Profits and the Internet: Seven Misconceptions
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Most managers rightly see profitable growth as essential to their business. However, given the realities of competition and the irreducible uncertainty in business, there will always be a gulf between the pursuit of profitable growth and its achievement. When the Internet arrived, many believed the gulf would narrow. Unfortunately, the opposite has been true.
To be sure, the Internet is powerful. It is opening the way to new markets, customers, products and modes of conducting business. But it also is prompting newcomers and veterans alike unwittingly to embrace some dangerous half-truths and to neglect serious tensions beneath seemingly sensible strategy choices. The consequences are visible in the long list of failed dot-coms. At established companies, the effects might be muted, but if the past is any indicator, they too are susceptible to the penalties of inadequate strategy scrutiny.
In assessing Internet-related business opportunities, companies must not let what is technologically feasible overshadow what is strategically desirable. To minimize any unintentional destruction of value, they must think through the full implications of the strategy choices they are making. In particular, they must be alert to seven widely held misconceptions.
The “First-Mover Advantage” Misconception
A land-grab mentality has pervaded the Internet, not just in startups such as Bluefly, ChateauOnline and QXL.com, but also in established companies such as Microsoft, Telefonica and Reuters. The logic is that one driver of success (if not the key driver) in Internet-related business is being first. That view has merit. Being first can give a company a frontier-pushing aura (as it did for Apple Computer); can generate free publicity and valuable brand recognition (Amazon.com and Yahoo! Inc.); can move companies down proprietary learning curves (Intel); and can provide a bigger opportunity to lock in unattached customers and achieve critical mass (America Online).1
Yet, in Internet business, first-mover status is a precarious perch on which to rest strategy, and managers should not overrate the importance of early entry and the durability of the advantages it might bring. To see why, consider three strains of first-mover advantage.
The Limits of Preemption
The strategic strain of first-mover advantage rests on preemption — the premise that “the early bird gets the worm.” It applies, for example, to airlines’ choices of routes and oil refiners’ capacity decisions. However, preemption works only when two conditions are satisfied.2 First, the opportunity under consideration must be efficiently sized.
References (23)
1. For a review of several theoretical and empirical studies on this topic, see F.M. Scherer and D. Ross, “Industrial Market Structure and Economic Performance” (Boston: Houghton Mifflin, 1990), 407, 586–589.
2. M.E. Porter, “Competitive Strategy” (New York: Free Press, 1980), 336–338.
