Competetive Advantages in Virtual Markets

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Competitiveadvantages in

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Competitive advantages invirtual markets

perspectives ofinformation-based

marketing in cyberspaceRolf Weiber and Tobias Kollmann

University of Trier, Trier, Germany

The aim of the following discussion is to present the division of markets into

marketplace and marketspace and evaluate the significance of virtual value

chains in opening up further possibilities in the marketplace and marketspace.

Against this background, it will secondly be argued that information becomes

a factor of success in its own right in competition in future markets. However, in

order to activate information, marketing is forced to adapt to the conditions of

information networks in the virtual marketplace (marketspace). Third, the

theory that marketing must develop into information-based marketing will be

discussed. The demands put on the information-based market in order to

achieve real competitive advantages in marketspace from the factor of

production information will be particularly considered.

The significance of virtual value chains in revealing new marketopportunities

T he marketspace the virtual market system of cyberspace

One can assume that through the development of networked information

systems (cyberspace), a division of market systems relevant to companies takes

place. Conversely, the physical world of raw materials, resources and products,

the so-called marketplace, continues to exist. Within t he marketplace, the

traditional problems concerning the real value chain of a product or service (e.g.

procurement, production, distribution, etc.) are considered. Alongside thephysical world there emerges a virtual world of cyberspace induced by an

increase in electronically networked information systems, this virtual world

being characterised by digitalised information and communication channels.

The virtual market in cyberspace, in which information is handled, processed

and utilised, and through which virtual value creation chains are brought about

within data networks, can be referred to as marketspace according to Rayport

and Sviokla (1994, p. 142). It is in this context that virtual marketplaces and

virtual t ransactions of or with information develop. This means t hat themarketspace can be seen as an ar tificial, intangible market for informat ion. The

European Journal of Marketing,

Vol. 32 No. 7/8, 1998, pp. 603-615, MCB University Press, 0309-0566


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consequences of this division of relevant market systems into marketplace andmarketspace can be structured in three central lines of development:

(1) Performance improvements in the marketplace: information can help toachieve a supporting increase in efficiency of the actual offer (products orservices).

(2) Freestanding output in marketspace: informat ion gained from themarketspace can function as an autonomous source of competitiveadvantages. Information becomes a product in its own right, which is

traded in the marketspace.(3) Additional consumer value in marketspace. Through the parallel

utilisation of marketplace and marketspace, information can form thebasis of an additional utility in its own right over and above the physicaloffer in the marketplace.

The significance of both market places means that competitive successes willbe determined in future by activities in the virtual and the real worlds. Thisdevelopment can be seen in an example from the music industry.

There has been a massive increase in the use of information networks bycompanies in the music industry. Various suppliers of sound carriers can becontacted through the networks, such as World Wide Web (WWW), ofcommercial online services (for example BMG, Sony, Geffen Records etc.).Originally the aim was to present real sound carriers. However, the informationnetworks can offer additional services to those products traded in themarketplace. By making digital audio recordings of music available, companieshave the opportunity to collect information about the popularity of the musicbefore they undertake an expensive launch. Because electronic traces of usersare left behind (e.g. the calling-up r ates of music titles in combination withdemographic data about users), the information can be analysed and can betransformed into profiles of potential users. Through the use of information inmarketspace, physical (real) offers of sound carriers and their contents can bemore effectively matched to the corresponding user profiles. In the future, it willbe possible to sell music directly through information networks; these can alsobe combined with other products such as concert tickets and video clips.

Three lines of development resulting from the division of market systemsinto marketplace and marketspace are indicated in this example:

(1) Consumer profiles provide useful informat ion which can be used forexample to improve the functionality and quality of real sound carriers(performance improvements in the marketplace).

(2) Consumers can be offered the opportunity in marketspace (e.g. throughan online system) of being able to compile individual pieces of music andto transfer them directly onto CD or PC (freestanding output inmarketspace).

(3) Digital audio recordings can be supplemented in marketspace by

additional information for example about the production of music titlesor about the artists (additional consumer value in marketspace).


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T he importance of virtual value chains in the marketspace for competitivesuccesses in information-based marketsThe creation of a marketspa ce in cybersp ace will make it necessary forcompanies to reconsider the way they regard value-creating measures. In thefuture, a company will be able not only to achieve consumer values throughphysical value adding in the marketplace but also through virtual value addingin marketspace.

The analysis of value chains in the physical marketplace is based on theapproach of Porter (1985, p. 59). The value chain divides a company intostrategically-relevant activities and identifies physically and technologicallydistinguishable value activities, for which the customer is prepared to pay. Inthis case, information also plays an important role in terms of competitivesuccess because it is through information that existing processes can be betteranalysed and controlled. However, this information has until now been seensimply as a supporting element rather than a source of value to the consumer inits own right.

Porters value chain can be used in two ways in the virtual world of data

networks to consider value chains in the virtual marketspace:(1) Rayport and Sviokla (1995, p. 75) have highlighted that first, a virtual

picture of the physical value chain in the business process can be created.Each step of this virtual picture is then to be tested for its informationcontent. In this way, virtual value creation activities, which are carriedout through or with the aid of information, are drawn out. Theseinformation processes are however linked to the origins of the physicalvalue chain, as virtual value creation activities have a direct influence onactual activities and are tied to them (information as a support ingincrease in efficiency). In this context, one can also speak of a virtual-actual value chain, as the relevant activities of the actual value chain alsoform the basis of activities in the marketspace.

(2) Going beyond the arguments of Rayport and Sviokla (1994, 1995) thereare also autonomous value creation activities in marketspace, which canbe traced back to the importance of information in its own right. Byinformation functioning as a source of competitive advantage in its ownright, virtual value creation activities can emerge in the marketspace,

independent of a physical value chain. These virtual value creationactivities are not however of the same nature as the physical valueactivities identified by Port er, but take t he form of the collection,systemisation, selection, combination and distribution of information. Itis through these specific virtual value creation activities at aninformation level that a virtual value chain, whose origin and influencecan only be found in the marketspace, manifests itself. This is the casefor example when in the music industry information which has been

collected from the electronic traces of users in the digital informationnetwork and which can provide detailed information about the musical


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tastes of consumers can be sold on to electronic entertainmentcompanies.

The interrelations between physical (marketplace) and virtual value chains(marketspace) as well as the creation of new markets can be seen in Figure 1.

Owing to the significance of marketspace, a common value matrix will exist inthe future, in which there will be an intensification of different value chains.This argument is also put forward by Rayport and Sviokla (1995, p. 82) inwhich the existence of a freestanding value chain in marketspace was

Figure 1.The path from thephysical to the virtualvalue chain

Physical Value Chain

Marketplace

Virtual Value Chain

NewMarkets

NewMarkets

NewMarkets

Marketspace

Marketplace/Marketspace

Value Matrix

Virtual-Actual Value Chain

Information gathering

Information systemisation

Information selection

Information combining

Information distribution

Information exchange

Information evaluation

Information offering

profitmarg

in

profitmargin

profitm

argin

profitmargin

Company infrastructure

Personnel Management

Technology Development

Procurement

Inputlogistics

Operations

Salesand

marketing

Outputlogistics

Customer

service

profitm

argin

pro

fitmargin

Company infrastructure

Personnel Management

Technology Development

Procurement

Inputlogistics

Operations

Salesa

nd

market

ing

Outputlogistics

Customer

se

rvice


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considered in terms of the formation of new output s through informat ionprocesses. The relevance of these arguments depends on the extent to which theproduct is linked to information technology. Generally it can be assumed thatthis link is stronger in the case of durable consumer goods than goods with ashort life cycle. A first summary point and recommendation for action at thisstage would be:

The growth in information technology and networks will lead to a division of marketsystemsinto marketplace and marketspace which is important for competition. Virtual value creationactivities enable performance improvements and supplements to be achieved in t he

marketplace and freestanding outputs to be offered in marketspace. The value creationactivities in both market systems should ideally be combined in a common value matrix.

Information as a freestanding factor of success in the marketplaceand markets paceIn order to ensure that companies are capable of surviving in the market, it is ofparamount importance that they offer successful products and services. Thesuccess of a product is determined by relations inside the so-called marketingtriangle, which consists of the relationship between ones own offer, the needsand wants of consumers, and the offers of relevant competitors (Ohmae, 1982,p. 91). It is possible, through the relationship network within the marketingtriangle, to achieve competitive advantages in terms of successful marketingwhen ones own offer corresp onds with t he goal system of consumers(customer-orientation) and is held by consumers to be better than that ofcompetitors.

As far as the marketplace is concerned, Porter (1980, p. 71) demonstratedthrough the so-called U-curve that successful companies follow a clear strategic

direction, which is expressed either in cost leadership (cheaper) or qualityleadership (better). Cost and quality strategies in the marketplace can bedescribed as generic competitive strategies. In the most recent past, two furthersuccess factors have been identified which can be termed t ime (speed) andflexibility. They do not replace quality and costs as success factors but rather

join them and are manifest in the speed of adaptability of companies.If, against the background of these factors of market success, one poses the

question as to what strength this discovery has, what characteristics must cost,quality and speed of adaptability have in order to be successful in the different

competition situations in the market, then the proponents of Austrian marketprocess theory have already shown that it is information which becomes thecontrolling power in competition. According to Hayek (1945, 1946), competitioncan be interpreted as a process of information distribution, and Kirzner (1973)argues that competitive leads can a lways be explained through informationleads. This means that, at the end of the day, it is the quality of informationwhich, on the one hand, is responsible for showing to what extent companiesare able to identify factors of market success in their various forms, and which

on the other ha nd, assumes t he central directing function for combiningoperational factors to produce successful offers in the marketplace.


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Although information is regarded as fundamental to the management of thecompany output creation process, it is difficult to interpret it as a factor ofproduction in t erms of classical production t heory, because informationprocessing by itself cannot produce any physical outputs for the marketplace.In contrast, an examination of the virtual value chain has shown that in themarketspace, information can most certainly be regarded as a factor ofproduction, which creates information products through virtual value creationactivities.

While until now, information in the marketplace has simply had a

supporting function for physical production processes, in the future it willbecome an independent factor of production and competition. Figure 2 providesa summary of the competitive factors in the marketplace and marketspace.

This factor of competition can be expla ined in that both the efficiency ofcompany performance systems as well as the effectiveness of entrepreneurialactivities with regard to the creation of successful market outputs can beincreased by gaining, processing and tr ansferring informat ion. In this way,information can fundamenta lly influence the dimensions of competitiveadvantage in terms of efficiency and effectiveness (Drucker, 1973, p. 45; Day andWensley, 1988, p. 2). If one concentrates on examining the achievement ofadvantages for physical outputs in terms of effectiveness, then the marketspaceoffers improvement potentials in two ways:

Figure 2.Factors of marketsuccess in themarketplace andmarketspace

Quality/

Service Costs

Time Flexibility

Information


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(1) Increase in effectiveness through the acquisition of information: bygaining information about the needs and wants or ideas of potentialcustomers in the marketspace, it is easier to realise the goal of offeringproducts or services tailored to individual demands, since customerinformation can be actively utilised in the shaping of products.

(2) Increase in effectiveness through the trans fer of informat ion: byproviding information in the marketspace about ones own products orservices, potential customers can become more aware of and assimilate

the advantages of products, as they can self-select and actively evaluateinformation which is relevant and useful to them.

From the point of view of the company, it is decisive that, on the one hand, itobtains more and better information about consumers than its competitors(factor : gaining information), in order to be able to offer more successfulproducts more effectively, and on the other hand , that it is able to offerconsumers better information through the marketspace (factor: informationtransfer), in order to structure communication with potential customers moreeffectively. While according to Porter (1985), it is possible to differentiat e

between market success in the marketplace in terms of cost-leader and quality-leader, in the marketspace one can distinguish between the successful marketstrategies of speed-leader (in terms of rapid gaining of information) and topical-leader (quality leader in terms of high quality information) (see Figure 3).

Against the background of the fact that the shift towards marketspace,brought about by information technology, results in information becoming animportant dimension of competitive advantage, a second summary point andrecommendation for action is as follows:

The division of market systems into marketplace and marketspace means that informationbecomes a factor of success in competition in real markets and a freestanding factor ofproduction in virtual markets, so that companies can only achieve success in the markets ofthe future if they actively participate in the information technological change process.

The nece ss ity of information-base d marketing in markets pace

The shift towards networked communication str uctures (cyberspace) and

therefore towards a division of relevant markets into marketplace and

marketspace places new demands on companies. At the centre of structural

change in market systems is the use of information through digital data paths.In order to utilise this central competitive factor, it is paramount that marketing

adjusts to these changes brought about by information technology. The result is

a type of marketing which specialises in the use of information. As information

is the basis of this specialised marketing in marketspace, it is referred to as

information-based marketing. In order to actually realise potential

competitive advantages in the future, a basic requirement for success in the

market, information-based marketing must also be able to adapt to the

conditions of information networks in virtual marketplaces (marketspace). The

increase in networked communication channels (computer and


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telecommunication networks) means that it becomes ever eas ier to place,

access, offer and exchange informat ion at certain points in the networks. Digital

processing means that, first, each network member becomes an independentinformation unit that can be autonomously driven (receiver function) while also

enabling each network member to provide other members with informat ion

(sender function). In this way a reciprocal information flow is induced, in whichit is possible for each member to individually access or provide information

selectively. This individualisat ion and d ifferentiat ion of demand through

Figure 3.The realisation offactors of marketsuccess in themarketplace andmarketspace

MARKETSPACE-Information Competition-

Profit

Topical-Leader

Speed of Information Acquisition

Speed-Leader

Costs FlexibilityTimeQuality

Information

Factors of Market Success

Profit

Quality-Leader

Market Share

Cost-Leader

MARKETPLACE-Product Competition-

Costs FlexibilityTimeQuality

Information

Factors of Market Success


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interactive information networks infers fundamental changes within exchangerelationships in the market:

Due to the part icular importa nce of information for the market systems marketplace andmarketspace it is necessary that marketing is concentrated on the utilisation of information(informat ion-based marketing).

Requirements of information-based marketing in marketspaceThe potential advantages of the reception and analysis of information throughinteractive informat ion systems can only be realised when thought patterns

and activities in marketing also undergo a thorough reengineering. Startingwith mass transactions, which concentrate on marketing pre-producedproducts to anonymous mass markets, the shift towards buyers marketsbrought about a stronger focus on customer commitment in terms ofrelationship tr ansactions ( Jackson, 1985, p. 120), while more recently thegreater use of information technology products in marketing have opened upthe possibilities of customisation transactions (Kotler, 1989, p. 10). In the future,however, information-based marketing is necessary in order to fit in with the

aforementioned features of the interactive future in cyberspace and particularlyin marketspace (Figure 4).Information-based marketing can be interpreted as being the software that

makes the hardware of interactive information networks (data-bank systems,Internet, etc.) useful to companies in terms of creating customer loyalty throughindividualised products and services. Through the information process, notonly will segmentation for real products become more differentiated but therewill also be an individualisat ion of the whole packet. Peppers and Rogers (1993)refer here to one-to-one marketing. Since information can be transported

everywhere without any great costs, the use of information technologyincreases the extent of individual advice and information and therefore theeffectiveness of the whole bundle of outputs of a product. It is, therefore, not thecase as in customised transactions that the offers remain flexible to the wishesof customers, but rather, in information-based marketing, an individual offer iscreated when the customer is involved in the company value creation processthrough interactive networks. Against this background, information-basedmarketing of the future is characterised by three central features:

(1) Digital transmission of informat ion: transmission of information bydigital means simplifies contact with information within the networks toa great extent. At the push of a button it is possible to access, select andanalyse comprehensive information offers. Moreover it is possible tosend information to individual addressees rather than to the anonymousmass market. In this way, each communication participant in the digitalnetwork becomes a target person.

(2) Interactive transmission of information: interactive information transferproduces a shift from one-dimensional to multi-dimensional mediacommunication. Through digital information networks and the


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participants means that their organisation becomes individual, i.e. it isaligned to the needs and wants of the individual contact person.

A fourth summary point would be:

The utilisation of information will in future consist of an interactiveinformation process between supplier and consumer, in which information-based marketing will help to improve the bundle of outputs offered and toincrease (new) competitive advantages in marketplace and marketspace.

Competitive advantages through information-based marketing in themarketspaceAgainst the background of the developments towards interactivecommunication networks, it is fundamental tha t companies trans form thepossibilities of information-based marketing into competitive advantages. Itcan be established that the use of information technology applications togetherwith information-based marketing can produce benefits in almost all phases ofthe marketing management process. This is a result of the ways of usinginteractive applications which differ greatly from those of traditional media

forms such as personal communication, printing, advertising, electronic mediaor new media (e.g. telefax) (Kollmann, 1994, p. 13). Figure 5 highlights thevarious starting points from which competitive advantages can be realisedthrough information-based marketing.

The factor of competition speed can be realised in the construction of an offerin that interactive information systems are not limited by spat ial and temporal

factors. Moreover, the digital selection of communication participants makes it

Figure 5.Competitive advantages

through information-based marketing in

marketspace

Temporal/spatial

Independence

Speed

Flexibility

Target Group

Closeness toCustomer

Interactivity

Individuality

Selectivity

information-basedmarketing

information-basedmarketing


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possible to be more effective in terms of the factor of competition reaching thetarget group. An increase in individual communication through interactivecontact between company and consumer reflects the factor of competitioncloseness to cust omer. Through t he interactive natu re, which enablesconsumers to be addressed individually and both communication partners toactively participate (sender/receiver function) it is possible to realise the factorof competition flexibility more effectively. Each of these factors of competitioncan lead to the creation of concrete extra value for the consumer within thephysical, virtual or vir tual-actual value chain which positively influencesexchange relationships with the company.

Existing contact with potential customers will become more successful, theearlier the company is able to tailor its information to the individual needs ofthe information seeker in the form of personalisation of service or a bundle ofoutputs, so that a fifth summary point can be made:

The increase in interactive information processes between supplier and consumer through

marketspace can be tra nsformed into competitive advantages when information-based

marketing succeeds in shaping these processes in terms of an individual bundle of outputs

with the help of flexible, quick and close-to-customer communication.

Marketing management in the marketspace

The above discussion has shown that movement towards the information ageadds a new dimension to the exchange relationship. The change resulting fromthe shift towards networked interactive communication structures (cyberspace)entails new challenges for companies if they are to survive the competition inthe markets of the future. These challenges take the form of marketing in theinteractive age of the marketspace. Interactive information systems enable

individual, interactive and media-effective contact with active communicationparticipants or consumers. Customer contact will no longer be a question ofspatial or temporal distance, but rather a question of the organisation ofinformation exchange between sellers and buyers. It is important here toconsider the possibilities of interactive information technologies that allow ashift from one-dimensional mass communication to multi-dimensionalindividual communication. The discussion has further shown that there mustbe a shift towards information-based marketing if the possibilities that

informat ion technology offers are actu ally going to be exploited, and ifcompetitive advantages in the future of the marketplace and the marketspaceare going to be realised. The change should occur in good time so that as muchexperience as possible with the use of the new interactive media forms can begathered. Information will play the decisive role when it comes to transformingcustomer needs and wants into output bundles and in this way into products.The receiving of information through interactive communication networks willcorrespondingly become the key success factor in competition. The use andmarketing of products through interactive information networks in the two-part market system of the marketplace and the marketspace must be learned


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and information-based marketing offers realistic opportunities for achievingthis. Thus, the following conclusion can be reached:

In the market system divided into marketplace and marketspace, information becomes thecentral competitive advantage through interactive information processes between supplierand consumer, so that in the future, companies, aided by information-based marketing mustconcentrate more on the acquisition and analysis of information for customer-oriented outputbundles.

Summary

The article offers an explanation of the phenomenon of the marketspace, a newvirtual market form, which is induced by the increasing exchange ofcommunication and information through digital data-networks. The virtualmarket form of the marketspace will exist parallel to the marketplace, whichrepresents the physical world of raw materials and resources. By analysing thetrade relationship in the marketspace, the factor information is identified asthe key factor of competition, and this factor should be strategically offeredeither as quickly as possible (speed-leader) or should be of high quality orrelevance (topical-leader). In the future, information exchange through the

digital data networks of the virtual marketspace will be dominated byinteractivity, which means every participant will be actively and individuallyinvolved in information exchange. These conditions infer an information-basedmarketing, which focuses on the individual consumer and enables (inter)activeembedding into the value chain of the enterprise.

References

Day, G.S. and Wensley, R. (1988), Assessing advantage a framework for diagnosing competitivesuperiority,Journal of Marketing, Vol. 52, pp. 1-20.

Drucker, P.F. (1973),Management Tasks, Responsibilities, Practices, Harper & Row, New York,NY.

Hayek, F.A. (1945, 1949), The use of knowledge in society, in Hayek, F.A. (Ed.), Individualismand Economic Order, London, pp. 77-91.

Hayek, F.A. (1946, 1949), The meaning of competition, in Hayek, F.A. (Ed.), Individualism andEconomic Order, London, pp. 92-106.

Jackson, B.B. (1985), Build customer relationships that last,Harvard Business Review, No. 6,pp. 120-8.

Kollmann, T. (1994),Der Wandel der Werbung im Spiegel der Kritik, Sinzheim.

Kizner, I.M. (1973), Competition and Entrepreneurship, Chicago.Kotler, P. (1989), From mass market ing to mass customizat ion, in Planning Review, Vol. 17

No. 10-13, p. 47.

Ohmae, K. (1982), T he Mind of the Strategist the Art of Japanese Business, New York, NY.

Peppers, D. and Rogers, M. (1993), T he One-to-One Future, Doubleday, New York, NY.

Porter, M.E. (1980), Competitive Strategy, The Free Press, New York, NY.

Porter, M.E. (1985), Competitive Advantage, The Free Press, New York, NY.

Rayport, J.F. and Sviokla, J.J. (1994), Managing in the marketspace,Harvard Business Review,Vol. 72 No.6, pp. 141-50.

Raypor t, J.F. and Sviokla, J.J. (1995), Exploiting the virtual value chain,Harvard BusinessReview, Vol. 73 No.12, pp. 75-87.

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Competetive Advantages in Virtual Markets