Web 2.0 and the Average Firm

Web 2.0 influences industry structure and profitability for the average firm much more positively than the web of the past. Over a decade ago, before the existence of social media, Michael E. Porter described in his article, “Strategy and the Internet”, a web where companies often only competed through price competition, a method that naturally favors economies of scale. He used as a basis for his argument his 5 Competitive Forces model to prove that businesses that operate on the web have very little chance for achieving a competitive advantage if they didn’t strategically distinguish themselves. Today, Web 2.0 with its basis in social interaction and collaboration, changes the landscape, especially for average firms that focus on value. The trust of advice and recommendations through peer groups on the new web helps create a sense of loyalty in brands and products. Businesses must now focus on brand reputation more than ever. By using the 5 Competitive Forces model, this essay hopes to show that Web 2.0 is a new environment where average businesses that offer value can compete through strong customer relationship management and cheaper ways to advertise.

In analyzing Web 2.0 with the 5 forces, we find that threats of substitute products remain high. Internet approaches to doing things cheaply and easily will always facilitate the creation of substitute products. An average firm can utilize this to compete in an industry that might be hard to enter otherwise.

Bargaining power of suppliers is increased by Web 2.0 technologies. The internet continues to facilitate increased supplier-to-buyer reach and social networking allows suppliers to better compete with firms for brand loyalty. Average firms can benefit by this since the procurement playing field is leveled.

Barriers to entry remain low. Ever cheaper ways for new businesses to enter industries from utilizing web technologies still remain. The average firm obviously benefits from this, largely by the reduced overhead of operating almost entirely on the web. In addition, viral marketing is a cheap and very potent way to advertise a business across the social web.

The brand loyalty that is created from a new focus on reputation and business-to-person interactions, increases buyer switching costs from popular brands, thus buyer bargaining power decreases. Groupthink often dictates which products we use, often due to name recognition. Many web searchers use Google because it’s Google, without considering whether another search engine is better. Average firms that develop strong brand recognition on the web will succeed in achieving brand loyalties and a competitive advantage within their industry.

Finally, rivalry among competitors is diminished. Brand reputation is a differentiating force that average firms can use to stand out from the rest of their industry. Although there will always be a wide geographic market with many competitors on the internet, the new focus from customers on brand instead of solely on price, will assist average firms with the best reputations to attain and sustain a competitive advantage over larger competitors.

By analyzing Porter’s 5 Competitive Forces, it’s clear that Web 2.0 enables average firms to attain and sustain a competitive advantage on the web. Firms that focus on reputation and customer loyalty through customer relationship management as well as through unique ways of advertising, such as viral marketing, have a better chance to succeed than in the past.

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