Brand building on the Internet

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2.3 The Layers of a Brand 14

2.4 Product and Service Brands 15

2.5 Branding & the Buying Process 16

2.6 The Importance of Customer Satisfaction and Loyalty 18

2.7 Emotional Loyalty 19

2.8 The Concept of Brand Equity 20

2.8.1 The Value of Brands to Customers 22

2.8.2 The Value of Brands to Companies 22

2.9 Conclusion 23

3.1 Introduction 25

3.2 Overview of the Brand-Building Process 25

3.3 The Value Proposition 26

3.3.1 Added Value 27

3.3.2 Distinctive Brand Identity 28

3.4 Developing the Framework and Communicating the Value Proposition 30

3.5 Building Customer Relationships 31

3.6 Characteristics of Successful Brands 32

3.7 Conclusion 32

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4.1 Introduction 34

4.2 Overview of the Internet 34

4.2.1 The Defining Characteristics of the Internet 35

4.3 The Growth of the Internet 35

4.4 The Internet & e-Commerce 39

4.5 The Impact of the Internet on Business 40

4.6 Conclusion 43

5.1 Introduction 45

5.2 The New Dynamics of Brands 45

5.3 The Importance of Customer Loyalty Online 47

5.4 Increasing Returns Economics and First-Mover Advantage 48

5.5 Viral Marketing 50

5.5.1 The Case of Hotmail.com 51

5.6 The Online Experience & The 7Cs Framework 52

5.7 The Interactive Brand-Building Model 57

5.8 Limitations of Brand-Building on the Internet 59

5.9 Conclusion 60

6.1 Introduction 62

6.2 Case Study: Amazon.com 62

6.2.1 Company Overview 62

6.2.2 Value Proposition 62

6.2.3 Sources of Value - The 7Cs Framework 64

6.2.4 Brand-Building Strategy 66

6.2.5 Other Factors that Contribute to their Brand Leadership 69

6.2.6 Conclusion 70

6.3 Case Study: BarnesandNoble.com 71

6.3.1 Company Overview 71

6.3.2 Value Proposition 72

6.3.3 Sources of Value - The 7Cs Framework 72

6.3.4 Brand-Building Strategy 73

6.3.5 Conclusion 75

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6.4 Case Study: Boo.com 76

6.4.1 Company Overview 76

6.4.2 Value Proposition 76

6.4.3 Sources of Value - The Failure of Boo.com 77

6.4.4 Brand-Building Strategy 78

6.4.5 Conclusion 79

6.5 Case Study: CDnow 80

6.5.1 Company Overview 80

6.5.2 Value Proposition 80

6.5.3 Sources of Value - The 7Cs Framework 81

6.5.4 Brand-Building Strategy 83

6.5.5 Other Factors that Contribute to their Brand Leadership 84

6.5.6 Conclusion 85

6.6 Case Study: eBay 86

6.6.1 Company Overview 86

6.6.2 Value Proposition 86

6.6.3 Sources of Value - The 7Cs Framework 87

6.6.4 Brand-Building Strategy 91

6.6.5 Conclusion 92

6.7 Case Study: Gap.com 93

6.7.1 Company Overview 93

6.7.2 Value Proposition 93

6.7.3 Sources of Value - The 7Cs Framework 94 6.7.4 Brand-Building Strategy - Extensive Integration 96

6.7.5 Conclusion 97

6.8 Case Study: Yahoo! 98

6.8.1 Company Overview 98

6.8.2 Value Proposition 98

6.8.3 Sources of Value - The 7Cs Framework 99

6.8.4 Brand-Building Strategy 102

6.8.5 Other Factors That Contribute to their Brand Leadership 104

6.8.6 Conclusion 104

7.1 Conclusion & Discussion of Key Findings 106 7.1.1 Key Factors that Contribute to Building a Successful Online Brand 107 7.2 Opportunities for Further Research 110

Appendix A Interbrand's Ranking of the Top 60 Brands 112

Appendix B The Mckinsey 7S Framework 113

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Figure 1.1 Years to Reach $100 million in Sales 7

Figure 1.2 Research Methodology 9

Figure 2.1 A Brand is More Than a Product or Service 13

Figure 2.2 Layers of a Brand 14

Figure 2.3 Five-Stage Model of the Buying Process 16

Figure 2.4 Steps Between Evaluation of Alternatives and a Purchase Decision 17

Figure 2.5 The Satisfaction-Loyalty Relationship 18

Figure 2.6 Creating Emotional Loyalty 20

Figure 2.7 Brand Progression 20

Figure 2.8 Brand Equity 21

Figure 3.1 Brand-Building Mechanism 25

Figure 3.2 Define the Value Proposition 26

Figure 3.3 Kapferer's Brand Identity Prism 29

Figure 3.4 The Innovation-Adoption Model 30

Figure 4.1 The Three Layers of the Internet 34

Figure 4.2 Growth in Internet Host Computers and Major Developments 36

Figure 4.3 Accelerated Rate of New Technology Acceptance 36

Figure 4.4 The Virtuous Growth Cycle of the Internet 37

Figure 4.5 What are People Doing Online? 38

Figure 4.6 World-wide Commerce on the Internet (1998-2003) 39

Figure 4.7 The Structure of an Online Company 43

Figure 5.1 The Network Effect 48

Figure 5.2 The Virtuous Spiral of Online Growth 49

Figure 5.3 The 7Cs Framework 52

Figure 5.4 Factors Affecting Web Brand Loyalty 53

Figure 5.5 The Community Hexagon 55

Figure 5.6 Customer Access to Information 56

Figure 5.7 The Interactive Brand-Building Model 57

Figure 5.8 Website Promotion Methods - Popularity & Effectiveness 58

Figure 5.9 Categories Suitable for Interactive Marketing 60

Figure 6.1 Overview of Amazon.com's Website 64

Figure 6.2 Amazon.com's Associates Programme 67

Figure 6.3 Overview of BarnesandNoble.com's Website 72

Figure 6.4 Overview of Boo.com's Website 77

Figure 6.5 Overview of CDnow's Website 81

Figure 6.6 Overview of eBay's Website 88

Figure 6.7 Overview of Gap's Website 94

Figure 6.8 Overview of Yahoo!'s Website 100

Figure 6.9 Overview of My Yahoo! 101

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Table 5.1 The Emerging Brand-Building Environment 46 Table 6.1 Amazon.com - Timeline and Major Milestones 63 Table 6.2 BarnesandNoble.com - Timeline and Major Milestones 71 Table 6.3 Boo.com - Timeline and Major Milestones 76 Table 6.4 CDnow - Timeline and Major Milestones 80 Table 6.5 eBay - Timeline and Major Milestones 87 Table 6.6 Gap.com - Timeline and Major Milestones 93 Table 6.7 Yahoo! - Timeline and Major Milestones 99

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1.1 OVERVIEW

Over the past few years, there has been an explosion in the online world - an explosion that is also a harbinger of how business will operate in the future. Supply chains are being re-thought, products and services reconfigured, and business models revamped. As such, the Internet is having a profound impact on the way business is being conducted in ways that are often disruptive to traditional methods1. This is creating new challenges and opportunities. The Internet provides the opportunity for companies to reach a wider audience and create compelling value propositions never before possible (e.g. Amazon.com's range of 4.5 million book titles), while providing new tools for promotion, interaction and relationship building. It is empowering customers with more options and more information to make informed decisions. The Internet also represents a fundamental shift in how buyers and sellers interact, as they face each other through an electronic connection, and its interactivity provides the opportunity for brands to establish a dialogue with customers in a one-to-one setting. As such, the Internet is changing fundamentals about customers, relationships, service and brands, and is triggering the need for new brand-building strategies and tools.

In the midst of this, aggressive Internet start-ups have emerged, creating strong brands that are putting established brands at risk. Internet companies such as Yahoo!, Amazon.com,

America Online (AOL) and eBay have been able to build powerful brands in a few years,

whereas it has taken decades for traditional companies to achieve the client base, customer affiliation and level of sales, that these Internet start-ups have achieved. Figure 1.1 shows the number of years it has taken some Internet brands to reach sales of $100 million.

Source: Securities and Exchange Commission Filings; McKinsey Analysis (www.mckinseyquarterly.com)

5.1 3.2 3.9 3.5 2.0 _1.7 2.9 0 1 2 3 4 5 6

CDnow Onsale.com1 _{Amazon.com Cyberian}

Outpost eBay Barnesand noble.com Priceline.com FEBRUARY 1994 JULY 1994 MARCH 1995 SEPTEMBER 1995 MARCH 1997 JULY 1997 JULY 1994 DATE OF INCEPTION

1 _{Since merged with Egghead.com}

As a result, harnessing the reach and interactivity of the Internet to build and maintain brands has become extremely important. For pure online players, who are essentially intangible, brands are even more critical as customers have little to go on other than a recognised brand. Given the tremendous clutter in today's e-commerce marketplace, and the high cost of acquiring online customers2, the most successful sites will be those that can attract customers and build brand loyalty and enthusiasm, that extends the brand-customer relationship beyond a single transaction. A Business Week / Harris poll, found that 57% of Internet users go to the same sites over and over again, rather than drifting from site to site3.

Therefore, building awareness, attracting traffic or 'eyeballs', turning browsers into buyers, and turning first-time buyers into loyal repeat customers has become the Holy Grail of online marketing strategies. However, as the need to build brand loyalty online is reaching a peak, there is a growing recognition that traditional methods are no longer suited to this new interactive environment. As such, companies lack a coherent framework and concrete methods to build an online brand. In light of this, this dissertation seeks to explore how companies should go about building a successful Internet brand and to identify the critical factors that must be considered.

1 _{Christensen, C., & Overdorf, M., 'Meeting the Challenge of Disruptive Change', Harvard Business Review, March - April}

2000, Volume 78 Issue 2, pp. 66-76

2 _{Hoffman, D. L. and Novak, T. P., 'How to Acquire Customers on the Web', Harvard Business Review, May-June 2000} 3 _{Hof, R., Browder, S., & Elstrom, P., 'Internet Communities - Forget Surfers. A New Class of Netizen is Settling Right In' -}

1.2 OBJECTIVES

The objectives of this dissertation are as follows:

• Togainan understanding of the role of brands and how they have traditionally been built. Areview and analysis of leadingacademic thinkingwillbeused to explore these issues. • To explore how the Internet is changing the brand-building environment, and to identify

new sources of value, tools and strategies to build brands on the Internet.

Academic literature and an analysis of the impacts of the Internet will be used to investigate these factors, supported by secondary data related to aspects of online business from accredited and published sources.

• To identify the key factors and characteristics that contribute to the development of successful Internet brands.

This is based on the outcome of the primary research (in-depth case studies), with reference to the theoretical themes that emerge from the literature review and in terms of the practical implications for companies.

1.3 METHODOLOGY

The methodology used in this dissertation is illustrated in Figure 1.2.

ACADEMIC RESEARCH

SECONDARY DATA

CASE STUDIES CONCLUSION HYPOTHESIS

The 7Cs Framework & The Interactive Brand-Building Process

FIGURE 1.2 - RESEARCH METHODOLOGY

Academic Research: Given that the Internet is such a new area, there is more work in popular

rather than academic literature. Consequently, the literature review draws on leading academic thinking in more established areas such as brand management, relationship management, marketing, strategy and economics. The absence of academic literature on Internet branding posed a major obstacle, however, this also highlights the true value of the dissertation. While there is no attempt, nor desire, to provide an in-depth analysis of the psychological and social dimensions of brands, certain key factors are highlighted in their relevance to the dissertation.

Secondary Data: This consists primarily of key facts and survey results quoted by leading

consultancy and research firms, and is used to provide insight into some of the factors that contribute to the development of successful brands.

Hypothesis (Framework): This is based on the literature review and secondary data. The

resulting 7Cs Framework and Interactive Brand-Building Model outline key sources of added value and the tools available for companies to create a high-impact customer experience that is critical in building an online brand. These are further refined using the insight obtained through the case studies.

Case Studies: The dissertation is essentially built on the in-depth analysis of the

brand-building efforts of seven online companies. The case studies include born-on-the-web companies that are among the most recognised Internet Brands (Amazon.com, CDnow,

eBay and Yahoo!), traditional 'bricks-and-mortar' companies that rose to the challenge of

taking their brands to the Internet (Barnesandnoble.com and Gap.com), as well as a recent Internet failure (Boo.com). The combination of cases provides a useful and practical insight into brand-building issues and problems, and factors that contribute to a brand's success.

1.4 STRUCTURE

The next chapter, Chapter 2, provides an analysis of leading academic literature in relation to branding, and introduces the core concepts that form the backbone of the dissertation. The nature of brands, their purpose and value are discussed.

Chapter 3 explores how brands have traditionally been built, highlighting some key factors

that have contributed to brand success.

Chapter 4 provides an overview of the Internet and its defining characteristics, outlining the

key developments that have contributed to the Internet's explosive growth and accelerated adoption. This chapter sets the context within which online brands must be built, by outlining the impact of the Internet on the business and competitive environment.

Chapter 5 explores new strategies and tools for building brands on the Internet (the 7Cs

Framework) and the importance of creating a positive end-to-end customer experience, as well as the interactive approach to attracting customers and building loyalty. The limitations of the Internet in terms of brand-building are also discussed.

Chapter 6 examines the brand-building efforts of seven companies. These case studies

provide a detailed and practical insight into how leading online brands have actually built their brands.

The final chapter, Chapter 7, summarises the key findings, and outlines the opportunities for further research.

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2.1 INTRODUCTION

Brands are made up of many layers and dimensions. In this chapter, these layers are unravelled to reveal the nature of brands and their reason for existence. The chapter proceeds to describe the influence of brands on the buying process, and the importance of customer satisfaction and brand loyalty. The concept of brand equity is outlined, explaining the value of brands, both to customers, and to companies. These concepts are central to brands and brand-building, whether online or offline, and they form the backbone of this dissertation.

2.2 WHAT IS A BRAND?

According to Rita Clifton, CEO of Interbrand Newell and Sorrell - a leading specialist brand consultancy firm - a brand is:

"a mixture of tangible and intangible attributes, symbolised in a trademark, which, if properly managed, creates influence and generates value4"

This definition truly captures the essence of a brand, and highlights the importance of brand management. Branding is about creating 'value', both for customers, and for the company. Thisvaluestemsfromtheproducts andservicesthatcompaniescreate and bring to the market, butextendsfurthertoencompassaddedvaluesderivedfromfactorssuchasthebrand-customer relationship, the brand's emotional benefits and its self-expressive benefits - see Figure 2.1.

4 _{Clifton, R. & Maughan, E., 'The Future of Brands', (London: Macmillan Press Ltd.), 2000, p. vii} PRODUCT OR SERVICE SCOPE ATTRIBUTES QUALITY USES COUNTRY OF ORIGIN USER IMAGERY SYMBOLS SELF-EXPRESSIVE BENEFITS BRAND PERSONALITY ORGANISATIONAL ASSOCIATIONS EMOTIONAL BENEFITS BRAND-CUSTOMER RELATIONSHIPS BRAND

FIGURE 2.1 - A BRAND IS MORE THAN A PRODUCT OR SERVICE

Other common descriptions of a brand include - a 'relationship', a 'reputation', a 'set of expectations', and a 'promise'. It is a company's promise to consistently deliver a specific set of features, benefits, and services to customers.

Brands are richly endowed entities. They start life as ideas, making their way into planning and strategy documents, yet ultimately reside as consumer perceptions. For some companies, brands are their most valuable asset. The space a brand occupies inside a customer's head can create a 'mental' patent, which grows out of the cumulative memory and the experiences customers have of products or services. As such, brand-building is about creating value through the provision of a compelling and consistent customer experience that satisfies customers and keeps them coming back.

2.3 THE LAYERS OF A BRAND

Brands are made up of four layers - the core product or service, the basic brand, the augmented brand and the potential brand - Figure 2.2.

PRODUCT OR SERVICE BASIC BRAND AUGMENTED BRAND POTENTIAL BRAND Quality Features Packaging Name Design Guarantees Service Credit & Terms Delivery & Installation

Source: Adapted from Levitt, T., 'Marketing success through differentiation - of anything', Harvard Business

Review, January-February, 1980, p.86

Product / Service

At the most basic level, customers buy products to meet certain functional needs. However, most products and services cannot survive on functionality alone as this is usually matched in time. The most common barrier to competition is building a brand.

The Basic Brand

The basic brand consists of the "name, term, sign, symbol, or design, or a combination of them, intended to identify the goods and services of one seller or group of sellers and to differentiate them from those of competitors"5. Essentially, this should support the offering's performance and differentiate the brand from those of competitors.

The Augmented Brand

Successful companies seek a competitive edge through the enlargement of the core product or service, with supplementary products and services (e.g. information, quick delivery) that enhance the customer’s total purchasing and use experience. These products and services add value and make the offering much more difficult for competitors to emulate.

The Potential Brand

A brand achieves its potential when added values are so great that customers will not willingly accept substitutes, even when the alternatives are substantially cheaper or more readily available (e.g. Coca-Cola, Kodak, Levi's).

2.4 PRODUCT AND SERVICE BRANDS

Product brands are the original brand carriers. They are the historical core of branding

because they are the most prevalent, and because they most readily come to mind when consumers are asked to recall brands.

Service Brands (intangible) are much less numerous than their product counter parts.

Intangible services are also more challenging to "package" and sell to consumers who often have difficulty conceptualising, preferring things they can see and touch. Certain service brands, such as in retailing, actually sell products, but the brand itself is the store, not the products it sells - The Gap stores, Southwest Airlines and Amazon.com are examples. In fact, this is the case with all Internet companies, as they essentially perform the function of a 'virtual' intermediary or 'infomediary' and are intangible.

2.5 BRANDING & THE BUYING PROCESS

In order to understand the context and the role of brands, it is important to clarify customers' underlying buying behaviour and the buying process. The buying process consists of five stages (Figure 2.3).

The process starts when the buyer recognises a need. This can be triggered by internal or external stimuli (advertisements). Once aroused, a consumer will be inclined to search for more information, either through heightened attention or through an active information search. Through gathering information, the consumer learns about competing brands, and evaluates them in terms of the degree to which their benefits and bundle of attributes satisfy their needs. Consumers differ as to which product / service attributes they see as important, and pay the most attention to the brands that will deliver the sought benefits. Therefore, it is critical to understand what attributes consumers value.

Consumers develop a set of brand beliefs about the attributes of competing brands. These brand beliefs make up the brand image (this concept is re-visited in Chapter 3). These beliefs depend on their previous experiences with the brand, and the effect of selective perception, selective distortion, and selective retention. In the evaluation stage, the consumer forms preferences among brands and may form a purchase intention to buy the brand they prefer. However, two factors can intervene between the purchase intention and the purchase decision - attitudes of others and unexpected situational factors (Figure 2.4).

NEED

RECOGNITION INFORMATION SEARCH

EVALUATION OF ALTERNATIVES PURCHASE DECISION POST-PURCHASE BEHAVIOUR

FIGURE 2.3 - FIVE-STAGE MODEL OF THE BUYING PROCESS

Source: Kotler, P., 'Marketing Management - Analysis, Planning, Implementation, and Control', (Europe: Prentice-Hall) 8th _{Ed., 1996, p.194}

If other people have had a negative experience with the brand, their negative attitude may influence the consumer's purchase intent or vice versa. A consumer's decision to modify, postpone, or avoid a purchase decision is heavily influenced by perceived risk. Expensive purchases involve some risk taking. A consumer tries to deal with this by gathering information from friends, and a preference for recognised brands they can trust.

After a consumer has actually purchased the product or service, they will evaluate their level of satisfaction - the customer will be highly satisfied, somewhat satisfied, or dissatisfied with the purchase decision. Satisfaction depends on how closely the brand's perceived performance matches the customer's expectations. If perceived performance and quality exceed their expectations then they are satisfied, even delighted. If performance falls below their expectations, they will be dissatisfied and look for alternative brands in the future. Customers' expectations are particularly important when dealing with services, and especially important when dealing with purchases made through the Internet, as these services are intangible and therefore, customers make decisions purely on the basis of their expectations. These expectations are formed through a combination of past experiences, word-of-mouth, advertising and communication.

The level of customer satisfaction will influence whether they buy the brand again and talk favourably or unfavourably about it to others. Highly satisfied and loyal customers tend to move directly from the need recognition stage to the purchase decision, locking out potential competitors. Customer satisfaction and loyalty are essential to creating successful brands.

EVALUATION OF ALTERNATIVES PURCHASE INTENTION ATTITUDES OF OTHERS (WORD-OF-MOUTH) UNEXPECTED SITUATIONAL FACTORS PURCHASE DECISION

FIGURE 2.4 STEPS BETWEEN EVALUATION OF ALTERNATIVES AND A PURCHASE DECISION

2.6 THE IMPORTANCE OF CUSTOMER SATISFACTION AND LOYALTY

According to Thomas Jones and Earl Sasser (1995)6, customers at the lowest and highest ends of the satisfaction scale tend to have intense feelings about a brand and its products / services. The customers at the bottom end of the scale are "terrorists" - those who actively attack the brand telling others not to buy from the company. At the opposite end of the satisfaction spectrum are "apostles" - customers who are satisfied and loyal and talk favourably about the brand - Figure 2.5.

Loyalty is derived when customers are continuously satisfied over time. This satisfaction encompasses the whole experience and not just a company's products or services. Customers that are passionately or emotionally loyal are those that have built trust in a company, and believe that it will always act in their best interest. Trust is critical for a brand's success. Some traditional companies identified as having established a strong trust relationship with their customers include: Disney, Federal Express, Hewlett-Packard, Johnson & Johnson,

Saturn, Southwest Airlines and Xerox7.

6 _{Jones, T., & Sasser, E., 'Why Satisfied Customers Defect' - Harvard Business Review, Nov-Dec 1995} 7 _{Hart, C. W. and Johnson, M. D., 'Growing the Trust Relationship', Marketing Management, Spring 1999}

1 2 3 4 5 SATISFACTION LOW HIGH LO YA L T Y “HOSTAGES” “MERCENARIES” “TERRORISTS” “APOSTLES” Completely Satisfied Completely Dissatisfied HIGHLY COMPETITIVE ZONE • Commodity • Consumer indifference • Many substitutes • Low switching costs NON COMPETITIVE ZONE • Regulated • Proprietary technology • Few substitutes • High switching costs

FIGURE 2.5 THE SATISFACTION-LOYALTY RELATIONSHIP & THE IMPACT OF COMPETITIVE ENVIRONMENT

Loyal customers are assets. The benefits of strong customer relationships are:

- The average cost of acquiring a new customer is five times more than it costs to retain an existing one8

- Loyal customers tend to spend more

- Regular customers tend to place frequent, consistent orders

- Satisfied customers are the best advertisement - they provide good word-of-mouth and are the best salespeople for the product / service

- They are willing to pay premium prices to a supplier they know and trust - Gaining market entry or share becomes very difficult for competitors - It is easier to communicate with them on a regular basis

2.7 EMOTIONAL LOYALTY

Emotional loyalty can be brought about in two main ways. Firstly, emotional loyalty is born out of a consumer's personal relationship with a brand. This relationship can actually start through the satisfaction of a functional need or expressiveness (self-image) need. Consumers cross the threshold from a mere brand relationship into emotional loyalty when they "animate" the brand, giving quasi-human qualities and relate to it as they would to humans - consider how Coke consumers felt betrayed when Coca-Cola decided to change their formula in 1985.

Emotional loyalty can be also created through the formation of a strong user community around the brand. The consumer reaches emotional loyalty when membership in the brand's user community becomes an end in itself. In this way, the brand becomes a link for people for whom fulfilling similar aspirations is a major life theme (e.g. Harley-Davidson motorcycle clubs). There is also clear evidence of this on the Internet, with the emergence of "community brands9" such as Geocities ('home' of more than 3 million community members 'living' in 41 'neighbourhoods') and FortuneCity.com. Some established brands are successfully developing online communities around them such as Disney and Pentax (where professional and aspiring photographers can exchange tips and information on techniques and equipment).

8 _{Peppers, D. & Rogers, M., 'The One to One Future', 1993}

Emotional loyalty leads to a deeper, almost irreplaceable bond as well as potentially to the negative feelings of betrayal. Emotionally loyal customers build a sense of trust and two-way commitment with the brand, which goes well beyond the satisfaction of a specific need.

Satisfying customers and building loyalty (creating "apostles") is the ultimate objective behind building a brand, and understanding the needs and buying processes of the target market is essential.

2.8 THE CONCEPT OF BRAND EQUITY

Brands vary in the amount of power and value they have in the marketplace (Figure 2.7).

At one extreme, there are brands that are unknown by most buyers. Some brands have a fairly high degree of brand awareness (measured by brand recall and recognition). Beyond this, there are brands that customers perceive as acceptable and would not resist buying. A stronger brand enjoys a high degree of brand preference over competing brands. However, a 'powerbrand' tends to have a high degree of brand loyalty, whereby customers would be unwilling to substitute it with competitors' offers.

UNKNOWN BRAND BRAND AWARENESS BRAND PREFERENCE BRAND ACCEPTABILITY BRAND LOYALTY

FIGURE 2.7 - BRAND PROGRESSION

•

•

•

TRIGGERS PATHWAYS THRESHOLDS

Brand Personification Community as an End in itself User Community Personal Relationship with the Brand

EMOTIONAL LOYALTY

FIGURE 2.6 - CREATING EMOTIONAL LOYALTY

Source: Fournier, S., 'Consumers and Their Brands: Developing Relationship Theory in Consumer Research',

A strong brand is said to have high brand equity, which is the value of the brand over and above its commodity value. According to David Aaker (1991), brand equity "is a set of assets (and liabilities) linked to a brand's name and symbol that adds to (or subtracts from) the value provided by a product or service10".

The major brand assets are brand loyalty, name awareness, perceived quality, strong brand associations, and other assets such as patents, trademarks, and relationships with distributors and strategic partners. The benefits of each are outlined in Figure 2.8.

10 _{Aaker, D., 'Managing Brand Equity: Capitalising on the Value of a Brand Name', (New York: Free Press), 1991}

BRAND EQUITY

FIGURE 2.8 - BRAND EQUITY

Source: Aaker, D., 'Managing Brand Equity: Capitalising on the Value of a Brand Name', (New York: Free Press), 1991

ProvidesValue to Customer by Enhancing Customer's: • Interpretation / processing of information • Confidence & Trust

in the purchase decision • Use satisfaction

Provides Value to Firm by Enhancing: • Efficiency and effectiveness of marketing programs • Brand loyalty • Prices / margins • Brand extensions • Trade leverage • Competitive advantage BRAND LOYALTY OTHER PROPRIETARY BRAND ASSETS PERCEIVED QUALITY BRAND ASSOCIATIONS BRAND AWARENESS

• Reduced Marketing Costs • Trade Leverage • Attracting New Customers - Create Awareness - Reassurance • Time to Respond to Competitive Threats • Anchor to which other

associations can be attached • Familiarity / Liking • Signal of Substance / commitment • Brand to be considered • Reason-to-Buy • Differentiate / Position • Price • Channel Member • Extensions • Competitive Advantage • Help Process / Retrieve

Information • Reason-to-Buy

• Create Positive Attitude / Feelings

2.8.1 THE VALUE OF BRANDS TO CUSTOMERS

According to Jean-Noel Kapferer (1992)11, brands perform several functions that add value and customer benefits:

• Identification - To be clearly seen, to make sense of the offer, to quickly identify sought after products

• Practicality - To save time and energy through identical repurchasing and loyalty

• Guarantee - To be sure of finding the same quality no matter where or when you buy the product or service

• Optimisation - To be sure of buying the best product in the category, the best performer for a particular purpose

• Characterisation - To have confirmation of your self-image or the image that you present to others

• Continuity - Satisfaction brought about through familiarity and intimacy with the brand that you have been consuming for years

• Hedonistic - Satisfaction linked to the attractiveness of the brand, to its logo, to its communication

• Ethical - Satisfaction linked to the responsible behaviour of the brand in its relationship with society

2.8.2 THE VALUE OF BRANDS TO COMPANIES

Brands create value for companies, in the following ways:

• Brands, market share and profits - Typically a brand leader obtains twice the market share of the number two brand, and the number two twice the share of the number three12. The brand leader is the most profitable and all beyond number two are unprofitable13. • Brand Leverage - The brand leader benefits from two main leverage effects: Higher

volume leads to economies of scale in development, production and marketing; Premium pricing increases revenue.

11 _{Kapferer, J., 'Strategic Brand Management', (New York: Free Press), 1992}

12 _{Worcester, R. & Downham, J., 'Consumer Market Research Handbook', (London: McGraw Hill), 3}rd _{Ed., 1986} 13 _{Golder, P. N., & Tellis, G., 'Pioneer Advantage: Marketing Logic or Marketing Legend?', Journal of Marketing}

• The Value of Niche Brands - Dominating a niche market is usually more profitable than being fifth in a large market.

• Brand Loyalty and Beliefs - Strong brands are more attractive to investors. Brand loyalty also reduces marketing costs and enables firms to override occasional problems (e.g. Johnson & Johnson with Tylenol).

• The Brand Barrier - Brand leaders usually have the financial strength to fend off competitors. Potential competitors are usually reluctant to enter the market if existing brands satisfy customers. In addition, brand leaders can exploit their superiority in the market (e.g. Coca-Cola “the real thing”).

• Avenues for Growth - The product life cycle applies to products, not brands. Companies can maintain a brand while modifying the underlying product to account for new technology, fashion or prevailing market conditions. The brand can also be used to penetrate new markets.

• Motivating Stakeholders - Companies with strong brands attract good recruits. They also tend to elicit community and government support.

In trying to estimate the monetary value of brands, companies such as Interbrand (see Appendix A), and Young & Rubicam have created complex formulas, but there remains an ongoing controversy about how accurate and meaningful these measures are.

2.9 CONCLUSION

Branding is essentially about creating value through the provision of a compelling and consistent offering and customer experience that will satisfy customers and keep them coming back. When a company creates this type of customer preference and loyalty, it can build a strong market share, maintain good price levels and generate strong cash flows. This, in turn, drives up share price and provides the basis for future growth.

The next chapter describes the process of how brands are built, the tools that are used, and the characteristics of successful brands.

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3

3.1 INTRODUCTION

Building a strong brand is a complex task. This chapter spells out the traditional brand-building process, highlighting important factors that contribute to the success of each step along the way. The major characteristics of successful brands are also reviewed.

3.2 OVERVIEW OF THE BRAND-BUILDING PROCESS

The brand building process starts with the development of a strong value proposition. Once this has been established, the next step is to get customers to try the brand. If the offering is developed properly, it should provide a satisfactory experience and lead to a willingness to buy again. To entice trial and repeat purchase requires triggering mechanisms, which are created through advertising, promotion, selling, public relations, and direct marketing. The company needs to communicate the values of the brand and then reinforce brand associations to start the wheel of usage and experience, and keep it turning. Through the combination of the stimulus of consistent communications and satisfactory usage and experience, brand awareness, confidence and brand equity are built. This is illustrated in Figure 3.1.

BRAND EQUITY LOYALTY DIFFERENTIATION SATISFIED CUSTOMERS ADDED VALUE TRIAL PRODUCT / SERVICE PR ADVERTISING SELLING PROMOTION PRESENTATIONS DISPLAY POTENTIAL BRAND PRODUCT OR SERVICE

3.3 THE VALUE PROPOSITION

Brand-building starts with a clearly defined value proposition - a strong offer that a potential customer would find compelling and interesting. In order to do this, a company must develop a strong understanding of who their potential customers are, what they value and how the products or services should be optimised or configured to deliver this value (Figure 3.2). The value propositionmustbe continuouslyre-evaluated torespond tochanges in the marketplace.

Central to this value proposition, a brand must deliver a quality product or service that meets the functional needs of customers and differentiates itself from competitors. It should seek to augment its basic appeal with added value through the provision of additional products or services to delight customers. In this way, the brand can elicit feelings of confidence that it is ofhigherqualitythancompetitors'. As such, acompelling value proposition is the combination of an effective product or service (P), a distinctive brand identity (I), and added value (AV).

These three characteristics are multiplicative rather than additive - each is essential. Without a good product or service, it is impossible to build a successful brand. Similarly, unless differentiation and awareness can be developed, it will never attract a strong client base.

B

= P

I

AV

What is the

optimal product or service offering that delivers this

value? Who is your

customer?

What does your customer value?

3.3.1 Added Value

Added value is at the heart of building successful brands. Most buying decisions are influenced by brand values, which are additional to those based upon real performance. The large number of decisions, the pace of technical change, the number of competing alternatives and the large variety of advertising and selling messages, mean that buyers look for short cuts. Reputable brand names provide confidence and allow customers to cut through the risks and complexity of choice.

Added values also occur when brands are bought for emotional reasons to satisfy other needs besides functional needs. People use brands to express their lifestyles, interests, values or wealth. Customers choose brands, which they perceive as meeting their needs. In today's affluent society, these needs are as likely to be about satisfying self-actualisation or esteem needs, or to gain a sense of belonging, as they are to be about satisfying basic physical and economic needs14. Brand values derive from five major sources15:

• Experience of Use - if a brand provides good service over time, it acquires added values of familiarity and proven reliability.

• User Associations - brands frequently acquire an image from the type of people who are seen as using them. Advertising and sponsorship are often used to convey images of prestige or success by associating the brand with glamorous personalities.

• Belief in Efficacy - in many cases, if customers have faith that a brand will work, it is more likely to work effectively for them. For pharmaceuticals, cosmetics and high-tech products, faith in brand generates satisfaction in use. Beliefs in efficacy can be created by comparative evaluations and rankings from consumer associations, industry endorsements and newspaper editorials.

• Brand Appearance - the design, layout and appearance of the brand can clearly affect preference by offering cues to quality.

• Manufacturers' Name and Reputation - In many situations a strong company name (e.g.

Coca-Cola, Gillette, Sony, Hewlett-Packard, Kellogg's) attached to a new product will

transfer positive associations, providing confidence and incentive to trial.

14 _{Doyle, P., 'Marketing Management and Strategy', 2}nd _{Ed. (Europe: Prentice-Hall), 1998, pp. 169}

3.3.2 Distinctive Brand Identity

A brand identity is the message sent out by the brand through its name, features, visual appearance, and advertising. This may be different from the brand image, which depends on how the target market perceives the brand. A company should seek to differentiate its brand through developing a distinctive identity. Jean-Noël Kapferer (1992) identified three levels of a brand identity16 - Figure 3.3:

• The Brand Core - the fundamental or genetic code of the brand, which remains fixed over time.

• The Brand Style - articulates the brand core in terms of the culture it conveys, its personality and its image or self-projection .

• The Brand Theme - the way the brand communicates through its advertising, press releases, packaging, etc. Themes include the physical appearance (logo, colour scheme, and visual appearance), its reflection (e.g. type of spokesperson / customer image used to advertise the brand), and the relationship expressed (e.g. glamour, prestige, friendly). Brand themes are the most flexible element and will tend to change with fashion, style or cultural differences from one country to another, however the brand style and core tend to be less flexible.

The brand prism enables management to understand the brand, its strengths and opportunities. Secondly, it helps in developing the brand strategy and the formulation of a distinctive positioning in the market. It also facilitates consistency in the message being transmitted through presentation (e.g. website design, structure and ease of use), advertising, below-the-line activities, and through line and brand extensions. Finally, understanding the brand's core and style helps set the perimeters of brand extensions - how far the brand can be meaningfully stretched to other products and market segments.

Source: Adapted from Kapferer, J., 'Strategic Brand Management', (New York: Free Press), 1992

FIGURE 3.3 - KAPFERER'S BRAND IDENTITY PRISM

PERSONALITY CULTURE REFLECTION RELATIONSHIP PHYSICAL SELF-IMAGE PICTURE OF RECIPIENT BRAND STYLE IN TER N A LI SA TI ON EX TER N A LI SA TI ON BRAND THEMES PICTURE OF SENDER BRAND CORE

Physical The physical qualities and features of the product or service

The character of the brand and how it speaks of its products / services Personality

The set of values feeding the brand's inspiration and energy Culture

The intangible exchange between the brand and the customer Relationship

The image of the buyer or user the brand seems to be portraying Reflection

What the brand says about the user (in the user's mind) Self-Image

3.4 DEVELOPING THE FRAMEWORK & COMMUNICATING THE VALUE PROPOSITION

Once the value proposition is clearly defined, the company must ensure that it develops the appropriate structure, systems, strategy (partnerships and alliances), skills, management style, culture and staff needed to support, deliver and reinforce this value proposition (see Appendix B-The McKinsey7-S Framework). Thevaluepropositionmust then be articulated in terms of the 'marketing mix' - often referred to as the '4Ps' - Product and service features,

Price, Promotion and Place (distribution strategy).

The value proposition must be communicated to entice customers to try the product / service. If the offering is developed properly, it should lead to satisfaction and re-purchase. Before potential customers can buy a product / service, they must learn about it. This learning is called the adoption process17 - Figure 3.4.

The Innovation-Adoption Model consists of:

• Awareness - The company has to create awareness of the brand, and its products / services. Advertising and PR are common tools for achieving awareness.

• Interest - Customers need to be stimulated to seek information about the brand's uses, features and advantages.

• Evaluation - Customers consider whether the product / service will meet their particular needs. Personal sources such as word-of-mouth from friends, colleagues and opinion leaders become important influences at this stage.

• Trial - The customer tries the product / service for the first time and decides whether to adopt it based on their expectations, and the product / service's perceived performance. • Adoption - The customer is satisfied and decides to make regular use of the product /

service.

17 _{Rogers, E., 'Diffusion of Innovations', (New York: Free Press), 1962, pp.79-86}

AWARENESS INTEREST EVALUATION TRIAL ADOPTION

FIGURE 3.4 - INNOVATION-ADOPTION MODEL

Traditionally, companies have used the tools of the promotions mix - advertising, direct marketing, sales promotion, personal selling and public relations / publicity - to move customers through the adoption process. Advertising and public relations can be effective in generating awareness and interest. Sales promotions and sampling are often used for encouraging evaluation and trial.

It is beneficial for companies to accelerate the adoption process before competitors emulate the benefits they offer. Enticing customers to purchase again and adopt the brand not only requires a successful trial experience, but enhanced customer interaction through relationship building.

3.5 BUILDING CUSTOMER RELATIONSHIPS

Building relationships with customers extends beyond a single transaction. This is often referredtoasCustomer Relationship Management (CRM). Thisfocusesonestablishing a long-term, multi-transaction relationship, when each trusts the other to deal fairly and reliably. Over time, this process enables an exchange of information, providing insight into customers' needs and wants. This information is a key competitive advantage, allowing companies to communicate regularly with their customers and customise their interaction. In this way, companies can increase buyers' satisfaction, making them less likely to switch to a competitor. Customer service is an important element of this relationship. Berry and Parasuraman (1991) identified three customer relationship-building approaches18:

• Financial Benefits - such asairline frequentflyerprogrammes, & loyalty / discount cards. • Social Benefits - by learning customers' individual needs and wants and individualising

and customising service and contact with the customer.

• Structural Ties - forexample, thecompany may supply customers with special equipment or tools (e.g. Internet linkages, software) to help customers interact with the company. Through building relationships with customers, companies can increase the value of each customer, while strengthening the position and value of the brand.

18 _{Berry, L. & Parasuraman, A., 'Marketing Services: Competing Through Quality', (New York: Free Press),}

3.6 CHARACTERISTICS OF SUCCESSFUL BRANDS

Several factors contributing to the success of brands have been identified19, including:

• A Quality Product / Service Experience - Satisfactory experience is the major determinant of brand values. If the quality of the experience deteriorates, or if the brand is surpassed by superior offers from competitors, then its position will be undermined. • First-Mover Advantage - Being first into the market does not necessarily bring success,

but it makes the task easier. It is easier to capture a share of the consumer's mind and build a customer base, when the brand has no competitors to rival its position.

• Unique Positioning Concept - If the brand is not the innovator, it must have a unique positioning concept - a segmentation scheme, value proposition or augmented brand, which will add value and distinguish it from competition.

• Strong Communications Programme - A successful brand requires an effective selling, advertising or promotional campaign, which will communicate the brand's existence, its function and psychological values, trigger trial and reinforce commitment to it. Without building awareness, comprehension and intention to buy, the brand is meaningless.

• Time and Consistency - Traditionally, brands were not built quickly. It often takes years to build up the added values, and establish a trusting relationship.

3.7 CONCLUSION

Building strong brands stems from the creation of a compelling value proposition. Once the framework has been established and the organisation configured to provide this proposition, companies must actively communicate it to the target audience to entice trial. As customers build trust in the brand through satisfaction of use and experience, companies have the opportunity to start building relationships with their customers, strengthening the brand further, and making it more difficult for competitors to emulate. The Internet provides the opportunity for companies to create compelling value propositions never before possible, while providing new tools for promotion, interaction and relationship building. As a result, it has a profound impact on the traditional brand-building process. As such, the next chapter explores the characteristics of the Internet and its impact on the business and competitive environment.

C

HAPTER

4

4.1 INTRODUCTION

The Internet is transforming the business environment, creating new challenges and opportunities. This chapter provides an overview of the Internet and its defining characteristics, highlighting the key developments that have contributed to its explosive growth and its impact on the business environment.

4.2 OVERVIEW OF THE INTERNET

The Internet is a world-wide network of networks. In essence, it is a common technology platform that allows computing devices to communicate with each other. In doing so, it offers a number of alternative channels that enable businesses and people to communicate. The three core channels include e-mail (the most common), news groups and mailing lists, and the 'world wide web' (www) - Figure 4.1.

The world wide web (www) is a large network of documents, which contain hypertext and pictures, and provides the opportunity for dynamic interaction. Hypertext allows information to be organised in a user-friendly way that is easily accessible. Information is becoming a major part of the products and services that people buy, and a critical source of added value.

FIGURE 4.1 - THE THREE LEVELS OF THE INTERNET

WWW AND CHAT ROOMS

Are used by more and more people, and provide the opportunity for the creation of Interactivity

E-MAIL

Is the part of the Internet that most users use at present. The system works as an electronic mailing system and can be used as a real time medium

NEWS GROUPS

& MAILING LISTS

Allow users to communicate with each other, but in practice not in real time.

4.2.1 The Defining Characteristics of the Internet

The distinctive characteristics of the Internet can be summarised in three key points:

• It Dramatically Reduces Information Costs - the cost of searching for information and the cost of the information itself is significantly reduced (and in many cases is free).

• It Allows for Two-way Communication and Interactivity - this radically alters the process of interaction between communicating parties, allowing both parties to identify each other and build one-to-one relationships - not previously available with mass medium forms of communication.

• It Overcomes the Barriers of Time and Space - The Internet is a global network and can be reached from everywhere, regardless of where the computer or Internet access device is physically located. The Internet can also be accessed at any time - 24 hours a day, 7 days a week. These qualities eliminate the barriers of time and space that exist in the physical world.

These characteristics combine to create a very powerful medium. By allowing for direct, ubiquitous links to anyone, anywhere, the Internet lets individuals and companies build interactive relationships with customers and suppliers, and deliver new products and services at low cost. These defining characteristics have fuelled its explosive growth.

4.3 THE GROWTH OF THE INTERNET

The origins of the Internet date back to 1969, when the United States Defence Department developed the 'ARPAnet', which was intended to link military networks together. The context of the Internet and certain key developments are highlighted in the Figure 4.2 (Note: Graph is not drawn to scale).

The growth of personal computing technology in the 1980s, largely contributed to the accelerated adoption of the Internet and the world-wide web (www) which far outstrips that of previous technologies - Figure 4.3.

FIGURE 4.2 - GROWTH IN INTERNET HOST COMPUTERS AND MAJOR DEVELOPMENTS

'82 '83 '84 '85 '86 '87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 100 1,000 10,000 1,000,000 10,000,000 100,000 100,000,000 1989: WWW HTML Language invented 1991:

National Science Foundation (NSF) lifts restrictions on commercial use of Internet

1993:

Mosaic browser invented at University of Illinois is released to public

1995:

Dell, Cisco and Amazon begin to aggressively use Internet for commercial transactions

1994: Netscape releases Navigator browser 1969: Internet / ARPAnet was created

Source: Network Wizards, 1998, as cited in 'E-Business Technology Forecast' - a PricewaterhouseCoopers Report, 2000

FIGURE 4.3 - ACCELERATED RATE OF NEW TECHNOLOGY ACCEPTANCE

41 25 22 9 7 2 0 5 10 15 20 25 30 35 40 45 Pager Cable TV Fax VCR PC www

YEARS TO REACH 10 MILLION CUSTOMERS

The number of Internet users is constantly increasing and by end-2000, there will be an estimated 375 million Internet users world-wide, increasing to 500 million users by 200220. This boom has been the result of several underlying forces that have come together:

- The wider availability of the Internet, offering inexpensive bandwidth. - Easier access to these networks provided by point-and-click web browsers. - Multimedia development tools that can be used to create rich content.

- The emergence of open standards in development tools and at the network protocol level (e.g. TCP/IP), making it more cost effective for software developers and other technology providers to create interoperable products.

- The growth in support services (e.g. web design, hosting, and gateway services). - The development of critical processes (ordering, billing, payment, etc.).

The most important factor has been that users are becoming accustomed to the Internet and are rapidly overcoming any inhibitions concerning e-commerce. As shown in Figure 4.4, the momentum created by all these forces has created a virtuous cycle of growth.

20_{'World Online Populations' - CyberAtlas Internet Statistics and Market Research, 2000 (http://cyberatlas.internet.com)}

FIGURE 4.4 - THE VIRTUOUS GROWTH CYCLE OF THE INTERNET

COMPUTING SERVICES BECOME MORE WIDESPREAD TECHNOLOGY AND SERVICE PROVIDERS MULTIPLY INFRASTRUCTURE DEVELOPS COMMUNITIES OF INTEREST PROLIFERATE

Source: Harrington, L., Reed, G., 'Electronic Commerce (finally) Comes of Age', The McKinsey Quarterly, 1996, No.2

- E-Marketplaces - Content Aggregators - Consumer Aggregators

- Cheap microprocessors & RAM - Higher PC penetration among

consumers and companies - New generation of PDAs and

Internet appliances

- Web site designers - Outsourced networks - Web hosts

- Ancillary services

- Low-cost networking alternatives - High-powered servers

- Attractive infrastructure and middleware software - Cheap bandwidth

A recent study by the Stanford Institute for the Quantitative Study of Society (2000), reveals the wide range of areas where people are embracing the Internet - from communicating (90% use e-mail) and sourcing information, to interacting (e.g. chat rooms, entertainment) and purchasing (37%) - Figure 4.5. These activities highlight the adoption of the Internet as an interactive, communication and information tool.

0% 20% 40% 60% 80% 100% Trading Stocks Banking Auctions Homework Chat Rooms Job Search Stock Quotes Purchasing Entertainment Work / Business Travel Info Product Info Hobbies Reading Surfing General Info E-mail

FIGURE 4.5 - WHAT ARE PEOPLE DOING ONLINE?

Source: Stanford Institute for the Quantitative Study of Society, as cited in the Economist Intelligence Unit (EIU), April 13, 2000 (www.eiu.com)

4.4 THE INTERNET AND E-COMMERCE

E-commerce describes the use of the Internet as a medium and as a market for commerce. The main difference between the Internet and other electronic media (i.e. fax, telephone) is that the Internet goes beyond just enabling transactions. The Internet becomes an information-rich 'virtual' market space through which buyers and sellers interact. These 'virtual' marketplaces are not fixed in physical territory but are created by the combination of standards-based networks, web browsers, software, content, and people. Conducting business over the Internet ('e-business') represents a fundamental shift in how buyers and sellers interact. The buyer and seller 'face' each other through an electronic connection. There is no need to travel to a physical location, no order book, and no cash register. Instead there is a website.

The value of e-commerce transactions and market forecasts vary widely among research firms and government agencies. However, they all project the value e-commerce transactions to grow at unprecedented rates. Figure 4.6 outlines the growth in the value of online Business-to-Business commerce (B2B) and Business-to-Consumer (B2C) transactions, as projected by Gartner Group.

0 500 1000 1500 2000 2500 3000 3500 4000 4500 5000 1998 1999 2000 2001 2002 2003 Year Billions US$ B2C B2B

FIGURE 4.6 - WORLD-WIDE COMMERCE ON THE INTERNET (1998-2003)

4.5 THE IMPACT OF THE INTERNET ON BUSINESS

The Internet has had a profound impact on the way business is being conducted - how companies operate, how they compete and how they serve their customers - and revolutionary new business models are emerging, which are often disruptive to traditional business models21. Although the particular impact will differ between industries, a number of sweeping impacts are identifiable:

The Development of Electronic Intermediation

The Internet is enabling companies to break through organisational and geographic boundaries to create new structures that link businesses 'virtually' (electronically) with customers, suppliers, partners and other corporate constituencies. By allowing customers to talk knowledgeably and directly to suppliers, the Internet is sidelining the role of many traditional intermediaries, and transforming traditional distribution channels. This is threatening to undermine many old established brands. At the same time, the explosion of information is placing a premium on skilled information management. New brands and business models are emerging to seize this opportunity, some of which look set to become the superbrands of the future (e.g. Yahoo!).

Improved Core Business Processes

The use of Internet-based technologies as the platform over which the organisation’s processes flow, represents a level of efficiency and integration previously unattainable. For example, CISCO e-enabled its financial systems and now has the capability to close its financial year within one day. Additionally, the Internet provides the opportunity for companies to integrate with their suppliers and customers in real-time and create previously unachievable synergies at a very low cost. Improved business processes and 'virtual integration' have allowed companies to move from 'make-to-sell' to 'make-to-order' modes of operation (e.g. Dell Computers).

Globalisation of Business

The Internet facilitates the globalisation of business by providing access to a global audience. A 'virtual' presence can mitigate the cost of having to invest in physical facilities. The Internet also facilitates the development and co-ordination of global activities (e.g. through the use of extranets).

21 _{Christensen, C., & Overdorf, M., 'Meeting the Challenge of Disruptive Change', Harvard Business Review,}

The Balance of Power is Shifting to the Customer

The Internet empowers customers, as they have access to more information leading to more informed decision-making. It also provides easy access to competitors' offers and allows customers to consider every available alternative. As a result, switching costs are much lower. According to George Colony, CEO of Forrester Research22, these new highly informed customers are "empowered fruit flies", with no time, little loyalty, quick evolution and all the power. They can move from one supplier to another searching for the best prices, highest convenience and quickest satisfaction. Customers have more options than ever before - they can choose between traditional 'bricks-and-mortar' companies, online stores, or catalogues. This is forcing companies to become flexible and responsive to customer needs, ensuring the delivery of a satisfying customer experience.

Competition is Intensifying

Although the Internet removes the geographical constraints of reaching customers, it also removes the geographical protection from competitors, as they are just one 'click' away. This, combined with the emergence of electronic intermediaries, the diminishing barriers-to-entry and the lower switching costs, has resulted in a fierce competitive environment.

Knowledge is Becoming a Key Strategic Asset

Many companies have recognised that if they want to succeed, their organisations must harness knowledge - internally and externally - in developing products, improving processes, getting closer to customers and ultimately staying ahead of competitors. Internet technology can be used to exploit collective learning and knowledge, allowing employees to share knowledge, collaborate more effectively and ultimately embed organisational intelligence within processes, products and services.

The Pace of Business is Accelerating

With the fast pace of technological change, the globalisation of business, fierce competition, empowered customers, the development of a knowledge economy, and the 24 x 7 environment, the typical clock-speed at which companies need to operate has accelerated. Now companies need to move at warp-speed, to capture new opportunities, commit and deploy resources, constantly innovate, respond to competitive and market dynamics, and reorganise as appropriate.

Revolutionising Sales and Brand Management

The Internet provides companies with a new channel to reach a new breed of customer. Enhanced communication capabilities allow companies to build one-to-one relationships with their customers and suppliers that were previously impossible. It allows companies to improve customer service, achieve global reach and realise a new source of cost advantage. As such, it provides the opportunity to reach customers where they want, when they want, how they want and with the levels of customer service they demand.

New Ways of Organising and Structuring Business

Transformed communications costs and capabilities are helping to drive a fundamental rethink of how firms should organise themselves. Examples of emerging information age business structures include flat versus hierarchical, extensive outsourcing, supply chain co-operation, and multiple strategic alliances and partnerships. The opportunity of linking the complete supply chain 'virtually', combined with intense competitive pressures, and the need for speed and flexibility have accelerated the unbundling of business systems. Increasingly, companies are focusing on the part of the value chain that is most valued by customers or where their company has a core competence, and partnering up with the best for the remaining activities. In this way, companies can provide customers with a strong value proposition by offering them the best in quality, variety, information, advice and convenience.

The Strategic Importance of Alliances and Partnerships

Although this point has already been touched upon, alliances and partnerships have taken on a new level of strategic importance. Traditionally, companies have looked upon alliances only as a means of filling gaps, and most traditional partnerships were vertical, linking companies with suppliers and customers up and down a pre-defined value chain. However, most Internet and e-commerce partnerships extend beyond this, linking companies with competitors and players from entirely different industries and business sectors, thus creating a 'value net23'. The extent of this partnering is illustrated in Figure 4.7, which highlights the typical structure and dynamics of an online company.