The Big Picture

By Nicholas G. Carr

Booming demand can cover up a lot of dumb business decisions. But when buyers get tight with their wallets, a company's faults come into sharp relief.

That's what we're seeing today throughout the technology sector. During the 1980s and 1990s, tech spending skyrocketed as companies sought to reap the potential productivity gains of, first, the personal computer and, second, the Internet. According to the U.S. Department of Commerce, spending on information technology as a percentage of total capital equipment expenditures went from less than 20 percent in 1980 to a whopping 50 percent by 1997. That's a big enough flood of cash to keep an armada of rickety boats afloat.

With money surging into technology, companies could afford to take a short-term, tactical view of their business. Competition was often reduced to a cat-and-mouse game of product development. Coming out with the next generation of technology a few weeks ahead of competitors meant a windfall of revenues and profits. And even if you were a little behind the curve, you often did OK. There were more than enough buyers to go around.

But if boom times are great for short-term profits, they're hell on long-term strategy. In a seller's market, it doesn't much matter if your products or the way you produce them differ significantly from those of other companies. You just have to be in the right place at the right time. The problem with such tactical competition is that eventually everyone ends up in pretty much the same place at pretty much the same time. And when the money flow slows, as it has over the past year, the lack of any distinctive strategic positioning forces companies to battle it out on price alone, decimating their profitability.

The Internet appears to be amplifying the destructive effects of this cycle. At least, that's the way Harvard professor Michael Porter sees it. Porter's writings on industry structure and competition over the past two decades have established many of the terms we use when we talk about strategy. In his recent article "Strategy and the Internet" in the Harvard Business Review, he lays out in stark terms what he calls the "absence of strategy" that has characterized competition in the so-called new economy.

"Many of the pioneers of Internet business," he writes, "have competed in ways that violate nearly every aspect of good strategy." As a result, they have "undermined the structure of their industries, hastened competitive convergence and reduced the likelihood that they or anyone else will gain a competitive advantage."

That's a harsh indictment, but Porter backs it up with hard facts. He shows how companies have rushed onto the Internet with me-too offerings that lead inexorably to price wars. Seduced by the Net's vast reach, they've sought to "acquire" customers at any cost in the vain hope that they could "lock in" those buyers for the long term. But the very openness of the Internet dooms such efforts.

First, it encourages a homogenization of corporate processes, erasing distinctions between companies and, in turn, their ability to earn a premium price. Second, it makes it easier than ever for customers to switch suppliers - a few mouse clicks are all it takes.

Porter's vision is not entirely bleak. He says Internet technologies can help companies better integrate all their activities, creating a tightly knit system that is hard for competitors to imitate. To do that, though, companies have to take a different approach to the Internet. They have to place a higher priority on being different than on being fast or agile. It's hard to make a company's operations and products truly distinct - it requires intense long-term thinking - but that's why it's so powerful a source of advantage. If it were easy, anyone could do it.

Amazon Honor System

The copyrighted content on this site is provided on the honor system. If it holds value for you, please pay a reasonable sum by clicking the above banner. If you are printing out the content or otherwise distributing it, you are required to pay a fee of $2.50 per article per copy. Thank you.