Strategy and the Internet
Author: Michael E. Porter
Published: Harvard Business Review - March 2001
The Internet Paradox – Technology’s Promise and the Reality of Profitability
When the internet began to gain real commercial significance in the late 1990s, it created an atmosphere of almost limitless optimism. New companies were being launched at a rapid pace, capital was pouring in, and many believed that we were entering an entirely 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 organizations created value. It was not simply a new channel, but a new reality. In this environment, the idea emerged that technology itself might be enough to ensure success. Being digital became almost synonymous with being competitive.
But another reality quickly began to emerge.
Despite increasing traffic, attention, and online activity, surprisingly few organizations managed to achieve sustainable profitability. Many companies generated substantial revenue yet still produced weak or negative financial results. What initially appeared to be a growth revolution turned out, for many, to be a profitability challenge.
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 enter markets, easier to reach customers, and easier to distribute products and services. But it also made it easier for competitors to do exactly the same. The result was greater competition, increased transparency, and persistent pressure on margins.
The key insight that emerges is that technology by itself does not create economic value. Value is created only when technology becomes part of a well-designed strategy that takes competitive dynamics, cost structures, and customer value into account. The internet may change the rules of the game on the surface, but the underlying mechanisms of value creation remain.
The Language That Reveals the Mindset
One of the most interesting observations from this period concerns not only what organizations did, but also how they talked about what they were doing. Instead of discussing strategy, competitive advantage, and positioning, many began using the term “business model” as an overarching explanation of how their business worked.
At first glance, this may seem like an insignificant linguistic nuance, but in reality, it represents a shift in how people thought about value creation. The term “business model” was often used as a loose description of how an organization generates revenue. It could refer to subscriptions, advertising, or transaction-based models. But having a way to make money is not the same as having a sustainable strategy.
This is where an important distinction emerges.
Generating revenue is not the same as creating economic value. An organization can have high levels of activity, substantial traffic, and significant revenue—and still lack profitability. Without a clear understanding of the competitive landscape and how to create a lasting competitive advantage, the business model becomes a weak management tool.
When the focus shifts from strategy to business models, organizations risk underestimating the importance of industry structure and competitive dynamics. They begin to believe that it is enough to “find a model” that generates revenue, without asking the more fundamental questions of why customers should choose their organization in the first place and how profitability can be sustained over time.
This opens the door to what can be described as self-deception. Activity is interpreted as progress, and revenue is interpreted as value, without considering the bigger 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 make it possible to build strong market positions quickly, and that being an early mover would create lasting competitive advantages.
But when we look more closely at how the internet actually affects markets, a different picture emerges.
The internet lowers 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 offerings across providers in a matter of seconds. Information that was once difficult to access is now openly available to everyone.
This intensifies competition.
Customers have more alternatives, and loyalty weakens. Providers increasingly have to compete on price, availability, and perceived value. Differentiation becomes more difficult to sustain, and margins come under pressure. In other words, the internet does not create a new type of competition. It amplifies the competition that already exists.
The Myth of First-Mover Advantage
In this context, a strong belief emerged that being first on the internet would provide a decisive competitive advantage. Terms such as “first-mover advantage” were treated almost as a given. The idea was that early entrants would establish strong customer relationships, build network effects, and thereby create high switching costs.
But this logic proved weaker than many had assumed.
The internet reduces friction. It makes it easy for customers to switch providers. With just a few clicks, they can find alternatives, compare prices, and choose a different provider. Technology not only makes it easier to enter a market—it also makes it easier for customers to move between providers.
This means that, in many cases, switching costs become lower, not higher.
As a result, the foundation for lasting competitive advantage based solely on early market entry is also weakened. Being first is not enough. What matters is how an organization positions itself, how it creates value, and how it builds a structure that is difficult for competitors to replicate.
Back to Basics
During periods of technological change, it is easy to believe that the old rules no longer apply. New opportunities create new expectations, and the market can appear unpredictable. But over time, market forces tend to stabilize.
What appears revolutionary in the moment eventually becomes part of the norm.
The fundamental principle that remains is simple but powerful: economic value matters. Value creation is about the difference between what a customer is willing to pay and the cost of delivering the product or service. This difference—the margin—is what ultimately determines whether a business is sustainable over time.
The internet does not change this principle.
It can influence how value is created, how costs are structured, and how customers are reached. But it does not eliminate the need for profitability. If anything, it makes that need even clearer.
A First Key Insight
What becomes clear through this first section is that the internet does not represent a break from strategy—it reinforces the need for strategy. The more accessible technology becomes, the more important it is to understand how to create a lasting competitive advantage.
Digitalization, therefore, is not primarily about technology.
It is about choices.
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Choosing a position.
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Choosing a structure.
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Choosing how value will be created and sustained over time.
Strategy and the Internet - Del 2
The Internet and the Competitive Forces – Not New Rules, but Greater Pressure
To understand how the internet affects organizations, we must first understand what determines profitability within an industry. This is the starting point for Porter’s analysis. He does not begin with technology, but with 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 among existing competitors, the threat of new entrants, the threat of substitutes, the bargaining power of suppliers, and the bargaining power of customers. The key point is that the internet does not eliminate these forces. It changes how they operate—and in many cases, amplifies them.
When the internet is analyzed through this framework, it becomes clear that technological development has largely contributed to increasing competitive pressure in many industries rather than reducing it.
Rivalry – Greater Transparency and Weaker Differentiation
The internet has made information more accessible than ever before. Customers can easily compare prices, products, and providers across geographic boundaries. This increases market transparency, but it also has a clear consequence: it becomes harder to maintain price differences.
When information flows freely, competitors are pushed toward more direct price competition. Products and services that could previously be differentiated through limited information or local availability can now be compared in real time. This makes it more difficult to stand out, and margins come under pressure.
At the same time, the internet reduces many of the traditional cost differences between competitors. Digital solutions can be standardized and replicated, further contributing to a more level competitive playing field. The result is intensified rivalry.
Threat of New Entrants – Lower Barriers to Entry
One of the most immediate effects of the internet is that it becomes easier to establish new businesses. In the past, building distribution channels, establishing a physical presence, and reaching customers required significant capital. The internet reduces many of these barriers.
A new entrant can now:
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establish a digital presence quickly
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reach 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 every new entrant will succeed. It does mean, however, that established organizations increasingly have to deal with continuous pressure from new competitors.
What is often overlooked is that while it is easier to start a business, creating profitability remains challenging. The internet makes market entry easier, but it does not guarantee sustainability.
Substitutes – More Options for Customers
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 prices, and more easily consider whether there are better ways to meet their needs.
This increases pressure on established players because they are not only competing with direct competitors, but with a broader range of possible solutions. The internet expands the market—but it also expands the competitive landscape.
Supplier Power – Both Strengthened and Weakened
The internet also affects the relationship between organizations and their suppliers. On the one hand, digital solutions can give organizations better visibility into 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 because they gain greater control over distribution and customer relationships.
The result is a more dynamic balance of power. The internet does not necessarily shift the balance in one direction, but it makes it more complex and dependent on the specific situation.
Customer Power – The Strongest Force
The most obvious effect of the internet, however, is the strengthening of the customer’s position.
Customers today have:
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access to extensive information
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the ability to compare offerings 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 demand more in terms of price, quality, and availability. They can easily reject providers that fail to deliver and quickly turn to alternatives.
This may be the most important consequence of the internet: power shifts toward the customer.
For organizations, this means that simply being present is no longer enough. They must remain relevant, competitive, and differentiated—continuously.
An Overall Assessment – Why Profitability Is Under Pressure
When all of these forces are considered together, the picture becomes clear. In many cases, the internet contributes to:
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increasing rivalry
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lowering barriers to entry
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increasing the availability of substitutes
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strengthening customers’ bargaining power
Taken together, these forces put pressure on profitability across many industries.
This does not mean that it is impossible to make money on the internet. It does mean, however, that it requires a clearer strategy. Organizations must understand how to build a position that is strong enough to withstand this pressure.
Strategy in a Digital Context
The central message of this section is that the internet does not eliminate the need for strategy—it reinforces it.
As competition increases and margins come under pressure, 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 replicate
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understand how to create value over time
The internet creates new opportunities, but it also creates new demands. It is not the technology itself that determines the outcome, but how it is used within a strategic context.
A Deeper Insight
What may be most striking about this analysis is how little of it is actually about technology in isolation. The internet is the tool, but competition is still shaped by economic and structural factors.
This leads to an important insight:
Digitalization changes how we compete, but not why we compete.
Value creation, profitability, and competitive advantage remain at the core. The internet simply makes the playing field more open, more dynamic—and more demanding.
Strategy and the Internet
Strategic Positioning – What Separates Winners from Losers
As the internet emerged as a commercial platform, a widespread belief developed that strategy in the traditional sense was no longer necessary. Many believed it was enough to be fast, innovative, and technologically forward-looking. Speed became more important than direction. Experimentation became more important than structure.
But this perspective overlooked something fundamental.
Strategy is not about doing as much as possible. It is about making deliberate choices.
Strategic positioning means choosing a particular way to compete while deliberately rejecting alternative approaches. It is about creating a clear identity in the market—an identity rooted in how the organization organizes its activities.
The internet does not change this principle.
It makes it more important.
When technology makes it easier to copy solutions, the need for a clear and consistent position increases. Without one, organizations risk becoming generic—with no distinctive identity and no lasting competitive advantage.
Operational Effectiveness Is Not Strategy
One of the biggest misconceptions of the dot-com era was confusing operational effectiveness with strategy. Many organizations focused on becoming faster, cheaper, and more accessible through digital solutions. This often led to improvements in efficiency, but it did not necessarily create lasting competitive advantages.
Operational effectiveness is about performing the same activities better than competitors. Strategy, on the other hand, is about performing different activities—or performing 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 organizations end up competing on the same parameters—often price and availability—without having anything that truly distinguishes them from one another.
That is not a strategy.
It is a competition to be the most efficient in a standardized market.
The Dot-Com Mistake – Growth Without Direction
Many dot-com companies were characterized by a relentless pursuit of growth. Traffic, market share, and the number of users were treated as goals in themselves. Profitability was often postponed until later, based on the assumption that it would eventually come naturally once the company reached sufficient scale.
This logic was problematic.
Growth without a clear strategy does not necessarily create value. On the contrary, it can lead to higher costs, weaker control, and unclear priorities. When organizations try to meet too many needs at once without a clear position, they lose focus.
This leads to what Porter describes as a form of strategic dilution.
The organization does a little of everything but is not the best at anything. It tries to reach every customer but does not appeal precisely to any particular group. It offers many services without a clear connection between them.
The result is low profitability and weak competitive strength.
Trade-Offs – The Need to Choose What to Give Up
A central element of strategy is something that is often overlooked in practice: trade-offs. Choosing one direction also means choosing not to pursue others.
This is challenging, especially in a digital context where the possibilities seem endless. The internet makes it technically possible to offer a broad range of products and services, reach many markets, and meet different needs at the same time.
But strategically, this is rarely sustainable.
Without clear boundaries, an organization becomes unclear. It loses direction, and its activities lose coherence. Trade-offs are therefore not a limitation, but a prerequisite for creating a clear position.
Strategy gains its strength through the choices made—and the alternatives deliberately left behind.
Coherence Among Activities – Strategy as a System
Strategy is not only about which activities an organization performs, but about how those activities fit together. It is the interaction among the activities that creates strength.
The internet creates new opportunities to connect activities, but it also increases the risk of fragmentation if this is not done deliberately.
A strong strategy is characterized by activities that reinforce one another. Marketing, distribution, customer service, and product development are connected and aligned in the same direction. This creates a form of internal consistency that is difficult for competitors to replicate.
When activities are tightly integrated, it is not enough to copy a single solution. Competitors must replicate the entire system. That is precisely what creates lasting competitive advantage.
Internet and Positioning – New Opportunities, Same Principle
The internet gives organizations new tools for positioning themselves. It enables direct contact with customers, new forms of distribution, and new ways to collect and use information.
But the fundamental questions remain the same:
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Who is the customer?
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What need should be addressed?
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How will value be created?
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What makes us different?
The internet provides more possible answers, but it does not provide the answers itself.
Strategic choices still determine the outcome.
Hybrid Models – The Best of Both Worlds
One of the most robust approaches to emerge was what can be described as hybrid models. This involves combining physical and digital activities, with the two dimensions supporting each other.
Physical activities can provide:
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trust
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brand connection
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customer interaction
Digital activities can provide:
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accessibility
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efficiency
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data insights
When these are combined thoughtfully, an organization can create a stronger position than purely digital or purely physical players.
This perspective is particularly relevant today, when the distinction between digital and physical has largely disappeared. The customer journey is seamless, and organizations must manage multiple touchpoints simultaneously.
Cost Structure and Value Creation
The internet affects not only how organizations reach customers, but also how costs arise and how value is created. Digital solutions can reduce certain costs, but they can also introduce new ones.
For example:
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distribution can become more complex
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logistics can become more demanding
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customer support can face new requirements
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technology investments can increase
This underscores the need to consider the bigger picture. It is not enough to focus on one part of the value chain. Organizations must understand how changes in one activity affect the others.
Value creation does not arise from isolated initiatives, but from the interaction among activities.
The Customer’s Role – From Recipient to Active Participant
The internet has also changed the customer’s role. Customers are no longer simply recipients of information, but active participants in value creation. Through search, comparison, feedback, and interaction, customers influence how organizations operate.
This creates new demands on organizations. 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: the customer is at the center of value creation.
Strategy in a Digital World
When all the insights from this analysis are brought together, it becomes clear that the internet does not make strategy less important. It makes strategy more demanding—and more critical.
Organizations must:
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understand their position in the market
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make clear choices
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create coherence among activities
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build structures that are difficult to replicate
This requires discipline. It requires a long-term perspective. And it requires the ability to resist the temptation to pursue every new technological opportunity without a clear direction.
A Final Reflection
The internet was once presented as a revolution. And in many ways, that is exactly what it was. It changed how we communicate, shop, and organize ourselves. But when it comes to competition and value creation, the picture is more nuanced.
The internet does not change the fundamental principles.
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It makes them clearer.
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It exposes weak strategy.
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It reinforces good strategy.
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It creates opportunities, but also increases competition.
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It opens markets, but puts pressure on margins.
What remains is a simple but powerful insight:
Value creation is still about creating more value than it costs—over time.
Technology can support this.
But it cannot replace it.
Comprehensive Conclusion
When the entire analysis is considered as a whole, the internet emerges not as a replacement for strategy, but as a test of it.
Organizations that succeed are not necessarily the most technologically advanced, but those that best understand how technology can be used within a comprehensive strategic context.
It is in this interplay—between technology, structure, and choices—that lasting competitive strength emerges.
Source
Author: Michael E. Porter
Published: Harvard Business Review – March 2001
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