How Firms Can Effectively Adopt Internet Technology, by Matthew Coppola
A key question firms must face in deploying internet technology is how to deploy it. The internet tends to alter industry structures, resulting in lower profitability and a levelling effect on business activities. Online firms thus find it difficult to establish an operational advantage that can be sustained (Porter, 2003). The following paper will look at internet strategies that the telecommunications firm Optus deploys and how they can combat competitive forces through strategic positioning to gain a competitive advantage and how the internet complements, rather than substitute, traditional ways of competing.
Optus engages in business to business (B2B) and business to consumer (B2C) transactions via its website optus.com. A major strategy that Optus employs is price discrimination. This entails charging different customers different prices or charging different prices to the same customers depending on the quantities consumed of the same product (Vanhoose, 2003 p.99). This is a basic strategy that even traditional bricks and mortar firms pursued, long before internet was around.
There are two types of price discrimination – perfect which involves charging consumers the maximum price, depending on their willingness to pay, thereby capture the whole consumer surplus, and imperfect which entails charging different prices to distinct consumer groups and charges for classifications on quantities consumed (Vanhoose, 2003 p.103). Perfect price discrimination is infeasible since it is very difficult to accurately define what each customer’s maximum willingness to pay is. Therefore we will centre our attention on imperfect price discrimination in reference to Optus deploying internet technology in their operations.
Households and businesses are two general major groups in the industry. Households tend to be more price sensitive and make few downloads relative to businesses that require the internet to make emails and online calls all day and thus require greater internet use. However they are less sensitive to price so their demand is more inelastic with respect to price. Through surveys and compiled statistics, the firm designs a pricing strategy for the two groups taking into account their price elasticity’s of demand.
See figure 1 overleaf:
Panel A (customers) and B (businesses) shows pricing for the two groups taking into account their demand curves. Customers’ demand curves are more price elastic than the demand of businesses. Panel C sums the demands of the two groups. If Optus engages in price discrimination, it can charge different prices – P*c and P*b to the two groups and provide different quantities of internet usage. Optus can thus earn profits equal to the shaded areas of panels A and B, shown as the shaded area in panel C.
The online communications firm partaking in imperfect discrimination however may find it infeasible, deciding instead to induce consumers to self-select (Vanhoose 2003, p.107). Consumers sort themselves into groups by having a choice of alternative pricing schemes. For instance a customer seeking to purchase a mobile phone on the Optus site has a number of choices a part from the basic $49 cap plan, to choose from the Mobile Browsing Starter at $4.95 per month to the Mobile Browsing Super at $14.95 month. Optus also offers ‘extras’ such as instant messaging plans. All these optional extras entice consumers to self-select to their appropriate category depending on their requirements.
Tie-in sales are another way Optus can practice price discrimination. These are product purchases that are only permitted if a consumer buys another good or service from the same firm (Vanhoose 2003, p.108). An example of this is a Nokia E66 advertised for sale on the Optus website. The conditions for the mobile are states that the offer is available to customers who connect to a 24 month Optus Cap (Optus website, 2008). The online communications firm Optus, ties the product with the available plans. As a result, it is more efficient to sell the phone and the plan together than separately.
Bundling is a form of tie-in sales Optus pursues which involves presenting two or more products for sale as a set (Vanhoose 2003, p.109). Currently, Optus offers three bundles - Home phone + Broadband + Mobile Phone under the ‘yes’ Fusion Plus plans, Home phone + Broadband ‘yes’ Fusion plans and the Home phone + Broadband general plans (Optus website, 2008). For example if the customer has a choice from the $99 to $199 ‘yes’ Fusion Plus plans, each with offers for broadband, mobile and home phone. Depending on the plan, the offers vary. In this, Optus is able to maximise its revenues as consumers pay for products together in a package rather than separately.
Internet competition can be defined in terms of “operational effectiveness” such as the speed, flexibility and efficiency in internet exchanges (Porter, 2003). However, strategic positioning becomes increasingly important, as firms can easily duplicate a competitor’s progress in these areas. According to Michael Porter, there are six principles that an internet firm should undertake to establish and maintain a strategic position, to gain a competitive advantage.
Firstly, the firm should have the right goal, which is, the “superior long term return on investment” (Porter 2001, p.12). Sustained profitability will bring economic value, instead of pursuing sheer volume or market share leadership first. This is consistent with economic theory, as firms with the capability to price their products strategically must “balance short term profit gains against longer-term erosions in their ability to engage in price discrimination in the face of entry of new rivals” (Vanhoose 2003, p.116). Optus should invest in long term activities and pursue a strategy that is consistent with its long term objectives.
Secondly, a firm’s strategy must allow it to deliver a value proposition, which is providing benefits that competitors are not offering. Optus should pursue a strategy that enables it to compete in a way that “delivers unique value…for a particular set of customers” (Porter 2001, p.12). For example, Optus could offer a unique way of providing online support to inexperienced mobile users, such as an interactive live video talk, whereby the customer can see the support officer on the computer showing the customer how to fix a problem on the phone.
Thirdly, strategy must be reflected in a distinctive value chain. Optus needs to perform different activities than its rival or perform similar activities differently. If Optus focused on performing the best industry practices, than it will find it difficult to gain any advantage since its business processes are similar to its competitors. Banner ads are common advertising medium used on many online communications firms’ websites, such as Telstra.com.au and virginmobile.com.au. Optus could advertise by way of banner ads, but instead, make them interactive and pertaining to the customer’s preferences.
Fourthly, successful strategies involve trade-offs. Optus must forego various features, services, or activities in order to be unique at others. If there are no trade-offs to be made for an online internet company, than they become the standard and are than imitated by competitors (Porter 2001, p.12). Optus could sacrifice traditional customer sales personnel and concentrate on online customer support and information dissemination.
A shopbot is a software program which searches large amounts of information contained in networks for queries posed by a customer (Vanhoose 2003, p.162). Optus could define its customer’s preferences and market accordingly through the use of a shopbot. In this way, the customer is not hassled by sales staff and is able to make an informed decision based on their queries of a product.
Fifthly, a strategy “defines how all the elements of what a company does fit together” (Porter 2001, p.12). To make a strategy hard to imitate, choices throughout the value chain must be interdependent. Therefore, all of Optus’ activities must be mutually reinforcing. For example, its website design and layout should reinforce the nature of Optus’ business and marketing strategy. For instance, zoo animals are commonly used in many Optus adverts, so this should be consistent on its website.
Finally, strategy entails “continuity of direction” (Porter 2001, p.12). Optus must define a distinctive value proposition that it will stand for and stick to it, even if it means foregoing certain opportunities. If Optus has a continuity of direction, it will be better able to develop unique skills and build sturdy relationships with customers online.
It has been widely assumed that the internet will replace all conventional ways of doing business. Many companies have assumed that we have made this transition into the ‘new internet economy’ and the old economic rules no longer apply. This has led many companies to make bad decisions, resulting in a competitive disadvantage and the demise of many dot com firms. According to Porter, the strategic potential of the internet has been over exaggerated.
It is sufficed to say, that trade-offs in certain traditional value chain activities can be made with the utilisation of internet technology. For example, at Optus, online mobile phone sales can reduce the need for sales staff at Optus stores. However, not all activities can be can be replaced by the Internet. For instance, in the telecommunications industry, maintenance of hardware and infrastructure, advertising in traditional mediums such as newspapers and magazines and other activities will continue to be highly important.
In many ways, the internet complements traditional ways of competing. In 2005 Optus formed a partnership with wireless internet group Personal Broadband Australia to provide mobile broadband services to business customers. It was expected to “complement future 3G mobile offerings” (Optus launches mobile broadband, 2005). Business would than be able to access the internet at a remote location via their mobile phone. Thus the internet complemented traditional ways of competing in mobile phones.
By pursuing Internet strategies such as price discrimination, including bundling and tie-in sales, Optus can improve its profitability and hence gain a competitive advantage in the face of rivalry. 6 principle ways in strategic positioning have been shown that Optus may employ if it wishes to maintain its competitive advantage. However, as Porter suggested, the internet must be seen as a complement to traditional ways of competing, not as a substitute.
Optus [website] 2008, Derived 27 September 2008 from optus.com.au.
Porter, M. 2003, Strategy and the Internet, Harvard Business Review, Harvard Business School.
Staff Writers 2005, Optus Launches Mobile Broadband, PC World. Derived 30 September 2008 from http://www.pcworld.idg.com.au
Vanhoose D, 2003. E-Commerce Economics, 1st edn, Ch. 4. Thompson Learning – South Western.