In 2013, interesting statistics that were published by Intel Company revealed what happens in an Internet Minute. The study said: 138,889 hours of videos watched on YouTube, 4.1 million searches on Google, 3.3 million pieces of content shared on Facebook and 347,222 tweets on Twitter are being done every minute. It is real. The way the internet changes all aspects of our life brings new challenges, yet, many opportunities. E-commerce, which is defined as “all electronically mediated information exchange between an organization and its external stakeholders” is one outcome of this revolution (Chaffey 2011, p.10). On parallel, the way that scholars look at strategic management in the new digital age has been changed too (Kalakota & Robinson 2001, p.257).
Within these changes, do the linear competitive strategy formulation processes applicable to e-commerce? And do Porterian models relevant to e-commerce businesses? This post will answer these two questions.
Strategy Formulation in E-Commerce Business
Companies’ business models have been changed over the time due to different factors, which eventually impacted the way they select the best strategic management approach. Kalakota and Robinson (2001) identified 20 trends that shifted the business environment into new e-business focus. In specific, there are two major shifts that are happening now (Kalakota & Robinson 2001, p.123):
- The shift from product and task- oriented thinking into customer and solution- oriented one; and
- The shift from rigid functions into flexible integrated service application.
These two characteristics encouraged scholars to look for new frameworks for strategic management. To make this statement clear, Chaffey summarized the main features of what is considered as a ‘traditional approach for strategic management’. Traditional approaches start by looking at the external environment and the internal resources. This step is followed by developing a vision, mission and objectives. Later, different strategies are developed, evaluated and the best one is selected and implemented. Finally, management collects information about their performance and compares it against plans so they can spot the gaps and act upon the difference (Chaffey 2011, p.248).
Different scholars have recommended that the traditional linear thinking does not fit within the e-business environment. Kalakota and Robinson highlighted that the top–down approach is most suitable for stable and well- predicted environment. In contrast, e-business needs a “continuous planning with feedback approach” where the continuous feedback loop allows the company to understand customers’ needs even when they are changing and respond to them. By doing this, they emphasized on the emergent nature in strategy formulation where the strategy is continuously iterated (Kalakota & Robinson 2001, pp.390–393).
On the same line, Combe discussed the feedback loop as part of the strategy formulation process and highlighted that the strategy evaluation is not just a step after strategy formulation and implementation stages. Instead, it is a continuous activity throughout the whole process (Combe 2006, p.215,273).
Chaffey showed that using traditional models for business strategy (top- down approach) is good, however, more innovating techniques are required to incorporate the new electronic channels and create what he called “e-commerce strategies” where multiple iterations and overlapping management process are must (Chaffey 2011, pp.248, 283).
Finally, Ivang et al. (2009) showed that there are three types of strategic planning in e-business: ‘comprehensive’ which is systematic and linear in nature, ‘incremental’ which is more dynamic and informal and finally ‘dynamic interaction-driven approach’ for which they concluded that the dynamic one is most suitable in rapid e-commerce environment (Ivang et al. 2009 in Vivas López 2005).
A study conducted by e-consultancy in 2008 examined the strategic thinking at different e-commerce managers. The results showed that they had used both approaches, i.e. ‘prescriptive’ and ’emergent’. A prescriptive approach was used when the strategy development stage and implementation stage were done sequentially as part of the long-term planning process, and emergent approach was used when the three stages were done together in order to respond to different emergent changes (Chaffey 2011, p.249). According to that, the managers are looking for ‘strategic agility’, which is the company’s capability to adjust its strategies according to the external environmental changes (Chaffey 2011, p.55).
A recommended ‘dynamic e-business strategy’ model that can help to ensure continuous monitoring for the external events is shown below.As a conclusion, the linear approach cannot be used as a stand-alone methodology for strategy formulation. In e-business context, the strategy needs to be a dynamic and iterative to allow the companies to have the needed ‘strategic agility’.
Porterian Models in E-Commerce
In the famous article that was published in Harvard Business Review in 2011, Michael Porter said: “the winners [companies] will be those that view the internet as a complement to, not a cannibal of, traditional ways of competing” (Porter 2001). Porter believes that the internet is very important to business, but it should not be a mean to shift the focus from quality and customer service into providing low prices only. Within this argument, can Porterian models help in the strategic management of e-commerce? In order to answer this question, four models will be discussed which are:
- Porter’s Five-Forces Model
- Porter’s Diamond
- Porter’s Value Chain
- Porter’s Generic Strategies Model
The applicability of each model is analyzed below.
First: Porter Five-Force Model
Porter Five forces model is used to understand the competitive factors in an industry under five forces which are (Porter 2008):
- “Threat of new entrants”
- “Bargaining power of buyer”
- “Bargaining power of supplier”
- “Threat of substitutes products or services”
- “Rivalry among existing competitors”
The model is shown below.
The application of this model in e-commerce has a wide acceptance. For example Chaston (2001, p.61) recommended using the five forces model as an assessment tool in a virtual business environment. Rao and Awan (2009) utilized the model to analyze the strategic issues in the e-commerce Business-to-Business (B2B) in the Middle East. Azadi (2011) utilized the model to identify set of strategies that can e-commerce sector use to respond to the external threats and achieve a competitive advantage. Finally, Chaffey (2011, p.257) recommended using this model to understand the external environment in e-business, and as an enhancement, he suggested regrouping the threats into three categories; “buy side threats” and “sell side threats” to reflect the upstream and downstream parts of the supply chain and “the competitive threats” where he argued that each one of them contributes in a different threat for the e-business as shown below.
Second: Porter Diamond
Porter diamond is a concept that was introduced in 1990 to understand the competitive advantages of nations using four determinants which are (Chaabna & Wang 2015):
- “National factors”
- “Demand conditions”
- “Related and supporting industries”
- “Firm strategy, structure, and rivalry”
The model is shown below.Different scholars used the model to assess the competitive advantages of e-commerce firms in different countries. The table below summarizes some of the scholars found in the literature and the purpose for which the model was used.
Despite of that, the model has been criticized too due to the limitation that is related to the initial scope of the model itself. Porter developed this model based on developed countries only and excluded the developing one, so scholars developed an amended one called ‘Double Diamond Model and Multiple Diamond Model’ (Mzembi 2000). A single and double diamond mode is shown below.Adding to that, Global Retail E-Commerce Index in 2013 showed that developing countries achieved promising results in this sector (Kearney 2013), hence excluding them from Porter’s Diamond Model is not correct. Another limitation of this model comes from the power of e-commerce in reducing the importance of boundaries between the countries, so the validity of Porter’s assumption that the nation location determines its competitive advantages becomes weaker (Helvik & Harnecker 2005).
Third: Porter’s Value Chain
Value Chain analysis is a strategic management tool used to identify the competitive advantage of the company by analyzing its activities. Activities are grouped under ‘primary’ and ‘supporting’ ones as shown below (Presutti & Mawhinney 2013, p.1).Value chain analysis is one of the tools that are used in the strategic management and strategic marketing context, in which the company can create a competitive advantage by looking at its activities as a set of primary and secondary activities. The concept was introduced in 1985 and then was not reviewed to reflect the changes in the business environment (Presutti & Mawhinney 2013, p.1). Therefore, the model has been criticized for different reasons.
Firstly, it was constructed based on a manufacturing environment rather than a service one. Secondly, it neglects the efforts needed to understand customers’ needs and translating them into features in the products and services rather than just sending them to customers (Chaffey 2011, p.327). Finally, according to the model, what was considered as a supporting activity is no longer a supporting one only. In facts, it became a primary activity, for example:
- Information technology is a big player in e-commerce (Chaffey 2011, p.326).
- The lack for a clear role of leadership and cultural, and include it under Human Resources while they have a bigger impact in e-commerce, given that transactions are done via virtual media (Presutti & Mawhinney 2013, p.3).
- Procurement is not a supporting activity since it is now part of the whole concept of supply management (Presutti & Mawhinney 2013, p.3).
Accordingly, Presutti and Mawhinney (2013) suggested using a ‘Contemporary Value Chain’ to bridge the gaps in Porter’s value chain as shown below.Fourth: Porter’s Generic Strategies Model
Porter suggested three strategies to succeed in the marketplace and gain a competitive advantage as shown in the graph below. These strategies are:
- Cost leadership strategy in which the company can have a competitive advantage by reducing the cost. This can be done via implementing different cost reduction programs and initiatives inside the company (Kotler & Keller 2012, p.35).
- Differentiation strategy in which companies should create unique products and services that are not provided by competitors. This could include a unique design, image, technology or any other aspects of the business (Kotler & Keller 2012, p.37).
Focus strategy in which the company focuses on one part of the business, e.g. a customer group, a geographical market … etc. and serving that segment in specific. The firm can gain a competitive advantage by serving that segment with a lower cost than its competitors or by fulfilling the needs of that segment in a way that is better than its competitors (Kotler & Keller 2012, p.39).This tool is used in strategy formulation where a company can gain a competitive advantage by adapting one of three strategies: ‘cost leadership’, ‘differentiation’ and ‘focus’ (David 2013, p.178). The model has been widely used but also has been criticized for certain limitations.
On the first hand, Koo et al. (2004) argued that the model is valid for e-commerce business and utilized it to understand the marketing strategies in 123 e-commerce firms in South Korea (Koo et al. 2004). In addition, Dann and Dann (2011) recommended that this model is good for e-commerce, however, they emphasized that it is not only about selecting one of the four options; it is about incorporating this strategy on a day- to- day decisions, and link them continuously to the selected strategy. They also recommended that this thinking requires high skills and focus from the management team (Dann & Dann 2011, pp.63–67).
On the other hand, Chaston recommended that the model can be followed incorrectly by the managers where they may choose to look at the four options separately. Some companies managed to provide high-quality services with low prices by improving and cutting the cost internally (Chaston 2001, p.106). As an alternative, he suggested using a modified one based on 12 options rather than 4 options as shown below. As a final drawback, this model emphasis on the importance of the internal competencies of the organization rather than looking at the external environment as well (Chaston 2001, p.108).As a summary for the four Porterian models, the table below shows the scholars that were reviewed and final conclusion.
Conclusion and Recommendations
The purpose of this post was to examine the strategy formulation process in e-commerce, the use of the linear model in specific and the application of Porterian models in this business.
The results are summarized as the following:
- Firstly, a solo linear model cannot fit in the e-business environment. A dynamic and iterative approach is required in order to timely respond to the changes in e-business era;
- Secondly, some of the Porterian Models are still relevant to e-commerce, while some of them have been criticized due to their limitations;
- Finally, the models have been under evaluation and amended by different scholars to reflect the nature of the e-commerce business.
As a final recommendation, the discussion of new strategic thinking related to e-commerce includes theories about change management, hence, it is recommended to link it to the analysis of ‘dynamic capabilities’ context (Helfat et al. 2007, p.120) that I discussed in a previous post.
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