Net Gain: Expanding Markets through Virtual Communities - Hardcover

Hagel III, John; Armstrong, Arthur G.

Hardcover

ISBN 10: 0875847595 ISBN 13: 9780875847597

Publisher: Harvard Business Review Press, 1997

Synopsis

Net Gain identifies where the next level of value lies on the Internet and lays out the first economic model to quantify the revenue potential and the investment required to build a successful virtual community. From the offerings of commercial online services such as the Motley Fool Investment group to Internet communities of book lovers, Net Gain offers a multitude of real-world scenarios and lessons for building value and creating competitive edge. The authors clearly show that in order to compete in the online economy, you must establish an entirely new approach to product development, marketing, customer service, and distribution, and rethink your company's relationships to customers, suppliers, and competitors. And they show you how to do it.

About this title

About the Author

John Hagel III is a principal at the Silicon Valley office of McKinsey & Company, Inc., and a leader of the firm's Interactive Multimedia Practice. His work is primarily with clients in the electronics, telecommunications, and media industries, with a focus on strategic management and performance improvement. Prior to joining McKinsey, he served as senior vice president for strategic planning at Atari; as president of Sequoia Group, a systems house selling turnkey computer systems to physicians; and as a consultant with the Boston Consulting Group. Mr. Hagel is the author of a number of legal and business books and articles. His most recent piece, written with Harvard Business School professor Jeffrey F. Rayport, was "The Coming Battle for Customer Information," which appeared in the January/February 1997 issue of the Harvard Business Review.

Reviews

According to Hagel and Armstrong, both with the multimedia firm McKindey & Company, virtual communities are the marketplaces of the future. Representing more than a physical place on the Internet, they are an evolution in business dynamics. By providing a common forum on the Internet for consumers to share information, the authors argue, vendors are seeking access to these valuable market enclaves, hence creating a power shift from the vendor to the customer. The authors clearly demonstrate their professional experience and business acumen regarding this new market forum. Their book is a manifesto for a generation of entrepreneurs hoping to learn about the future of the online economy. Recommended for those seriously interested in the direction of business markets.?Dennis Krieb, St. Charles Cty. Community Coll. Lib., St. Peters, Mo.
Copyright 1997 Reed Business Information, Inc.

Excerpt. © Reprinted by permission. All rights reserved.

Selections from Net Gain

Not technology-members

In our experience, the number one thing that keeps the senior management of large companies from launching a virtual community is discomfort with the technology choices required to be successful. Yet, success in the virtual community business hinges not on technology-driven differentiation but on strategies designed to accelerate member acquisition and to create deep understanding of the needs of those members. The following seven guidelines will help flesh out what a technology strategy-based on the key concepts of speed and leverage-might look like:

1. Use proven technologies wherever possible-maintain a strong bias for proven technologies that have already emerged as de facto or de jure standards.
2. Avoid technology innovation at the customer interface and instead concentrate on incorporating the most robust technology for information capture and analysis.
3. Be disciplined and creative in defining member environments and services that can be delivered with existing technologies.
4. Avoid developing any technology in-house.
5. Carefully evaluate the evolving competition among technology providers when sourcing technologies that have not yet emerged as broad-based standards.
6. Design a modular technology architecture to allow you to "swap out" key technology components if they being to lose ground in the marketplace in terms of price or performance.
7. Carefully develop information architectures at the outset to help focus sourcing of appropriate data capture, storage, and manipulation technologies. (pp. 172-174)

A level playing field for small companies?

(Virtual) communities will further strengthen companies that demonstrate excellence in management. By making markets more efficient, they will reward companies able to manage their cost structure effectively when market prices come under pressure. By systematizing word of mouth, communities will tend to reward companies that give their customers excellent value. To the extent that a smaller company offers a better product or better customer service, it will have a better chance of promoting these strengths in a virtual community than in the off-line world. Virtual communities will erode the many scale-related advantages in marketing and sales that large corporations have enjoyed, such as their ability to get space on the shelves of large retailers, their ability to buy expensive TV advertising, and their global distribution networks. The leveling of the playing field that virtual communities are likely to bring about suggests that companies-whether large or small-should focus more than ever on the excellence with which they deliver their value proposition. (PP. 209-210)

Radical management implications of virtual communities

If successful, virtual communities will spawn new industries: community organizing, bulletin board moderating, software design, and community architecture among others. Mostly entrepreneurial, rarely capital intensive, they may be a partial antidote for the layoffs of the 1980s and 1990s. But the most radical potential impact of the virtual community may well be its impact on the way individuals manage their lives and companies manage themselves. Communities will serve to connect, much like the postal system and telephone before them. But they will go several steps further than the telephone or fax, as they help the individual seek out and find souls in search of relationships, colleagues in search of teamwork, customers in search of products, suppliers in search of markets: the virtual community might have a place for them all. (P. 216)

Assets aren't enough

We suspect that the skills required to organize a community will be as important as any initial advantage a company might appear to have based on its assets. If true, this will open up the community-organizing business to new competitors. The keys to becoming a successful organizer over time will be the abilities to aggregate members, retain them, and encourage them to make transactions.

Many companies will consider themselves the natural owner of a given type of community. Let's take companies with previously existing assets such as strong brands, strong customer relationships, and strong content. How relevant are these assets if a company does not know how to spark excitement and grow a community? This is not a product line extension, another corporate joint venture, or a different way of packaging the same content. That is precisely the mistake that so many companies have made in the on-line world. Magazine companies, for instance, have produced on-line magazines or 'Webzines' that fail to encourage communication between 'readers.' Many corporate sites are glorified posters with little interactivity and, again, no interaction encouraged between customers or between customers and the company. Lack of e-mail, bulletin boards, and chat areas is a clear symptom of a failure to grasp the essentials of what the experience of being on-line can offer. (pp. 128-129)

New roles for new organizations

Overall responsibility for running a relatively large community with ambitious growth targets (for example, one that is pursuing a highly leveraged entry strategy with $15 million start-up cash and a five-year goal of acquiring 900,000 members) is not for your traditional general manager. What's required is a blend of creativity, flexibility, and financial rigor. It is not unlike that of a producer in a movie studio. In fact, the person who fills the chief operating role for ParentSoup (a parenting community) describes herself as its producer.

A community's executive producer must have a feel for the creative, a line to the community member, an instinct for drawing 'talent' to the community, and a handle on the bottom line. A strong sense of timing will be crucial. For example, it will be up to the executive producer to decide when the community should start expanding its focus from acquiring members to increasing usage and attracting advertisers and vendors. One of an executive producer's key roles will be to find and develop the skills required to grow the community. Each stage of community development has a different skill set associated with it. Many of the roles required to manage a community are new-like executive moderator or community architect-while others are variants on roles that are played in business enterprise today-such as customer service manager. These roles fall naturally into the three areas of activity they are associated with: acquiring members, stimulating usage, and extracting value from the community. (pp.157-158)

The race belongs to the swift

Skeptics might argue that it won't be worthwhile competing on electronic networks until the economic model is more proven. Yet we suspect that they have yet to fully understand or take into account the laws of increasing returns and the ways that they're changing the rules of the game in manufacturing, service, and knowledge-based industries. As Microsoft proved so spectacularly, harnessing the power of increasing returns means 'the more you sell, the more you sell.' Microsoft saw and exploited the increasing returns potential of networks-the idea that the more people participate in the network, the more valuable the network becomes. In this case, the network was the array of companies designing products based on the Microsoft operating system standard. The more companies joined this network, the more useful the entire network became to computer buyers and the more units of the operating system Microsoft sold.

Of course, the converse is also true: increasing returns make it all the more likely, if you are on the losing end in a market, that you will fall farther behind. That's why preemptive strategies become so important in markets where increasing returns prevail-if you don't get there first, you may be too late. The advantages of being among the first make the most compelling argument for beginning to plan for a virtual community now. Once the market really begins to take off, it will become increasingly difficult (and expensive) to catch up with market leaders. (pp. 6-7)

Edition details

• Publisher: Harvard Business Review Press
• Publication date: 1997
• Language: English
• ISBN 10: 0875847595
• ISBN 13: 9780875847597
• Binding: Hardcover
• Edition number: 6
• Number of pages: 256