Electronic commerce was a land grab in its initial generation. Whoever got there first with the resources to build a legitimate firm grabbed retail space on the Internet. It takes a lot of speed, a willingness to try new things, and a lot of cyber-savviness. Companies that had excelled in conventional contexts seemed to be completely lost. There isn’t a single major e-commerce sector in which a brick-and-mortar store has a significant market share. Even Wal-Mart, the king of information technology, has been caught off guard on the Web thus far.
Profits—or even being on a path toward profits—were judged irrelevant by applauding investors throughout this land grab. Even though Amazon has yet to make a profit, the stock market has given it a larger value than the entire conventional book selling and publishing businesses combined. Some e-commerce entrepreneurs admit to being perplexed as to how they can ever earn a profit in private. They’ve had to concentrate significantly more on expansion as a result of need. Tactics are subservient to experimentation, which is subjected to strategy. The Great White Hope is an acquirer, which means that it should be left to someone else to address the issue. Meanwhile, continuing expanding at a rate of 200 percent every year.
However, that era is coming to an end: the obvious land has been taken, the conventional incumbents are becoming more serious, and the Internet stock bubble is losing some of its luster. The second generation of internet commerce is upon us. The essential players—branded-goods providers, physical shops, electronic retailers, and pure navigators—will focus their efforts on protecting or conquering territory rather than claiming it. They will be obliged to concentrate on achieving competitive advantage and developing tactics to do so. Virtual commerce must become more real.
As a Separate Business, Navigation
Shoppers find it difficult in the familiar realm of physical commerce. If you want to purchase a shirt, for example, you have a million options to choose from, and you’ll have to get in your vehicle and go to malls and downtown department shops to compare them. A comprehensive search takes time, is tough, and is always incomplete. It isn’t done. Consumers instead depend on product producers and merchants to guide them through their options. These companies, in turn, profit from customers’ search expenses in order to gain a competitive edge. They design navigational tools—from branding and advertising to relationship development and merchandising—that assist customers bypass the intricacies of a complete search and identify things they’re eager to purchase. In other words, sellers have some influence over the navigation function since navigating this network of information without assistance is comparably difficult and costly. Indeed, in most consumer firms, influencing navigation—say, via a strong brand identity—produces significantly more profit than producing or selling the actual product itself.
Millions of individuals, on the other hand, share vast volumes of knowledge directly, promptly, and for free via the Internet. Consumers may do far more thorough searches at a low cost. Physical warehousing and distribution have no impact on navigation and selection. Physical storekeepers, who used to have a lot of power over customer decisions, no longer have that power. Customers may buy directly from product vendors. Electronics stores may concentrate on navigation while outsourcing fulfillment. And “pure” navigators, such as the Yahoo! search engine and Quicken software, can arrange data and assist consumers in making sense of it even if they are not involved in the transaction.
This transition, in which navigation may be treated as a different company from production, marketing, and distribution, cannot be overstated. Navigation is the battleground for gaining or losing competitive advantage. Much of the earning potential of most consumer goods providers and retailers is on the line. Navigation, on the other hand, is a company with huge potential. The services provided by navigators will only accidentally correlate to any physically defined firm or industry. Many people still think of Amazon.com as an online bookstore, although its primary business is navigation. Its product line has quickly expanded from books and CDs to movies, pharmaceuticals, and toys. Amazon is worth more than the whole publishing sector combined, precisely because it is unclear what limits the domain for which Amazon is the chosen navigator.
Navigation is the battleground for gaining or losing competitive advantage
There are three dimensions to navigation. The term “reach” refers to a person’s ability to connect with others. It simply refers to the number of consumers a company can serve or the number of things it can sell. Affiliation refers to the interests that a company represents. The breadth and detail of the information that a company provides or gathers about a consumer is referred to as richness. The fight for competitive advantage will take place along these dimensions. (See “The Three Dimensions of Navigational Advantage” in the sidebar.) And various players begin with a variety of advantages.
Reaching for the Top
Category killers and retail superstores fought successfully on reach before the advent of e-commerce by providing accessible locations and a wide assortment. However, their format is limited by the economics of things. Only 200,000 titles are available at the United States’ biggest physical Barnes & Noble shop. Amazon.com has 4.5 million books and is “present” on more than 25 million computer screens. Because the navigation function (catalog) is isolated from the physical function, this orders-of-magnitude increase in reach is achievable (inventory). EveryCD was so confident in its reach that it offered rewards to clients who discovered a title missing from its inventory. In a classifieds industry that is currently more than 50 times bigger than any physical newspaper, Careerpath.com connects prospective businesses with job searchers. Reach expands when it is not confined by physical restrictions. This surge isn’t limited to traditionally defined industries. If customers appreciate broad search capabilities, the smart navigator will be able to search across the domains that they like. The navigator who is the first to do so will get an advantage. This hasn’t occurred yet—e-retailers still closely resemble physical counterparts—but it will. Dell is a company that offers more than just computers. Amazon has quickly expanded its offerings beyond books.
This presents the alarming potential of unstable business limits for insurgents, particularly e-retailers. CDNow established itself a strong, reach-based position in CD sales, only to lose it to Amazon in a matter of months. CDs aren’t a realm where customers can effectively define reach, as we’ve discovered after the fact. The concept of “CD retailing” as a separate industry brings to mind the realm of physical shopping. Toys, banking, grocery, and other categories may be similar. As electronic shops intrude on one another’s turf and test the actual bounds of customer search domains, category boundaries will continue to erode.
The growth of online reach also poses a serious problem for goods providers. At first glance, it seems to be a blessing—a opportunity to break away from the retailer’s grip and form direct ties with the ultimate customer. Any effort to do so, however, is by definition a navigational vehicle with limited product reach for the customer. Other considerations may compensate for this, but product vendors that only provide navigation for their own items are at a disadvantage. They may avoid participating in the growing navigation sector because they are stuck in a mindset that mixes navigation with marketing.
That’s great with many suppliers: they don’t want to be in the navigation business, and they embrace the proliferation of information channels via which customers may locate their goods and services. Small wineries, who are usually confined by limited distribution channels, applaud Virtual Vineyards’ success and are worried about the potential of more store rivalry. Amazon is seen as a boon for small publishers. However, the navigation function (also known as sales, marketing, advertising, branding, and promotion) is where many big suppliers find their distinction and competitive advantage. Losing control of navigation would mean relinquishing control of a key source of competitive differentiation. But how will they be able to retain it?
Product providers’ first response is to attempt to prevent the new navigators from reaching critical mass. After all, consumer-product providers are the ultimate source of product information, including features, price, and availability. If vendors refuse to allow Yahoo! and Quicken to scan their product listings and compare them to those of rivals, Yahoo! and Quicken will be relegated to their existing duties as glorified phone directory and checkbook.
There are two flaws in the defensive approach. The first is that stopping a navigator from analyzing information that is accessible electronically is technically challenging. Customers may access the website, and navigators can as well. It doesn’t have to be a human visit: modern technologies allow a navigator to visit hundreds of Web sites in a matter of seconds, query them, get replies, and then sort the results.
Obviously, the vendor may put an end to the game by refusing to run a website. But therein lays the second, more basic issue: it is not evident that doing so is in the best interests of any one vendor. To a seller, a navigator is still a source of additional business. Unless the selling company is very focused, the navigator’s capacity to acquire critical mass is unlikely to be reliant on data from a single source. As a result, although withholding data to navigators may be in the best interests of all sellers collectively, it is not in the best interests of any individual vendor. To combat the challenge posed by new navigators like as Quicken and Microsoft Money, the banking sector banded together to develop shared methods. Individual banks, on the other hand, discovered that participation in the common information standard that these navigators were developing had greater benefits for them. The defense as a whole crumbled.
So, if critical mass can’t be avoided, the old players will have to match the new’s reach. Product providers that wish to engage directly with customers must go to any length to gain the reach that buyers appreciate. To attain critical mass, this may include forming cooperative partnerships with rivals. It may include navigating to the goods and services of other businesses. Universal and BMG, two of the world’s major music corporations, have combined their efforts by launching GetMusic.com, an electronic joint venture that sells a wide range of records from both their own and other companies’ catalogs. The reach of CDNow and Amazon would far beyond any solo efforts. The provider will be disadvantaged, even fatally, if the scope of search grows outside the supplier’s own offering. (See “The Doomsday Scenario” in the sidebar.) As a result, forming coalitions is critical. Even if—especially if—competing suppliers are involved.
Physical stores may need to adopt a similar strategy. Most businesses see their online presence as a way to drive people to their physical locations: an HTML-enhanced storefront. Treating electronic retailing as a significant business in and of itself—indeed, as the biggest challenge and opportunity they face—forces them to operate in a very different way. They must define their product mix in the same way as e-retailers do, rather than the way that their brick-and-mortar shops compelled them to. Acquisitions and joint ventures may be required. They must fulfill orders in the most effective manner possible for the electronic firm, including splitting from their old storage infrastructure if required. They must take use of synergies with the physical retail sector, but only if doing so would assist the electronic sector compete. Above all, they must see e-commerce as a separate business and not jeopardize its success in order to preserve the conventional physical model. They must anticipate that the new company will eat into the old.
Catalog firms, more than any other traditional retailer, are most positioned to make the transition. Their fields of business are already characterized by brand identities and search domains that customers understand. They use advanced data-mining algorithms to constantly modify their services. Their fulfillment processes are set up to handle deliveries from afar. It’s no surprise that Land’s End and Victoria’s Secret are among the pre-Internet businesses that have made the most effective shift to electronic commerce.
The Web is still seen by physical merchants as a venue for marketing and promotion: a new channel for doing old things
Other employees, on the other hand, will have a considerably more difficult time transitioning to the Web. Product producers and physical merchants continue to see the Internet as a platform for marketing and promotion: a new way to accomplish old things. If they maintain this viewpoint, they will be handicapped against new competitors—whether e-retailers or pure navigators—who consider e-commerce as a separate industry and pursue reach with zeal.
Competing on the Basis of Affiliation
Consumer-savvy customers are pressuring e-commerce enterprises to shift their allegiance away from suppliers and toward consumers. For example, book publishers have traditionally paid physical booksellers to promote their titles by placing them in prominent locations in the shop. Consumer outrage over the conflict of interest and lack of trust drove Amazon to publicize such deals on its home page when it performed the electronic equivalent—allowing publishers to pay for better Web page placement. The nature of affiliation is changing in ways that even electronic sellers are unable to regulate.
This shift in allegiance is in part due to Internet culture and the increased openness with which everyone now acts. It is, nevertheless, a result of the collapse of the trade-off between richness and reach. When a sales agent exclusively offers one product line (such as life insurance), he will push it as hard as he can since he has no alternative but to act as a product supplier’s representative. Give that salesman the whole universe of alternatives to present, and he’ll be far more likely to do it objectively. If you go even farther and provide the customer all the information she needs to compare salespeople, the chances are that the salesperson will work more to delight the customer than any single product seller.
Microsoft CarPoint gives automobile purchasers the information and tools they need to evaluate different cars based on 80 different criteria. That type of information is never provided by physical sellers. Neither do the automakers on their own websites (quite reasonably). Microsoft is able to do so because Internet technology allows for the collection of such rich data from a broad range of sources at a low cost. Microsoft chose to do so in order to obtain a competitive edge over its rivals in the navigation market.
This shift in affiliation does not require Microsoft to be compensated by the customer. Advertising, hyperlinks, and the sale of related items or services may all contribute to its revenue. However, if the customer is prepared to pay, the case is further strengthened. Consumers will never pay for navigation, according to conventional opinion, but this may prove to be erroneous. (It was originally commonly assumed that customers would never pay for television programming; but, they now pay for cable, satellite, pay-per-view, and rental DVDs on a regular basis because they feel the quality is worth the money.) The lack of paid navigation today may reflect corporations’ inclination to give it out rather than customers’ refusal to pay. Paid navigators will very certainly develop to assist the most intelligent customers with their biggest and most complicated transactions. The tilt in allegiance will be amplified where they do.
The pure navigator is ready to use the affiliation dimension to his advantage. Because Lipper and Motley Fool aren’t in the business of marketing funds, they’re in a better position to guide you to mutual fund investments than Fidelity. Pure navigators may act as “meta-navigators,” comparing numerous electronic merchants utilizing technology.
When the selection criteria are straightforward and well specified, consumer-affiliated navigators are most helpful. Pure navigators may be at a disadvantage versus providers when the decision involves qualitative weightings of nonstandard parameters because they lack the essential product-information richness. Because choosing a new automobile is such a difficult and subjective activity, consumers are reluctant to outsource it to a human or computer agent. However, after they’ve decided on a model, choosing a dealer (if dealers still exist) may be a simple issue of pricing and availability, which a consumer-affiliated navigator might easily manage. Within a single transaction, there may be many phases where customer affinity plays a varied role.
The product provider is in the weakest position to profit from affiliation since, by definition, the supplier has an interest in the transaction that differs from the consumer’s. Customers accept clearly nonobjective product hype as part of the consumer experience in numerous industries, such as sports automobiles and high fashion. The product seller, on the other hand, has a problem when customer affiliation counts (and the pure navigators have every motivation to perpetuate the impression that it always matters).
One solution is to take advantage of how navigational firms have evolved outside product categories. Instead than just selling things, provide a navigation service that solves issues for customers. Include impartial data and decision-making tools on stuff that isn’t relevant to your company. Provide impartial information on items and services that you do not offer in the consumer’s search realm. Provide thorough but not necessarily equivalent data about your own items and those of your rivals, but subtly skew the presentation with alternate ordering and emphasis. With SABRE, American Airlines accomplished all of this a long time ago. Dell is presently integrating its wildly successful online sales operation into a far larger configuration and retailing solution. By doing so, it matches the reach of existing computer stores, gives thorough and really impartial navigation to things it doesn’t create, and keeps the option of promoting its own products. Although the general navigational concept supports customer affiliation, Dell maintains merchant affiliation where it counts. It’s the finest line of defense in the computer retailing industry against the danger of a cyber-Wal-Mart, whether it’s Amazon, Microsoft, or even Wal-Mart.
Dell’s plan exemplifies another another manner in which affiliation benefits the customer without the consumer having to pay for it. Dell may give a rigorously complete and impartial reference to peripherals in order to maintain a slightly skewed portrayal of its machines. If it succeeds, it’ll be great for Dell, but it’ll be cold comfort for peripheral makers, whose products will now be put to the test. The logical approach would be for producers of a collection of (noncompeting) peripherals to get together and give a favorable depiction of their own goods alongside a thorough and impartial reference to computers. If the two navigators then evenly divided the browsing and purchasing populations for computer-related items, the upshot would be that impartial navigators would drive half of the electronic sales volume for computers and peripherals—more than half, as customers learn to cherry-pick. Sellers eagerly commoditize one another’s businesses in order to protect their own from commoditization.
Sellers eagerly commoditize one another’s businesses in order to protect their own from commoditization
Of course, the primary reason this occurs in the virtual world but not in the real one is because the consumer’s favorite search domain is unrelated to any actual business. As a result, the supply industries have the most trouble maintaining navigational control. They may lose control of allegiance precisely because they lose control of reach.
Richness as a Differentiator
Traditional players find it difficult to keep up with electronic shops and pure navigators when it comes to reach and affiliation. They do, however, have inherent benefits in terms of diversity. Traditional shops may make use of their extensive consumer information. Suppliers may benefit from having a lot of product knowledge. This will very definitely need a rethinking of their branding strategy.
Customer data in plenty
Retailers have always been in a good position to acquire and utilize information about their consumers, but the Internet has significantly improved their capacity to do so. For example, 1-800-Flowers now utilizes the Internet as its major customer contact channel since it allows the firm to provide many more tailored services at a little extra cost. The firm keeps a client information file containing information about anniversaries and birthdays, as well as a list of presents provided to individual customers. As a result, it may notify clients when a birthday or anniversary is coming, as well as propose gifts. The firm has developed beyond its physical roots into an electronic concierge service, so these presents are no longer merely flowers.
This type of low-cost, endlessly selective customisation of offers, goods, and marketing is unrivaled on the Internet. Browsing activity, as well as shopping history and demographics, may all be analyzed using data-mining tools. And the data is essentially untapped: until recently, Excite! gathered 40 terabytes of consumer data each day and did nothing with it; Amazon’s undifferentiated mass e-mails were lovingly dubbed “Spamazon” by receivers. All of that will change when Firefly, Match-Logic, Aptex, and other companies create systems to trace patterns in terabytes.
Some e-retailers have already progressed to the next level. CDNow, for example, asks its clients to tell them about their favorite music artists. The firm correlates that data with the individual’s real music purchases, then uses Net Perceptions’ statistical matching engine to locate a universe of others with similar likes. It might then suggest music that has been bought by the wider group. Although reach is mainly unimportant and the objective is clearly to sell records, many consumers like the service and have become CDNow loyalists as a consequence. Relationships are built on the foundation of rich consumer data.
The vast data that physical shops acquire from different sources is a significant advantage. Even when properly mined, web-derived data is a fairly tiny database when compared to that collected by grocery shops and credit card corporations. Businesses, on the other hand, may develop powerful connections and gain a competitive edge by combining the two types of information and leveraging the Web to customize on the fly.
Two constraints restrict the use of consumer data-driven tactics. The first is privacy concerns, which require customers to be informed about and consent to any data transfers. This is increasingly becoming a requirement of running excellent business. The second issue is the ability of customers to seek for and arrange information on their own. Consumers who use Quicken, for example, may design their own statement of net worth: they don’t have to provide a financial institution all of their financial data (let alone all of their assets). Insidiously, if the customer data file is valuable, the consumer might acquire and sell the same data as the navigator.
These two variables certainly restrict the value of rich consumer data, but within those parameters, both electronic and physical shops have a powerful weapon. Because no one entity is likely to have the best database, and because digital information can be purchased and sold, alliances and marketplaces for exchanging data are likely to emerge. Most of the value will be extracted by the originators and key aggregators of such data, whether they be grocery shops, websites, credit agencies, or consumers themselves.
Product details are abundant
Because merchants are more intimately linked to consumers, it is more difficult for manufacturers to exploit rich customer data competitively. When it comes to detailed product information, however, producers have a unique edge.
In the music business, for example, the majority of the big labels—Universal, Sony, BMG, and Warner—are building singer biographies, recording histories, chat rooms, and discographies that are rich in content. They’re employing them in a variety of ways, such as standalone Web sites, information feeds to electronic shops, and improved CDs that are sold straight to consumers. Cross-selling from their product portfolio is one of their goals. Part of the process is to cultivate a cult following for the performer. Part of the goal is to provide the electronic retailing business marketing tools that would otherwise be limited to Tower Records or Amazon, preventing retailer concentration and the resulting change in bargaining power.
When this kind of content is published as a standalone Web site, it has limited reach: customers can’t readily locate it, and the product choice is limited. It also has association limitations: corporate Web sites are seldom a reliable source for picks and pans or the quirky, anti-establishment rumor mill that bestows legendary meaning on musicians’ lives. The concept, however, has a lot of promise as a low-cost method to develop a communication route that bypasses merchants.
In certain cases, rich product-information methods work well for manufacturers, but not in others. When a product is constantly developing, such as mobile phones and software, the product provider possesses up-to-date knowledge that merchants and navigators lack. When innovation is more aesthetic than actual, but customers like the “sizzle,” these tactics are also beneficial. Stereo components, automobiles, and even kitchen knives all showcase attributes that customers want to trust in. “Uni-Q Technology with its outstanding power to unify co-planar and co-axial directivity variables in the key crossover area,” for example, may not pass the objective examination of engineering bench testing. However, many audiophiles would prefer read and trust such information (and boast about it to their friends) than face a Consumer Reports cold evaluation claiming that those $3,000 loudspeakers sound no better than a $300 pair offered at Circuit City.
As a result, rich product information is a strong but risky weapon in the hands of the product provider. Rich product-information methods may be successful whenever customers accept evangelism, excitement, and a strong connotative environment. The Nokia 8800 is a phone made by Nokia. Apple’s next very awesome product. When detachment, objectivity, and comprehensiveness are more important, though, such strategy may backfire. Nobody will be impressed by breaking news or giddy excitement about mortgages or groceries. And, as with the car example, a single transaction may have certain elements (the virtual reality demo) where rich information triumphs over reach and affiliation, while others (price, availability) where it is completely unimportant.
Of course, manufacturers use branding to transmit extensive, product-specific information to their customers all the time. However, there are two sorts of brands, one of which we feel is significantly more suited to e-commerce than the other.
There are two different kinds of brands. The first, brand as experience, is significantly more suitable for e-commerce than the second, brand as conviction.
Some businesses use branding to express facts or ideas about product features. Sony, for example, persuades customers that for a slight but justified price premium, it would give better technology, excellent production quality, and miniaturization. Each of these statements is a belief about Sony products that may or may not be true.
Branding is also used by other marketers to convey an experience: sentiments, connections, and recollections. “Coca-Cola” isn’t a collection of proposals regarding the beverage. The flavor, the curving bottle, the logo, and the emotional and visual associations that the drink bears as a result of a century of promotion are all part of the brand.
On brand-as-belief and brand-as-experience, rich information channels have quite distinct consequences. The brand message is basically a navigational message to the degree that a brand is a matter of belief. When you buy a Sony, you are getting superior technology that is lighter and has better manufacturing quality. The brand-as-belief competes with the navigator since an objective navigator might deliver such messages. It would be damaging to Sony’s reputation if a reputable expert continually revealed that certain Sony items did not, in fact, have superior technology, weigh less, and so on. Even if the navigator confirmed Sony’s assertions, if consumers began to esteem Sony goods as a result of the navigator’s recommendation, the brand would be rendered obsolete. As a result, to the degree that the product can be navigated independently, brand-as-belief is equally susceptible.
It’s a different scenario when it comes to branding as an experience. Barbie is a trademark that is not defined by Mattel’s words or product specifications. Barbie is a collectable for adults and a dream world for young girls. Mattel invests a significant amount of time and money into creating and maintaining the consistency with which that fantasy world is presented. Barbie-as-experience will be amplified through more diverse communication platforms. Mattel can extend the Barbie dream world with dress-up, stories, and dialogues if it can reach young girls in a broadband, interactive, tailored environment (as will be customary in a few years). This not only improves the brand, but it also improves the product and the ownership experience. The brand, the product, and the experience are all essentially the same thing.
Toy makers and customers are now separated by category killer shops like Toys R Us. Mattel’s capacity to convey the Barbie experience is limited not just by the static nature of marketing displays, but also by shelf space constraints and the retailer’s aversion to favoring one toy maker over another. The corporation will be able to bypass the retailer and build a brand-as-experience that is significantly more appealing than what can be found in a physical shop by presenting the Barbie experience directly. The provider of the goods regains control.
In response to reach, an electronic merchant like eToys or Toysrus.com may create an interactive fantasy realm with characters from several manufacturers. In reality, such an universe could be more like the way a girl genuinely plays with her toys. They may react to affiliation by forming a partnership with educational broadcasters to produce a more “uplifting” website, aimed at gaining parental approval. If young girls want to imagine the experience through dolls or with a dash of political correctness, those are sound strategies. But we don’t think so. Brands that are truly exceptional as an experience transcend tinkering.
The emerging medium will enhance companies that are already characterized by experience rather than conviction. Brands that combine the two (as most do) must emphasize the experience component. The product supplier’s counter to the better reach and affiliation of retailers and navigators is rich, product-centered information that supports a brand defined as experience.
The Incumbent’s Conundrum
For established product suppliers and merchants, the logic of reach, connection, and richness creates a serious organizational challenge. They must accept that their value chain is being dismantled. Navigational aspects are no longer functions; they have evolved into enterprises. If incumbents wish to compete in any of those growing companies, they must do so by expanding their reach, affiliation, and richness, as well as changing strategy and scope as the company grows outside its physical boundaries. They can only achieve this if they psychologically break down the present company into its constituent parts, grasp the growth of new business models from the outside-in, and relieve their new-business managers of any need to prop up the old. Indeed, the new enterprises will fight effectively against the old, buying from or partnering with conventional rivals, and taking risks that may turn out to be expensive mistakes. Every component of the business, as well as the incentives and working style, will be altered.
For a well-established company, this is a huge task. Competencies, processes, and power structures all work against it. Many incumbents have discovered that the only solution is to distance the new endeavor as much as possible from the existing firm, sometimes even spinning it off. That is basically the only option if the goal is to compete on reach or affiliation. However, we have maintained that the incumbent’s greatest asset is his diversity. How can a company acquire the autonomy, drive, and freshness of an Internet start-up while still using its very rich customer- and product-centric data? That might need a considerably more risky organizational shift, similar to the one Schwab made when it slashed its brokerage fees, declared navigation to be its business definition, and began offering its rivals’ goods. But, like Ford and Sony, Schwab has a history of reinventing itself. For many incumbents, this is their first and final chance to redefine themselves.