Profits and the Internet: Seven Misconceptions

The Internet has created new markets, customers, products and modes of conducting business. But it also has given currency to some dangerous half-truths. Admonishing Internet businesses to “stop grabbing the land and start cultivating it,” Subramanian Rangan and Ron Adner, professors of management and strategy at INSEAD in France, explain why seven popular strategies are not the path to profitable growth.

First-mover advantage, for example, gets too much credit for e-business success. Companies believe that they can lock in customers and trigger a winner-take-all dynamic, but there is no guarantee that those benefits will go to first movers.

The allure of reach — increasing the number of customer segments — causes many companies to ignore fit, the coherence with which their activities reinforce one another. Digital Equipment Corp. paid the price when it sacrificed fit to reach, attempting to make PCs, workstations, minicomputers and mainframes under one roof.

Another tempting growth strategy is to provide customer solutions, offering products or services that complement a company’s core offering. But offering solutions can dilute a company’s focus. Targeting the right Internet sector is one way to maintain focus. When companies view the Internet as undifferentiated landscape, they are less able to distinguish the drivers of customer value and performance — or the metrics to measure them.

Some companies see best-of-breed-partner leverage as the secret of profitable growth. But although the Internet makes it easier and cheaper to align activities across company boundaries, it does not do much to align interests — a requirement for the creation of joint value.

Another misconception is the belief that an Internet business will automatically be successful abroad. As MTV, Wal-Mart and Honda discovered, companies first must be successful at home and then move outward in a way that accommodates local differences.

The last, and perhaps most dangerous, misconception is managers’ belief that technology can substitute for strategy. Technology and strategy are strong complements. Companies that understand their technology better than they understand their customers and competition won’t succeed in any economy, old or new. The authors provide thoughtful guidelines for avoiding misconceptions and taking a sensible approach to business on the Internet.