THE FUTURE OF COMPETITION ON THE INTERNET
The aim of this chapter was to elaborate on essential factors impacting and constituting an Internet business strategy. We presented particular properties of the Internet that strongly influence corporate strategies and the business models derived from them.
Internet business models can be categorized into five types dependent on their value proposition: context, connection and communication, commerce, coordination, and content. Based on these foundations we elaborated on the core elements of an Internet business strategy, which depends on the Internet’s influence on competition in a particular industry. We further identified sources of competitive advantage on the Internet. Staying ahead of rivals in a high-velocity environment such as the Internet is challenging because the barriers to imitating or leapfrogging a technological or organizational innovation are usually low. A sustainable business model will therefore yield persuasive value propositions to customers, have beneficial cost and risk structures, and capture a significant proportion of the value generated in form of reliable revenue streams (Teece, 2010).While business models are refined and changed regularly, the strategic focus of a firm’s Internet venture should be well defined and stable over a longer period of time. By well defined, we mean that an Internet business strategy needs a clear focus with respect to which customer segments are addressed and how unique value can be created to satisfy the needs of a particular market segment. A robust strategic positioning avoids ‘trying to be all things to all customers’ (Porter, 2001, p. 71) but empowers firms to be perceived as distinct by consumers. This also requires that firms form a distinctive way of creating and delivering value. The strategy and each element of the value chain have to fit together to create a system of competing that is hard to come by for competing firms.
Particularly for established companies, this implies that the strategy for doing business on the Internet has to match the ‘offline strategy’. In the early ages of the Internet many established firms lost (some of) their competitive advantage because their online and offline features cannibalized each other, rather than complemented, leading to increased price competition.Competing on the Internet, characterized by recurring and discontinuous changes in consumer needs, rivals, suppliers, technologies, and regulations, makes dynamic capabilities for old and new companies alike essential assets. Specifically, the ability to adapt business models to environmental changes quickly and frequently is crucial. Therefore, successful firms need extraordinary competencies in Internet technologies and in-depth knowledge about the industry to anticipate technological change, the development of costs, and future capabilities of rivals. While most dot-com firms have the necessary mindset in their ‘corporate DNA’, established firms in particular are often reluctant to adapt to environmental changes, especially disruptive innovations (Christensen and Raynor, 2003; Yu and Hang, 2010). Most firms have reacted to changes caused by the Internet in their respective markets. However, they have primarily addressed different aspects of digital changes in traditional domains, such as supply chain management, marketing, or manufacturing (Bharadwaj et al., 2013). Most firms fail to pursue the opportunities for value creation and capture arising from leveraging the company-wide opportunities of digital transformation.
The market turbulences of the last years have underlined that successful firms are those capable of quickly adjusting to changes in competitive and economic environments with regard to demand, costs, time, technology, or innovation. As research found that firm size is negatively correlated with the success of disruptive innovation (Tushman and O’Reilly, 2002; Christensen and Raynor, 2003), establishing smaller, flexible, and autonomous corporate units is regarded as key to solving the ‘innovator’s dilemma’ (Christensen and Raynor, 2003).
Consequently, ever more firms shift from a ‘research and develop’ to a ‘connect and develop’ approach (Arora et al., 2001; Huston and Sakkab, 2006). On the Internet, business value co-creation is more widespread than in traditional markets. Often, numerous companies are involved in complex and dynamic collaborations, which often rely on modularized business processes and ‘plug-and-play capabilities for richly linking digital assets’ (Bharadwaj et al., 2013, p. 476), for example, through APIs.As combining and sharing services in ecosystems, alliances, and partnerships is common on the Internet, companies need to define and protect their unique sources of competitive advantage. As business models in these arrangements are highly dependent on each other, further research should focus on how these ecosystems are managed and evolve over time. Also, richer theorizing on business models, especially regarding dynamic aspects, value co-creation, and pricing, is needed. With the advent of the Internet of things and cyber physical systems that link computational with physical elements in areas like energy, transportation, healthcare, or education, an abundance of data will be generated. The key for firms will be to develop capabilities and processes to set up an appropriate corporate infrastructure to handle the data volume, velocity, variety, and veracity and to explore how to make use of the heterogeneous data. Scholars are also called upon to study the opportunities and threats of big data for organizations and society. To substantiate the current hype, research should also provide case studies on successful applications and further develop methods to store and analyze big data.
Internet business strategies heavily depend on national and international regulatory frameworks. For the time being, net neutrality and user privacy are important and controversial issues. As new sophisticated technology allows ISPs to block or degrade specific content, sites, platforms, applications, types of attached equipment, and modes of communication, net neutrality is essential for enabling - particularly smaller - companies to market innovations on the Internet (van Schewick and Farber, 2009; Bauer, 2010; van Schewick, 2010; Picot and Krcmar, 2011).
Further, many established and future data-driven Internet business models (e.g., big data, Internet of Things, online advertising) may be affected by stricter laws regarding privacy depending on national regulations and culture. Regulation may also be needed if the trend towards platformization results in a few powerful platforms dominating the Internet. Already today Internet business resembles a flat inverted pyramid with a few platforms at the bottom and a multitude of contributors of complementary services and products at the top (The Economist, 2014), giving platform operators considerable market power.Competing on the Internet requires firms to permanently reflect on how to adapt to the rapidly changing environment and how to leverage the Internet to gain or sustain competitive advantage. For established firms this is not necessarily a blessing since the offline business may be cannibalized and the firms’ profitability may drop. However, the digital era has generated many examples of struggling firms in media, digital imaging, commerce, or even manufacturing, showing that adhering to conventional business strategies, models, and practices for too long can be an unpleasant experience (e.g., Tripsas and Gavetti, 2000; Agarwal and Helfat, 2009; Lucas and Goh, 2009; Dosi and Galambos, 2013).
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