Competing on Affiliation [Part II]

Implications for Sellers

For suppliers and for retailers, this raises a troubling scenario. The trade-off between richness and reach blows up, enabling universal search to replace hierarchical search. Freed from their prior constraints, navigators compete against each other on the range and customer affiliation. Struggling to achieve critical mass, navigators push for reach, merge, and concentrate. As their reach goes up, their affiliation to sellers loosens, which proves a further advantage in competing for buyers. Some navigators get ahead of the others, cross the threshold of critical mass, and then march toward positions of monopoly in their respective search domains. Winner takes all. Armed with superior reach, a high level of consumer affiliation and trust, and equivalent richness (since by assumption the trade-off has been blown up), that navigator is advantaged in navigation against both retailers and suppliers. Retailers are demoted to the substantial role of distributor. Suppliers see their business commoditized. They are at least forced to compete on product-specific characteristics such as cost, technology, and features. Much of the value potential of the company is drained off. Just like what Wal-Mart did to the apparel business. Just like what Microsoft does to everybody.

Farfetched? Probably. It hasn’t happened yet. In most businesses, it will not happen. But it is a logic: a set of forces that compound the strategy calculations to all companies. If a supplier or a retailer is to avoid that logic, there have to be some countervailing forces or strategies. In fact, there are seven.

Continuation of the Richness/Reach Trade-off.

The first line of defense is in areas where the existing richness/reach trade-off curve will endure. It is not clear, for example, how "streaming audio" technology will enable consumers remotely to select a pair of high-end stereo speakers or whether virtual reality technology will ever allow them to choose a designer dress without trying it on. Although on-line apparel retailers now offer "virtual mannequins," customized to the size and appearance of the consumer, one might be skeptical that this will ever seriously replace fitting rooms. For these types of products, the economics of information and the economics of things are unlikely ever to separate; the richness/reach trade-off will therefore persist, and navigators (such as sales clerks) will continue to be affiliated with the seller.

This logic applies to specific slivers of navigation. Consumers can still develop a preliminary idea of what they want based on two-dimensional information, and after physical selection may even choose to find the lowest-priced, fastest-delivery supplier by a selection process unconstrained by the richness and reach. As always,

From Your Perspective  

If You Are a New Navigator . . .

• Recognize that closer affiliation with consumers is a significant competitive advantage for you. It is part of your Web identity. Cultivate it. Do not compromise consumer interests for your own short-term gain. Never do anything you would not want all your users to know about because, within a few days, they will.

If You Are a Product Supplier . . .

• Recognize that moving to a closer affiliation with your consumers is a profound shift in your business model.
• Understand that new navigators, who are more closely affiliated with your consumers, can effectively blunt the competitive advantages of your sales force, your advertising, or your product literature, almost overnight.
• Look seriously at alliances to address the affiliation problem: a group of suppliers may be able to create a navigator with strong customer affiliation that is more comprehensive and more credible than any of its members. Start from the search domain as defined by the consumer, identify the full range of desired content providers and the most compelling providers of credibility, then pick your alliance from that list.

If You Are a "Broad Reach" Retailer without Close Supplier Affiliations . . .

• As a general merchandiser or "category killer" you are better positioned than other established players (e.g., product suppliers, other narrow reach retailers) to build a navigational business based on reach and affiliation with the consumer. You have no commitment to particular suppliers. You do robust product evaluations anyway, and that is part of your brand. You have probably built your reputation on siding with the consumer. You just have to be willing to cannibalize your current physical business.
• The retailer best positioned to become the cyber- equivalent of Wal-Mart maybe . . . Wal-Mart.

If You Are a "Narrow Reach" Retailer Closely Affiliated With a Few Suppliers . . .

• You are vulnerable. New navigators and "broad reach" retailers can beat you on reach and on consumer affiliation. Your suppliers may decide to make their case to consumers directly. Your real function is probably creating a shopping "experience." But how will it survive multimedia?

It is necessary to "deconstruct" a purchase quite minutely into its component steps and consider the richness, reach, and affiliation logic of each separately. The fact that one step requires wealth is not necessarily determining for the others.

Remember also that Moore’s Law is steadily displacing the richness/reach trade-off. Wait ten years, and information technology will be a hundred times more powerful. And the new technologies have no obligation to define wealth in the same way as the old ones. Computer screens may never be able to match colors with the technical precision of offset printing (a question on which experts are currently divided), but sound and full-motion video may prove a more-than-adequate substitute for the purposes of electronic catalog shopping. It is easy to lapse into a definition of richness that reflects what delivery technologies are currently good at, rather than what the consumer in some fundamental sense really needs. Nonetheless, there are many areas of choice.

where the richness/reach trade-off will not be displaced and where seller-affiliated navigators will continue to thrive.

Lack of Compromised Value.

The second line of defense hinges on whether any value is actually released by the explosion of reach and the shift in agency affiliation. Does anybody need search engines, databases, threaded discussion groups, chat rooms—the whole panoply of comprehensive, objective navigation—to select and buy a pack of bubble gum? There are vast swaths of the economy where the value of superior navigation is simply not high enough. In many businesses, the mutual compromising of the economics of things and the economics of information, of richness and reach, is trivial.

However, trivial economics is a feather to every wind that blows. The fact that there is no particular reason to change them means that there is also no specific reason to preserve them. They could be transformed as the accidental consequence of apparently unrelated events. The destruction of the encyclopedia business can be interpreted—at least in part—as an unintentional byproduct of promotional economics in the computer industry. But that risk is hardly new. Many theoretically vulnerable businesses do perfectly well because neither competitors nor customers see enough value to warrant disrupting them.

Denial of Critical Mass.

The third line of defense is altogether more strategic: take advantage of the indeterminacy of network evolution by preventing the new navigators from ever achieving critical mass. Suppliers and retailers are the source of information on product features, prices, and availability that the new navigators need. So simply refuse to make that information available. Let Yahoo! navigate to your Web site, but don’t let it or anybody else parse your product.

Lists and compare them with those of your competitor. If every seller does that, Yahoo! will be confined to its current role as a high-reach but low-richness navigator: a glorified phone directory.

There are two problems with this. The first is that technically it is quite difficult for a seller to stop a navigator from parsing information that the seller releases electronically. If customers can go to the Web site, so can navigators. It doesn’t have to be a personal visit: technologies like Junglee enable a navigator to visit dozens of Web sites with the same inquiry, query them in whatever format each Web site requires, return the responses, and then parse and array the answers, all within a few seconds. Yahoo! uses Junglee technology to operate as a metanavigator, or navigator to navigators, for book buyers. Ask Yahoo! for a book, and you get bids from some twenty electronic bookstores and can seamlessly choose the lowest price, the fastest delivery option. On average, this approach saves 5 percent to 10 percent of the amount that one would pay by going to anyone's electronic bookstore. Amazon.com recently acquired Junglee. This will not stop metanavigators in the book business (there are lots of alternative technologies available to Yahoo!), but it will enable Amazon to do the same thing to electronic vendors in other categories.

Obviously, the seller can ultimately stop this game, if only by refusing to operate a Web site. But herein lies the second and more fundamental issue: it is not evident that it is in any one seller’s interest to do so. The most rigorous customer- affiliated navigator with the broadest reach is still a source of incremental business to a seller. Unless the selling business is highly concentrated, it is unlikely that the navigator’s ability to achieve critical mass will depend on the availability of data from any one source. Therefore, while it is undoubtedly in the interests of all sellers collectively, it is not in the interests of anyone seller individually to deny its own data to the navigator. But if everyone reasons that way, the navigator will achieve critical mass.3

The point is by no means merely theoretical. Consider the difficulties that the banking industry has experienced in combating the threat from Intuit, Microsoft, and other consumer-affiliated navigators. Many banks initially refused to support these "value-added browsers" for their customers, because they disliked their high reach and lack of seller affiliation. They pushed their own proprietary products instead. Industry groups solemnly agreed on collective strategies to fend off the threat. However, some banks saw supporting these new navigators as a competitive advantage in acquiring customers from other banks. For each bank deciding to do this, the gain in its own competitive advantage outweighed the slightly increased risk to the industry from giving those browsers a bit more critical mass. But as banks switch, the credibility, value-added, and bargaining power of Intuit and Microsoft increase. Which makes it more logical for other banks to shift. The attempt to deny critical mass to consumer-affiliated navigators in banking is destined to fail for the same reasons cartels in general fail.

Frequently Asked Questions

  1. Is the shift to buyer affiliation a one-way move, or is this just a swing of the pendulum?

The explosion in reach is permanent, so the implied shift in affiliation is also durable. Nonetheless, a lot of energy will be devoted by sellers to trying to preserve the association of navigators, and some of it will succeed. Recognizing the permanence of the explosion of reach is essential to long-term competitive survival.

2. Why don’t navigators in cyberspace simply form tied vertical relations with suppliers, much the same way as their equivalents do in the physical world?

Because they don’t have to and they don’t want to. They don’t have to because they can reach all suppliers, far more than in the physical world. They don’t want to because of the competition from other navigators, which is much more intense and unstable than the equivalent in the physical world. A salesman has every reason to work for a supplier. Yahoo! has every reason not to.

3. Can I charge for high-quality navigation?

Possibly, eventually. But not while others, rationally or not, are giving it away. Don’t let uncertainty about charging stop you from offering high-quality navigation. The stock market has already decided that reach is worth more than current profits. Soon, the stock market will come to the same conclusion about richness.

While it is difficult for sellers to stop a navigator once it has passed the point of critical mass, it can also prove supremely tricky for the navigator to get to that inflection point. Amazon.com, tapping into a ready-made database, is the exception, not the rule. Jump-starting a network-based product or service is generally a considerable challenge. Many seller-based navigators will survive for a long time, not because of smart defensive strategies, but because no consumer-affiliated navigator has the will and resources to mount a successful attack.

Greater Affiliation with Customers.

The fourth line of defense is to embrace customer affiliation and try to become an advantaged navigator. Mimic, indeed exceed, the con

Summer orientation of the independent navigator. Offer a navigation service that solves problems instead of merely pushing the product. Add in objective data and decision-support software about content unrelated to one’s own business. Provide accurate and comprehensive information about products and services in the consumer’s search domain that one does not sell, commoditizing the companies of others to protect one’s own. Perhaps provide comprehensive but not necessarily comparable data on one’s own products and those of direct competitors, and slightly bias the presentation through the ordering of alternatives and the occasional emphasis or omission. Possibly ally with noncompeting sellers in other industries that might have the same logic for partnering to support the chosen search domain. Conceal from the consumer the navigator service’s supplier affiliation. All of these options (or combinations of them) are different forms of the same strategy. They involve giving up some measure of self- alliance (relative to a captive navigator) in return for greater collective reach and closer consumer affiliation. The theory is that such a navigator may not be ideal for the seller, but is preferable to the independent alternative, and might suffice to deny to the latter critical mass.

It might work. It worked for American Airlines’ SABRE system, where American was able to bias presentation of a comprehensive flight listing by giving its own offering slightly more richness and greater prominence.4 But there are two problems. The first is that the navigator product is likely to be inferior (from the customer’s point of view) to that provided by an independent third party. People are not that impressed by sellers announcing that they are "objective." Even if they are objective, people will often refuse to believe them.

Moreover, the symmetry and transparency of information flows, together with the apparent motivations of an independent navigator, will ensure that any self-serving injections of navigational bias will be loudly and widely noted. The hope has to be that some combination of timing, preemption, and alliance building can overcome limitations in reach and customer affiliation. In the airline customer reservations system (CRS) business, the staggering complexity of the data-processing requirements proved a lasting barrier to new entrants. But in many Web-based navigation businesses, the technical hurdles are small. Therefore, one has to worry about the long-term defensibility of a "weakly biased navigator."

The second problem is a consequence of success. Suppose a TV manufacturer creates a "home theater" navigator that provides comprehensive and objective information about how to choose video and audio components (and, almost invisibly, presents its own products and technology in a favorably biased light). Suppose this navigator becomes popular. How, fearing commoditization, will the manufacturers of sound-processing systems or loudspeakers respond? With a parallel strategy, obviously. That might quickly lead to a half-dozen "home theater" Web sites, each offered by a coalition of rival sellers, each offering lots of consumer affiliation and complete objectivity except for a small area in which the owners have a vested interest. But if such sites are all equally good, then the odds are five-out-of-six that a customer selecting one of these navigators to buy a TV set will not choose the TV manufacturers. For the TV manufacturer (and by the same logic, for all other sellers), commoditization is avoided only one-sixth of the time. This implies a bit of a paradox: the consumer may always be guided by a seller- affiliated navigator, but it does not follow that the navigator will act to protect the interests of the particular seller whose product the consumer actually buys. Working to preserve their own individual businesses from commoditization, sellers happily commoditize each others’.

And fundamentally, of course, the reason why this happens in the virtual world, but not in the physical, is that the consumer’s preferred virtual search domain does not correspond to any physical industry.

Co-option of the Navigator.

The fifth line of defense is to do a deal with the navigator. Advertise on the navigator’s Web site. Pay the navigator for each referral. Provide the navigator with some consideration in return for favorable navigational assistance. This cannot be done covertly (information about such arrangements will immediately become public), but it need not be highly visible. If the navigator business is still in an intense battle for critical mass, this may meet limited receptivity because the navigator thereby compromises its own competitiveness, and some navigators accepting such deals have been forced by consumer indignation to relinquish them. But if the navigator has already achieved a dominant position in some search domain, it may be quite open to the idea of an additional revenue stream. Many navigators (especially those with apparently captive audiences) will probably do profitable deals with sellers to give them exclusive or preferred positioning.

The apparent caution is that this goes against the long-term tide of increasing richness and reach, which separates the navigator business from the supplier business, and favors those navigators with the highest supplier reach and the most productive customer knowledge. Every time an incumbent navigator makes a move in the reverse direction, space is opened up for an insurgent navigator. And in the fluid world of information economics, there is no such thing as a locked-in position. Therefore either insurgent navigators chip away at the incumbent’s job, or the incumbent is forced— eventually—to modulate the strategy. Meanwhile, however, the consumer tilt is forestalled.

Deconstruction of the Seller’s Business.

The most extreme strategic response to these dilemmas is an aggressive deconstruction of one’s own value chain. Split the navigational function from the product supply function and let them operate as separate businesses. If the navigator then guides customers to competitor products and services, so be it. The customer relationship may matter more than the incremental product margin, at least in the long term. If the supplier business deteriorates, exit from it. Survive as a fully customer-affiliated navigator. Instead of treating navigation as a marketing function for a supplier business, think of products as a sourcing strategy for a navigator business. This may sound extreme, but some of the smartest and most aggressive commercial banks, institutions with hundreds of billions in assets, see this as their long-term strategy.