Competing on Affiliation [Part 1]

New navigators derive much of their advantage—versus the established players and versus each other—by affiliating as closely as possible with the interests of the consumer. This tilt toward consumers is a direct and fundamental consequence of the blowup of the richness/reach trade-off. The higher the reach of navigators across suppliers, and the more intense the competition among navigators for the loyalty and attention of consumers, the weaker is the navigators’ bond to anyone seller and the higher is the pressure on them to serve as buyers’ rather than sellers’ agents. This tilt in affiliation shifts the balance of power from sellers toward buyers.

From the product suppliers’ point of view, the tilt in affiliation threatens their influence over the buying process. This tilt also endangers the effectiveness of their substantial investments to control retail channels and patterns of consumer choice. The emergence of new navigation channels outside their control poses acute dilemmas for those they do control:

Whether to keep them strictly loyal at the price of long-term competitiveness, or preserve their competitiveness by sacrificing some of their efficacy as captive channels. Product suppliers have to choose between adjusting to the reality of buyer-affiliated navigators and trying to prevent the shift in agency affiliation from occurring.

The affiliation of retailers is more complex and more ambiguous than that of suppliers. Retailers by definition buy from suppliers and then resell to consumers. In some ways, retailers represent consumer interests to product suppliers (negotiating for high quality and low price). And in others, they represent supplier interests to consumers (cooperative advertising and joint promotions). Retailers vary in their mix of these two roles.

All retailers welcome the cooperative advertising, promotional materials, tie-ins, and sales support offered by their suppliers. Nike’s large force of sales evangelists, called "Ekins" ("Nike" spelled backward), train retailers’ salespeople to explain shoe technology to customers and guide them to the most appropriately designed (Nike) shoe. Detail men from packaged goods companies rearrange their products in supermarkets to maximize the banner effect of shelf space and navigate customers toward the current promotion. Apple Computer manages its value-added resellers as extensions of its own sales force. Retailers whose environmental economics constrain them to a narrow range of suppliers (such as motorcycle dealers or camera shops) are passionate advocates of the offerings from their preferred suppliers.

However, not all retailers are so closely aligned with sellers. Hard goods and packaged goods suppliers certainly don’t see Wal-Mart as an extension of their sales forces. They are much more likely to think of Wal-Mart as a (or the) customer. And while they have little choice but to collaborate with Wal-Mart, they would hardly characterize the relationship as one driven by an overwhelming commonality of interests. Indeed, by pressing relentlessly for maximum choice and everyday low prices and by actively discouraging suppliers from spending money on self-serving forms of promotion, Wal-Mart, supermarket chains, and category killers affiliate themselves much more closely with the consumer than with the supplier. To be more precise, they affiliate themselves with the collective rather than the individual interests of consumers; they are still mass retailers.

For retailers with close ties to particular suppliers, the tilt in affiliation raises questions about the continuing viability of their strategy. For retailers without such and intimate relations (such as general merchandisers and category killers), it presents the opportunity, indeed often the imperative, to position even more aggressively as a champion of the consumer.

The Affiliation Spectrum

"Affiliation" does not mean caring for the customer: any supplier, retailer, or navigator has to do that. It also does not refer to any of the helpful, positive-sum activities by which sellers further their own interests by furthering those of their customers. That is only good business. The test of affiliation is where the consumer’s gain is directly the seller’s loss. Informing the consumer of purchasing alternatives available from other suppliers; explaining why a premium feature is not worth the money; sharing critical information on product performance or customer satisfaction: these are the kinds of navigational services that consumers would expect from a navigator serving their interests. They rarely get it, because it is not the purpose of most navigators to serve the interests of consumers. The goal of most navigators is to serve the interests of sellers.

This is obviously true of advertising, product brochures, and sales pitches, which the seller pays for, creates, and controls. It is equally though less obviously right for intermediaries who facilitate or broker transactions among others, such as insurance agents, home decorators, and securities brokers. Whenever such an intermediary gets paid by the seller, it is a reasonable bet that the intermediary pursues the seller’s interests.

1 Some independent navigators flourish by maintaining a studied ambiguity as to where their affiliation really lies. Computer and stereo magazines offer extensive reviews of hardware and software products. But more than 80 percent of their revenue typically comes from advertising placed by the suppliers of those products. These magazines do not want to offend a significant advertiser by panning its latest product, but neither do they want to compromise the objectivity that their readers expect. Hence a delicate balancing act: rigorous lab tests, uncritical gushing about the latest in industry technology, and a general reluctance to be really trenchant about anything. Newspapers and newsmagazines resolve the same ambiguity by segregating the editorial and business sides of the organization.

Exclusively buyer-affiliated navigation is the exception. Consumer Reports provides technical product evaluations, carries no advertising, and assiduously avoids association with any seller. Readers have to pay $2.95 for a thirty-page issue, far more per page of text than the cost of advertising-sponsored equivalents. Some human navigators are a buyer- affiliated. Architects often deal with contractors on behalf of the customer in return for a fixed percentage of the project cost. In the corporate sphere, insurance brokers work unambiguously for their corporate clients to evaluate property and casualty risks and to buy insurance on their behalf. Purchasing departments navigate through sourcing options with expertise (and aggressiveness) that the rest of the organization could never hope to muster. But in every case, if customers want a buyer-affiliated navigator, they have to be willing to pay for it.

The Logic of Affiliation

There are two reasons why navigators affiliate with sellers. One is the fact that rich navigation tends to be specific to suppliers. The other is the unwillingness of consumers to pay for shipping.

A salesman with only one product to sell (such as an encyclopedia) and with thousands of potential customers is going to push that product as if his life depended on it. Similarly, a purchasing agent, serving one encyclopedia publishing company and dealing with a vast universe of printers, will vigorously protect that publisher’s interests. The salesman or purchasing agent does not have to be employed by the corporation for these affiliations to apply: they follow from the logic of specificity. With narrow reach and few other options, both parties become highly dependent on each other, and there are no conflicts of interest for the navigator’s loyalty. Specificity—the extent to which the navigator’s economics depend on the economics of the sellers or buyers with whom he is tied—drives a large part of the affiliation. The employment relationship between the company and its salesman or purchasing agent is then a consequence of the association, not really a cause.

In a navigational context, specificity is determined by reach. A navigator positioned to assist an early choice in the consumer’s navigational hierarchy may have rich knowledge

Of the searcher (a customizable search agent or personal adviser, for example) and certainly will have low-richness/ high-reach understanding of the domain being searched (directories, product lists, phone numbers). That makes the navigator possibly specific to the consumer but certainly not particular to any individual seller in the domain being searched. Therefore, the navigator is likely to be affiliated with the interests of the consumer. A navigator in the middle of a search hierarchy, with high reach and low richness connections to both buyers and sellers (such as a newspaper classified section), will be neutral between the two principal parties. A navigator positioned to support a late choice in a consumer’s search hierarchy, where the search has been narrowed to a just few alternatives (such as a salesman), is unlikely to have rich knowledge of the consumer who has found his way to him. But he is very likely to be in the business of offering a rich understanding of the narrow domain of choice that he covers. That makes such a navigator nonspecific to the consumer but very specific to the supplier or suppliers whose products or services are being searched. Therefore, such a navigator is very likely to be formally or informally affiliated with these suppliers. That is why, in the world of the richness/reach trade-off, navigators closely affiliated with suppliers provide the vast majority of the detailed, rich navigation.

This has an important implication. If reach controls specificity and specificity controls affiliation, the same constraints that limit reach also control agency affiliation. If it is only because of limited scope that navigator specificity arises, then anything that blows up the trade-off between richness and reaches not only undermines the necessity for hierarchical search, it also simultaneously undermines the logic for navigators affiliating with sellers. A shift away from seller affiliation becomes possible once the trade-off between richness and reach blows up.

Paying for Navigation

The shift in affiliation becomes possible but not inevitable. There are numerous examples of navigators covering the same domains, and therefore operating with the same reach, but behaving differently as a consequence of being paid individually. "Financial advisers," for example, can be salespeople employed and paid by brokerage houses to sell securities, or they can be independent counselors paid an hourly advisory fee by the customer. Some home decorators receive a 40 percent commission from the furniture shop (a number rarely admitted to the customer). Others bill their clients at an hourly rate like architects. The White Pages and the Yellow Pages have roughly the same navigational reach, but one is paid for as part of the phone bill, and the other is an advertising medium. In each case, and entirely independent of reach, the options that the navigator presents, and the quality and tone of the guidance that he, she, or it provides, are subtly or not so subtly influenced by the navigator’s economics. So even if reach explodes and new navigation models become possible, the affiliation of the navigation function still critically depends on how it is paid for.

However, in a world unconstrained by richness and reach, navigation becomes orders of magnitude cheaper. When all information sources can be accessed electronically, when any item of information has to be collected only once, when standards spread through the self-organizing logic of networks, and when navigators can navigate to and through each other, stunningly sophisticated searches become possible for fractions of a cent. And both the cost and the capability of such searches will continue to be driven by Moore’s Law.

The sheer cheapness of navigation in the electronic domain changes the nature of the problem. The choice between a salesman paid for by the seller and a consultant paid for by the buyer is a real dilemma, but it is finessed when many of those functions can be performed electronically for pennies. Internet search engines provide navigational services without charging the customer. This makes sense given the low cost of the electronic product: it is merely so cheap to provide electronic navigation that a bit of banner advertising, pennies for a hyperlink, or some minor collateral benefit suffices to justify the complete navigator service. Navigator economics in the world of pure information is quite different from those embedded in the economics of people and things. The navigator does not have to be affiliated with a seller to justify giving away its services.

Fundamentally, as search increases in richness and reach and simultaneously drops in cost, the search function becomes less and less dependent on a high level of assistance from a few suppliers and more reliant on less involvement (banner advertising, hyperlinks) from many suppliers. This implies an affiliation shift: the navigator will have some loyalty to its advertisers as a group, but not to any particular advertiser: there are simply too many. The navigator is forced to be mostly dispassionate because of its reach.

But this statement dodges the issue a bit. High-quality navigation may well cost real money and may well be economically feasible only if customers are willing to pay. Much of the customers’ unwillingness to pay may stem from the fact that today they don’t have to, and it is difficult for them to distinguish quality that is worth the premium. With time, as the Wild West character of cyberspace subsides, that may change. Branded navigators, delivering quality content for a subscription, are likely to emerge. Wherever the outcome of a navigational process matters to consumers, and whenever information becomes sufficiently symmetric to make that value manifest, the logic of value pricing is likely to emerge.

The Competitive Advantage of Navigators

This leads to the fundamental principle that will govern the competitive evolution of navigation. When navigators are constrained in terms of reach, they connect to each other hierarchically, and those navigators providing high-richness/ low-reach information become affiliated, formally or informally, with sellers. This is undesirable from the consumer’s point of view, but consumers have no alternative unless they are willing to pay the substantial cost of their own navigator.

Once the richness/reach trade-off is broken, however, navigators cease to be specific to sellers and in many contexts become very cheap. This leads navigators to compete with each other for the attention of consumers based on two new factors: reach and affiliation with consumer interests. They can contend that way because the range and therefore, specificity constraints have been relaxed; they will compete that way because that is how consumers prefer to choose among navigators. The pursuit of competitive advantage among navigators should, therefore, drive them toward higher reach and closer affiliation with customer interests. Indeed, if the scope is subject to the network economics of Metcalfe’s Law, navigators will dash for the northeast corner of Figure 6-3 with an intensity driven by the knowledge that the winner takes all. A potential big winner in this scenario is the navigator who offers infinite reach and close affiliation with the consumer. The cyber equivalent of Wal-Mart.

The parallel makes a telling point. Wal-Mart did not set out to establish a close affiliation with consumer interests as its primary competitive advantage. Compared with many retailers, it is not particularly close to its customers. Wal- Mart’s primary competitive advantage lies in physical economies: scale and logistics. These real economies allow the retailer to offer a wide selection, reaching many suppliers,

which reduces the specificity of its supplier relationships. Those same physical economies give Wal-Mart an enormous reach to millions of customers. Lack of specificity (dependence on any one supplier) plus customer volume give Wal- Mart the bargaining power to operate effectively as a consumer-affiliated intermediary by negotiating for lower prices and rapid delivery. Wal-Mart’s segment is not necessarily one where consumer affiliation is of exceptional value. Instead, it is the real economics that enabled—and indeed caused— Wal-Mart to shift agency affiliation.

The same is true of the pure navigator business. Agency shifts occur not as a consequence of discovering latent customer needs for affiliated navigators, but rather as a consequence of the relaxing of the richness/reach constraints.

[PART II]