marketing strategy and the internet: an organizing framework

Marketing Strategy and the Internet: An Organizing Framework

P, Rajan Varadarajan Manjit S. Yadav Texas A&M University

Competitive strategy is primarily concerned with how a business should deploy resources at its disposal to achieve and maintain defensible competitive positional advantages in the marketplace. Competitive marketing strategy focuses on how a business should deploy marketing resources at its disposal to facilitate the achievement and maintenance of competitive positional advantages in the marketplace. In a growing number of product-markets, the competitive landscape has evolved from a predominantly physical marketplace to one encompassing both the physical and the electronic marketplace. This article presents a conceptual framework delineating the drivers and outcomes of marketing strategy in the context of competing in this broader, evolving marketplace. The proposed framework provides insights into changes in the nature and scope of marketing strategy; specific industry, product, buyer, and buying environment characteristics; and the unique skills and resources of the firm that assume added relevance in the context of competing in the evolving marketplace.

In a growing number of product-markets, the competitive landscape has evolved from a predominantly physical marketplace to a broader marketplace encompassing both the physical and the electronic marketplace. The emergence of the electronic marketplace has been associated with a number of developments, including the following:

�9 Greater information richness of the transactional and relational environment

Journal of the Academy of Marketing Science. Volume 30, No. 4, pages 296.312. DOI: 10.1177/009207002236907 Copyright �9 2002 by Academy of Marketing Science.

�9 Lower information search costs for buyers �9 Diminished information asymmetry between sellers

and buyers �9 Electronic spatial proximity of buyers and sellers �9 Greater temporal separation between time of pur-

chase and time of possession of physical products purchased in the electronic marketplace

�9 Greater temporal proximity between time of purchase and time of possession of digital products purchased in the electronic marketplace

Paralleling these developments, the business literature has witnessed a number of new additions to its lexicon (e.g., e-business, e-commerce, e-procurement, e-services, e-customer relationship management, e-alliance partner relationship management, e-supplier relationship management, e-supply chain management, etc.). Concur- rently, scholarly research in marketing has focused on such issues as new models of communication (Hoffman and Novak 1996), buyers' and sellers' incentives to participate in the electronic marketplace (Alba et al. 1997; Burke 1997; Grewal, Comer, and Mehta 2001), and the migration of products to the electronic marketplace (Peterson, Balasubramanian, and Bronnenberg 1997; Yadav and Varadarajan 2001). The contextual relevance of factors such as industry structure characteristics (e.g., market dispersion and market thinness), product characteristics (e.g., product digitizability), and buying environment (e.g., information search costs) for competing in the electronic marketplace have also been explored in recent research (Alba et al. 1997; Bakos 1991, 1997; Balasubramanian, Krishnan, and Sawhney 2000; Benjamin and Wigand 1995; Blattberg and Deighton 1991; Burke 1996; Gurbaxani and Whang 1991; Hoffman and Novak 1996, 1997; Lynch and Ariely 2000; Rayport and Sviokla 1994). Contributions from strategy (e.g., Porter 2001), manage-

Varadarajan, Yadav / STRATEGY AND THE INTERNET 297

ment information systems (e.g., Adam and Yesha 1996; Huber 1990; Malone 1997; Malone, Yates, and Benjamin 1989; Weill and Broadbent 1998), economics (e.g., Bakos 199 t, 1997; Brynjolfsson and Seidmann 1997; Gurbaxani and Whang 1991; Shapiro and Varian 1999), and technology (e.g., Clark 1996; Oliver 1996) complement the above research streams in marketing.

Against this backdrop, this article focuses on the implications for marketing strategy of a competitive landscape that is evolving from a physical marketplace to one encompassing both the physical and the electronic marketplace. More specifically, our objectives are to

delineate the nature and scope of competitive marketing strategy in reference to competing in the physical and the electronic marketplace; and develop a conceptual framework that delineates rep- resentative industry structure, firm, product, buyer, and buying environment characteristics pertinent to competing in the physical and the electronic marketplace.

The remainder of this article is organized as follows. First, we provide a brief overview of the evolving electronic marketplace and extant perspectives on competitive strategy. Second, building on extant literature, we present a conceptual framework focusing on selected drivers and outcomes of competitive strategy. Third, we present a refinement and extension of the general framework by delineating certain additional industry structure, firm, product, buyer, and buying environment characteristics that are particularly pertinent to competing in an electronic marketplace (and, by extension, in the new competitive landscape that encompasses both the physical and the electronic marketplaces). The proposed framework focuses on new challenges and opportunities for ongoing producer firms (legacy businesses) as they seek to understand the implications of the evolving marketplace for competitive marketing strategy.

THE ELECTRONIC MARKETPLACE: CONCEPTUALIZATION AND EVOLUTION

Conceptualization of the Electronic Marketplace

The Intemet, a rapidly expanding global computer and communications infrastructure, has facilitated the emergence of computer-mediated environments that serve as electronic marketplaces for buyers and sellers. Bakos (1991) defined the electronic marketplace as "an inter-organizational information system that allows participating buyers and sellers to exchange information about prices and product offerings" (p. 296). According to Barrett and

Konsynski (1982), interorganizational information systems span organizational boundaries, linking firms to their customers and/or suppliers. This view of the electronic marketplace, while useful, appears restrictive in two respects. First, the term interorganizational information system seems to suggest an infrastructure created by and for organizations. In reality, the role played by consumer- controlled access devices (e.g., personal computers and personal digital assistants) continues to increase. There- fore, in conceptualizing the electronic marketplace, the broader term networked information system seems more appropriate than the seemingly restrictive term interorganizational information systems. Second, the nature and scope of activities that occur in the electronic marketplace often extend well beyond the "exchange of information about prices and product offerings." In fact, what often transpires after the exchange of information--a transaction and other activities related to the transaction-- represent important functions that are also facilitated by the electronic marketplace and should, therefore, be noted. While the specific implementation of such functions may vary across firms, any conceptualization of the electronic marketplace must more fully encompass the scope of activities that may occur in such a setting. Accordingly, we conceptualize the electronic marketplace as a networked information system that serves as an enabling infrastructure.for buyers and sellers to exchange information, transact, and perform other activities related to the transaction before, during, and after the transaction. A brief elabora- tion of this conceptualization follows.

As can be noted, an electronic marketplace performs essentially the same set of functions as a physical marketplace--both bring buyers and sellers together. While they both share this important common purpose, electronic and physical marketplaces do have certain distinguishing characteristics. The most obvious salient difference, of course, is that the enabling infrastructure is electronic rather than physical. This difference, in turn, leads to a number of other differences that are worth mentioning. For instance, variations such as the following are increasingly prevalent in the electronic marketplace: private electronic marketplaces that serve either multiple buyers and a seller (e.g., buyers purchasing tickets directly from an airline's Web site) or multiple sellers and a buyer (e.g., sellers participating in a live reverse auction at a prespecified date and time in response to a call for bids posted by a buyer). Such variations can occur in the physical marketplace as well, but they can be scaled much more readily in the context of the electronic marketplace. A second distinguishing characteristic pertains to the increasingly prominent role played by other participants in the electronic marketplace--entities other than buyers and sellers who provide value-added services to buyers and/or sellers. For example, interacting with other marketplace participants may involve activities such as a buyer accessing information

298 JOURNAL OF THE ACADEMY OF MARKETING SCIENCE FALL 2002

about product quality and price of competing brands comprising his or her consideration set from an entity other than a seller (e.g., an informediary) and engaging in a conversation about product quality and price of competing brand offerings with past and prospective buyers in an electronic chat room. Again, while such interactions can also occur in the physical marketplace, their prevalence and scalability are greater in the electronic marketplace. As the electronic marketplace evolves, additional distinguishing characteristics relative to the physical marketplace may emerge and thus deserve close attention. How this evolution is likely to occur is the focus of the next section.

Evolution of the Electronic Marketplace

The concept of interactivity is crucial for understanding current buyer-seller activities in the electronic marketplace and how these activities may evolve over the years. Hoffman and Novak (1996) distinguished between unme- diated interactivity (e.g., direct face-to-face communication between two individuals) and mediated interactivity (e.g., communication between two individuals facilitated by a device). Steuer (1992), a communication theorist, defined mediated interactivity as the "extent to which users can participate in modifying the form and content of a mediated environment in real time" (p. 84). In the context of a computer-mediated environment, interactivity would refer to a user's ability to alter the environment experi- enced via a computer (Hoffman and Novak 1996). Yadav and Varadarajan (2001) reviewed extant work in the area and defined interactivity in the electronic marketplace as "the degree to which computer-mediated communication between entities comprising the marketplace is (a) bi- directional, (b) timely, (c) mutually controllable, and (d) responsive" (p. 6). With technological advances currently occurring in the realm of connectivity (i.e., how consumers and firms connect with and participate in computer-mediated environments), even higher levels of interactivity can be envisioned in the future (Cairncross 1997).

According to Fidler (1997), understanding the evolution of different forms of media technologies can provide clues about how buyers and sellers may embrace (or resist) higher levels of interactivity in the electronic marketplace. Fidler described the evolution of three types of media technologies: document domain (print), interpersonal domain (telephone), and broadcast (radio, television). Fidler noted that media technologies seem to incubate for many years (even decades or centuries in some cases) before they have a widespread impact on the marketplace. In the document domain, it took almost 300 years before the steam press brought automation to the Gutenberg press and facilitated its rapid expansion. In the broadcast domain, the first ama- teur radio broadcast occurred in 1906, but it was not until

1920 that Westinghouse's first commercial radio station went on the air (see Hanson 1998 for an interesting account of how the radio industry evolved in its early years). The popular press described the radio as "a fad that seemed to come from no where [and grew] with almost stunning suddenness" (Douglas 1991:190)----even though radio technology had been evolving for more than two decades. FM technology, developed in 1936, languished until the 1960s, when it was resuscitated by congressional legislation (the 1967 Public Broadcasting Act) that ush- ered in the era of public broadcasting in the United States. Finally, in the interpersonal domain, the telephone market remained quite restricted until the key patents expired in 1895 and allowed independent phone companies to enter the market.

As the electronic marketplace represents a merging of different forms of media (which Fidler 1997 referred to as mediamorphosis), it is also instructive to study consumer adoption of previous generations of similar products and services. VCA (Video Corporation of America), a joint venture of Knight-Ridder and AT&T, attempted to bring the document domain to television in 1983 with a service called Videotron. Subscribers to this service, which used a setup box on their television set, could access financial, local, and national news. It was discontinued in 1986 after receiving a disappointing response from the market. Simi- lar services met the same fate in England (Prestel) and Germany (Bilderschirmtext) but succeeded in France (Minitel) (see Mayntz and Hughes 1988 for details related to these early attempts at providing online information services). Reviewing such historical evidence, Fidler (1997) concluded that

however society and media may change, we can be reasonably assured that they will embody and build upon the experiences of the past, as they always have. By letting history be our guide, we will see that the forces shaping our future are essentially the same that have shaped our past. (P. 7)

Recognizing the potential relevance of extant literature and perspectives, the next section provides a broad overview of competitive strategy and the drivers and outcomes of competitive strategy. In a subsequent section, we build on this foundation and delineate additional characteristics and considerations that merit attention in the context of the evolving marketplace.

DRIVERS AND OUTCOMES OF COMPETITIVE STRATEGY

Strategy exists at multiple levels--corporate, business, and functional---of an organization. Corporate strategy refers to a firm's choice of businesses to be in. Business or competitive strategy refers to how a particular business in a

Varadara jan , Yadav / S T R A T E G Y A N D T H E I N T E R N E T 299

FIGURE 1 Competitive Strategy: Drivers and Outcomes

8. Macro Environment

�9

-Social

,Legal

,Regulatory

�9

.Infrastructure

.Technological

4. Product Characteristics �9 Goods vs. Services

�9 Search vs. Experience

vs. Credence Goods

�9 Tangibles Dominant vs.

Intangibles Dominant Products

l 5. Buyer and Buying Environment Characteristics

�9 Individual vs. Organizattonal

�9 Non-trivial Information Search Costs

�9 Non-trivial Information

Asymmetry VlS-~t-vls Seller

�9 Low Cost Transparency

�9 One-to-Many Communicauon Model

2. Industry Structure Number of Competitors Size of Compehtors Industry Concentration Market Growth Rate Entry & Exit Barriers

L 1. Competitive Strategy

�9 Generic Competttive Strategy *Product Strategy "Promotton Strategy *Pricing Strategy *Distribution Strategy

3. Firm Characteristics, Skills & Resources

�9 Size �9 Brand, Customer & Channel

Equity �9 Positioning Skills �9 Segmentation Skills

6. Marketplace

Performance �9 Market Share & Growth

�9 Sales & Growth

�9 Customer Satisfaction

�9 Customer Loyalty

7. Financial Performance *ROI �9 Earnings Growth �9 Shareholder Wealth

N O T E : El l ipses ( . . . . . . ) denote that the d r ive r s /ou tcomes are in tended to be

firm's portfolio of businesses chooses to compete in the marketplace. At the functional level, marketing strategy (or competitive marketing strategy) refers to how a business chooses to deploy marketing resources at its disposal to facilitate the achievement of competitive positional advantage(s) in the marketplace. The centrality of pattern of resource allocation to competitive strategy is evident in a number of conceptualizations and definitions of strategy. For instance, Hofer and Schendel (1978) defined strategy as the "fundamental pattern of present and planned resource deployments and environmental interactions that indicates how the organization will achieve its objectives" (p. 25). Barney (1996) defined strategy as "a pattern of resource allocation that enables firms to maintain or improve their performance" (p. 27).

Building on the extant literature, this section provides an overview of the embeddedness of the competitive strategy of a business in the industry structure, firm, product, buyer, and buying environment. In the next section, we present an exposition of how competitive strategy in an electronic marketplace can also be viewed as embed- ded in these same factors. However, while the factors remain the same, we draw attention to certain additional

i l lustrat ive ra ther than c o m p r e h e n s i v e . R O I = re turn on inves tment .

industry structure, firm, product, buyer, and buying environment related variables that are particularly relevant considerations in regard to competing in the electronic marketplace.

Building on extant research in marketing, strategic management, and industrial organization economics focusing on understanding, explaining, and predicting business performance, we present a framework delineating the relationship between the following (see Figure 1):

1. competitive strategy pursued by the business, 2. structural characteristics of the industry in

which the business competes, 3. distinctive skills and resources of the firm, 4. characteristics of the product offerings of the

business, 5. characteristics of buyers and the buying envi-

ronment, 6. marketplace performance, 7. financial performance, and 8. macro environment.

The proposed framework constitutes an attempt to delineate certain key linkages between competitive strategy


and its drivers and outcomes. The intent here is to parsimo- niously organize extant works and perspectives focusing on these linkages. After briefly reviewing this framework, we use it as a foundation for our subsequent discussion of competitive strategy, drivers of competitive strategy, and outcomes in the context of the electronic marketplace (see Figure 2).

Competitive strategy and performance (Links 1 ~ 6 and 6 ~ 7). As noted previously, the purpose of competitive strategy is to achieve a competitive positional advantage (differentiation and/or cost advantage) in the marketplace. Achieving competitive differentiation and cost advantage entails performing activities comprising the value chain in ways that lead to differentiation of a business's offerings from its competitors' offerings and at a lower cost relative to competitors, respectively. The sustainability of competitive positional advantages is a function of the characteristics of the firm's skills and resources underlying the strategy (i.e., the extent to which the underlying skills and resources are rare, valuable, nonimitable, and/or characterized by the absence of equiv- alent substitutes) (see Barney 1991). A business's competitive positional advantages, in turn, affect its marketplace performance (e.g., market share, market share growth rate, sales, sales growth rate, customer satisfaction, customer loyalty) and financial performance (e.g., return on invest- ment, earnings growth rate, shareholder wealth).

Industry structure characteristics and competitive strategy (Link 2 ~ 1). Industry structure refers to the economic and technical characteristics of an industry that de- fine the context in which competition takes place. Research in industrial organizational economics, strategic management, and marketing lends support for the link between the structural characteristics of the market in which a business competes and the competitive strategy pursued by the business. For instance, the structure-conduct- performance (SCP) model (Bain 1956) views industry structure as determining the behavior (conduct/strategy) of businesses in an industry, and conduct as determining industry performance. Conduct/strategy, in effect, is viewed as merely reflecting the industry environment in which a business operates. For example, to the extent that concentrated market structures are conducive to facilitating oligopolistic coordination among competitors, it could result in lower output, higher prices, and higher rates of retum.

Firm-specifc skills and resources and competitive strategy (Link 3 --~ 1). A firm's unique skills and resources are a major determinant of its choice of competitive strategy at the level of individual business units. Competitive business strategy entails leveraging the firm's unique skills and resources to perform the various activities in the value chain in ways that differentiate a business's offerings from its competitors' offerings and/or at a lower

cost. The resource-based view ofthefirm suggests that the sustainability of the competitive advantage of the businesses in a firm's portfolio is a function of the core competencies of the firm (Barney 1991; Hunt 2000; Prahalad and Hame11990). A firm's core competencies are based on the collective learning in the organization and built around resources that are valuable, rare, difficult to imitate, and not easily substitutable (Barney 1991). As noted by Prahalad and Hamel (1990), "The real sources of advantage are to be found in management's ability to consolidate corporate- wide technologies and production skills into competencies that empower individual businesses to adapt quickly to changing opportunities" (p. 81).

Product characteristics and competitive strategy (Link 4 ---) 1). There is a long history of research in marketing and economics focusing on the competitive strategy implications of the characteristics of a product. The vast body of literature in marketing on product and brand management, as well as on innovation and new products, provides valuable insights into the linkage between product characteristics and marketing strategy. Seminal works highlighting the differences between goods and services (Shostack 1977), tangible and intangible product attributes (Levitt 1981), and search, experience, and credence attributes of products (Darby and Karni 1973; Nelson 1970) also provide valuable insights into the linkage between product characteristics and the competitive strategies of businesses.

Buyer and buying environment characteristics and competitive strategy (Link 5 ---) 1). The literature in marketing focusing on the role of buyer characteristics and buying environment characteristics on competitive strategy is also vast and extensive. Starting with Webster and Wind's (1972) call for studying the differences related to individual and organizational buying processes, a large body of research has emerged over the years that seeks to provide insights into the competitive dynamics of business- to-business environments (see Keep, Hollander, and Dickinson 1998 for a historical overview). Research focusing on the interconnectedness of the information environment prevalent in a marketplace and the competitive strategies of businesses can be traced to the early work of Stigler (1961) and Ackerlof (1970). Stigler's analysis of markets, characterized by nontrivial search costs, continues to inspire research efforts in the area (e.g., Dickson and Sawyer 1990; Urbany 1986). Ackerlof's notion of information asymmetry in the marketplace (which gives an information advantage to sellers over buyers) also has served as a foundation for a large body of subsequent work (e.g., Rao and Bergen 1992; Urbany, Dickson, and Wilkie 1989). Building on the drivers of competitive strategy delineated in Figure 1, in the next section, we focus on the drivers of competitive strategy in the physical and electronic marketplace.


INTEGRATING THE INTERNET INTO COMPETITIVE STRATEGY: A CONCEPTUAL FRAMEWORK

Integrating the Internet into a business's competitive strategy and competitive marketing strategy is increasingly becoming an imperative, with the market environment evolving to encompass both the physical and the electronic marketplaces. Figure 2 provides an overview of selected industry structure, firm, product, buyer, and buying environment characteristics that assume added relevance in the context of competing in the evolving hybrid marketplace. It should, however, be noted that the factors delineated in Figure 1 continue to be relevant considerations from the standpoint of competing in the electronic marketplace in and of itself, as well as in the broader marketplace encompassing both the physical and the electronic marketplaces. In Figure 2, Links 8 ---) 2, 8 ~ 3, 8 4, and 8 ---) 5 are shown as dotted lines. These linkages serve to highlight technological developments that have necessitated the need to revisit extant perspectives relating to Links 2 ~ 1, 3 ---) 1, 4 ~ 1, and 5 ~ 1. A more detailed discussion of these linkages follows.

In response to the change in the frame of reference for competitive strategy from "How to compete in the physical marketplace?" to "How to compete in the physical and the electronic marketplace?" businesses have instituted a number of changes in their competitive marketing strategies (i.e., their pattern of deployment of marketing resources). Illustrative of such changes are the following (see Box 1 in Figure 2):

1. Changes in resource deployments manifesting as relative emphasis on traditional channels versus electronic channels (i.e., the Internet) for �9 providing product-related in format ion to

customers, �9 communicating with customers, �9 promoting to customers, �9 transacting with customers, �9 distributing digital/digitizable products, and �9 customer trial/sampling of digital/digitizable

products. 2. Changes in resource deployments manifesting

as greater emphasis on �9 marketing directly to customers in the electronic

marketplace versus through intermediaries (traditional, electronic, and/or hybrid intermediaries),

�9 market pioneering (first to market), and �9 strategic alliances.

3. Deployment of resources in an attempt to leverage the potential of the Internet for innovations, customization, and augmentation in the realms of product, price, promotion, and distribution (e.g., product innovations, customization, and augmentation).

. Deployment of resources in an attempt to leverage the potential of the Internet to pursue new business models and competitive strategies. "~

The potential of the Internet can be leveraged for enhancing the effectiveness of a business's competitive strategy as well as the efficiency of its operations. The absolute amount of marketing resources a business chooses to allo- cate toward competing in the electronic marketplace, as well as the allocation relative to the resources allocated to competing in the physical marketplace, will therefore be affected by both efficiency and effectiveness considerations. Complementing Box 1 in Figure 2, Table 1 provides an overview of how businesses might leverage the potential of the Internet to enhance the effectiveness of their marketing strategy and the efficiency of their marketing operations in the evolving hybrid marketplace. As indicated in this table, with the exception of the actual distribution of nondigital/nondigitizable products, effective and/or efficient deployment of all other marketing mix elements can be enhanced by leveraging the potential of the Internet.

We next focus on selected linkages (drivers of competitive strategy) delineated in Figure 2. While we recognize that a business's competitive strategy decisions will realis- tically be based on a multiplicity of considerations, in this initial exposition, we limit our discussion to linkages between specific drivers of competitive strategy delineated in Boxes 2, 3, 4, and 5 and competitive strategy (Box 1). Our goal is to develop the logic underlying these linkages generally rather than describe all possible relationships between pairs of variables depicted in Figure 2.

Industry Structure Characteristics and Competitive Strategy

Market thinness, customer dispersion, and relative emphasis on competing in the physical versus the electronic marketplace. Among the structural characteristics of a market that favor placing greater emphasis on competing in the electronic marketplace vis-~t-vis the physical marketplace are market thinness and customer dispersion (Gupta and Chatterjee 1997). Thin markets, such as the market for antique cars, tend to have undesirable properties for both buyers (e.g., lack of choice) and sellers (e.g., inability to locate buyers). The electronic marketplace, due to its effectiveness in bringing potential buyers and sellers together, is conducive to improving the working of thin markets. Dispersion of customers over a wide geo- graphical area, as opposed to concentration in one geo- graphical area, results in a market that is thin on the buyer side at the local level. A business focused on a local market may not be viable due to the small number of potential buyers in that market. However, by leveraging the potential of the Internet, a seller, by aggregating buyers dis-


TABLE 1 Leveraging the Potential of the Internet for Enhancing Marketing

Strategy Effectiveness and Marketing Operations Efficiency

Product Class

Digital and Dtgitizable Intangibles-Dominant Tangibles-Dominant Products a Products b'd Products c'd

Leveraging the potential of the Internet for the following: Information provision to prospective buyers Communicating with prospective buyers

(prepurchase and/or postpurchase) Customer service and customer relationship management e Market research Product innovations Product customization f Promotion renovations Promotion customization f Pricing innovations Price customization f Distribution innovations Distribution customization f Transaction processing Product distribution

Y Y Y

Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y Y y N g N g

NOTE: Y = yes; N = no. As indicated in the table, while the Internet is not a viable channel for the actual product distribution (i.e., physical transportation) of nondigitizable products (whether intangibles-dominant or tangibles-dominant products), it is a viable medium for, and/or a facilitator of, every other marketing-related activity delineated in the table. a. Software, music, videos, books, newspapers, magazines, financial information, etc. Although digitizable, in some instances, customers' preference may be for the product in a nondigital format (e.g., books). b. Air travel, car rental, hotel accommodations, etc. c. Automobiles, appliances, computers, entertainment electronics products, real estate, etc. d. Finer distinctions within intangibles-dominant and tangibles-dominant products can provide further insights into the viability of the Internet as a medium for, and/or facilitator of, the marketing-related activities delineated in the table. For instance, tangibles-dominant products can be further distinguished as products that are light (weight) and/or compact (volume) versus those that are heavy and bulky. All else equal, lower fulfillment costs associated with high value, light weight, and compact products make them more conducive to being bought and sold in the electronic marketplace. e. As in ECRM (electronic customer relationship management). f. Although customization at the level of an individual buyer may be feasible, the economics of customization and the buyer's level of interest in customized products (e.g., for products such as toothpaste, soap, detergent, etc.) are factors that should be borne in mind. g. Based on a broader construal of a product as an "augmented product," it could be argued that certain elements of an augmented product can be digitized (e.g., reviews of books, virtual tours of real estate properties) and distributed through the Internet. We include them here under "distribution innovations." Product distribution here refers to the actual distribution of the core product.

persed over several local markets, may be able to create a

viable cus tomer base and cater to their needs in the elec-

tronic marketplace.

Network externalities, tippy markets, and market pio-

neering. Network externalities (or effects) refers to the

p h e n o m e n o n of a product becoming increasingly valuable

to its present and potential users as the n u m b e r of others

who adopt, own, or use the product (i.e., the size of the net-

work) increases. For instance, as the instal led base of fax

machines increases, so does the usefulness of the device to

each individual with access to the service. For markets

characterized by ne twork effects, the market pioneer, by

cult ivating a large user base for its product offering prior to

the entry of competi tors, can achieve a competi t ive advan-

tage. Such effects are often observed in the case of many

communica t ion technologies (e.g., telephones, fax ma-

chines, e-mail) . Product digitizability, by facil i tat ing net-

worked intelligence (i.e., products be ing able to interact

with each other and with individuals) (see Tapscott 1996),

can increase substant ial ly a product ' s functionality. The

greater the order of magni tude of ne twork effects, the

greater the impor tance of market p ioneer ing as a source of

compe t i t ive advan tage for d igi ta l p roducts v i s -a -v i s

nondigi ta l products.

Network effects exist at mul t ip le levels:

�9 market exchange level (e.g., eBay.com vs. Amazon .

com and Yahoo.com auct ion sites),

�9 industry standards level (e.g., Windows vs. Mac Op-

erating System; VHS vs. Be tamax format VCRs),

�9 brand level (Word vs. WordPerfect word-processing

software).

Consider network effects as a source of f irs t-mover advan-

tage at the electronic market exchange level. Al l else

equal, sellers will be more predisposed to list to sell their products at electronic market exchanges with the most

Varadarajan, Yadav / S T R A T E G Y A N D T H E I N T E R N E T 303

FIGURE 2 Integrating the Internet Into Competitive Strategy: A Conceptual Framework

1 • 2 . Industry Structure

i 4. Product Characteristics .Market Thinness �9 Customer Dispersion

i -i~roduct Digitizabdtty | .Network Externalities �9 Market Tippiness

:- ................ P -Dtsaggregatability [ .Channel Structure

-Aggregatablhty /

8. Macro Environment

.Pohttcal

.Social

�9

�9

.Economic

�9

.Technological

.Other~

�9 Cost structure

�9 Primary-Complementary Space

�9 Product Tangibility

-Remote Information Provision

�9 Volume-Weight-Value

�9 Product Perishability

V

5. Buyer and Buying Environment Characteristics

�9 Dlrnlmshmg Informanon Search Costs �9 D~rnmlshmg Informanon Asymmetry i . . . . . . . . . . . . . . . . . .

�9 Increasing Cost Transparency �9 Many-to-Many Commumcatlon Model

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1. Competitive Strategy

�9 Relative Emphasts on Traditional and Electronic Channels for:

-Providing Information to Customers -Communicating with Customers -Transacting -Distributing -Trial/Sampling

�9 Relative Emphasis on: -Marketing Direct vs Intermediaries -Market Pioneenng & Alliances

�9 Leveraglng Electronic Channels for: -Product Innovation/Customization -Pricmg Innovation/Customization -Promotion lnnovatton/Customization -Dlstrtbunon Innovation/Customization

�9 Competing in Fundamentally New Ways

3. Firm Characteristics, Skills & Resources

�9 Resources ..... �9 IT Resources and Information

Processing Slolls

6. Marketplace

P e r f o r m a n c e

�9 Market Share & Growth

�9 Sales & Growth

�9 Customer Satisfaction

�9 Customer Loyalty

�9 Other Indicators

t 7. Financial Performance �9 �9 Earnings Growth �9 Shareholder Wealth �9 Other indicators

v

N O T E : El l ipses ( . . . . . . ) denote charac ter i s t ics de l inea ted in Boxes 1 to 5 in F igure 1. R O I = return on inves tment ; I T = in fo rmat ion technology.

buyers, and buyers will be more predisposed to look to buy at electronic market exchanges with the most sellers. The above behavior of sellers and buyers can be mutually rein- forcing. Network effects at the industry level for digital products are attributable to systems tending to evolve around (competing) standards. The associated high switching costs can lead to the market pioneer enjoying a competitive advantage (see Shapiro and Varian 1999). Farrell and Saloner (1985) showed that a standard, once established, exhibits "inertia" (i.e., it is difficult for the market to adopt another standard). When some users do move from one dominant (but inferior) standard to another emerging (but superior) standard, they experience "tran- sient incompatibility" (Farrell and Saloner 1986)--that is, they are temporarily part of a smaller network that lacks the network externalities of the dominant standard. Net- work externalities at the brand level are also driven by similar considerations in that a network of users of one brand competes, in effect, with networks represented by users of other brands.

Tippy markets refer to markets that tend to tip in favor of just one firm. While the term winner-take-all is often used

to describe such markets (Frank and Cook 1995), this is somewhat of a misnomer as a number of (albeit, very small) competitors can in fact coexist with a dominant firm in such markets (Economides and Flyer 1998). Shapiro and Varian (1999) suggested that a market's likelihood of tipping depends on two factors: (1) consumer demand for variety and (2) economies of scale. While consumer demand for variety can be high for certain types of digital products (e.g., entertainment software such as computer and video games), it can also be low (e.g., for productivity tools such as word-processing software). When consumer demand for variety is low, users tend to develop loyalty toward familiar products that get the job done. Digital products are generally characterized by considerable economies of scale as the reproduction of product compo- nents with a high level of digitization is associated with relatively low incremental costs. Furthermore, due to supply-side effects of network externalities (Katz and Shapiro 1985), the total cost of serving an installed base of users may in fact decline as the installed base expands (largely because the expanding installed base attracts additional firms that produce spare parts, supplies, and other value-


adding services). Shapiro and Varian noted that pioneering advantage is more likely to be sustained in product-markets characterized by relatively low demand for consumer variety and high economies of scale.

Channel structure characteristics and marketing directly to customers. An inverse relationship can be expected to exist between concentration at the intermediary level and the propensity of producers to transact directly with customers in the electronic marketplace (i.e., resort to disintermediation). An indicator of concentration at the intermediary level is the percentage of industry sales ac- counted for by the largest intermediaries. In the United States, the airline industry is characterized by low concentration (high fragmentation) at the intermediary level (i.e., several thousand travel agencies that are small in size, relative to the size of commercial passenger airlines). In such industries, producer firms face fewer deterrents to shifting an increasingly larger proportion of their marketing resources to marketing directly to customers in the electronic marketplace. Illustrative of an industry that is characterized by high concentration at the intermediary level is the small electrical home appliances industry (e.g., electric irons, toasters, and blenders). Here, a few large retailers in the United States (e.g., Wal-Mart, Target, Home Depot, and Lowe's) account for a significant percentage of the producer industry's sales. In such industries, there is a lower likelihood of firms in the producer industry commit- ting substantial resources to transacting directly with customers in the electronic marketplace. High concentration at the traditional intermediary level, as well as their attendant ability to retaliate, is conceivably a deterrent to firms in the producer industry pursuing a direct-to-consumer strategy in the electronic marketplace. Established producers in industries characterized by high concentration at the traditional intermediary level are likely to be more se- lective in their choice of a direct-to-consumer strategy in the electronic marketplace. For instance, a producer that implements a direct-to-consumer strategy involving a limited product line (e.g., refurbished products, niche products, replacements parts, etc.) is less likely to encounter retaliatory actions from traditional intermediaries.

Firm-Specific Skills and Resources and Competitive Strategy

As shown in Figure 2, the development and nurturing of two firm-specific skills and resources assume considerable importance in the context of competing in the electronic marketplace:

Information resources involve the nature and amount of information possessed by the firm about individual customers.

Information technology resources and information- processing skills involve the ability of the firm to use information technology (IT) resources and information-processing skills to gain insights about individual customers and use this knowledge to customize its future interactions with these customers.

A firm's skills and resources in the above two catego- ries are key strategy enablers in that they determine the ability (or lack thereof) of a business to pursue certain competitive strategies in the electronic marketplace. Glazer (1991), in his analysis of information- and technology- driven changes in the marketplace, discussed the increasing strategic significance of information as an organizational asset. He argued that information (often originating as transaction-related data that firms can capture) could be used to reduce costs and increase revenue. Information- intensive firms, in Glazer's conceptualization, acquire and use information toward this end to a greater extent than their competitors. Porter and Millar (1985) discussed the implications of information-intensive value chains that are characterized by a large number of "value activities" involving the processing of information (relative to the processing of physical inputs). They also documented the increasing prevalence of information-intensive products (i.e., products that require a large amount of "information content" to facilitate their purchase and use).

A firm's information assets and information-processing skills and resources critically affect its ability to pursue certain marketing strategies as well as make better decisions in the realm of various marketing mix variables. For instance, a firm's ability to engage in suggestive selling (recommending products to an individual customer based on perceived similarity with the purchase patterns of other customers) depends on its information assets and information-processing skills and resources. Similarly, in the area of pricing, the information assets and information- processing assets of a firm determine the extent to which it would be able to engage in more fine-tuned price discrimination (e.g., inferring buyers' price sensitivity from their Web navigation and purchase behavior and offering products at prices customized to the level of individual buyers). A firm's IT assets and capabilities are also a critical determinant of its ability to pursue other strategies in the realm of pricing such as dynamic pricing (e.g., changing the price at which a product is offered on the basis of prevailing supply and demand conditions).

Firms with superior information assets and information- processing assets may eventually be able to pursue market segmentation to its logical limits--segment size of one. Not surprisingly, firms are being advised to diagnose their one-to-one capabilities by assessing their ability to


identify, differentiate, and interact with individual customers and to develop customized product offerings (Peppers, Rogers, and Doff 1999). Increasing interest in managing customer relationships and measuring customer lifetime value (Berger and Nasr 1998), besides reflecting a shift in focus from groups of consumers to individual consumers, also highlights the imperative for firms to focus on developing superior information assets and information- processing assets.

Finally, as information-intensive environments are characterized by frequent and unpredictable changes (D'Aveni 1999), it is important to emphasize the need for constantly renewing a firm's set of skills and resources. Specifically, a finn's dynamic capabilities (Eisenhardt and Martin 2000; Teece, Pisano, and Shuen 1997) that result in the creation of new skills and resources pertaining to the management of information-based assets need careful scrutiny when competing in the electronic marketplace. While extant work has highlighted the significance of creating such information-based assets (e.g., Glazer 199 I), it remains unclear how these assets can be created and nur- tured most effectively. Eisenhardt and Martin's (2000) observation regarding the equifinality of dynamic capabilities (i.e., different paths may lead to similar outcomes) implies that each firm must seek out best prac- tices but also leave room for experimentation with alternative approaches.

Product Characteristics and Competitive Strategy

Product digitizability and relative emphasis on competing in the electronic versus the physical marketplace. Product digitizability has important implications for competitive strategy due to the potential for augmentation of a product that conversion into digital hardware or software offers (see Balasubramanian et al. 2000 for an extended discussion). For instance, products amenable to being digitized offer considerable potential for

�9 product customization (e.g., developing a customized readings packet for a course comprising book chapters from different textbooks, made available either in print or digital version),

�9 product innovation (e.g., creating new services such as audio and video on demand), and

~ product enhancement (e.g., offering to subscribers of the print version of a business magazine privileged access to certain sections of the publication's Web site that are not accessible to the general public).

Digital products and products amenable to being digitized also offer considerable potential for aggregation

(e.g., a dictionary and thesaurus being subsumed within a word-processing software) and disaggregation (e.g., a chapter of a textbook or a song in a CD collection). Products created through disaggregation can be mar- keted as micro products as well as reaggregated to create other macro products (e.g., a customized CD that is a compilation of songs from different CDs). Product disaggregatabitity, while presenting opportunities for firms to generate new revenue streams, also presents associated challenges such as pricing of micro products, cost- effective mode of distribution of micro products, and guarding against the threat of cannibalization of macro products from which the micro products are derived.

Abell's (1980) schema for defining the scope of a business in terms of customer functions served, customer groups served, and technologies used is relevant to understanding the implications of product digitizability for competitive strategy. In some instances, alternative analog and digital technological solutions for satisfying a specific customer need may coexist (e.g., e-books and printed books; a roll of film being processed and delivered to the customer as pictures on paper, on a CD as digitized pictures, or digitized and stored at a Web site for the customer to access and selectively print or electronically forward). In other instances, the analog technological solution to satisfying a customer need may eventually be displaced by a superior and/or cost-efficient digital technological alternative (e.g., the print version of an encyclopedia being displaced by a Web site and/or a CD version). Such dynamics, in turn, can be expected to affect a business's relative emphasis on the physical versus the electronic marketplace.

As a result of increasing product digitization, the primary- complementary product space has broadened well beyond analog primary--analog complementary products (e.g., razor and blade cartridge) to encompass the foUowing:

�9 analog primary-digital complementary products (e.g., car telematics and digital music services),

�9 digital primary-analog complementary products (e.g., digital navigation services and alternative access devices such as cell phones and personal digital assistants), and

~ digital primary-digital complementary products (e.g., e-mail and stock alert services packaged for wireless delivery).

The insights that extant literature provides into the marketing strategy implications of complementary products (e.g., price bundling, joint sales promotion, marketing alliances) were, for the most part, developed in the context of analog primary-analog complementary products. The relevance of these insights in the context of other pairings of


primary and complementary products delineated above is somewhat limited. Contrast, for instance, complementary digital products consumed in the virtual marketspace with analog complementary products consumed in the physical marketplace. Compared to stand-alone analog complementary products that tend to retain their distinct identity, a number of digital and digitizable complementary products tend to be subsumed and seamlessly integrated into more aggregate digital products (e.g., products such as free e-mail service, Web search engine, and an information portal and a shopping portal being integrated in a Web browser). Such considerations suggest that exploration of the feasibility of acquiring providers of complementary products and/or forging alliances with a larger network of providers of complementary products (e.g., an Internet access provider forging alliances with a large number of providers of content and marketers of goods and services) assumes added importance for businesses competing primarily in the virtual marketspace vis-h-vis the physical marketplace. 3

Product tangibility, remote information provision, and relative emphasis on competing in the electronic versus the physical marketplace. Product tangibility refers to the relative dominance of tangible attributes relative to intangible attributes in a product. In general, tangible attributes that require tactile feedback may be difficult to communi- cate in electronic settings (e.g., a fabric's texture). How- ever, tangible attributes that have some degree of standardization (e.g., neck size of men's shirts) can be evaluated with relative ease. Also, in a repurchase situa- tion, buyers may feel comfortable evaluating attributes that do require tactile feedback (Alba et al. 1997). For some products, physical proximity may be essential for providing the information needed. Nevertheless, even products for which buyers need large amounts of information to facilitate evaluation, acquisition, and use are likely to benefit more from the information search capability of the electronic marketplace. For example, by undertaking a virtual real estate tour, a prospective buyer may be able to reduce the consideration set to a smaller and manageable number. The electronic marketplace also facilitates trial and/or sampling of digital/digitizable products (e.g., the first chapter of a book, the basic version of a video game, or selected clips from a soon-to-be-released CD/DVD) at a considerably lower cost to the firm vis-?~-vis the physical marketplace. In certain instances, facilitating product trial in the electronic marketplace may allow a firm to offer to prospective buyers the option of trying its complete product offering prior to making a purchase decision (e.g., free trial of software for preparation of personal in- come tax returns and seeking payment only when the user is ready to print or electronically file a copy of the com- pleted tax return).

Product volume-weight-value characteristics and potential of the electronic marketplace. The volume-weight- value characteristics of a product can affect a firm's relative emphasis on the physical versus the electronic marketplace. As pointed out in Table 1, the economics of fulfillment of transactions that occur in the electronic marketplace favors products that are less bulky and command a high price relative to transportation costs, but it may be inefficient for bulky products that have a low value/weight ratio. Niche e-retailers such as Ashford.com (which spe- cializes in high-end watches and jewelry) capitalize on the economics of performing fulfillment activities in the electronic marketplace for certain types of products.

Product perishability and relative emphasis on competing in the electronic versus the physical marketplace. Product perishability refers to the degree to which product value declines due to the mismatch between when the product is produced and when it is consumed. The decline in product value can be viewed from the perspective of a buyer (in that the product suffers a loss in utility) and a seller (in that the seller is unable to recover this loss in product utility). While practically every product has some degree of perishability, the value of some products (e.g., fashion and seasonal merchandise, financial information) is more likely to decline as the time between production and consumption increases. In the case of many services where production and consumption must occur simulta- neously (e.g., airline seats, hotel rooms), product perishability is very high. Naturally, the key to operating effectively in a perishable product category is to develop mechanisms that will enable the seller to (a) anticipate when product supply is likely to exceed demand and (b) implement promotional mechanisms (such as discounts) that will clear the market when available supply exceeds prevailing demand. The electronic marketplace, by virtue of inexpensive and highly scalable communication linkages between buyers and sellers, is ideally suited for developing such mechanisms.

Buyer and Buying Environment Characteristics and Competitive Strategy

Significant changes are occurring in buyers and the buying environment as a result of the increasing reliance of buyers and sellers on the emerging electronic marketplace. For instance, Haubl and Trifts (2000) noted that the avail- ability of sophisticated interactive decision aids in online buying environments is likely to alter how consumers search for product information and make purchase decisions. Research by Lynch and Ariely (2000) shows that lowering buyers' search cost for information on product quality is conducive to lowering buyers' price sensitivity


TABLE 2 The Evolving Hybrid Marketplace and Associated Changes in the Buying Environment

Characteristic of the Buying Environment Physical Marketplace Physical and Electronic Marketplace

Principal sources of information Traditional word of mouth (WOM) and Electronic WOM and new media a mass media

Few Many Sources of credible/neutral information Amount of information available to buyers about price and nonprice attributes of competing product offerings

Information asymmetry between seller and buyer Buyer reliance on proxies (e.g., brand name) in the absence of objective information on product quality

Ease of information search Quality of information Organization and structuring of information Ease of comparing and evaluating alternatives in the buyer's consideration set

Limited Considerable

Considerable

Extensive Diminishing

Diminishing Greater b Better Better

Greater

a. In addition to traditional word of mouth and mass media. b. Relative to the physical marketplace, an information search can be done with greater ease in the hybrid physical and electronic marketplace. Other items that follow should be interpreted similarly.

when products are differentiated. Such efforts serve to highlight sellers' need to adapt to changes in buyers' information search and buying behavior as a consequence of changes occurring in the buying environment. Table 2 provides an overview of changes in the buying environment as the competitive landscape shifts from a predominantly physical marketplace to a physical and electronic marketplace. As indicated in this table, every stage of buyers' decision-making process--search, simplification of the choice set, evaluation, and final choice--is likely to be affected as the role played by the Internet increases. The nature of these changes and their implications for competitive strategy are discussed next.

Diminishing information search costs. Beginning with Stigler's (1961) seminal analysis, search costs have been recognized as an important determinant of buyers' decision- making process in the marketplace. Information economics, which examines consumer behavior under conditions of incomplete price knowledge in imperfectly competitive markets, assumes that consumers are aware of price dispersion in the marketplace and that they engage in price search as they seek a lower asking price. This search process is subject to diminishing returns, and an optimal ter- mination of the search is determined by equating marginal search costs with marginal returns of search.

It has been shown that in commodity markets (at equilibrium), sellers charge the same price---one that would have been charged by a monopolist (Salop and Stiglitz 1977). In such markets, even a modest increase in search costs enables sellers to increase prices and profits. When buyers' search costs vary in commodity markets, a mixed- price equilibrium may result (i.e., both low-price and high- price sellers emerge). Differentiated markets are

characterized by heterogeneous buyer preferences and product characteristics. Hotelling's (1929) work modeling choice in differentiated markets suggests that sellers are able to increase prices when (1) consumers' search costs increase and/or (2) consumers' perceived costs associated with not selecting the "ideal" product increase.

Using the broad framework of information economics, Bakos (1991, 1997) examined the implications of diminishing search costs in the electronic marketplace. The general finding is that reduced search costs lead to increased price competition between sellers and, consequently, lower average prices. Bakos (1997) made a distinction between search costs associated with price information and nonprice information (e.g., product attributes related to product quality). While declining search costs associated with price information increase pricing pressures on sellers, declining search costs associated with nonprice information dampen pricing pressures on sellers.

Surviving and prospering in an environment characterized by declining search costs will require considerable skill and new thinking on part of the firms. As noted above, it appears likely that there will be increased industry-level pricing pressures. However, even in this environment, there will be opportunities to preserve (and perhaps even increase) profit margins. Profit margins may be preserved by cutting costs, segmenting the market more astutely and precisely, and implementing price discrimination and dynamic pricing that more effectively capture consumers' surplus. The analysis presented by Bakos (1997) suggests that facilitating consumers' access to the type and amount of nonprice information disseminated in the marketplace can reduce pricing pressures. Of course, the effectiveness of this approach is likely to vary considerably across firms (depending on the specifics of nonprice information that is


disseminated by an individual firm). Firms that can make credible claims regarding the superiority of their nonprice attributes will be able to combat pricing pressures more effectively than other firms.

Diminishing information asymmetry. An exchange is viewed as characterized by information asymmetry when the parties participating in the exchange are unequally in- formed about pertinent details regarding the exchange. For example, while a buyer may learn about the quality of a product after it is purchased, the seller may have access to this information prior to the exchange. Markets characterized by information asymmetry facilitate the emergence of branded products offered at premium prices, ensuring a certain level of predetermined quality to buyers. Sellers of branded products charge premium prices that reflect the higher production costs (if any) and also "yield a normal rate of return on the foregone gains from exploiting consumers' ignorance" (Klein and Leffler 1981:624). Infor- mation asymmetry also leads to more concentrated markets with higher prices because it is difficult for new entrants (that seek entry by offering lower prices) to make credible claims pertaining to the quality of their products. The likelihood of market concentration increases in product- markets where experience and credence attributes domi- nate search attributes.

To a large extent, information asymmetry results from buyers' (a) inability to evaluate a product prior to purchase and/or (b) inability to access appropriate information due to high search costs. The emergence of the electronic marketplace can affect both factors. Buyers not only can learn how to evaluate a product (e.g., which attributes are more diagnostic of overall quality), but they can also access the evaluation of other buyers who may already have purchased and used the product (through electronic word of mouth). As a result, information asymmetry can be expected to decline significantly as buyers and sellers increase their reliance on the electronic marketplace. Sellers of branded products will be under pressure to jus- tify the price premiums they have traditionally charged in the physical marketplace. Justifying and maintaining price premiums can be accomplished by making a renewed commitment to continuous innovation and by educating existing and prospective buyers about the superiority of a given product. In segmented markets, firms can explore opportunities to develop a value proposition that justifies a premium pricing approach in selected market segments. However, one consequence of declining information asymmetry is that firms wilt have to work considerably harder to develop and pursue such premium pricing opportunities.

Increasing cost transparency. The emergence of the electronic marketplace is also affecting information asymmetry regarding costs. Sinha (2000) suggested that buyers'

increased participation in the electronic marketplace cre- ates cost transparency--that is, it enables buyers to infer (among other things) sellers' cost-related information. In- creased participation in the electronic marketplace leads to more exposure to price information, which, in turn, may provide clues about costs. As discussed above, information asymmetry regarding quality enables sellers to offer branded products that seek to reduce buyers' uncertainty. Buyers may be willing to pay a premium for this reduction in uncertainty, but the magnitude of this premium cannot be judged fully unless buyers have access to firms' cost- related information. Once the magnitude of this premium is ascertained, it can serve as a basis for making assess- ments about price fairness. Access to cost information also enables buyers to evaluate the plausibility of a competi- tor's claim that its lower priced product is comparable in quality to an incumbent's offering. Thus, by facilitating the entry of credible lower priced competitors, increased cost transparency can spur price competition in the marketplace. Some pricing strategies (e.g., price bundling) can partly disguise price (and thus cost) information regarding individual products. However, in the long run, firms must accept the reality of increasing cost transparency. As in the case of information asymmetry regarding quality, developing and offering a superior value proposition to buyers through sustained innovation is perhaps the only effective strategic response to increasing cost transparency in the marketplace.

Changing communication model. Finally, many changes occurring in the buying environment can be traced to changes occurring in the underlying communication model. Hoffman and Novak (1996) suggested that the traditional one-to-many model of communication (one firm transmitting standardized content to segmented buyers) is being replaced by a many-to-many communication model (firms and buyers transmitting customized content to each other). One important implication of this change is that buyers are abandoning the relatively passive role that has been traditionally assigned to them in the communication process. Moving away from being mere recipients of firm-generated content, buyers are demonstrating a keen interest in developing and exercising greater control over the communication they receive and generate.

According to Hoffman and Novak (1997), this communication-related shift has profound strategic implications. Consider increasing electronic word of mouth, for example, which is just one manifestation of how communication patterns are changing in the marketplace. The ease with which buyers can spread the word about a firm (both favorable and unfavorable) has spurred a new type of buyer activism. Buyers are sharing experiences with one another and, increasingly, expect that firms will pay attention and respond appropriately. The well-publicized


design and/or quality problems in Intel's original Pentium chip (the so-called "floating point" problem, which could result in erroneous answers to division problems) were first revealed in a seemingly innocuous posting on a computer bulletin board. Intel's initial response was to assure computer buyers that the likelihood of this specific error was so small that a broad product recall was not warranted. Eventually, with negative publicity spiraling out of hand largely due to electronic word of mouth, Intel announced a broad product recall to address this problem.

Buyers' increasing involvement in the communication process also has implications for how firms conduct need assessment studies in the marketplace, design and test new products, and make marketing mix decisions. Buyer activism can either be a threat (when ignored by an unrespon- sive firm) or an opportunity (when a responsive firm har- nesses buyers' ideas and sentiments to address existing problems and develop new initiatives). Indeed, the marketing concept--a philosophy of putting customers at the center of all of the firm's activities---can be (and should be) embraced more fully in a communication environment where a meaningful, more interactive conversation with customers becomes possible (Hoffman and Novak 1997). Insights gleaned from these conversations can then serve as a basis for determining unmet needs in the marketplace, obtaining rapid feedback on new product concepts, and developing and implementing a more customized marketing mix.

CONCLUSION AND FUTURE RESEARCH DIRECTIONS

Marketing strategy as a field of study is primarily concerned with understanding, explaining, and predicting the marketplace behavior of businesses in the realm of deploy- ing marketing resources at their disposal to facilitate the achievement of competitive advantage and their contextual underpinnings. Regardless of whether a business is competing in the physical marketplace, electronic marketplace, or both, certain fundamental tenets are likely to en- dure. Among other factors, businesses are likely to continue to base their competitive strategy decisions on an analysis and understanding of factors such as the of the following:

�9 the industry in which the business competes (e.g., concentrated vs. fragmented markets),

�9 the unique skills and resources of the firm (e.g., superior alliance management skills and a large customer base),

�9 the company's product offerings (e.g., goods vs. services),

�9 the buyers (e.g., businesses vs. households),

the buying environment (e.g., high vs. low information search costs), and the macro environment in which the firm operates (e.g., legal, political, regulatory, social, cultural, economic, and technological factors).

Building on the extant strategy literature and the emerging literature on e-commerce, this article advances a conceptual framework highlighting the role of the Internet as an enabler and driver of competitive marketing strategy. As shown in Figure 2 (Box 1), competing in the evolving hybrid market environment calls for a broader construal of the scope of marketing strategy. Key to such a broader construal is recognizing the potential of the Internet as an enabler of marketing strategy, a strategic tool whose potential is gainfully leveraged to enhance the effectiveness of a business's competitive marketing strategy. The linkages from Box 8 (specifically, the information technology dimension of the macro environment) to Box 1 (competitive strategy) through Boxes 2, 3, 4, and 5 (industry structure, f i rm-specif ic skills and resources, product characteristics, and buyer characteristics and buying environment) delineated in Figure 2 serve to highlight the role of the Internet as a driver of competitive strategy.

Future Research Directions

Further refinement of the proposed conceptual framework and empirical research building on the proposed framework constitute promising avenues for future research. For instance, the change in the competitive landscape (from a physical marketplace to one encompassing both the physical and the electronic marketplace) can be expected to evoke a multiplicity of responses from buyers and sellers. Broadly, these responses can be characterized as follows:

1. First-order effects A. Supply-side effects: Changes in seller behavior B. Demand-side effects: Changes in buyer

behavior 2. Second-order effects

A. Demand-side effects: Effects of changes in seller behavior on buyer behavior

B. Supply-side effects: Effects of changes in buyer behavior on seller behavior

The scope of the article in its present form is largely limited to first-order effects and points to the need for future research focusing on second-order supply-side and demand- side effects. Both cross-sectional and longitudinal investi- gations are needed to empirically examine the relationships depicted in the proposed conceptual framework. The proposed conceptual framework also serves to highlight future research in the following broad areas:


1. The impact of the Internet on the drivers of competitive strategy (i.e., industry structure, firm characteristics and skills and resources, product characteristics, and buyer characteristics and the buying environment).

2. The performance consequences of changes in the competitive strategies of businesses in response to the opportunities afforded by and challenges posed by the evolving hybrid marketplace.

3. A unique and distinctive characteristic of the Internet in regard to digital products is its dual role as both a distribution channel and a promotion channel. In contrast, for the most part, the distribution and promotional channels for marketing of goods in the physical marketplace are distinct. Extant literature focusing on issues relating to distribution and promotion has also, for the most part, evolved as distinct streams. Against this backdrop, exploration of issues and questions pertaining to the use of the Internet as both a distribution and promotion channel for digital products constitutes a promising avenue for future research.

4. For legacy businesses in particular, competing in the evolving hybrid marketplace implies effective and seamless integration of the business's interface with its customers in the physical and the electronic marketplace. Although our focus here was limited to marketing strategy content- related issues, we nevertheless recognize the importance of strategy formulation process and implementation effectiveness-related issues from the standpoint of competing in the evolving hybrid marketplace and the attendant need for future research.

NOTES

1. In the interest of completeness, the links relating to both drivers and outcomes of competitive strategy are shown in Figure 1. However, our primary focus here is on the drivers. In Figure 1, with the exception of firm characteristics (Box 3), all other boxes are shown at the business unit level. The underlying rationale is that in the case of a multibusiness firm, the unique skills and resources of a firm deployed to compete in a particular business arena are also the unique skills and resources of the focal business. Collectively, the variables enumerated in Boxes 2, 3, and 4 denote "supply-side drivers," and those enumerated in Box 5 denote "demand-side drivers."

While our primary focus here is on selected drivers of competitive

strategy (Links 2 ~ l, 3 --* 1,4 ~ 1, and 5 ~ 1), it should be noted that effects m the opposite direction are also conceivable. For instance, a bus~- ness's competitive strategy can affect the structure of the industry in

which it competes (i.e., Link 1 --* 2) when efficiency differences between competitors in an industry lead to the exit of marginal competitors, and the number and size of competitors in an industry are affected. Link I --4 3 is affected when the strategy pursued by a business leads to the firm accu- mulating certain valuable resources (e.g., brand equity, customer equity, and channel equity) and skills (e.g., product innovation and brand positioning skills). These resources are likely to be leveraged by the firm dur-

ing subsequent time periods to enhance the competitive positional advan-

tages of its present and new product offerings (i.e., Link 3 ~ 1). It is also conceivable to envision linkages between the drivers of com-

petitive strategy delineated in Figure 1--for instance, heterogeneity of demand affecting the heterogeneity of supply as a consequence of the

strategic actions of competing businesses in an industry (Link 5 --~ 1 --~ 4) (see Dickson 1992).

In the interest of space, we do not discuss the direct impact of the macro-environmental factors on competitive strategy (Link 8 --4 1). However, in a later section, we highlight the impact of macro-environmental changes (specifically, technological changes related to the emergence of the electronic marketplace) on the other drivers of competitive strategy delineated in Figures 1 and 2.

2. Resource deployment activities related to Items 1 to 3 can be la- beled broadly as sustaining innovations (Christensen and Overdorf 2000) in that they seek improve the effectiveness of existing organizational processes and strategies. Disruptive innovations refer to developments that suggest fundamentally new ways of competing, frequently involving new organizational processes and strategies. A wide variety of initiatives by new entrants in the business-to-consumer sector (e.g., eBay.com, Pricehne.com) and in the business-to-business sector (e.g., Freemarkets. com) highlight the disruptive opportunities available in this regard. In- cumbent firms also have shown a keen interest in developing such initiatives (e.g., Covisint, an ambitious business-to-business [B2B] initiative in the automotive sector that is cosponsored by prominent incumbents such as Ford, General Motors, and DaimlerChrysler). While we make references to such developments where appropriate, a comprehensive discussion of disruptive innovations in the context of the electronic marketplace is beyond the scope of this article.

3. In regard to the discussion pertaining to digital primary~ligital complementary products presented here, we gratefully acknowledge the insights shared by Dr. Venkatesh Shankar.

The authors are grateful to Dr. Tom Ingram for sharing his insights on this issue.

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ABOUTTHEAUTHORS

P. Rajah Varadara jan is a distinguished professor of marketing and the Ford chair in marketing and e-commerce in the Mays Business School at Texas A&M University. His research and teaching interests are in the areas of strategy and e-commerce. His research on corporate, business, and marketing strategy-

related issues has been published in the Journal of Marketing, Journal of the Academy of Marketing Science, Academy of Man- agement Journal, Strategic Management Journal, and other lead- ing journals. He is coauthor of a textbook titled Contemporar?; Perspectives on Strategic Market Planning. Dr. Varadarajan served as editor of the Journal of Marketing from 1993 to 1996. He currently serves on the Board of Governors of the Academy of Marketing Science and as editor of the Journal of the Academy of Marketing Science.

Manj i t S. Yadav is an associate professor of marketing and Mays Faculty Fellow, Department of Marketing, Mays Business School, Texas A&M University. He obtained his Ph.D. in marketing from Virginia Tech. His research focuses on electronic commerce, firms' pricing strategies, and consumers' price per- ceptions. He has published in a number of journals, including Journal of Marketing Research, Journal of Consumer Research, Journal of the Academy of Marketing Science, and Sloan Man- agement Review. He is a member of the Editorial Review Board of the Journal of the Academy of Marketing Science. At Texas A&M, Dr. Yadav developed and currently teaches a graduate course (Strategic Foundations of E-Commerce) dealing with the strategic challenges and opportunities in the emerging electronic marketplace. He served as cochair of the American Marketing Association's 2001 Faculty Consortium on Electronic Com- merce held at Texas A&M University.

marketing strategy and the internet: an organizing framework

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