Getting Real About Virtual Commercew.cali.org/conference/2000/PROGRAM BOOK/hbr1.pdf · 2004-12-07 · Getting Real About Virtual Commerce or capturing it. They will be forced to focus

Getting Real About VirtualCommerce

by Philip Evans and Thomas S. Wurster

Reprint 99605

84 harvard business review November–December 1999

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n it s f i r st generat ion ,electronic commerce has beena landgrab. Retail space on the

Internet was claimed by whoevergot there first with enough re-sources to create a credible busi-ness. It took speed, a willingnessto experiment, and a lot of cyber-savvy. Companies that had per-formed brilliantly in traditionalsettings seemed totally lost. Indeed, there isn’t amajor e-retail category in which a bricks-and-mortarretailer has leading market share. Even Wal-Mart,that master of information technology, has so farproven hopelessly flat-footed on the Web.

Achieving profits during this landgrab – or evenbeing on a trajectory toward profits – was deemedunnecessary by cheering investors. The stock mar-ket has voted a higher valuation for Amazon.comthan for the entire traditional book retailing and pub-

Copyright © 1999 by the President and Fellows of Harvard College. All rights reserved. 85

by Philip Evans andThomas S. Wurster

lishing industries combined, eventhough Amazon has yet to turn a profit. In private, some e-com-merce entrepreneurs confess per-plexity as to how they ever willmake a profit. They have, of neces-sity, focused far more on growth.Strategy is subordinated to tactics,which are subordinated to experi-mentation. The Great White Hope

is an acquirer: let somebody else solve the problem.Meanwhile, keep growing at 200% a year.

But that phase is ending: the obvious land hasbeen grabbed, the traditional incumbents are get-ting serious, and the Internet stock bubble is losingsome buoyancy. We are entering the second genera-tion of electronic commerce. The key players –branded-goods suppliers, physical retailers, elec-tronic retailers, and pure navigators – will shifttheir attention from claiming territory to defending

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A second generation

of electronic commerce is

emerging, one that will

be shaped more by strategy

than by experimentation.

The battle for competitive

advantage will be waged

along three dimensions:

reach, affiliation,

and richness.

GettingReal About

VirtualCommerce

G ett ing Real About V i r tual Commerce

or capturing it. They will be forced to focus on com-petitive advantage and on strategies to achieve it.Virtual commerce has to get real.

Navigation as a Separate BusinessIn the familiar world of physical commerce, shop-pers have it tough. If you want to buy a shirt, for in-stance, you have a million different choices and, tomake comparisons among them, you have to hop inyour car and drive to malls and downtown depart-ment stores. A broad search is time-consuming, dif-ficult, and, inevitably, incomplete. Nobody does it. Instead, consumers rely on product suppliers and retailers to help them navigate among their

choices. Those busi-nesses, in turn, exploitthe consumers’ searchcosts to build competi-tive advantage. Theycreate navigationaltools – everything frombranding and advertis-ing to relationshipbuilding and merchan-

dising – to help consumers short-circuit the com-plexities of a comprehensive search and find prod-ucts they’re willing to buy. Sellers, in other words,exercise some control over the navigation functionbecause it is comparatively difficult and expensivefor the consumer to navigate this web of informa-tion unaided. Indeed, in most consumer businesses,far more profitability derives from influencing nav-igation – by means of a strong brand identity, say –than from manufacturing or distributing the physi-cal product itself.

On the Internet, by contrast, millions of peopleexchange massive amounts of information directly,quickly, and for free. Consumers can search muchmore comprehensively and at negligible cost. Navi-gation and selection occur independently of physi-cal warehousing and distribution. Physical shop-keepers, who used to exert enormous influenceover consumer choice, no longer enjoy special ad-

vantages. Product suppliers can sell directly to cus-tomers. Electronic retailers can focus on navigationand outsource fulfillment. And “pure” navigators,like the Yahoo! search engine and Quicken soft-ware, can organize information, helping peoplemake sense of it without being party to the transac-tion at all.

The importance of this shift –wherein navigationcan be a separate business, unbundled from produc-tion, marketing, and distribution – cannot be over-emphasized. Navigation is the battlefield on whichcompetitive advantage will be won or lost. At stakeis much of the profit potential of most consumer-products suppliers and retailing businesses. For nav-igation is a business with enormous potential scope.The services navigators provide will correspondonly coincidentally to any physically defined busi-ness or industry. Many people continue to viewAmazon.com, for example, as an on-line bookseller,but its true business is navigation. It has rapidlybroadened its offerings from books and CDs tomovies to drugs to toys. Precisely because it is notclear what limits the domain for which Amazon is the preferred navigator, Amazon is worth morethan the entire publishing industry put together.

Navigation has three dimensions. Reach is aboutaccess and connection. It means simply how manycustomers a business can access or how many prod-ucts it can offer. Affiliation is about whose inter-ests the business represents. Richness is the depthand detail of the information that the businessgives the customer or collects about the customer.It is along these dimensions that the struggle forcompetitive advantage will take place. (See thesidebar “The Three Dimensions of NavigationalAdvantage.”) And different players start with verydifferent advantages.

Competing on ReachBefore the advent of e-commerce, category killersand retail superstores competed brilliantly on reachby offering convenient locations and broad selec-tion. But theirs is a format constrained by the eco-nomics of things. The largest physical Barnes &Noble bookstore in the United States still carriesonly 200,000 titles. Amazon.com offers 4.5 millionvolumes and is “located” on some 25 million com-puter screens. This orders-of-magnitude jump inreach is possible precisely because the navigationfunction (catalog) is separated from the physicalfunction (inventory). The average music superstorecarries 50,000 titles; EveryCD was so confident ofits reach that it offered prizes to customers whofound a title missing from its catalog. Career-


Philip Evans is a senior vice president of the Boston Con-sulting Group in Boston.

Thomas S. Wurster is a vice president of the Boston Con-sulting Group in its Los Angeles office.

Together they are the global coleaders of BCG’s Media &Convergence Practice. This article is adapted from theirbook, Blown to Bits: How the New Economics of Infor-mation Transforms Strategy (Harvard Business SchoolPress, 1999).

Navigation is thebattlefield onwhich competitiveadvantage will bewon or lost.

path.com links potentialemployers with jobseekers in a classifiedsmarket already morethan 50 times largerthan that of any physi-cal newspaper. Uncon-strained by physical lim-itations, reach explodes.That explosion extendsbeyond conventionallydefined industry bound-aries. If consumers valuecomprehensive searchcapabilities, then thesmart navigator willspan across the searchdomain that consumersprefer. The first naviga-tor to do so will capturean advantage. This hasbarely happened so far –e-retailers still largelymimic physical ante-cedents –but it will. Dellsells more than comput-ers. Amazon has rapidlymoved beyond books.

For insurgents – for e-retailers in particular –this raises the terrifyingprospect of unstablebusiness boundaries.CDNow carved out adominant, reach-basedposition in the CD salescategory, only to lose itin just a few months toAmazon. CDs (we see after the fact) are not adomain within whichconsumers meaning-fully define reach. Theidea of “CD retailing” as a discrete business is amental throwback to the world of physical re-tailing. The same maybe true for toys, banking,groceries, and other cat-egories. The erosion ofcategory boundaries willcontinue, as electronicretailers encroach on oneanother’s territories and


probe the true bound-aries of consumer searchdomains.

The explosion of reachon the Internet also raises an acute dilemmafor product suppliers. Atfirst blush, it looks like a godsend – a chance tobreak free from thestranglehold of the re-tailer and build direct relationships with thefinal consumer. But anyattempt to do so is by definition a navigationalvehicle offering the con-sumer limited productreach. This might be off-set by other factors, butif product suppliers offernavigation to only theirown offerings, they putthemselves at an inher-ent disadvantage. Stuckin a mind-set that con-fuses navigation withmarketing, they mayforgo competing in theemerging navigationbusiness.

For many supplierbusinesses, that is justfine: they do not wish tobe in the navigation busi-ness, and they welcomean explosion of informa-tion channels by whichconsumers can find theirproducts and services.Small wine makers,which frequently areconstrained by limiteddistribution channels,welcome the success ofVirtual Vineyards andview the prospects of intensified retailer com-petition with equanim-ity. Small publishersconsider Amazon to be a blessing. But formany large suppliers,the navigation function(variously called sales,

harvard business review November–December 1999 87

The Three Dimensionsof Navigational Advantage

Reach is about access and connection. It means,simply, how many customers a business can connectwith and how many products it can offer to thosecustomers. (Reach has come to mean “eyeballs” onthe Web, but we’re broadening the definition hereto include upstream reach to a variety of productsand suppliers as well.) Reach is the most visible dif-ference between electronic and physical businesses,and it has been the primary competitive differentia-tor for e-businesses thus far.

Richness is the depth and detail of informationthat the business can give the customer, as wellas the depth and detail of information it collectsabout the customer. Electronic businesses haven’tyet learned to compete seriously on the richness di-mension. (They’ve made far more progress onreach.) But richness holds enormous potential forbuilding close relationships with customers in a future dominated by e-commerce.

Traditional businesses have always had to make atrade-off between richness and reach. Doing both –getting highly detailed, customized information toand from a massive audience –was prohibitively ex-pensive. E-commerce businesses can exploit thedramatic displacement of the trade-off permittedby electronic connectivity and information stan-dards. For very little money, an e-business can pro-vide a wide base of customers (reach) with access toa broad range of products (also reach) and detailed,complete information about each product (rich-ness). It can also collect huge amounts of informa-tion about each customer (richness again) and use it to sell more products and services.

The same technological forces that blow up thetrade-off between richness and reach also open athird competitive dimension – affiliation, or whoseinterests the business represents. Until now, affilia-tion hasn’t been a serious competitive factor inphysical commerce because, in general, no companyever devised a way to make money by taking theconsumers’ side. However, it’s a natural progressionfor pure navigators to affiliate with customers; theyaren’t selling anything except, possibly, infor-mation – and therein could lie a huge competitiveadvantage. E-retailers with navigational functionsare also shifting their affiliation toward customers.Traditional manufacturers and retailers must findways to fight, co-opt, or imitate their e-commercecompetitors’ affiliation strategies.

marketing, advertising,branding, and promo-tion) is precisely wheretheir differentiationand competitive advan-tage lay. To lose controlof navigation would beto lose ownership of aprimary source of com-petitive differentia-tion. But how can theykeep it?

The knee-jerk reac-tion of product suppli-ers is to try to keep thenew navigators fromachieving critical mass.Consumer -productsuppliers, after all, arethe ultimate source ofinformation on productfeatures, price, andavailability. If sellersdon’t let Yahoo! orQuicken parse theirproduct lists and com-pare them with those oftheir competitors, thenYahoo! and Quickenwill be confined to theircurrent roles of glori-fied phone directoryand checkbook.

There are two prob-lems with that defen-sive strategy. The firstis that technically it isdifficult to stop a navi-gator from parsing in-formation that’s avail-able electronically. Ifcustomers can go tothe Web site, so cannavigators. It doesn’thave to be a personalvisit: technologies en-able a navigator to visitdozens of Web sites,query them, return theresponses, and thensort the answers – allwithin a few seconds.

Obviously, the sellercan stop this game, ifonly by refusing to op-


erate a Web site. Buttherein lies the secondand more fundamentalissue: it is not obviousthat it is in any singleseller’s interest to doso. A navigator is still asource of incrementalbusiness to a seller.Unless the selling busi-ness is highly concen-trated, it is unlikelythat the navigator’sability to achieve criti-cal mass will depend onthe availability of datafrom any one source.Therefore, while deny-ing data to the naviga-tors may be in the in-terest of all sellerscollectively, it is not inthe interest of any oneseller individually.The banking industrycollectively commit-ted to common strate-gies to fend off thethreat from new navi-gators such as Quickenand Microsoft Money.But one by one, indi-vidual banks foundthat they had more togain from participatingin the common infor-mation standard thatthese navigators werecreating. The collec-tive defense collapsed.

So if critical masscannot ultimately bedenied, then the oldplayers have to matchthe reach of the new.Product suppliers thatwant to communicatewith the consumer directly must do what-ever it takes to achievethe reach that buyersvalue. That may meanentering into joint ven-tures with competitorsto achieve critical mass.


The Doomsday ScenarioIt’s possible to imagine circumstances under which the new navigational businesses, exploiting richnessand reach, will capture all the value in an industry.First, navigation becomes a business in its own right.Pure navigators compete against one another. Sincethey are operating a network business, reaching buyersand sellers is critical to their competitive advantage.Struggling for reach, navigators push for market share.Over time, they merge and concentrate. In parallel, but driven by the same logic, the e-retailers like Amazon.com broaden their business definitions be-yond physical industry categories.

As their reach extends, the affiliation loosens be-tween navigators or e-retailers and their suppliers. Thelargest ones start bargaining on the consumer’s behalf.Consumers enjoy their new leverage, and they rewardit with their patronage. Affiliation becomes a furtherbasis for competitive differentiation. A positive feed-back loop develops. The navigators that perform bestcross a threshold of critical mass. Consumers preferthem because they offer greater product reach, andmanufacturers concede them advantageous terms be-cause they offer greater consumer reach. Reach buildson itself. These navigators then march toward posi-tions of monopoly in their respective domains. Physi-cal retailers are demoted to the role of distributor.Product suppliers see their business commoditized, orat least forced to compete on product-specific charac-teristics such as cost, technology, and features. Muchof the value potential of the business is drained. Ama-zon and Yahoo! rule. That is exactly what Wal-Mart didto parts of the apparel business.

It has already happened in electronic commerce.SABRE, originally conceived as a marketing arm forAmerican Airlines, is now an independent navigationcompany that is valued at nearly twice as much asAmerican Airlines. Priceline.com, an Internet auctionsite for deep-discount travel bookings, was valued in itsApril public offering at $ billion –higher than thevalues of United, Northwest, and Continental airlinescombined. These navigators create more shareholdervalue than the suppliers to which they navigate. And byexploiting reach and by affiliating with the ticket pur-chaser, they make air travel even more of a commodity.

Farfetched for your business? Maybe. But it is a logic:a set of forces that shape the strategy calculations foreveryone. If a supplier or retailer is to avoid theseforces, it needs a countervailing strategy. If an elec-tronic retailer or pure navigator wants to exploit theseforces, it must understand how incumbents will try toforestall it.

It may mean navigating to other companies’ prod-ucts and services. Universal and BMG, two of theworld’s largest music companies, have done both,creating an electronic joint venture, GetMusic.com,that offers a full selection of albums drawn fromtheir own as well as other companies’ rosters. Soloefforts would be hopelessly outmatched by thereach of CDNow and Amazon. Whenever the do-main of search extends beyond the supplier’s ownoffering, the supplier will be disadvantaged, perhapsfatally. (See the sidebar “The Doomsday Scenario.”)Therefore alliances are essential. Even with – espe-cially with –competing suppliers.

Physical retailers may have to take a similar ap-proach. Most treat their Web presence as a means ofdriving traffic to their physical locations: a store win-dow dressed up in HTML. Treating electronic retail-ing as a serious business in its own right – indeed asboth the greatest threat and opportunity that theyface – forces them to act quite differently. They haveto define their product mix as the e-retailers do, not as the physical constraints of their bricks-and-mortar stores forced them to.This may necessitateacquisitions and joint ventures. They need to fulfill

orders in whateverway is most effi-cient for the elec-tronic business –separating, if nec-essary, from theirtraditional ware-housing infrastruc-ture. They have toexploit synergieswith the physical

retail business, but only where that helps the elec-tronic business to compete. Above all, they have tothink of e-commerce as a business in its own rightand not compromise its success in an effort to pro-tect the traditional physical model. They must ex-pect the new business to cannibalize the old.

Of all the incumbent retailers, catalog companiesare best positioned to make the shift. Their lines ofbusiness are already defined around brand identi-ties and search domains that make intuitive sense toconsumers. They revise their offerings continuouslythrough sophisticated data-mining techniques.Their fulfillment systems are designed for remotedelivery. It is not surprising that the pre-Internet retailers that have most successfully managed thetransition to electronic commerce are Land’s Endand Victoria’s Secret.

But other incumbents will find managing thetransition to the Web much more difficult. Productsuppliers and physical retailers still see the Internet

as an arena for marketing and promotion: a newchannel for doing old things. If they persist in thatview, they will handicap themselves against newcompetitors – whether e-retailers or pure naviga-tors – that see e-commerce as a business in its ownright and pursue reach single-mindedly.

Competing on AffiliationE-commerce businesses are already tilting their affiliation away from suppliers toward the con-sumer – Net-savvy consumers are forcing them to.Book publishers, for example, have long paid physi-cal booksellers to promote books by giving themspecial placement in the store. But when Amazondid the electronic equivalent – letting publisherspay for superior Web page placement –consumer in-dignation at the conflict of interest and the betrayalof trust forced it to publish such arrangements onAmazon’s home page. Affiliation is shifting, in waysthat even the electronic retailers cannot control.

This change in affiliation is partially a manifesta-tion of Internet culture and the greater transparencyunder which everyone operates. But it is also a con-sequence of the blowup of the trade-off betweenrichness and reach. When a sales agent sells only oneproduct line (such as life insurance), he will pushthat as aggressively as he can: he has little choice butto serve as an agent for the product supplier. Givethat salesperson the whole universe of alternativeproducts to offer, and he is much more likely topresent them neutrally. Go further and equip theconsumer with all the information she needs tocompare sales agents, and the odds are that thesalesperson will try harder to please the consumerthan he will to please any single product supplier.

Microsoft CarPoint provides car buyers with thedata and software to compare alternative modelsalong 80 objective specifications. Physical dealersnever offer that kind of information. Nor (quite ra-tionally) do the car makers on their proprietary Websites. Microsoft can do this because Internet tech-nology enables such rich information to be assem-bled from wide-reaching sources at negligible cost.Microsoft chooses to do this because it thereby es-tablishes an advantage against its competitors inthe navigation business.

Microsoft needn’t be paid by the consumer for thistilt in affiliation to occur. Its income can still comefrom advertising, hyperlinks, and the sale of associ-ated products or services. But if the consumer is will-ing to pay, that only strengthens the argument. Con-ventional wisdom says that the consumer will neverpay for navigation, but that may prove incorrect. (Itwas once widely believed that consumers would



Physical retailersstill see the Web as anarena for marketingand promotion: a newchannel for doingold things.

never pay for television programs, but they now payregularly for cable, satellite, pay-per-view, and rentedvideos, because they deem the quality worth theprice.) The paucity of paid navigation today may re-flect the willingness of companies to give it awaymore than the unwillingness of consumers to pay.Paid navigators, serving the most sophisticatedconsumers in their largest and most complex pur-chases, are quite likely to emerge. Where they do,the tilt in affiliation will be intensified.

The pure navigator is poised to exploit the affilia-tion dimension. Lipper and Motley Fool are in a

better position for navigating to mutual fund in-vestments than Fidelity precisely because they arenot in the business of selling funds. Pure navigatorscan serve as “meta-navigators,” using technologiesthat compare multiple electronic retailers.

Consumer-affiliated navigators are most usefulwhen the selection criteria are simple and well de-fined. When the choice requires qualitative weight-ings of nonstandard factors, pure navigators may beat a disadvantage to suppliers because they lack the necessary product-information richness. Con-sumers are unlikely to delegate the task of selectinga new car to a human or electronic agent because itis too complex and subjective a task. However, afterthey have selected a model, their choice of dealer (if

dealers still exist) may be purely a matter of priceand availability, and a consumer-affiliated naviga-tor could handle that job easily. Within one pur-chase, there may be different steps where consumeraffiliation has varying importance.

The player in the worst position to exploit affilia-tion is the product supplier because by definition thesupplier has an interest in the transaction that isdifferent from the consumer’s. In many businessesthis does not matter: with sports cars and high fash-ion, customers welcome blatantly nonobjectiveproduct hype as part of the consumption experience.

But when consumer affiliation mat-ters (and the pure navigators haveevery reason to propagate the ideathat it always matters), the productsupplier has a problem.

One response is to exploit theway that navigational businessesevolve beyond product categories.Offer a navigation service thatsolves consumer problems insteadof merely pushing products. Add inobjective data and decision-supportsoftware about content unrelatedto your own business. Provide ob-jective information about productsand services in the consumer’ssearch domain that you do not sell.Perhaps provide comprehensivebut not necessarily comparabledata on your own products andthose of direct competitors, butslightly bias the presentationthrough the ordering and emphasisof alternatives. American Airlinesdid all this long ago with SABRE.Dell is currently embedding its extraordinarily successful Inter-net sales presence within a much

broader configuration and retailing service. By so doing, it matches the reach of current computer re-tailers, provides comprehensive and genuinely unbi-ased navigation to the products it does not make, andpreserves the option to promote its own products.The overall navigational proposition favors con-sumer affiliation, yet seller affiliation is preservedwhere it matters to Dell. It is the best defense incomputer retailing against the threat of a cyber-Wal-Mart – be it Amazon, Microsoft, or for that matter,Wal-Mart itself.

Dell’s strategy illustrates another way affiliationtilts toward the consumer, without the consumerpaying for the privilege. To preserve a subtly biasedpresentation of its computers, Dell might offer a



Now that all the obvious space on the Internet has been staked, the key e-commerce players– branded-goods suppliers, physical retailers, electronicretailers, and pure navigators– are battling for competitive advantage.

rigorously comprehensive and objective guide toperipherals. Wonderful for Dell if it works, but coldcomfort to the manufacturers of peripherals, whosewares are now subjected to rigorous evaluation.The obvious response would be for the manufactur-ers of a group of (noncompeting) peripherals to gettogether and offer a flattering representation oftheir own products attached to a rigorously com-prehensive and objective guide to computers. If thetwo navigators then split the browsing and buyingpopulations for computer-related products equally,the result would be that half the electronic salesvolume for computers and for peripherals would bedriven by unbiased navigators – more than half, asconsumers learn to cherry-pick. Acting to preservetheir own business from commoditization, sellershappily commoditize one another’s.

Of course, the fundamental reason this happensin the virtual world but not in the physical one isthat the consumer’s preferred search domain doesnot correspond to any physical industry. Thereforesupplier industries have the greatest difficultykeeping control of navigation. Precisely becausethey lose control of reach, they can also lose controlof affiliation.

Competing on RichnessWhen competing on reach and affiliation, traditionalplayers have to struggle to keep abreast of electronicretailers and pure navigators. But they have naturaladvantages when it comes to richness. Traditionalretailers can exploit their detailed informationabout customers. Suppliers can use extensive prod-uct information to their advantage. Doing so willmost certainly involve revisiting how they thinkabout branding.

Rich Customer Information. Retailers have al-ways been well positioned to collect and use infor-mation about their customers, but the Internetgreatly enhances their ability to do so. 1-800-FLOWERS, for example, now uses the Internet asits primary communications channel with cus-tomers because it lets the company offer manymore customized services at a minimal incremen-tal cost. The company maintains a customer infor-mation file with anniversary and birthday informa-tion, as well as a record of gifts sent to specificrecipients. It can thus alert customers when a birth-day or anniversary is approaching and suggest pres-ents. These gifts are no longer just flowers; the busi-ness has evolved beyond its physical origins into anelectronic concierge service.

The Web offers an unparalleled opportunity forthis kind of cheap and infinitely discriminating

customization of offers, products, and advertise-ments. Data-mining techniques can be applied tobrowsing behavior as well as to purchasing historyand demographics. And the data are largely unex-ploited: until recently, Excite! collected 40 gigabytesof customer data each day and did nothing with it;Amazon has been affectionately nicknamed “Spamazon” by recipients of its undifferentiatedbulk e-mails. Allthat will changeas technologiesdeveloped byFirefly, Match-Logic, Aptex,and others tracepatterns in theterabytes.

Some e-retailers are already becoming sophisti-cated. CDNow, for example, solicits informationabout which recording artists its customers like themost. The company relates that information to theindividual’s actual music purchases and then ap-plies a statistical matching technology, created byNet Perceptions, to identify a universe of peoplewith similar tastes. It can then recommend musicthat the larger group has purchased. Reach is largelyirrelevant, and the motivation is obviously to sellrecordings, but many customers love the serviceand have become loyal to CDNow as a result. Richconsumer information becomes a basis for buildingrelationships.

The great advantage of the physical retailers isthe rich data that they collect from other sources.Web-derived information, even when thoroughlymined, is actually a surprisingly thin database com-pared with those developed by grocery stores andcredit card companies. However, by putting the twokinds of information together and using the Web asa means of customizing on the fly, businesses havethe potential to build powerful relationships andstrong competitive advantage.

Two factors limit strategies based on rich con-sumer information. The first is privacy constraints,which require that consumers be informed of, andagree to, any exchanges of data. Increasingly, this issimply a condition of doing good business. The sec-ond factor is consumers’ option to search and orga-nize information for themselves. Consumers usingQuicken, for example, can customize their ownstatement of net worth: they do not need to give alltheir financial data (still less all their assets) to a fi-nancial institution. More insidiously, if the cus-tomer data file has real value, the consumer couldcollect the same information as the navigator andsell it.



Acting to preservetheir own business fromcommoditization, sellershappily commoditizeone another’s.

These two factors dolimit the power of richcustomer informationbut, within those limits,electronic and physicalretailers have an effec-tive weapon. No singleplayer is likely to havethe ideal database, anddigital information canbe bought and sold, so al-liances and markets forswapping informationwill probably begin toform. The originatorsand primary aggregatorsof such information,whether they are grocerystores, portals, creditagencies, or the con-sumers themselves, willextract most of the value.

Rich Product Informa-tion. It’s generally diffi-cult for manufacturers touse rich customer infor-mation competitivelybecause retailers aremore directly connectedto customers. But manu-facturers have distinctadvantages when itcomes to rich product in-formation.

In the music industry,for example, most of themajor companies – Uni-versal, Sony, BMG,Warner – are developinginformation-rich per-former biographies,recording history, chatrooms, and discogra-phies. They are usingthem in a number ofways: as stand-alone Websites, as informationfeeds to electronic retail-ers, and as enhanced CDssold directly to the con-sumer. Part of their aimis to cross sell from theircatalog of products. Partis to build a cult follow-ing for the performer.



If You Are a Pure Navigator…■ Never take your business definition for granted. You must compete with

other navigators on richness and reach within a search domain whoseboundaries are constantly moving.

■ Recognize that close affiliation with consumers is a major competitive advan-tage for you. It is part of your Web identity. Cultivate it. Do not compromiseconsumer interests for your own short-term gain. Never do anything youwould not want all your users to know, because within a few days, they will.

■ Build richness fast. When the incumbent suppliers get serious, that is wherethey will attack.

If You Are an Electronic Retailer…

■ Define your business in terms of a coherent consumer search domain, notan irrelevant physical category.

■ Be very skeptical of exclusives with product suppliers. The sacrifice of reachand consumer affiliation is likely to cost you more in competitive advantagethan the gain in margin is worth.

■ Beware of category killer physical retailers: they often have better consumerinformation and better logistics. Their only handicap is an inability to thinkdifferently. That could change.

If You Are an Incumbent Product Manufacturer…

■ Adding richness –especially product-specific richness –is the most powerfulway for you to compete. Concentrate on enhancing brand as experience.

■ Mentally deconstruct your own business. Look at its informational compo-nents as businesses in their own right. Develop independent strategies forthem. Create an organization that takes those strategies seriously.

■ Reach for you is a two-edged sword: it might enable you to escape the stran-glehold of your retailers, but it simultaneously exposes you to new naviga-tors whose potential reach is far greater than yours.

■ Look seriously at alliances to address the affiliation and reach problems: agroup of suppliers may be able to create a navigator that is more comprehen-sive and credible than any of its members.

If You Are an Incumbent Category Killer Retailer…

■ You have been beating department stores and general merchandisers in thereach game through overwhelming selection and mastery of logistics. Butthat is all economics of physical things. The new reach game is about infor-mation. If you play it seriously, it will force you to redefine your business.

■ You are going to be attacked, so do it to yourself before somebody does it toyou. And understand the multiplicative effects that even slight revenue ero-sion can have on the profitability of a high-fixed-cost physical business. Youwill need to make those fixed costs variable.

■ You ought to win in the new world of e-commerce. You start with reach, a highmeasure of consumer affiliation, physical distribution, rich consumer data,options for multichannel marketing, brands, and many of the right merchan-dising skills. You just have to be willing to compete against yourself.

■ Know that your operating managers, if left to themselves, will never makethe necessary changes. The threat to their core business is simply too great.Create a separate entity and give its managers the authority to exploit theassets of the traditional business. Synergy must be a one-way street, fromthe old business to the new.

From Your Perspective


Part is to give to the electronic retailing industrythe marketing capabilities that might otherwise beavailable only to Tower Records or to Amazon, andthereby to discourage retailer concentration andthe attendant shift in bargaining power.

When this kind of material is presented as astand-alone Web site, it suffers limitations of reach:consumers cannot find it easily and the productrange is narrow. It also has limitations in affiliation:corporate Web sites are generally not a crediblesource for picks and pans or for the funky, anti-establishment rumor mill that endows performers’lives with mythic significance. But as a low-costway to build a channel of communication that cir-cumvents the retailers, the strategy has powerfulpotential.

Rich product-information strategies work wellfor manufacturers in some circumstances, not sowell in others. If the product is continually evolv-ing, as cell phones and software are, the productsupplier has state-of-the-art information that retail-ers and navigators can’t match. These strategies arealso effective when innovation is more cosmeticthan real but consumers like the “sizzle.” Productslike stereo components, cars, even kitchen knives,boast features that people want to believe in. Theimpressive, if inscrutable, technical claims present-ed in stereo literature or, potentially, on Web sites –“Uni-Q Technology with its exceptional capacity tounify co-planar and co-axial directivity factors inthe critical crossover region” – may not withstandthe objective scrutiny of engineering bench tests.But many an audiophile would rather read and be-lieve such material (and brag about it to friends)than confront a cold review in Consumer Reportssuggesting that those $3,000 loudspeakers sound nobetter than a $300 pair available at Circuit City.

Rich product information is thus a powerful butuncertain weapon for the product supplier. Wherev-er consumers welcome evangelism, enthusiasm,and a strong connotative context, rich product-in-formation strategies can be effective. Nokia’s 8800phone. The next insanely cool product from Apple.But when detachment, objectivity, and comprehen-siveness matter more, that approach may provecounterproductive. Hot news and breathless excite-ment about mortgages or groceries will impress no-body. And, as with the automotive example, a singlepurchase may have some components (the virtualreality demo) where rich information successfullytrumps reach and affiliation, and others (price, avail-ability) where it proves totally irrelevant.

Brands. Manufacturers use branding all the time,of course, to communicate rich, product-specificinformation to their consumers. But there are two

different types of brands, and we believe that one isfar better suited to e-commerce than the other.

Some companies attempt to convey facts or be-liefs about product attributes through branding.Sony, for example, persuades consumers to believethat it will deliver superior technology, high manu-facturing quality, and miniaturization at a modestbut warranted price premium. Each of these thingsis a belief about Sony products – perhaps true, per-haps not.

Other marketers use branding to communicate anexperience: feelings, associations, and memories.“Coca-Cola” cannot be paraphrased as a set ofpropositions about the drink. The brand is the taste,the curvy bottle, thelogo, and the set of emo-tional and visual conno-tations that the drinkcarries by merit of a cen-tury of advertising.

Rich informationchannels have very dif-ferent effects on brand-as-belief and on brand-as-experience. To theextent that a brand is amatter of belief, thebrand message is funda-mentally a navigator message. Buy a Sony and youget better technology that weighs less and has higher manufacturing quality. Because an objectivenavigator could provide those messages, the brand-as-belief competes with the navigator. If a crediblenavigator repeatedly demonstrated that specificSony products did not, in fact, have better technol-ogy, weigh less, and so forth, that would underminethe brand. Indeed, even if the navigator validatedSony’s claims, if people came to respect Sony prod-ucts because of the navigator’s endorsement, thenthe brand would become redundant. Thus to the ex-tent that the product is amenable to independentnavigation, brand-as-belief is vulnerable also.

Brand-as-experience is a different story. Barbie isnot a brand defined by Mattel’s statements about itor by its product specifications. Barbie is a fantasyworld for young girls and a collectible for adults.Mattel devotes enormous resources to creating andpreserving the consistency with which that fantasyworld is presented. Barbie-as-experience will bemagnified by richer channels of communication.When Mattel can reach young girls in a broadband,interactive, customized environment (as will becommonplace in a few years), it can enrich the Bar-bie fantasy world with dress up, storytelling, andconversations. This enhances the brand, but it also


There are twotypes of brands.One – brand asexperience – is farbetter suited toe-commerce thanthe other – brandas belief.

enhances the product and the experience of owningit. Indeed the brand, the product, and the experi-ence are really one and the same.

Today, category killer retailers such as Toys R Usstand between toy manufacturers and consumers.Mattel’s ability to deliver the Barbie experience isconstrained not just by the static nature of mer-chandising displays but also by shelf space limita-tions and the retailer’s unwillingness to favor onetoy company over another. Direct presentation ofthe Barbie experience will enable the company tocircumvent the retailer and create a brand-as-expe-rience far more compelling than that in the physi-cal store. Power shifts back to the product supplier.

An electronic retailer such as eToys or Toysr-us.com might respond on reach by creating an inter-active fantasy world featuring characters that aredrawn from multiple vendors. Such a world may becloser, in fact, to the way a girl actually plays withher toys. They might respond on affiliation by ally-ing with educational broadcasters to create a more“uplifting” site, calculated to win parental approval.If mixing up dolls or adding doses of political cor-rectness is how young girls want to imagine the ex-perience, those would be smart strategies. But wesuspect not. Really strong brands-as-experiencetranscend tinkering.

Where brands are already defined in terms of ex-perience rather than belief, the evolving mediumwill strengthen them. Brands that have elements ofboth (as most do) must play up their experiential aspects. Rich, product-centered information, sup-porting a brand defined as experience, is the prod-uct supplier’s counter to the superior reach and affiliation of retailers and navigators.

The Incumbent’s DilemmaThe logic of reach, affiliation, and richness poses aprofound organizational dilemma for incumbentproduct suppliers and retailers. They have to recog-

nize that their value chain is being deconstructed.Aspects of navigation are no longer functions; theyare becoming businesses. And if incumbents chooseto compete in any of those emerging businesses,they must do so by building reach, affiliation, andrichness and redefining strategy and scope as thebusiness evolves beyond its physically defined ori-gins. They can do all this only if they mentally breakdown the current business into its components, understand the evolution of new business modelsfrom the outside-in, and free their new-businessmanagers from any obligation to prop up the old. In-deed, the new businesses will quite properly com-pete against the old, buy from or ally with traditionalcompetitors, and take risks that may prove to becostly errors. Every aspect of organization, incen-tive, and operating style will change.

This is an enormous challenge to an establishedorganization. Its competencies, procedures, andpower structures stand in the way. The only answer,many incumbents have found, is to separate the newventure as much as possible from the established or-ganization, perhaps even to spin it out. If the aim isto compete on reach or affiliation, that is probablythe only answer. But we have argued that richness isthe incumbent’s greatest strength. How can an in-cumbent achieve the autonomy, motivation, andfreshness of an Internet start-up and simultaneouslyexploit its uniquely rich customer- and product-cen-tered information? That may require a far morethreatening corporate transformation – the kind ofreinvention that Schwab undertook when it halvedits brokerage fees, committed to navigation as itsbusiness definition, and started selling its competi-tors’ products. But Schwab –like Ford, like Sony –hasa history of reinventing itself. For many incumbents,their first attempt to reinvent themselves may alsobe their last.

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Getting Real About Virtual Commercew.cali.org/conference/2000/PROGRAM BOOK/hbr1.pdf · 2004-12-07 · Getting Real About Virtual Commerce or capturing it. They will be forced to focus