The Water Cooler: 2000 to 2006… Are Profits a Myth?

Every Monday, Bryan Glanzberg contributes The Water Cooler, a new column that bridges the gap between technology and business.

The internet has certainly shaped the business environment of today, with technology changing daily, markets are forced to pay much closer attention to their environments (external, internal, and operating). This can prove to be advantageous for some firms and a disadvantage for others. Michael Porter made two interesting points about the internet and its affect on industries. The first, which I would disagree with states that “the internet tends to alter industry structures in ways that dampen overall profitability”. The internet has been a spark for competition and increased profitability for the majority of firms over the last 5 years. Beyond the consumer-to-consumer (C2C) bubble bursting in early 2000, the last 5 years have been marked by growth in profits as well as market expansion (as can be seen by advances in the stock market since its collapse in 2000).

Although the consumer is highly educated because of the vast amount of information on the internet, many companies have developed synergistic relationships with outside industries in order to aid in growth and cost reduction. Industries are beginning to converge as business-to-business (B2B) e-commerce is gaining mainstream popularity as internet searches become more advanced. Marketers are “turning to smarter, fully integrated technologies that present buyers with more complete product information and offer sellers new ways to profit from online transactions.” Firms can relay information easier than before which has allowed for the reduction in shipping costs and marketing costs primarily. As a result, companies can afford to reduce selling prices to consumers while at the same time maintaining significant margins.

In addition to industry convergence, brand loyalty is significant to consumers despite how much money they will save by shopping around for goods. Through a concentrated focus on image, customers will continue to follow the trends, despite any cost savings that might arise. Apple Computers Inc. is a good example in the mp3 player market (with the iPod). Although this market is extremely saturated, consumers have flocked to Apple because of their sleek design and ability to continually enhance their products. As competition increases, Apple has continued to develop new and innovative models of the iPod that continue to raise standards for future competitors. The internet has not dampened the overall profitability of industries but instead encouraged competition and enhances innovation.

Another proclamation made by Porter states that “most industries will likely end up with a net increase in the number of competitors and fiercer rivalry than before the advent of the internet.” I agree with this statement (which is evident from my previous remarks) and think that competition has proven to be a catalyst for innovation. As previously mentioned B2B commerce is increasing and helping suppliers communicate with customers much more effectively and efficiently. In the past, relationships had to be developed with suppliers to ensure on time delivery as well as a reliable product. In today’s market, the barriers to entry are beginning to erode in most industries because the ability to produce products has become much cheaper than in the past. If a company desires to sell a particular product for which they know the components, they can very easily place an order with a supplier through an online medium and have the components shipped as needed.

Porter neglects an important point in his statements because although fiercer competition among industries might dampen overall profitability, the internet is aiding in increased innovation and significant cost reduction for most industries. This attributes to greater profit margins. I believe that in the coming years, products costs for manufacturers and sellers will decrease even further as B2B develops further and becomes more customized. Because of the internet, continuous focus on product enhancement will drive profitability for the years to come.

Source: B2B e-Commerce Sites Increase Profitability Through Intelligent Search