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The Applicability of Porters Generic Strategies in the Digital Age:


Assumptions, Conjectures, and Suggestions
Eonsoo Kim, Dae-Il Nam and J. L. Stimpert
Journal of Management 2004; 30; 569
DOI: 10.1016/j.jm.2003.12.001
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Journal of Management 2004 30(5) 569589

The Applicability of Porters Generic Strategies in


the Digital Age: Assumptions, Conjectures,
and Suggestions
Eonsoo Kim
Department of Management, Korea University, 5-1 Anam-dong Sungbuk-ku,
Seoul, 136-701, South Korea

Dae-il Nam
LG Economic Research Institute, LG Twin Towers, East Tower 33rd Floor, 20,
Yoido-dong Youngdungpo-gu, Seoul, 150-721, South Korea

J.L. Stimpert
Department of Economics and Business, Colorado College, 14 East Cache La Poudre Street,
Colorado Springs, CO 80903, USA
Received 16 October 2002; received in revised form 10 July 2003; accepted 16 December 2003
Available online 15 June 2004

Because current management theories evolved in the context of brick-and-mortar firms, this
paper examines three key questions raised by the advent of e-business: (1) Will the strategy
types found among e-business firms resemble Porters (1980) generic strategies? (2) Will we
find performance differences among e-business firms pursuing different types of strategies? (3)
Will we find differences in the strategy-performance relationships of pure online firms (pure
plays) and firms with both online and offline operations (clicks-and-bricks)? We conclude that
integrated strategies that combine elements of cost leadership and differentiation will outperform cost leadership or differentiation strategies. We also argue that, regardless of business
strategy type, clicks-and-bricks firms that closely integrate their on- and offline operations will
enjoy performance advantages over their pure play counterparts.
2004 Elsevier Inc. All rights reserved.

Enthusiasm for e-business has waned since the Internet boom of the late 1990s, but business activity on the Internet continues to grow. A recent Business Week article claimed the
Net is actually delivering on many of its supposedly discredited promises . . . It is helping
Corresponding author. Tel.: +1 719 389 6418; fax: +1 719 389 6927.
E-mail addresses: eskim@korea.ac.kr (E. Kim), dinam@mail.lgeri.co.kr (D.-i. Nam),
LStimpert@ColoradoCollege.edu (J.L. Stimpert).

0149-2063/$ see front matter 2004 Elsevier Inc. All rights reserved.
doi:10.1016/j.jm.2003.12.001
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E. Kim et al. / Journal of Management 2004 30(5) 569589

companies slash costs. It is speeding the pace of innovation and jacking up productivity . . . Of the publicly held Internet companies that survived the shakeout, some 40 percent
were profitable in the fourth quarter of 2002 (Business Week, 2003b:44). Expedia.com is
now the top leisure-travel agency online or off, while 13 percent of all traditional travel
agency locations closed in 2002. Expedia also has higher profit margins than American
Express. Nearly every public Internet-based financial services company is profitable. And,
while less than five percent of all shopping is done online, eBay will become one of the top
15 retailers in the United States during 2003, and Amazon.com will move into the top 40
(Business Week, 2003b). Andy Grove, chairman of Intel, has recently stated, Everything
we ever said about the Internet is happening (Business Week, 2003a:86).
In surveying this new economic landscape, Scott and Walter (2003) concluded that Internet technologies constitute a major business innovation, and suggested that this is reason
enough for research into the challenges, problems, and opportunities facing e-business
firms. And, based on their review of the e-business literature, Ngai and Wat (2002) noted
that e-business research is emerging as a major stream of management scholarship, and that
the pace of e-business research is likely to quicken in the future.
One important question is how this new information age differs from the machine age of
the last 100 years. Managers and scholars alike are struggling to understand how economic
and business rules have changed and should change. Many have claimed that existing business and management concepts will not be applicable in this new environment. Others argue
that the Internet is nothing but a new business tool and that not much has really changed. In
their review of the e-commerce literature, Amit and Zott (2001) concluded that researchers
have not yet articulated the central issues related to the e-business phenomenon, nor have
they developed theories that address the unique features of virtual markets. They suggested
two important questions for future research and scholarship: (1) What are the sources of
competitive advantage in online markets, and how do they differ from the sources of advantage in offline markets? and (2) Are strategy perspectives and tools that were formulated in a
competitive landscape inhabited by offline firms still relevant in the new world of e-business?
This paper addresses these important issues by examining how existing strategy frameworks, models, and tools are, and are not, applicable in this new Internet age. We explore:
(a) when the strategy types found among e-business firms resemble Porters (1980) generic
strategies, (b) when we will find performance difference among e-business firms pursuing
different strategy types, and (c) when we will find differences in the strategy-performance
relationships of pure online firms (pure plays) and firms with both on- and offline operations (clicks-and-bricks). Although current management theories evolved in the context of
brick-and-mortar firms, we propose that Porters generic strategy framework is still applicable, albeit in need of some modification, to competition in the digital age.

Background
Porters Typology
A major stream of strategy research examines the relationship between strategy type and
firm performance (Carter, Stearns, Reynolds, & Miller, 1994; Dess & Davis, 1984; Fahey &

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Christensen, 1986; Kim & Lim, 1988; Miller, 1987; McDougall & Robinson, 1990). These
strategy types, sometimes called generic strategies (Porter, 1980), archetypes, or gestalts
(Robinson & Pearce, 1988), simplify a myriad of possible strategies into a limited set of
strategy types.
Here, we focus on Porters framework of generic strategies for a couple of reasons. First,
Porters framework of generic strategies is inherently tied to firm performance. Second,
Porters framework overlaps with other typologies. For example, Porters strategy of differentiation resembles Miles and Snows (1978) prospector strategy, and Porters strategy of
cost leadership is similar to Miles and Snows defender and Hambricks (1983) and Dess
and Daviss (1984) cost leadership strategies. Porters strategy of focus is very much like
Miller and Friesens (1986) niche innovator strategy.
Porters framework proposes that firms must choose whether to serve broad or narrow
market segments and whether to seek advantage through low costs or perceived uniqueness.
Firms choosing to serve broad markets and to derive advantage through low costs are termed
cost leaders, while those that seek to derive advantage through uniqueness are termed
differentiators. Firms may also pursue focus strategies by targeting narrow market
segments and by emphasizing either low costs or uniqueness.
According to Porter, some firms do not pursue a viable business strategy, and he labels
these firms stuck in the middle. According to Porter, firms become stuck in the middle for
one of two reasons. First, they might fail to pursue successfully any of the generic business
strategies. For example, a firm might fail to differentiate itself from its competitors, but it
may also fail to develop the capabilities or resources needed to be a successful cost leader.
Porter has also suggested that firms can become stuck in the middle by trying to pursue
more than one generic strategy simultaneously.
Characteristics of the E-Business Environment
While Porters typology has received a good deal of empirical support in traditional business contexts (Dess & Davis, 1984; Hambrick, 1983; Miller & Friesen, 1986; Miller, 1988),
we do not know whether Porters generic strategies or any other strategy typology can be
applied to e-business firms (Smith, Bailey, & Brynjolfsson, 1999). An extensive body of literature has already described the essential characteristics of the e-business environment and
how it differs from and is similar to traditional business environments (e.g., Armstrong &
Hagel, 1996; Bakos, 1997; Burke, 1996; Cross & Smith, 1996; Murphy, Hofacker, &
Bennett, 2001; Porter, 2001; Schlauch, & Laposa, 2001). Here, we highlight aspects of
the e-business competitive landscape that are most relevant to the concept of competitive
strategy.
How is e-business different? The Internet allows firms to overcome physical boundaries
and distance and it also allows them to serve larger audiences more efficiently. At the same
time, and perhaps more importantly, Web technologies allow companies to target specific
consumer groups, which may be difficult to do in traditional markets due to the high cost
of obtaining information about a particular customer segment. Furthermore, traditional
marketing methods usually emphasize only one-way communication from marketers to
consumers, while the Internet is an interactive medium (Yelkur & DaCosta, 2001). Since

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information flows both ways between retailers and customers, firms can use the information
gathered through customer interactions to develop more effective marketing methods, to
refine their product mix, and to offer better customer support (Wang, Head, & Archer,
2002). As a result, the Internet allows firms to go beyond market segmentation to market
fragmentation, dividing their markets into ever-smaller groups of customers even tailoring
their offerings to individual consumers (Robert, 1993).
Second, the Internet provides firms with more detailed and higher quality information on
customer transactions. Information technologies making use of point of sale data have been
used to improve inventory management and customer analysis, but this information tends
to be rather crude since it usually includes only merchandise descriptions and quantities
sold. On the other hand, vast amounts of rich data can be collected, analyzed, and accessed
through the Web by marketers and consumers. This gives e-business firms potentially very
important advantages in being able to target their product or service offerings to specific
customers. For example, Amazon.com uses collaborative filtering software to offer its users
customized page views based on past searching habits. The software also permits Amazon
to engage in anticipatory marketing by suggesting titles that may appeal to customers. And,
consumers gain by readily obtaining more market knowledge for criteria comparison (Head,
Archer & Yuan, 2000).
The Internet also offers significant opportunities for reducing operating costs, particularly
for service firms. A study by Andersen Consulting (as cited in Yelkur & DaCosta, 2001)
provides examples of improved transaction efficiency for service industries such as travel
and financial services. For example, the average cost of a banking transaction at a local
branch is $1.07. Use of an ATM machine reduces this cost to $.27, but performing this same
transaction over the Internet costs a mere $.01. A typical reservation made through a travel
agent costs $10.00, but this same transaction made over the Internet costs only $2.00.
What has not changed? On the other hand, we believe many firms have been trapped
by what we would characterize as the myth of lower cost and price that there are no
limitations to how much costs and prices can be reduced. If the dot.com bust proved anything,
its that e-businesses must have viable business models. In fact, many e-businesses have
found that they must incur considerable costs and make sizeable investments to provide value
to their customers (Porter, 2001). Amazon.com has, for example, made large investments in
its distribution facilities. Other companies have found that virtual activities do not eliminate
the need for physical activities, but often amplify their importance. The introduction of
Internet applications in one activity often places greater demands on physical activities
elsewhere in the value chain. For example, direct ordering makes warehousing and shipping
more important. Similarly, while Internet job-posting services have greatly reduced the
cost of reaching potential job applicants, they have also flooded employers with electronic
resumes. By making it easier for job seekers to distribute resumes, the Internet forces
employers to sort through many more unsuitable candidates. The added back-end costs,
often for physical activities, can end-up outweighing up-front savings (Porter, 2001).
Interestingly, Internet firms do not necessarily offer lower prices than traditional firms.
Clay, Krishnan, Wolff, and Fernandes (2002) found that, on average, total prices were lower
in physical bookstores than at online bookstores because sales taxes tend to be less expensive
than shipping costs. Lee and Gosain (2002) reported a similar conclusion in the pricing of

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CDs. The Internet marketplace continues to show price dispersion despite the apparently
near-zero search costs for consumers.
Many products and services sold by online retailers are the same as those offered by offline
retailers. The primary attraction of online shopping is that customers enjoy rich information and convenience. At the same time, consumers can be overwhelmed by information
overload, and they may actually perceive an increase in their search costs. Furthermore,
consumers often view online shopping as being riskier than traditional shopping channels.
Orders are contracted before consumers receive or physically evaluate merchandise, and
the delivery process may also generate risks if consumers do not receive their orders in the
time frame and condition expected. Consumers also risk privacy loss (Head et al., 2000).
The Internet provides an efficient means to purchase products and services, but catalog retailers with toll-free numbers and automated fulfillment centers have been around
for decades offering a convenient, consumer-friendly interface and speedy delivery. The
Internet only changes the customer interface (Porter, 2001). In the context of electronic
commerce, the functions provided by Web sites can be classified into three phases promotion, online transaction, and after-sales phases and the activities associated with each
of these phases are not all that different from the activities that are associated with offline
transactions. The promotion phase includes a companys efforts to attract customers by
advertising, public relations, new product or service announcements, and related activities. Customers electronic purchasing activities occur during the online transaction phase,
where orders and charges are placed electronically through a Web-based interface. As in
any type of transaction environment, trustworthiness, dependability, and reliability are important catalysts in triggering sales. The after-sales phase includes customer service and
problem resolution. This phase should generate customer satisfaction by meeting demand,
addressing any concerns, and pleasing customers (Liu & Arnett, 2000).

Generic E-Business Strategies


Assumptions and Necessary Conditions for E-Business Competitive Strategy
We cannot say with certainty whether the new e-business environment represents a totally
different, discontinuous change from the old business environment or whether the old and
new environments will share many features and competitive challenges. We therefore make
several assumptions about the application of conventional generic strategies in e-commerce
settings.
One critical assumption underlying this paper is that electronic technologies create a
platform to support existing business practices and that we have not advanced to the point
of precipitating a paradigm shift (Porter, 2001). As a result, we assume that firms still view
customers in terms of shared characteristics (i.e., market segmentation is possible), that
different sets of customers have different needs and desires (i.e., opportunities for product
differentiation exist), and that products and services exhibit different demand elasticities
(i.e., firms may compete on price).
In addition to this assumption, at least two other conditions seem necessary for e-business
success. First, online businesses must offer some minimally acceptable level of service, con-

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venience, and quality. Companies offering products or services online must demonstrate
that they provide real benefits (Porter, 2001). The demise of Priceline.coms reverse auction business demonstrates that the benefits offered by any e-business must significantly
outweigh any inconveniences suffered by customers.
Second, a broad range of factors can serve as sources of differentiation, and many factors,
including reliability and convenience, can help online firms differentiate themselves from
other firms. At the same time, we believe that some factors, such as security, are simply
necessary conditions for the success of any online business. Customers will not pay for
products or services over the Web if they do not believe their credit card information will
be transmitted securely (Liu & Arnett, 2000). Yang and Jun (2002) found that reliability
was the most important consideration for regular Internet customers, while those who do
not shop on the Internet identified security as their most critical concern.
Our brief overview of the e-business landscape and these assumptions and necessary
conditions suggest two plausible scenarios of competitive strategy: First, due to the power
of search engines and the ease of making price comparisons, Internet retailers will be
forced to charge essentially the same price, giving an advantage to successful cost leaders.
Alternatively, firms will strive to compete on factors other than price, giving an advantage
to firms that employ successful differentiation strategies (Clay et al., 2002). In the following
sections, we explore these strategic options and consider possible variations.
Cost Leadership Strategy
Cost leadership can be an obvious strategic choice for many e-business firms. Although
lower costs do not necessarily mean lower prices, lower prices have been a key selling point
for e-business firms like Expedia.com, CDnow, and many others, at least in the early stages
of their development. The cost leadership strategy may be particularly appealing to online
buyers who are price sensitive. In one study conducted in Korea, 71 percent of 500 first-time
online shoppers indicated that price was their most important consideration (Kim & Kim,
2000). The Internet also allows firms to adjust their prices quickly so they can enjoy greater
pricing flexibility and more efficient price competition (Bakos, 1998; Lee & Gosain, 2002).
The Internet also helps consumers overcome bounded rationality in terms of price scanning. The longstanding satisfying argument (Cyert & March, 1963) may be less applicable
in the Internet environment since the speed and expansiveness of information search on the
Web enable consumers to quickly gather a wealth of data for price comparisons. Price comparison sites can further reduce search costs, so sophisticated Internet users can benefit from
nearly perfect information acquired at little or no cost (Bakos, 1997). Internet technologies
also provide buyers with easier access to information about products and suppliers, thus
bolstering buyer bargaining power (Porter, 2001).
Another characteristic of e-businesses is the law of increasing returns (Arthur, 1996). For
a firm to enjoy increasing returns, it must secure a critical mass of consumers as soon as
possible. Competitive pricing is often the quickest and easiest way for a firm to secure the
largest number of consumers.
If the Web brings considerable pressure to bear on prices, firms may conclude that they
have no choice but to pursue a strategy of cost leadership. Porter (2001) argues that it is
difficult for online firms to differentiate themselves, since they lack many potential points of

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distinction such as showrooms, sales personnel, and service departments. Moreover, Internet
brands have proven difficult to build, perhaps because the lack of a physical store location or
direct human contact makes virtual businesses seem less tangible to customers. Despite huge
outlays on advertising, product discounts, and purchase incentives, most dot.com brands
have not approached the power of previously established brands, achieving only modest
levels of customer loyalty and creating few barriers to entry (Phau & Poon, 2000).
Differentiation Strategy
As noted above, differentiation can be based on many elements or factors, including
design, brand image, reputation, technology, product features, networks, and customer service. Any successful differentiation strategy must be based on elements that are difficult for
competitors to imitate. In spite of conditions that encourage e-business firms to compete on
price, we believe that many if not all of these differentiating elements can also be used by
e-businesses to distinguish themselves from competitors.
The Internets lower switching costs should also encourage e-businesses to pursue a
strategy of differentiation. In traditional businesses, consumers often tolerate mediocre
products and services due to high switching costs. In the e-business environment, however,
consumers can get access to information that was previously impossible to obtain or to
compare, and can, with just a few mouse clicks, easily switch to firms that offer additional
value through differentiated features (Kim, 2000; Porter, 2001).
As a result, e-business retailers will gain advantage if they can offer differentiated products
and services, and they must also seek additional ways to distinguish themselves (Kim &
Lim, 1988; Miller, 1991). In addition to traditional differentiating factors such as brand
image, product features, and customer service, many e-businesses are also differentiating
their distribution channels by emphasizing speed of delivery, convenience, and the security
of transactions. Amit and Zott (2001) concluded that trust and security can be keys to
locking-in customer purchases and loyalty.
Liu and Arnett (2000) identified characteristics of Web sites that help online retailers
differentiate their offerings, including the quality of information and the level of service provided by the site, perceived quality of products and services, interactive feedback between
the retailer and customers and the level of customization offered to individual customers,
Web site playfulness that promotes customer concentration and excitement, system design features that offer well organized hyperlinks, customized search functions, high-speed
access, ease in correcting server errors, and follow-up services to customers.
The few empirical studies that have examined the efforts of e-business firms to differentiate themselves have confirmed the importance of branding and other non-price factors. For
example, a study of 13 online bookstores and two nationwide chains with physical stores
found that prices were essentially the same at all of the retailers and that online prices had not
converged to the lowest prices (Clay et al., 2002). In spite of its low-price claims, the study
found that Amazon.coms unit prices were five percent higher than Barnesandnoble.coms
prices and 11 percent higher than Borders.coms prices, providing some indirect evidence
of product differentiation. The two leading online retailers of CDs in the US that together
account for more than 80 percent of the total market share are not the dominant price leaders
(Lee & Gosain, 2002). These findings suggest that customers may be price rational but not

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necessarily price obsessive, and that they have a strong inclination to be loyal to a retailer
that offers a satisfying shopping experience (though not necessarily the lowest prices).
Although popular sites like Amazon.com frequently advertise their low prices, many
people are also attracted to these sites because of their brand reputation and credibility (Smith
et al., 1999). Chang (1997) found that customers of Internet bookstores in Korea saw brand
(of a company) as more important than the prices charged for books. He also reported that
more people used these Web sites to search for information and to find certain books than to
compare prices. Lynch and Ariely (2000) found that, even in highly competitive e-business
environments, buyers are less sensitive to price when they were given more information
about how a particular product or service might meet their wants or needs. Other studies
emphasize the importance of service and convenience as differentiating elements. Yang and
Jun (2002) found that customer loyalty comes from an Internet company offering better
service than other firms. Reichheld and Schefter (2000) also found that convenience was
the top priority for the largest single segment of online customers, and that these customers
were willing to pay more for greater convenience.
Focus Strategy
Firms pursuing a focus strategy target specific groups of buyers, product lines, or geographic areas. Within their more limited market scope, they emphasize either low costs or
differentiated products and services. Many Internet companies are new entrants, and they
will logically choose to compete against large, established firms by focusing on a particular
market niche. In addition, the lower levels of investment required by many online businesses
means that they enjoy lower break-even points than competitors with higher levels of fixed
costs. Thus, targeting even small market segments might be viable, and consumers may be
easily connected with companies that focus on niche markets due to the Internets search
advantages.
Furthermore, the Internet allows firms to customize their offerings to meet the specific
wants and needs of their customers (Bakos, 1998). Customers are identified every time they
visit a Web site, and a great deal of information about each customer can be accumulated
over time. Based on this information, firms can customize products or services for particular
customers. In fact, the Internet is the ideal medium for serving the fragmented nature of
todays consumer markets, and it is becoming increasingly viable for a firm to communicate and deliver content over the Internet to small niche markets (Yelkur & DaCosta,
2001).
As already noted, Internet businesses can face extreme price competition when products
and services are similar because other factors that moderate competition (e.g., store location) are not present. When products and services are capable of significant differentiation,
however, the Internet can help segment consumers and direct them toward the appropriate product or service, as is the case in the hotel industry. The more specific the segment,
the easier it is to estimate demand, and the Internet facilitates this micro-segmentation or
fragmentation. As a result, e-businesses pursuing a focus strategy may have the ability to
charge higher prices by matching buyers needs with specific product or service offerings.
In traditional business settings, this same degree of personalization would be relatively more
expensive to offer (Yelkur & DaCosta, 2001).

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Focused customer recruitment and retention are foundations of customer loyalty in any
business setting, but they are musts for any e-businesses. In fact, we believe that focus is
a necessary condition for a successful e-business competitive strategy. E-businesses that
do not take advantage of the focusing or fragmenting capabilities of the Internet will
be unlikely to establish a competitive advantage. Successful e-businesses should find that
Internet technologies make Porters (1980) competitive scope dimension infinitely scalable.
As noted earlier, scalability and market scope flexibility the ability to serve simultaneously
(or in quick succession) broad markets and very small market niches are hallmarks of
Internet technologies. As a result, we believe that the traditional focus strategy is not as
relevant or viable in the e-business business-to-consumer context. In short, the strategy of
focus is more of a competitive imperative than a competitive option for e-business firms.

Generic Strategies and E-Business Performance


Cost leadership is widely practiced today among e-business firms that sell standardized products and services such as books (Barnesandnoble.com) and travel (Expedia.com).
Indeed, among first-time online shoppers, price may well be the most important factor influencing their buying decisions (Kim & Kim, 2000). This may be partially attributable to the
ease of scanning and comparing prices on the Internet (Bakos, 1998). However, easy price
comparisons and very low customer switching costs suggest that firms pursuing a strategy
of cost leadership could easily become locked in a vicious cycle of price-cutting.
Because the Internet is an open system, companies have more difficulty maintaining proprietary offerings, thus intensifying the rivalry among competitors. Internet technologies
tend to reduce variable costs, tilting cost structures toward fixed cost and creating significantly greater pressure for companies to engage in destructive price competition (Porter,
2001). In addition, firms pursuing cost leadership will turn to outside vendors that offer the
same products and services to other firms, so that purchased inputs become more homogeneous, further eroding company distinctiveness and increasing price competition (Porter,
2001). Since the Internet also mitigates the need for an established sales force or access to
existing marketing and distribution channels, barriers to entry are further reduced. Given
all of these drawbacks, Merrilees (2001) concludes that, while low prices are important to
customers, a generic strategy of cost leadership has many drawbacks for e-business firms.
Magretta also reaches a similar conclusion in a recent Harvard Business Review article:
It was precisely this kind of competition destructive competition, to use Michael Porters
term that did in many Internet retailers, whether they were selling pet supplies, drugs,
or toys. Too many fledgling companies rushed to market with identical business models
and no strategies to differentiate themselves in terms of which customers and markets to
serve, what products and services to offer, and what kinds of value to create. (2002: 91)
Therefore, differentiation, based either on customizable products and services, on a customized online experience, convenience, or some combination of all of these factors, is likely
to be a more viable strategy. Firms like Amazon.com that reduce customer search costs,
engender trust, and offer products, services, and online experiences tailored to end-users
needs are likely to elicit initial and repeat purchases.

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Traditionally, cost leadership and differentiation or their equivalents were regarded as


equally effective strategies (Porter, 1980). We suggest otherwise. For obvious reasons, price
competition will almost certainly intensify in the Internet business environment, and firms
with commodity-like products and services will face great pressure to keep their prices as
low as possible. Therefore, the preferred strategy choice for firms wanting to survive on the
Internet would be differentiation. Hence, we offer the following proposition:
Proposition 1: In e-business, the generic strategy of differentiation will be associated
with higher performance than the generic strategy of cost leadership.
As discussed earlier, Internet technologies potentially give all online retailers the ability
to target both broad and narrow customer segments. Firms that pursue narrowly focused
strategies are unlikely to be as successful as firms pursuing either cost leadership or differentiation strategies because those firms can take advantage of the infinite scalability of Internet
technologies to reach simultaneously both broad and narrow customer segments. So, unlike
Porter (1980), who argued that firms could viably serve very narrow market segments, we
propose that firms pursuing strategies of focus cost leadership or focus differentiation will
be less viable than firms that take advantage of the scalability of Internet technologies:
Proposition 2: In e-business, the generic strategy of focus will be less viable than the
generic strategies of cost leadership or differentiation.

Stuck in the Middle Versus Integrated Strategies and E-Business Performance


Porter (1980) argued that cost leadership and differentiation are such fundamentally contradictory strategies, requiring such different sets of resources, that any firm attempting
to combine them would wind up stuck in the middle and fail to enjoy superior performance. From a traditional business perspective, cost leadership and differentiation do seem
incompatible. Cost leadership requires standardized products with few unique or distinctive
features or services so that costs are kept to a minimum. On the other hand, differentiation
usually depends on offering customers unique benefits and features, which almost always
increase production and marketing costs (Hitt, Ireland, & Hoskisson, 2001).
Subsequent studies have both supported and called into question Porters claims. Studies by Dess and Davis (1984) and Kim and Lim (1988) found that firms employing only
one of Porters generic strategies outperformed firms pursuing elements of more than one
strategy. Robinson and Pearce (1988), in their study of 97 manufacturing firms, found that
stuck in the middle firms showed lower levels of performance. Several other studies have,
however, challenged Porters typology and questioned his claims about the exclusivity of
the generic strategies (Booth & Philip, 1998; Glazer, 1991; Karnani, 1984; Wright, Knoll,
Caddie, & Pringle, 1990). For example, Hill (1988) argued that sustainable competitive
advantage rests on the successful combination of these two strategies. Murray (1988) criticized Porters typology, and noted that the development of any successful business strategy
must reflect the larger competitive environment. He argues that since industry environments
do not specifically prescribe the need for cost leadership or differentiation, there is little

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reason to conclude that only one strategy should be employed in response to any particular
environment.
Furthermore, turbulent global environments require firms to adopt flexible combinations
of strategies (Chan & Wong, 1999; Kim & McIntosh, 1999). Any incompatibility between
cost leadership and differentiation may hold true in more stable environments, but rapidly
changing competitive environments call for more flexibility and the ability to combine
elements of more than one generic strategy. Mass customization and the development of
network organizations both demand and make possible the flexible combination of multiple
strategies (Anderson, 1997; Pine, 1993; Preiss, Goldman, & Nagel, 1996).
Evans and Wurster (1999) concluded that the Internet disassembles traditional value
chains, introducing new competitive imperatives and requiring new strategies. One doesnt
have to agree completely with these sweeping observations to accept that the Internet has
reduced trade-offs between information richness and information reach, or that the Internets
universality and its ability to reduce information asymmetries and transactions costs have
created opportunities to rewrite the rules of business strategy (Afuha & Tucci, 2001).
Merrilees (2001) observed that several online companies have successfully employed a
combination of cost leadership and differentiation, and Amazon.com is offered as a case in
point. Amazon.coms skills at branding, innovation, and channel management have successfully differentiated it from its competitors, but the company routinely offers low list prices
on much of its merchandise. As a result, it is difficult to classify Amazon.com into either
strategy type. Amazon.com does emphasize low prices and offers many discounts, but it has
also been very innovative. Amazon.coms Web site was designed around a straightforward
five-step process that makes the consumer shopping experience convenient and helpful.
Prompt delivery is also a hallmark of the Amazon.com shopping experience.
While we do not want to minimize the very real challenges of pursuing a successful combination of generic strategies (Hitt et al., 2001; Porter, 1980), we believe that an integrated
strategy combining elements of cost leadership and differentiation is not only possible but
is the most successful strategy for e-business firms to pursue. As discussed in the previous
section, the strategy of cost leadership suffers from many inherent disadvantages. It is thus
likely to offer lower performance than an integrated strategy that combines the best features
of cost leadership and differentiation. We also expect that an integrated strategy will have
higher performance than a pure differentiation strategy, since a strategy of pure differentiation does not take advantage of the Internets potential for lowering costs. Thus, we offer
the following proposition:
Proposition 3: Integrated strategies combining elements of cost leadership and differentiation will result in higher performance than cost leadership or differentiation do individually.

Pure Plays, Clicks-and-Bricks, and Firm Performance


Two broad types of Internet businesses exist: pure online firm (pure plays) and firms
with both online and offline businesses (clicks-and-bricks). During the earlier stages of
e-business, many observers believed pure plays would be in a stronger competitive position.

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It was thought that pure plays would be more flexible and better able to leverage their first
mover advantages, and that they would not be hindered by conflicts between online and
traditional marketing channels. They would also enjoy greater flexibility in pricing. Netscape
provides a good example of a pure online firm that was able to seize a dominant share of
the browser market by ignoring conventional rules (Yoffie & Cusumano, 1999). Dell is
another company that gained significant advantages by pursuing an online strategy. In fact,
traditional offline firms, which joined the Internet as second movers, did struggle at first.
By the end of 1998, however, many of these firms were becoming market leaders. A recent
market survey found that clicks-and-bricks firms such as Barnes & Noble, Toys R Us, and
KBKids are among the largest Internet shopping sites (Bulik, 2000).
Advantages of Clicks-and-Bricks Firms
Since clicks-and-bricks firms are already familiar to customers and have credible brands,
other things being equal, customers should prefer clicks-and-bricks Internet sites.
Brynjolfsson and Smith (2000) concluded that the brand recognition, reputation, and credibility of clicks-and-bricks firms are important advantages that pure plays often lack. Furthermore, clicks-and-bricks firms can offer product returns and other customer services through
their physical storefronts (Griffith, 1999). Zettlemeyer (1996) showed that clicks-and-bricks
firms could enjoy higher performance by properly combining their online and offline businesses, whereas the ability of pure plays to provide information would be limited to their
online channel. In fact, recently many pure plays are realizing the advantages of adding
offline elements such as warehousing (Glover, Liddle, & Prawitt, 2001).
Modahl (2000) concluded that e-business would be dominated by clicks-and-bricks,
particularly by established firms that expand online by leveraging their offline assets such
as distribution channels, brand reputation, and credibility. Support for this perspective comes
from an empirical study by Uhlenbruck, Hitt, and Semadeni (2001), which found that old
economy firms could achieve positive market returns by acquiring Internet firms.
Office Depot has employed the Web to improve its catalog services. Without printing more
catalogs, the companys customers can access updated and accurate information through
the Web and complete transactions online. Walgreens, which has established an online site
for ordering prescriptions, has found that its extensive network of stores remains a potent
advantage, even as much prescription ordering shifts to the Internet. Fully 90 percent of the
companys customers who place orders over the Web prefer to pick up their prescriptions
at a nearby Walgreens store rather than have them shipped to their homes, most likely to
save shipping costs. The Gaps online customers will find an almost seamless integration
between the companys Web site and the product offerings at its physical stores (Head et al.,
2000).
Tight integration between a companys Web site and its physical store locations not
only increases customer value, but it can also reduce costs. It is more efficient to take and
process orders via the Web, but it is also more efficient to make bulk deliveries to a local
stocking location than to ship individual customer orders from a central warehouse (Porter,
2001). A recent article in The Wall Street Journal noted that many clicks-and-bricks firms
are encouraging customers to pick up merchandise ordered online at their physical store
locations. Not only does customer pick up save what are often substantial shipping charges

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(especially on large or heavy items), but companies also find that customer pick up leads to
more impulse purchases. The article cited an executive at REI who estimated that online
shoppers who pick up their items in stores spend an additional $90 before they walk out the
door (Xiong, 2003, D4).
It would seem that an obvious advantage for pure plays is the potential for lower costs
due to the absence of physical store locations or warehousing facilities, but Schlauch and
Laposa (2001) found that pure play firms were not realizing significant real estate-related
cost savings over their clicks-and-bricks competitors, perhaps because they must frequently
incur substantial costs to develop elaborate supply chain networks. Furthermore, many
customers have used the Internet as a source of product and service information, but still
prefer to make their purchases through traditional channels (Yang & Jun, 2002). If this
customer segment remains large, then clicks-and-bricks firms will enjoy further advantages
over pure plays.
Pure plays face a number of other drawbacks. First, their customers cannot physically
examine, touch, and test products, and they often get little or no help in using or repairing
them. In addition, knowledge transfer is restricted to codified knowledge, sacrificing the
spontaneity and judgment that can result from interactions with skilled sales personnel. Its
always possible that advances in Internet technology will allow pure plays to offer highly
personalized customer service Amazon.com with its personalized customer recommendations offers an example of what is currently possible but the lack of human contact
with customers eliminates a powerful tool for responding to questions, providing advice,
and motivating purchases. Finally, the lack of a physical storefront, fixtures, and amenities
limits the ability of pure play firms to reinforce a brand image (Porter, 2001).
Potential Problems Faced by Clicks-and-Bricks
Clicks-and-bricks firms also face a number of drawbacks. First, unless on- and offline
operations are tightly integrated, a firm will see few synergies from having both an online
and a physical presence. For example, Barnes & Nobles decision to spin-off Barnesandnoble.com as a separate organization is now viewed as a mistake. It prevented the online
store from capitalizing on the many advantages provided by Barnes & Nobles network of
physical stores (Porter, 2001). Similarly, visitors to the Web site of Angus and Robertson, an
upscale Australian book retailer, are likely to be confused by the low prices emphasized by
the companys online store, since this theme is inconsistent with the upmarket positioning
of the companys physical stores (Merrilees, 2001).
Old economy companies those that were not created to employ an Internet business
model but instead have added Web activities to their traditional operations face considerable hurdles in establishing online operations. Not surprisingly, Scott and Walter (2003)
found that the most serious problem facing these old economy companies is strategy related,
specifically, the need to effectively align their e-business and traditional strategies.
All in all, at this stage of evolution, it appears that clicks-and-bricks firms can enjoy a
number of advantages over pure plays, but to realize these advantages, they must effectively integrate their online and physical operations. Pure plays face all of the difficulties of
establishing online operations (e.g., intense rivalry, pressure to lower prices, and the difficulty of establishing brand name recognition), without any of the opportunities to leverage

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their online operations with offline assets that clicks-and-bricks firms enjoy. Based on these
arguments, we offer a final proposition:
Proposition 4: In e-business, the relationship between strategy and performance will be
mediated by type of firm, with clicks-and-bricks firms that tightly integrate their on- and
offline operations enjoying performance advantages over pure play firms.

Conclusion
We raised three research questions at the outset of this paper: (1) Will the strategy types
found among e-business firms resemble Porters (1980) generic strategies? (2) Will we
find performance differences among e-business firms pursing different types of strategies?
(3) Will we find differences in the strategy-performance relationships of pure plays and
clicks-and-bricks firms?
Addressing the first question, we argued that Porters generic strategies of differentiation
and cost leadership will still be applicable to e-business firms in a broad sense. We also
argued that, although cost leadership and differentiation strategies will be employed and
observed among e-business firms, a strategy of focus will not be as viable as it has been
in traditional business contexts. Regarding the second question, we propose that differentiation will show superior performance to cost leadership in e-business contexts. We also
proposed that a third type of strategy will be observed and that it will outperform both
cost leadership and differentiation. We used the term integrated strategy to indicate that
this strategy successfully combines cost leadership and differentiation (Hitt et al., 2001).
It is distinguished from Porters stuck in the middle conundrum in that (1) while stuck in
the middle suggests no clear strategic focus, an integrated strategy is a desirable strategic
position in the e-business environment, and therefore, (2) it should be treated as one of the
three prototypes of strategy along with cost leadership and differentiation.
As a result, we suggest that the concept of generic strategy be modified as shown in
Figure 1. Figure 1 is the traditional two-by-two Porter (1980) classification. Figure 1a
shows the same classification, without the competitive scope dimension. We argued that,
given the scalability of Internet technologies, e-business firms should necessarily be pursuing simultaneously broad and narrow customer segments, thus rendering a strategy of
focus less viable as a distinct strategic option. Furthermore, due to the characteristics of
the Internet, we argued that the integrated strategy is not only a feasible but also a desirable strategic option. Therefore, as presented in Figure 1b, we argue that the previously
dichotomous view of cost leadership and differentiation as incompatible strategies should
be modified into two extreme cases on a continuum with the integrated strategy bridging the
two.
Regarding the third and last question, we proposed that clicks-and-bricks firms will outperform pure plays with a condition: Recognizing the characteristics of clicks-and-bricks
firms and assessing both their advantages as well as their disadvantages, we suggest that
clicks-and-bricks firms will enjoy superior performance relative to their pure play counterparts only when their online and offline operations are aligned and tightly integrated.

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583

Competitive Advantage

Narrow
Broad

Competitive Scope

Low Cost

Cost
Leadership

Uniqueness

Cost
Leadership

Differentiation

Focus

Stuck in the middle

Differentiation

(a)

Competitive Advantage
Low Cost

Combination of Both

Cost
Leadership

Integrated Strategy

Uniqueness

Differentiation

(b)
Figure 1. Traditional classification of competitive strategies. (a) E-business classification of competitive strategies
with focus embedded. (b) E-business competitive strategy as a continuum.

Managerial Implications
When e-business was in its infancy, many firms were obsessed with the need to develop an
Internet presence. Without a well thought-out strategy for pursuing e-business opportunities,
many firms failed to develop distinctive strategies and failed to differentiate their online
operations (Merrilees, 2001). All too often, firms have pursued destructive, cost-based
competition rather than differentiation (Magretta, 2002). In short, many firms were attracted

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to what we earlier described as the myth of lower cost and price, even though the Internet
makes a strategy of cost leadership especially difficult to sustain. We believe that many
firms have pursued cost leadership not because it is more rational or advantageous, but as a
default for insightful strategic thinking. Porter (2001) reminds us that pursuing a distinctive
strategic position i.e., differentiation has been always more difficult and requires a good
deal more creativity than pursuing operational efficiency or a strategy of cost leadership.
Merrilees (2001) emphasized that the strategy of cost leadership requires a fairly straightforward set of integrating tasks vividly displaying low prices and running all company
operations on a no-frills basis. The openness of the Internet, combined with advances in
software architecture, Web development tools, and modularity, makes it much easier for
companies to design and implement new applications. It is therefore more difficult to sustain
purely operational advantages in the Internet environment (Porter, 2001). By contrast, differentiation requires a complex integration of strategy, tactics, and capabilities. The reward
in the latter case, however, is that a unique set of competencies is created to help sustain
a competitive advantage over a longer period of time. Differentiation is harder to achieve
but, once achieved, it offers greater likelihood of sustained high performance.
This paper also proposes that a cost leadership strategy will not produce superior performance for e-business firms. Since the Internet can help all players drive down costs (and
prices), a differentiated strategic position will prove to be a more viable way to develop and
maintain distinctiveness, offer superior customer value, and charge higher prices. Instead
of emphasizing price competition, firms should take advantage of the Internets ability to
support convenience, speed, interactive service, and customization. Trust, credibility, and
brand name recognition which are at the heart of differentiation become even more
important in the e-business world where there is often little or no physical contact between
customers and company personnel. Firms have many ways to differentiate themselves:
through marketing and advertising, Web site design, customer reviews, newsletters, gift
services, loyalty programs, convenience, and customized recommendations, to name just
a few (Clay et al., 2002). Differentiation is possible even for seemingly undifferentiated
products and services. Amazon.com has demonstrated that, although books are homogeneous goods, the book buying experience doesnt have to be. At the same time, it would, of
course, be foolish not to employ the Internets cost-cutting features. Thus, we suggest that
e-business firms should move away from a pure cost leadership strategy toward differentiation or toward integrated strategies that combine the best features of cost leadership and
differentiation.
We also propose that clicks-and-bricks firms that achieve a tight integration between their
on- and offline operations should enjoy performance advantages over their pure play counterparts. This conclusion also offers some implications for practice. First, for clicks-and-bricks
firms, it emphasizes the importance of coordinating on- and offline activities. For pure plays,
it suggests that performance might be enhanced by partnering or joining with vendors and
other firms to develop products, services, or retail interfaces that improve the overall customer shopping experience. As we have noted throughout the paper (and address specifically
in the next section), many pure play firms have already moved in this direction and begun
to function much more like traditional, offline retailers. Further, there are almost certainly
opportunities for pure plays to realize value by merging with, acquiring, or being acquired
by brick-and-mortar firms (Uhlenbruck et al., 2001).

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Directions for Future Research


As researchers begin to empirically test this papers propositions, they will need to resolve
several theoretical and methodological issues. The first issue is the classification of pure
play and clicks-and-bricks firms. We believe that simply classifying e-business firms into
pure play and clicks-and-bricks categories could be misleading. Many pure play retailers
have relied on alliances with other firms to provide warehousing and distribution services,
while other pure play firms have begun to function more like traditional retailers, purchasing
goods from manufacturers and distributors and warehousing these products before they are
shipped to customers. Amazon.com with its growing network of warehouses and distribution
centers is an example (Schlauch & Laposa, 2001). In many ways, this issue is a question of
vertical integration or how much of the value chain an e-business chooses to own. Some pure
plays have chosen to own more of the value chain and have, for example, in-house physical
distribution and order-fulfillment capabilities. These firms may be able to offer faster or
higher quality service to their customers, and they may also be able to blunt some of the
advantages clicks-and-bricks firms enjoy by having both online and offline operations.
We suggest, therefore, that pure play firms should be further divided into pure plays
and vertically integrated online firms. Possible synergies and potential conflicts between
online and offline operations should be important considerations as incumbent firms develop
their Internet strategies. We also believe that potential performance differences across pure
play firms, vertically integrated online firms, and clicks-and-bricks firms should be significant enough to warrant research attention.
The second issue is the choice of performance measures. One obstacle to empirical
study of e-business firms is the lack of widely accepted performance measures. Many
e-business-specific measures such as traffic and number of hits have been dismissed as
unreliable indicators of long-term success. Porter (2001) has argued that dot.com success should be evaluated using traditional performance indicators such as profitability.
Garbi (2002) countered, however, that if profitability is the sole criterion for firm performance, then many existing, but unprofitable, Internet companies should have died away by
now.
Garbi (2002) compared surviving and failing dot.coms along various performance measures, including asset productivity, shareholder value, growth and survival, and an ecommerce-specific performance indicator (the number of unique visitors). Dot.com survivors had significantly higher levels of asset productivity and unique visitors. Garbi also
found that the e-business-specific performance measure number of unique visitors
is significantly correlated with measures of market value and growth. This implies that
cyberspace-specific performance indicators, such as page views, stickiness, click-through
rate, and conversion rate, may be reliable performance measures in studies of e-business
firms. We recommend that researchers adopt an eclectic, multidimensional approach to
assessing the performance of e-business firms, relying on a combination of traditional performance yardsticks, measures that are routinely used to gauge the success of other types
of start-up businesses, and a variety of e-business-specific measures.
Regardless of how these methodological issues are resolved, we believe the implications
of the new business landscape are profound enough to warrant considerable scholarly interest, theory development, and empirical research. We hope that this paper helps to lay

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a theoretical foundation for studying firms in the information age and that it serves as a
catalyst to stimulate future investigation as well.

Acknowledgments
Research support was provided by the Institute for Business Research and Education at
Korea University and by the Department of Economics and Business at Colorado College.
The authors appreciate the many helpful comments and suggestions provided by the reviewers and the editor. We also acknowledge the assistance provided by Robin Satterwhite
and Marla Gerein.

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Eonsoo Kim is Professor of Management at Korea University. Professor Kim received his
Ph.D. from the University of Illinois, and his research interests include strategic change,
process, and implementation. He has written on corporate and business strategy issues, including strategic responses to environmental change, downsizing and turnaround, network
and project-based organizations, and the application of the military art of war to strategic
management.
Dae-il Nam is Senior Consultant at the LG Economic Research Institute. Mr. Nam received
his Masters degree from Korea University. His research and consulting focus on strategy
formulation and implementation, including industry consolidation, convergence marketing,

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global market strategy, corporate venture incubation, corporate governance, leadership appraisal, and vision.
Larry Stimpert is Professor of Economics and Business at Colorado College. Professor
Stimpert received his Ph.D. from the University of Illinois, and his research interests include top managers and their influence on strategic decision making and organizational
strategies. He has written on many strategy issues, including managerial responses to environmental change and organizational decline, business definition and organizational identity, the management of corporate strategy and diversification, corporate governance, and
company strategies following deregulation.

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