – not new rules, but stronger pressure
To understand how the Internet affects businesses, one must first understand what determines the profitability of an industry. This is the starting point for Porter's analysis. He does not start from technology, but from structure. The question is not what the Internet can do technologically, but how it affects the fundamental forces that shape competition.
These forces are well-known: rivalry between existing players, the threat of new entrants, the threat of substitutes, the bargaining power of suppliers, and the bargaining power of customers. The crucial point is that the Internet does not eliminate these forces. It changes how they operate – and in many cases, it reinforces them.
When analyzing the Internet through this framework, it becomes clear that technological developments have largely contributed to increasing competitive pressure in many industries, rather than reducing it.
Rivalry – increased transparency and weakened differentiation
The Internet has made information more accessible than ever before. Customers can easily compare prices, products, and suppliers across geographical boundaries. This increases transparency in the market, but it also has a clear consequence: it becomes more difficult to maintain price differences.
As information flows freely, players are forced to compete more directly on price. Products and services that were previously differentiated through limited information or local availability are now comparable in real time. This makes it harder to stand out, and margins are squeezed.
At the same time, the internet reduces many of the traditional cost differences between players. Digital solutions can be standardized and copied, which further helps to level the playing field. The result is an intensification of rivalry.
The threat of new entrants – lower entry barriers
One of the most immediate effects of the Internet is that it makes it easier to establish new businesses. In the past, it required significant capital to build distribution channels, establish a physical presence, and reach customers. The Internet reduces many of these barriers.
A new player can now:
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establish a digital presence quickly
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now a global market
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operate with lower fixed costs
This increases competition by allowing more players to enter the market. At the same time, this does not mean that all new players will succeed. It does mean, however, that established businesses will have to deal with continuous pressure from new competitors to a greater extent.
What is often overlooked is that while it is easier to start, it is still challenging to create profitability. The internet makes entry easier, but it does not guarantee sustainability.
Substitutes – more options for the customer
The Internet makes it easier for customers to find alternative solutions. This applies not only to direct competitors, but also to substitutes – products and services that meet the same need in a different way.
When information is readily available, awareness of alternatives increases. Customers can explore new solutions, compare functionality and price, and more fully consider whether there are better ways to meet their needs.
This increases the pressure on established players, because they are not only competing with direct competitors, but with a wider range of possible solutions. The Internet expands the market – but it also expands the competitive landscape.
The power of suppliers – both strengthened and weakened
The Internet also affects the relationship between businesses and their suppliers. On the one hand, digital solutions can give businesses a better overview of alternative suppliers, which can reduce suppliers' bargaining power.
On the other hand, suppliers can also use the internet to reach the market directly, without going through traditional intermediaries. This can strengthen their position, as they gain greater control over distribution and customer contact.
The result is a more dynamic power relationship. The Internet does not necessarily shift the balance in one direction, but it does make it more complex and situational.
The power of the customer – the strongest force
The most obvious effect of the internet is, however, the strengthening of the customer's position.
Customers today have:
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access to comprehensive information
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possibility to compare offers in real time
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lower switching costs
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greater freedom of choice
This gives customers significant bargaining power. They can set higher demands on price, quality and availability. They can easily choose suppliers who do not deliver, and they can quickly orient themselves towards alternatives.
This is perhaps the most important consequence of the internet: power is shifting towards the customer.
For businesses, this means that it is no longer enough to simply be present. You must be relevant, competitive and differentiated – continuously.
An overall assessment – why profitability is being pressured
When you see all these forces together, the picture becomes clear. In many cases, the Internet contributes to:
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increase rivalry
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lower entry barriers
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increase the availability of substitutes
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strengthen customers' bargaining power
Overall, this leads to pressure on profitability in many industries.
That doesn't mean it's impossible to make money online. It does mean it requires a clearer strategy. Businesses need to understand how to create a position that is robust enough to withstand these pressures.
Strategy in a digital context
The central message of this section is that the internet does not remove the need for strategy – it reinforces it.
As competition increases and margins are squeezed, it becomes even more important to:
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choose a clear position
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create differentiation
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build structures that are difficult to copy
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understand how to create value over time
The Internet offers new opportunities, but it also brings new demands. It is not the technology itself that determines the outcome, but how it is used in a strategic context.
A deeper insight
What is perhaps most striking about this analysis is how little of it is about technology in isolation. The Internet is the tool, but competition is still shaped by economic and structural factors.
This brings up an important realization:
Digitalization changes how we compete, but not why we compete.
Value creation, profitability and competitive advantage are still the core. The Internet only makes the playing field more open, more dynamic – and more demanding.
Strategy and the Internet – Norwegian version - Part 3
Strategic positioning – what separates winners from losers
As the internet grew as a commercial platform, there was a widespread belief that strategy in the traditional sense was no longer necessary. Many believed that it was enough to be fast, innovative, and technologically advanced. Pace became more important than direction. Experimentation became more important than structure.
But this perspective overlooked something fundamental.
Strategy is not about doing the most possible. It's about making conscious choices.
Strategic positioning involves choosing a particular way to compete, while simultaneously rejecting alternative approaches. It is about creating a clear identity in the market – an identity that is rooted in how the business organizes its activities.
The Internet does not change this principle.
That makes it more important.
As technology makes it easier to copy solutions, the need for a clear and consistent position increases. Without this, businesses risk becoming generic – lacking distinctiveness and lasting competitive advantage.
Operational efficiency is not strategy
One of the biggest misconceptions of the dot.com era was the confusion between operational efficiency and strategy. Many businesses focused on becoming faster, cheaper, and more accessible through digital solutions. This often resulted in improvements in efficiency, but it did not necessarily create lasting competitive advantages.
Operational efficiency is about doing the same activities better than your competitors. Strategy, on the other hand, is about doing different activities – or doing the same activities in a different way.
The Internet makes it easier to improve efficiency. Processes can be automated, information can be shared more quickly, and costs can be reduced. But these improvements are often easy to copy.
When everyone does the same thing, differentiation disappears.
The result is that businesses end up in a situation where they compete on the same parameters – often price and availability – without having anything that truly differentiates them from each other.
This is not a strategy.
It is a competition to be the most efficient in a standardized market.
The Dot.com Failure – Growth Without Direction
Many of the dot.com companies were characterized by a one-sided pursuit of growth. Traffic, market share, and number of users were seen as goals in themselves. Profitability was often postponed until a later date, with the assumption that it would come naturally when the scale was large enough.
This logic was problematic.
Growth without a clear strategy does not necessarily create value. On the contrary, it can lead to increased costs, weaker control and unclear priorities. When businesses try to meet many needs at once, without a clear position, they lose focus.
This leads to what Porter describes as a form of strategic dilution.
The business does a little bit of everything, but is not the best at anything. It tries to reach all customers, but hits no one precisely. It offers many services, but without a clear connection.
The result is low profitability and weak competitiveness.
Trade-offs – the necessity of choosing not to
A key element of strategy is what is often overlooked in practice: trade-offs. Choosing one direction means simultaneously choosing to forego others.
This is demanding, especially in a digital context where the possibilities seem endless. The Internet makes it technically possible to offer a wide range of products and services, reach many markets and meet different needs simultaneously.
But strategically, this is rarely sustainable.
Without clear boundaries, the business becomes unclear. It loses direction, and activities lose coherence. Trade-offs are therefore not a limitation, but a prerequisite for creating a clear position.
It is through choices and deselections that the strategy gains power.
Coherence in activities – strategy as a system
Strategy is not just about what activities a business performs, but about how these activities are connected. It is the interaction between the activities that creates strength.
The Internet provides new opportunities to connect activities, but it also increases the risk of fragmentation if this is not done consciously.
A strong strategy is characterized by activities that support each other. Marketing, distribution, customer service, and product development are interconnected and point in the same direction. This creates a form of internal consistency that is difficult for competitors to copy.
When activities are tightly integrated, it is not enough to copy a single solution. You have to copy the entire system. This is precisely what provides lasting competitive advantage.
Internet and positioning – new opportunities, same principle
The Internet gives businesses new tools to position themselves. It opens up direct contact with customers, new forms of distribution, and new ways of collecting and using information.
But the basic questions are the same:
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Who is the customer?
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What need should be met?
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How should value be created?
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What makes us different?
The Internet provides several answer options, but it does not provide the answers itself.
Strategic choices are still decisive.
Hybrid models – the best of both worlds
One of the most robust approaches to emerge was what could be described as hybrid models, which involve a combination of physical and digital activities, where the two dimensions support each other.
Physical activities can provide:
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trust
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brand anchoring
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customer contact
Digital activities can provide:
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availability
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efficiency
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data insights
When these are combined in a thoughtful way, the business can create a stronger position than purely digital or purely physical players.
This perspective is particularly relevant today, where the distinction between digital and physical has largely blurred. The customer journey is seamless, and businesses must manage multiple touchpoints simultaneously.
Cost structure and value creation
The Internet is not only affecting how businesses reach customers, but also how costs arise and how value is created. Digital solutions can reduce some costs, but they can also introduce new ones.
For example, you can:
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distribution becomes more complex
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logistics become more demanding
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customer support get new requirements
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technology investments increase
This highlights the need to look at the big picture. It is not enough to focus on one part of the value chain. You need to understand how changes in one activity affect the others.
Value creation does not occur in isolated measures, but in the interaction between activities.
The customer's role – from recipient to active participant
The Internet has also changed the role of the customer. The customer is no longer just a recipient of information, but an active participant in value creation. Through search, comparison, feedback and interaction, the customer influences how businesses operate.
This places new demands on businesses. They must not only deliver products and services, but also manage relationships in a more dynamic way. They must listen, adapt and learn continuously.
But again: this is not a new logic. It is a reinforcement of something that has always been true – that the customer is at the center of value creation.
Strategy in a digital world
When you put all the insights from this analysis together, it becomes clear that the internet doesn't make strategy any less important. It makes it more demanding – and more crucial.
Businesses must:
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understand their position in the market
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make clear choices
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create connections between activities
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build structures that are difficult to copy
This requires discipline. It requires long-term thinking. And it requires the ability to resist the temptation to follow every new technological opportunity without a clear direction.
A final reflection
The Internet was presented as a revolution at the time. And in many ways it was just that. It changed how we communicate, trade and organize ourselves. But when it comes to competition and value creation, the picture is more nuanced.
The Internet does not change the basic principles.
It makes them clearer.
It reveals weak strategy.
It reinforces good strategy.
This provides opportunities, but also increased competition.
It opens up the market, but squeezes margins.
What remains is a simple but powerful realization:
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Value creation is still about creating more value than it costs – over time.
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Technology can support this.
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But it cannot replace it.
Overall conclusion
When you look at the entire analysis together, the internet does not appear as a replacement for strategy, but as a test of it.
Businesses that succeed are not necessarily the most technologically advanced, but those that best understand how technology can be used in a holistic strategic context.
It is in this interaction – between technology, structure and choice – that lasting competitiveness arises.
Source
Author: Michael E. Porter
Published: Harvard Business Review - March 2001
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