What drives a successful Website Services business

Despite being generated in a time when heavy manufacturing was more predominate, the competitive framework developed by Michael Porter (Harvard Business Review, 1977) is valuable for Website Services businesses.

Threat of new entrants

Barriers to entry seem to be low in the industry. Barriers to entry should not be confused with barriers to quality. Low barriers to entry are driven by

• minimal initial capex requirements
• increasing global labour supply
• productisation of once valuable skills
• lesser scaling benefits
• minimal market recognition of standards or qualifications
• no legislative requirements for practitioners

Threat of substitute products

In the sector of the industry that prioritises audience reach for clients, substitute products remain real

• billboards
• television

In the task performance sector of the industry, substitutes (almost invariably humans) are losing ground in favour of systematised solutions, which can impose high switching costs to future decisions 

• workflow automation
• quality control
• transaction management

Bargaining power of customers

This force is the hardest of all upon which to draw a conclusion.

At the larger end of the industry, the (perceived or actual) ability to make the solution represents the true bargaining power of customers. Empire building (cloaked by the premise of better project security and control) can be assumed to be highly influential in the make or buy decision.   

The make option can be expected to exceed the buy option in total costs (especially when indirect costs are properly attributed to the make option).  

At the smaller end of the industry, the low barriers to entry, however, mean that customer bargaining power (as traditionally understood on a cost basis) is also high, but for different reasons. 

Customer bargaining power is only low where the customer has external commitments and minimal in-house expertise. Such fact situations were probably previously much more common than now, and the failure of the industry to consolidate suggests that these situations were exploited to support rent-seeking inefficiencies. 

Quality suppliers of Website Services welcome informed and alert customers. This is the path to long term mutually beneficial relationships.

Bargaining power of suppliers

As a service industry, there are two classes of suppliers with high bargaining power

• skilled labour
• capital intensive infrastructure providers

The industry will pivot towards labour standardisation only when supply approaches demand. Until then, quality labour supply will command extremely high bargaining power. The US experiences show us that providing equity to key person labour will slow the attrition rate, but taxation treatment of shares and options in Australia has historically taxed unrealised (or unrealisable) gains.

How best to align labour to long term shareholder value creation is not an easy problem to solve. Whilst quality labour remains (or perceives itself to remain) sufficiently scarce, misalignment must be presumed. 

Industry rivalry

It is noteworthy that, despite the large sums invested across website projects throughout Australia, no mention can be found of any breaches of competition laws. This suggests, without being conclusive, a highly competitive landscape.

Innovation is occurring rapidly in the technologies used, the processes to derive and execute requirements, and the operations employed to carry out repeatable tasks.

But innovation is occurring more slowly in management. The 5 forces here described can be addressed far more effectively in a consolidated setting. Centralised administrative functions, with small autonomous teams that both define the scope and execute, appears to be the best path forward.  

To maximise one’s chances to run a successful Website Services businesses, a manager needs:

• loyal staff with a drive to innovate
• customers that understand the causal link between quality and cost
• expertise that is resistant to productisation (unless as first mover)
• an increasingly variable cost base (to minimise any capital charges)

Since those factors are very difficult to combine, only when quality providers combine will there be an answer to customer bargaining power and supplier bargaining power. Until competition law affects the industry, it must be regarded as immature and ripe for exploitation by stakeholders on all sides (as ill-informed customers once were).