Network Economy Marketing

Marketing in the Network Economy Author(s): Ravi S.
Achrol and Philip Kotler Reviewed work(s): Source: Journal of Marketing, Vol. 63, Fundamental Issues and Directions for Marketing (1999), pp. 146-163 Published by: American Marketing Association Stable URL: http://www.jstor.org/stable/1252108 . Accessed: 27/12/2012 07:42
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Ravi S. Achrol & Philip Kotler
Marketing in
the
Network
Economy
As the twenty-first century dawns, marketing is poised for revolutionary changes in its organizational context, as well as in its relationship with customers. Driven by a dynamic and knowledge-rich environment, the hierarchical organizations of the twentieth century are disaggregating into a variety of network forms, including internal networks, vertical networks, intermarket networks, and opportunity networks. The role of marketing in each network is changing in profound ways. Marketing increasingly will be responsible for creating and managing new marketing knowledge, education, real-time market information systems, intrafirmintegration, conflict resolution, technology forecasting, risk and investment analysis, transfer pricing of tangibles and intangibles, and the coordination of the network's economic and social activities. It will explore new frontiers in multilateral marketing, reshape markets through technology convergence and electronic commerce, organize consumer communities, and aggregate consumer information and demand into saleable business assets. The most radical implication for marketing is the shift from being an agent of the seller to being an agent of the buyer, from being a marketer of goods and services to being a customer consultant and manager of his or her saleable consumption assets.
In the relatively short period of a half century,marketing has made several transitions,from seller of a firm's outputs to key player in shapinga firm's products,technologies, marketingpolicies, and strategicdirection.As the next century unfolds, marketingagain is poised to undergosignificant changes in its content, emphases, and boundaries. Peter Druckerhas describedthe economy of the futureas a networksociety. Business networksare not entirelynew, but there has been a rapidevolution in their number,form, and complexity. Marketingoutcomes increasingly are decided by competition between networks of firms ratherthan by competitionamong firms.Companiesembeddedin strategic networkswill enjoy significantmarketadvantagesin the future. In this article, we explore how marketingwill be organized and function in different types of network structures world economy. that are populatingthe contemporary The twenty-first century is shaping up to be a knowledge-driven society in which the basic economic resourceis not materials, labor, or capital, but knowledgel (Drucker 1993). Networks are adaptedbetterto knowledge-richenvironments because of their superiorinformation-processing capabilities. They minimize idiosyncratic investments in fixed assets and technology and thus are more flexible and responsive to change. But the networkorganizationis about not only structuralupheaval, but also a new managerial of instruments ethos. Networks are not tolerantto traditional workersare recogand IForexample,knowledge knowledge suchas Miassetsof companies nizedeasilyas the corestrategic withan intoo environment is charged crosoft.The consumption Knowledgeproducts,such as creasingknowledgecomponent. We the are smart cars, homes,appliances, androads, around corner. with knowledgeand anxiously anticipatebeing overwhelmed and such awaitknowledge intelligence insurrogates as artificial agents,or "knowbots." telligent & of School Business Public of is RaviS. Achrol Professor Marketing, Johnson is KotlerS.C. Philip University. George Management, Washington J.L. of Professor International Marketing, Kellogg & Son Distinguished Northwestern of School Management, University. Graduate
authorityand control. Hierarchy,power, and contracts recede in managerialsignificance and are supplantedby relational mechanismsof governance.2 The implications for marketingare likely to be radical and pervasive. To appreciatethis, it is useful to distinguish among marketingas a business function, a set of skills, and a philosophy. Consider first the implications for marketing as a business function. Until recently, venerablecompanies such as Ford, Procter& Gamble, and GeneralElectric were organized as classic hierarchies. They exhibited a strong center of control, unity of purpose,and many levels of management.The AT&Tof old had 16 levels of managementbetween the senior officers and the lowest-paid workers.The companies sought to minimize their dependence on suppliers and extended their control over those resources considered importantto the flow of productionand the quality of their products.At one time, Ford even owned a sheep farm (to supply wool for car seats) and a glass company. When these companies did outsource, they avoided long-term commitmentsand preferredto deal with multiple suppliers that competed for their business. The marketingfunction in these companies evolved in the same integrated, hierarchical fashion. Over time, the marketinghierarchyspawned product,brand,and category managers, market segment managers, geographic market managers, national account managers, mail order experts, telemarketers,database marketers,and specialists in marketing research,advertising,sales promotion,and public relations. A sales and logistics hierarchyparalleledthis marketing hierarchy.
on economictheoryis founded the assumption 2Conventional economicagentsare that,in the absenceof suitablesafeguards, prone to opportunisticand self-interest-seekingbehaviors the theoriesemphasize network 1975). In contrast, (Williamson are in and normative social structure whichexchanges embedded and 1994). of determinant behavior (Baron Hannan as theprimary Concepts such as trust play a prominentrole in network explanations.
Journal of Marketing Vol. 63 (Special Issue 1999), 146-163
146 / Journalof Marketing, Special Issue 1999
All this worked as long as markets were growing and technology was more or less predictable. But hierarchical organizations have not proved adept in today's turbulent global environment at sensing market shifts and creating knowledge or in the speed of their response to change. To enhance innovation and flexibility, companies are focusing their resources on core competencies and outsourcing all other activities. In sharp contrast to a midcentury AT&Tor Ford, the modern-dayNike or Galoob Toys does practically no manufacturingof its own and focuses all its energies on marketing. Today's companies work closely with dedicated partners on the supply side (often using single supplier partners) and the distributor side of their business, expecting them to play proactive roles in designing winning technologies, services, and marketing strategies. in How will this transformation functionalorganization affect the set of skills that marketerswill need in the next century?George Day has labeled these skills "market-sensing," a deep ability to understandcustomers, and "marketrelating,"an ability to maintainand enhance customerrelaskills in tionships(Day 1994). Conventionalmarket-sensing consumer and market research will continue to be important, but in a knowledge-intensiveenvironment,we foresee the need for bigger strides in forecasting technological change and how consumer needs and market structures evolve in response. skills, such as brandand imLikewise, market-relating age building,marketingcommunications,customerservice, and loyalty programs,will continue to be salient. However, because networksdistributebusiness functionsamongfirms that are functionallyspecialized and relatedby informalauthoritystructures,marketingskills in negotiation,interorganizational coordination, and conflict managementwill be highlighted. Also, marketing in networks is a semiautonomous function and far more exposed to tests of its economic productivity.This means marketingwill need to incorporatefinancial criteriamore explicitly in its theory and decision calculus. The philosophy of marketingis likely to retain its core values and beliefs-those that espouse the view that customerwelfare is the ultimategoal of all marketingactivities. Successful networks will be more customer-focused and and will deliver bettervalue and satisfaction market-driven than ever before. However, in networkorganizations,marketing is pushedcloser to being an agent of the customeras opposed to the agent of the firm or seller. Marketingon behalf of consumers, as opposed to marketingto consumers, means marketerswill devote more time and resourcesto oras ganizing consumersand consumerinformation, well as to product,consumption,and lifestyle-relatedinformanaging mation that is useful to the consumer. The objective of this article is to explore the organization and functioning of marketing in a network economy. For analytical purposes, the network phenomenon can be studied at four levels of aggregation:internal,vertical, intermarket,and opportunitynetworks.In this article, we describe the emerging structureof these networks and their economic rationaleand hypothesizeaboutthe changingrole of marketingin each. We conclude with brief comments on
how the changes are likely to affect the direction of theory development in marketing.
Network Organizations
There is growing literatureon networktheory in marketing (e.g., Achrol 1991;Achrol, Reve, and Stern 1983;Anderson, Hakansson,and Johanson 1994; Gadde and Mattson 1987; Hakanssonand Snehota 1995; lacobucci and Hopkins 1992; Webster 1992). The field has evolved in significant ways during the past three decades (Galaskiewicz 1996; Nohria 1992). Much of the early work focused on mappingthe patties tern of interpersonal within and between organizations. These networksconsisted of informalsocial ties, more a collection of dyadic bonds than a formal network, and functioned in the shadows of the formal organization.What has changed the field significantly in recent years is the emergence of large-scale managed networks. The basis of the paradigmshift is the move away from studying networksas to informalsocial structures studyingthem as formal governance structuresthat represent a legitimate alternative to marketsor hierarchy(Galaskiewicz 1996; Powell 1990). Marketsgave way to hierarchiesfollowing the Industrial Revolution. As the technology of production became more and more complex, the costs of coordinatingacross market interfaces became too high. Whereas the evolution of the hierarchicalfirm was drivenby the technology of production, informationtechnology is driving the evolution of networkorganization.Even the military,the bastion of hierarchical organization, is being driven toward a network structure(as describedin the Appendix). Large, vertically integrated hierarchies are inefficient means of governancein knowledge-richand turbulentenvironments. They are overcommitted to specialized asset structuresand a series of upstreamand downstream technologies along the value chain.Adaptationis slow and costly because of entrenched interests eager to preserve their power and prerogatives. Maximizing organizational learning and adaptive flexibility rather than economizing on transaction costs becomes the critical organizing imperative in turbulent environments. Networks are more adaptable and flexible because of loose coupling (Weick 1976) and openness to information. Environmental disturbances transfer imperfectly through loosely coupled networks and tend to dissipate in intensity as they spread through the system. Each unit in the network must deal with and respond to a small component of the disturbance. Networks also dampen turbulence by moving information efficiently through the system, thus reducing discontinuities and enabling members to adapt more or less continuously to change. The network organizationis also a superiorlearning organization because it organizes functional components so that each fits better with its external knowledge environment. Hierarchycreates strong ties within and among functional units. Strong ties cause members to think and act alike, and thus, information that flows in the system becomes largely redundantover time (Burt 1980; Granovetter 1973). In contrast, networks create dense but weak ties The Network Economy/147
with members with different functions, interests, and knowledge bases. Each link transmitsnew and different information, and for the network as a whole, this means superior knowledge assimilation. We define a network organization as follows: coalitionof A network is organization an interdependent
task- or skill-specialized economic entities (independent firms or autonomous organizationalunits) that operates without hierarchical control but is embedded, by dense lateral connections, mutuality, and reciprocity, in a roles and shared value system thatdefines "membership" responsibilities.
Embeddednessis the fundamentalconcept differentiating network from economic theories of organization(Granovetter 1985). Understandingmarketing in networks rethe quires understanding structurein which it is embedded. Internalnetworks involving process teams or autonomous units can be created within so-called hierarchicalorganizanetworksthatcome close to tions, and there are opportunity replicating market systems. In this article, we distinguish four categories of networkorganizationson theoreticaland practicalgrounds:
*Internalnetworks that are designed to reduce hierarchyand open firms to their environments; *Verticalnetworks that maximize the productivityof serially among independependentfunctionsby creatingpartnerships dent skill-specialized firms;
horizontal that networks seekto leverage *Intermarket synergies across industries;and
Layered Networks Brand management in leading marketing companies has been evolving toward team structurefor some time now, moving from productmanagersto productteams to category management to customer-need management (Kotler 1997, p. 753). For example, Kraft Foods now operates a of multilayeredstructure process teams,categoryteams, and customer teams. Day (1997) proposes that there are three core marketingprocess aroundwhich team-basedorganizaconsumer management(to replace tions will be structured: brandmanagement),customer process management(to replace the sales function), and supply management (to replace logistics). in There is a growing literature marketingon cross-functional teams and theirrelationshipto organizational learning (e.g., Day 1997; Sinkula 1994; Slater and Narver 1995; Workman, Homburg,and Gruner1998). But team-basedorganizations are unlikely to be sufficient vehicles for deep learningand next generationknowledge. Team-basedorganizations favor the development of generalist skills and adaptivelearning.Over a periodof time, specialist skills and proactive learning are likely to atrophy,and long-term investments in next generationtechnologies could suffer.The firm's future adaptive capability is seriously endangered. Team-basedstructuresmust be supportedby functional or knowledge silos. One solution is a hybridor colateraltype of organization referredto as the "layerednetwork"(Huber 1984; Nonaka andTakeuchi1995;Zand 1974). It can be defined as follows: of is A layerednetwork a firmcomposed an operational teams on the one handand a layer of cross-functional silos on the other, layerof functional creating knowledge an and connected through extensive internally externally flows. information and of databank knowledge transparent SharpElectronicsand Kao Corporationof Japanare pioneering examples of layered organizations (Nonaka and of Takeuchi1995). In Figure 1, we depict the structure a layered networkorganization.The operationallayer of the organization is composed of cross-functional teams drawn from all relevant functional areas and responsible for managing key organizationaloutputs such as new productdevelopmentand customerrelations. The layered networkis an information-processing organization. Thus, the operationallevel sits atop an extensive, companywidedata bank of scientific knowledge and financial, operations,and marketingdata.To foster transparency, the bank is accessible to most employees, irrespective of affiliation. rankor departmental Below these layers is the knowledge creating layer of the organization, which consists of the functional silos. These could involve pioneering areas of science, such as SharpElectronic's focus on what it calls "optoelectronics" (combining optical and electronic sciences). Or, they could involve conventional fields of science underlying the core technology of the firm, such as fat and oil science, surface science, polymer science, biological science, and applied physics for Kao, a leading manufacturerof toiletries and cosmetics in Japan (Nonaka and Takeuchi 1995, p. 176). This layer includes areas of managementscience, such as
aroundcustomer that are organized networks *Opportunity

and needs and marketopportunities designed to searchfor the best solutions to them.
Internal Networks Designed to Open Firms to Their Environments

of The classic hierarchicalorganization the twentiethcentury is focused on the technologies of production. It is designed to economize on the boundedrationalityof top management and minimize the governance costs of sequential adaptations to contingencies (Williamson 1975). But the challenge posed by knowledge-richand dynamic industries is to create organizationsthat are maximally open to their environmentsand can approacha state of more or less continuous adaptationto fluid environments.This calls for organizations that are focused on processing informationand creatingknowledge. by Knowledge organizationsare characterized weak hierarchies, dense lateral connections, low departmental These traitsare well walls, and openness to the environment. illustratedin professional organizations,such as hospitals, medical firms, law firms,consultingfirms,and researchuniversities, and in innovativefirms in the fast-pacedcomputer boundariesare and biotechnology industries.Organizational permeable,and operatingunitsare networkedby lateralconnections, both internallyand externally. Firms are experimenting with replacinghierarchywith two forms of internal network structures:the team-basedand the internalmarket organizations. 148 / Journalof Marketing, Special Issue 1999
FIGURE 1 The Layered Network Organization
marketing or finance. The functional silos are the home bases for membersoperatingin teams at other layers of the organization,and members often rotate in and out of their and immersion. home bases for reorientation are by Layeredorganizations characterized extensive lateral and verticalconnectionsacross and among its layers, as well as between layers and the external environment.The connectionsare informationintensive and not hierarchically ordered.The idea is to develop a self-monitoringand selfof throughtransparency information controllingorganization and sharedresponsibility.Thus, the layeredorganizationreand model of interpersonal interfunclies on the relationship tional linkages. The links are more effective the greaterthe mutuality,mobility,trust,and transparency interdependence, of relationships among individualsand teams (Achrol 1997). Internal Market Networks A second innovationin organizationalnetworkingis the internalmarketstructure (Ackoff 1993; Halal 1998). In Figure 2, we picturethe organizationof transactionsin an internal marketnetwork,which can be defined as follows:
An internal marketnetworkis a firm organizedinto inter-
as units nalenterprise thatoperate semiautonomous profit in centers buyingfrom,sellingto, or investing otherinterunitsas bestservestheirneedson marketnalandexternal to but termsof trade subject firmpolicy. determined There are few internal monopolies in the firm. Profit centers have the freedomto buy any productor service they need from any internalor externalsource,but they also must compete to sell their own outputs in marketsboth internal
and external to the firm. Thus, for example, AC-Rochester, divisions of General one of eight componentmanufacturing Motors, which now is organizedas an internalmarket,also sells to Mitsubishi in Japan,Daewoo in Korea, and Opel in Europe(Snow, Miles, and Coleman 1992). In some forms of internal market organizations, each unit maintains and publishes its own financial statements, and compensationis tied to the competitive performanceof each unit. LufthansaAirlines has gone so far as to incorporate its passenger,cargo, maintenance,and data processing divisions into legally separate companies (Lehrer 1998). They transactbusiness with one another as customers and cost accounting suppliers and are connected by transparent and informalnetworkingat lower levels and a common governing boardat the top. Another example is Alcoa Aluminum, which has orgaengineering,andresearchanddesign nized its manufacturing, (R&D) unitsinto inputor supplierunitsand its businessunits, which package and market its products,as customer units (Starr 1998). An interestingexperience with Alcoa was that its supplierunitsadaptedquicklyto the internalmarketstructure,but the business units caused considerablefriction with the demandsthey made on supplierunits.Thus, decentralized networksare unlikely to functionsmoothly withoutan overand archingstructure leadershipat the top. In addition,Alcoa automaticalfound thatadoptingan internalmarketstructure and accountability responsibilitydown throughthe ly pushed organization,leading to the developmentof work teams that developed direct links with their customers and supervised theirown activities.It is possiblethatmarket-andteam-based networkswill coalesce in variousways over time. The Network Economy/149
FIGURE 2 Organization of Transactions in the Internal Market Network
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The Role of Marketing in Internal Network Firms In both team-basedand internalmarketstructures, functhe tions of marketingare distributedthroughoutthe organization. Process teams are organizedaroundspecific customers or use categories and, thus, focus the energies of all their members-production or design engineers, financial analysts, salespersons,or logisticians-on satisfying consumer needs. Likewise, in the internalmarket,each unit is a customer of its inputs and a marketerof its outputs to other units inside and outside the firm. Exchanges among the firm's internalunits are subject to substitutionby external exchanges, and the unitsthemselves are liable to be spun out of the organization.Therefore,each unit is responsible for marketingitself. Several scholars have noted that, as marketingbecomes an organizationwideresponsibility,it is confrontedwith the possibility of losing its functional identity (Day 1996). A major question for the discipline in the twenty-firstcentury is whether marketingwill cease to be an identifiable functional area and disappear into general management. One danger is that if everyone is responsiblefor marketing,then no one is responsible for marketing.Consequently,in the majority of organizations,marketing is likely to remain a defined and powerful functionalarea, but the role and function of marketingwill change significantly. itself increasinglywill beThe marketing"department" come a functional silo, the creator and repository of the 150 / Journalof Marketing, Special Issue 1999 firm's marketingskills and knowledge base and the keeper of the faith. It will operate the firm's market information system, databases,and analytical models; conduct research commissioned by its process teams or marketunits; and be responsiblefor environmentalscanning. It will be the home base for marketingspecialists assigned to various teams or units, to which they rotate back periodically or return for sabbaticalsand immersions.It will have the opportunityto lead the trainingand education of technical and nontechnical membersof the organizationin marketing.Thus, its most importantfunction will be to create marketingknow-how, the latest in concepts and methods that operationallevels of the organizationwill find invaluable to their success. Marketing's role in the layered network will change in the following importantways. Real-timemarketing.The kinds of data flowing through even sophisticated business information systems are little more thandescriptiveinformation.Marketing'smost significant contributionas a business function will be enabling the firm to process information into knowledge. Marketing must bring the informationas close to real time as possible by connecting all units of the firm to sales forces, resellers, suppliers, and customers. Today's informationsystems are largely vertical in nature.To be effective as network systems, they must have dense lateralconnections among functional teams and supportunits such as those depicted for the Marines in the Appendix. Marketing'sother great opportu-
nity is developing expert systems and decision models that can presentanalyzed data and decision scenarios on an interactive basis to personnel in the field and a "battlefield view" of the entire marketto top management. Firms graduallyare Marketingas internal Infomediary. acceptingthatconsumerinformationis not a free good but a business asset. It is quite likely that independent firms, will emerge to manage and market called "Infomediaries," information about their member consumers to businesses willing to pay for it (Hagel and Singer 1999). In the network can organization,the marketingdepartment assume the role of internalInfomediary. Thus, marketingwill need to search for ways to develop customer relationshipsof the kind in which customers value membershipin the firm's data bank. Such consumer cooperationalso will be necessary to supsystems. In additionto ofportreal-timemarketinformation to fering a "return" customersfor contributingto the firm's informationassets, the marketingdepartmentwill act as a privacy guard. It will need to guaranteethe security of the customer's information,and even departmentsin the firm will have access only to aggregatedand analyzeddata. knowledge.To date, Marketingas a creatorof marketing marketingmanagementhas operatedprimarilyas an applied science. Preoccupiedwith day-to-dayoperationalresponsibilities, it has not developed a depthof strategicunderstanding about its customers, competitors,producttechnologies, and environmental trends. Work in this area often is assigned piecemeal to outside agencies. The separationof operations from marketingknowledge creation, coupled with the advent of databaseand relationshipmarketing,is likely to catapultmarketingpractice to a higher plane of market We analysis and strategic understanding. predict that there will be some reintegration marketingactivities that have of been sourced out to consulting, advertising,and marketing research agencies. In addition, marketingwill need to develop stronger involvement with other sources of knowledge, includingtheoreticalknowledgesuch as thatproduced by universitiesand researchinstitutions. Marketingas an organizationaleducator.Because marketing in the network firm is everyone's responsibility,a will major role of the "department" be to trainand educate technical and nontechnicalmembersof the organizationin marketing.Marketingwill need to develop formal and informal trainingprogramsand keep the organizationabreast of the latest in marketingmanagementpracticesand theory, as well as the operationof its data banks and decision models. Again, it will benefit by building close relationships with universitiesand researchinstitutions. Marketingas an integrator Marketingalso will be in a unique position to become the integratingfunction for the firm. The concept of decentralizedexchange in internalnetworks relies on a system of dense lateralconnections,transparency,and accountabilityat lower levels of the organization. However, there is always the potentialthatthe interest of specific teams will run counter to the overall interest of the firm. As mentioned previously, Alcoa found that the business units responsiblefor packagingand marketingthe outputsof its networkprovedto be the most troublesomein Thus, the lack of hiadaptingto an internalmarketstructure.
erarchicalcontrol must be supplantedby an overarchingintegrating function. We anticipate that, because of its networkwide role of information manager and educator, marketingwill be best positionedto functionas networkintegrator.The inherentnatureof its knowledge base also positions it to make critical strategicdecisions, such as in what marketsand technologies the firm should be, what its core competencies should be, and in shaping the firm's external network of partnershipsand alliances. The "department" will have the opportunityto reach its potentialas the strategic core of the organization. Marketingas coordinatorand conflict manager In the conventional firm, the flow of resources (goods, services, capital, personnel, technology, information,and materials) is controlledby hierarchical decision-makingand budgeting processes. But in the new organizations,resources are disextributedby processes that resemble interorganizational change, namely, bargaining and negotiation among teams and units that are characterized varyingdegrees of interby dependence and organizationalpower. Conflicts and disagreements are resolved by horizontal or peer processes ratherthan by hierarchical processes. Marketing,because of its experience with managing interorganizational relations, should be ideally positioned to integrateand mediate internal networkrelations.In many situations,marketingwill act as consultantand marketerfor the productsand services of individualunits to other internalunits, as well as to external customers. It could consult for other noncompeting businesses and create strategicalliances to markettheir products when there is a synergy between their products and the firm's own products, sales force, distributionchannels, or promotionalstrategies. In summary,the potentialexists for marketingto rise to functional prominencein the new organizations.However, in a nonhierarchicalorganization, marketing can rise to power only because it serves the needs and solves the problems of other organizationalconstituents.The key resource of the futureis informationand knowledge. The more comprehensive the databasesand decision models that marketing develops for its constituents and the more useful the fund of knowledge it develops, the more powerful its role will be in the internalnetworkorganization.
Networks Based on Maximizing Vertical Synergies

Until the 1970s, industrialorganizationwas driven by the principlesof mass production.The mass productionorganiactivization is most efficient when serially interdependent ties are organized internally so that sequential operations can be performed repetitively and continuously without This model favors investment in variation or interruption. highly specialized assets that are linked by rigid transfer mechanisms.Direct laborskills andcosts of monitoringproduction assets are low, but indirectlabor skills and costs of designing, maintaining,and reconfiguringsystems are high. The advent of computer-controlledFlexible Manufacturing Systems (FMS) has revolutionizedthe economics of costs are sharplyreorganization.WithFMS, variety-driven minimumefficient scale. Accordingto duced, along with the The Network Economy/151
Jaikumar(1986), the minimumefficient scale for FMS is a cell of roughly six machines and fewer than a half a dozen people. The logic of long productionruns and vertical integration is no longer compelling. Asset specificity is not a cause of great concern that requireselaboratesafeguardsor governance structures.Rather,asset generality becomes an effective instrument focusing the firm's activities around for its core competencies, reducinghierarchyand structuralinertia, and making it more open to the environment. The result has been two decades of organizational downsizing and outsourcing. The vertically integrated, into a networkof multidivisionalfirm has been transformed alliances among suppliers, distributors, and competitors. The network firms are smaller companies that are focused on core technologies and functions. Peter Druckerpredicts that "in 10 or 15 years, organizationsmay be outsourcing all work that is 'support' rather than revenue-producing, and all activities that do not offer career opportunitiesinto senior management."3
In many vertical networks, the focal organizationperfunctions and is referredto as an forms few manufacturing acting as the organizing and coordinatinghub "integrator," of the network.Well-knownvertical networksorganizedby firms thatspecialize in marketingand do virtuallyno manufacturing of their own are Galoob Toys, Casio, and Nike. giants are loath to admit that Many erstwhilemanufacturing For they do little or no manufacturing. example, practically all of IBM's manufacturingis done by a little-known firm called Solectron. Solectron has 21 manufacturingplants worldwide that turn out a variety of high-technology electronic products,includingpersonalcomputers,cellular telephones, printers, and medical equipment for big name brandssuch as Intel, Compaq, Hewlett-Packard, Motorolla, Nortel, and Mitsubishi.It provides complete preproduction and planningand design, manufacturing, distributionfor its networkcustomers. In Figure 3, we depict a vertical network organized aroundan integratorthat specializes in the marketingfunction. It can be defined as follows:
A vertical marketnetworkcomprises a group of resource firms specializingin the various products,technologies, or services that constitute the inputs of a particularindustry,
3Quoted in "The Network Society," The Wall Street Journal, (March 29, 1995).
FIGURE 3 Organization of Transactions in the Vertical Network
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152 / Journalof Marketing, Special Issue 1999
organizedarounda focal company (sometimes a "virtual" company) that focuses on monitoring and managing the critical contingencies faced by the networkparticipants in that market.
An interesting case is offered by the electric utility industry, which, similar to most monopolies, is integrated heavily. But facing deregulation, the environment is suddenly volatile, and the power companies are disaggregating. Some are focusing on power generation, others are primarilydistributorsthat own and maintainthe transmission infrastructure,and still others are becoming power retailers and marketers.As integrated firms disaggregate into specialized businesses, the emergent network is far more complex than a hierarchicalstructurebeing replaced with an interorganizational one. Power manufacturers may continue to market directly to regional consumers along with marketing companies. Marketing companies will buy power from the least expensive source nationally, possibly on an hour-by-hourbasis. In networks, there is also the natural tendency to search for horizontal synergies as opposed to the vertical synergies of a hierarchy. This tendency is to define the business from the consumer's point of view ratherthan the product's or industry's. Power marketers begin to consider their product as anything that travels electronically in and out of a consumer's home. Pepco of Maryland, which recently announced it was selling its power plants and becoming a marketing company, is part of a joint venture called StarPower, which also sells cable television, long-distance telephone, and Internetaccess services. Thus, the tendency of vertical market networks is to become intermarket networks or opportunity networks, which will be discussed subsequently. The Role of Marketing in Vertical Networks A vertical networkderives its competitive advantagefrom a quasi-organizationaldivision of function. Manufacturing, product technologies, marketing,and support services are specialized in member firms. Each member is able to optimize its operations and the knowledge associated with its function. Revival of production and product-oriented business philosophies. One implication is that functional specialists in vertical networks will draw more on product- and production-orientedthinking than on marketing conceptinspired thinking. A production specialist strives to remain at the forefront of manufacturing technology and deliver high-quality, low-cost production. And because it manufactures to customer's orders, it can employ a more mechanistic organization structure and invest in process development research but devote few resources to marketing or product R&D. Flextronics International is a manufacturing specialist serving the electronic industry. Of its 1400 employees, only 50 or so hold marketing, finance, or administrativejobs. Likewise, Solectron manufactures for several companies, including Compaq. Its overhead is only 4% of sales, compared with 18% at Compaq. Similarly, a supplier of components and product technology can focus on being an innovative leader in its field.
It concentratesresources on basic research and aims to excel in innovative product design. Its ranks bulge with engineers and research scientists, and its organizational culture and resource allocation patterns reflect a product orientation. It is a technology-driving rather than a market-driven firm. For example, Weitek is a small Silicon Valley firm specializing in designing state-of-the-art math-intensive chips. It does not have any chip production facilities of its own but uses various domestic and Japanese manufacturers.Most biotechnology firms are focused similarly. Marketingas networkintegrator.However, both product and productionorientationsare known to cause marketing myopia, which can be fatal in complex and dynamic markets. If the specialized skills of the networkare to be rapidly and continuously adaptedto changing consumer preferences, distribution structures, and competition, the integrator firm itself must be a marketing-orientedfirm. Thus, it is likely that marketingwill play a focal role in the organization and management of vertical networks. The marketingintegratorwill develop conventional strengthsin customer research,forecasting, pricing, distribution,advertising, and promotion.But a key change is its role as network coordinator. Because the networkmembers are highly and there is no hierarchical specialized and interdependent authority,the burdenrests on marketingmanagers to organize informationand resource flows, coordinate decisions and activities, expand opportunitiesfor network members, and nurturethe social cultureof the network. Marketinglong has struggledwith the paradoxof how to integrateR&D and productdesign with consumer research better.The paradoxarises because the closer the integration, the more appliedand less innovativethe technology tends to become. Conversely, the lower the integration, the higher the risks of product failure in the marketplace are. Some model of scholars believe there is need for a market-driving This probmarketingas an alternativeto the market-driven. lem does not go away in verticalnetworks.Focal firms must decide how much of the design functionthey will retainand how much they will rely on their partnersto perform.Some focal firms, such as Nike, retain all productdesign and engineering functions and outsource only the manufacturing. But in more complex products,such as automobiles, retaining technological functions defeats the objective of vertical networks. Networks tend to be far more innovative when their technology suppliersare design-independent. Technologyforecasting and risk management. To accommodate the tension between marketingand technology independence in vertical networks, marketing will require more proactive and less adaptive research techniques for evaluatinginvestmentsin futuretechnologies. It may not be feasible in many cases to test radical new ideas on consumers, and marketing will need to develop and rely on more rigorous methodologies for technology forecasting and risk assessment. It may be feasible in the near futureto create virtualsimulationsto test certainkinds of futuretechnologies on consumers,but in general, marketingwill need a strongertoolbox of techniquesfor conductingindustryand risk analysis, assuming alternativetechnological and competitive scenarios. The Network Economy/153
Measuring performanceand transferpricing. Another problem that arises in vertical networksis transferpricing, which is not simply the pricing of currentexchanges, but pricing investments in basic research,high-risk R&D, and even brandequity. For example, brandequity is tied most closely to the focal firm responsiblefor marketing.Yet over time, it is also a function of superior productionquality, productdesign, and innovationcontributed networkpartby ners. One set of solutions to this problem is throughcrossinvestmentsand equity holding among partners.The tradeoff is that the higherthe mutualinvestmentamong network partners,the less likely it is that upstreampartnerswill attract many outside customers and, thus, the lower their exposure to their knowledge environments. There is also greaterrisk of violating antitrustregulations.In any event, sharingon the basis of financial investmentsalone does not account for the many intangible contributionsinvolved in knowledge-richexchanges. Marketingwill need to develop more elaborate models of how tangible and intangible resource inputs and outputs can be measured and rewards sharedin collaborativerelationshipsamong firms. The multifunctionalmarketingmanager. The competitive advantageof the verticalnetworkdependson augmenting the functionalexpertise of its upstreamspecialists. This is enhanced when the upstreampartnersdeal with a variety of downstreammarketingcompanies in differentindustries. Marketerswill act as marketingconsultantsto theirpartners, search for new business opportunities, even directly asand sist partnersin marketingto other customers. Although dealing with multiple customers strengthens the specialist firm's orientationto its technologyand sources of knowledge, as well as enhances its economic viability, it also makes it more difficult for the system to retainthe close and committed relationshipsthat shape the social normsby This which the networkis governedas a superorganization. is the internalcontradictionof the vertical marketnetwork and determines the trade-offbetween how much flexibility versus cohesiveness is designed into the system. Intermarket networks, which are discussed next, offer one solution to this networkdilemma.They also boast highly developed social structures. Required to work closely and consult with production companies and technology companies, marketingmanagers will need new skills, such as degrees in engineeringas well as management.Marketersalso will play a new role as social engineers, responsible for creating a network culture and mediating network conflict. The twenty-first century will demand a new breed of marketing manager, one trained in the functions of marketing,negotiation, interorganizationalmanagement,social science, and some branch
of engineering.
Networks Designed to Exploit Intermarket Synergies

Mid-twentieth century business organizations vigorously As opportunities. a result, the multidipursuedintermarket became the dominantform of visional (M-form)corporation organization in the West, and the keiretsu-typeenterprise group became the dominantform in the East. The formeris 154 / Journalof Marketing, Special Issue 1999
a vehicle for creating intermarket synergies in hierarchies, and the lattera network vehicle. One of the more elegant explanationsof the M-form hierarchy is in terms of an "internal capital market" (Williamson 1975), in which corporate managers allocate surplusresourcesamong a firm's business units.Williamson argues that corporatemanagersare more efficient than capital marketsin allocating financial resourcesamong alternative marketuses because they are privy to internalinformation not available to investors or financial institutionsand thereforeare better able to analyze and monitor sequential adaptationsto contingencies. Of late, there has been much evidence that internalcapital marketsare also prone to inefficiencies and myopic investment decisions. The large fortunes made by takeover specialists, which aggressively bought and spun off assets from M-form firms, revealed the magnitudeof overinvestment and underuseof assets in the M-form. The 1990s are witnessing a self-declared redundancy or incompatibility among divisions of many conglomerate firms in the West (see Markides 1995). Sears has divested its insurance,real estate, and financial services to focus on retailing.HewlettPackardis spinning off its measurementinstrumentsdivision to focus on computers. A new form of intermarketorganization,the leveraged buy out (LBO) association, has emerged as an alternativeto the M-form corporation(Jensen 1989). The LBO organization is an unusualhybridof networkand hierarchicalstructures. The LBO firm is a privatecompany whose members are large institutional investors and entrepreneurialinwho are revestors. Unlike investorsin a public corporation, stricted by a variety of laws from direct involvement in company management,LBO investorsare connecteddirectly by strong,active ties to management.These ties are closer because the bulk of LBO finances are in the form of debt the ratherthan equity. Furthermore, ties are reciprocalbecause top managementhas significant equity interestin the division it manages. Thus, the LBO replaces arm's-length transactionswith a network of close relationshipswith the But unlike the M-fromcompany,each difinancialmarket.4 vision of the LBO is an independentcompany whose management is under an explicit contractualrelationshipwith the LBO firm and investors, and transferof resources between divisions is not permitted. A second type of intermarketnetwork, the enterprise group,is largelya phenomenonof the collectivist culturesof the East and includes a varietyof forms (e.g., the chaebol of Korea),of which the most prominentis the Japanesekeiretsu. As depictedin Figure4, the typical enterprisegroupconfirms from a wide crosssists of independentmanufacturing section of industry organized around several financial institutions and a general trading company (sogo shosha). The financial institutions maintain intimate relationships
4According to leading financial economists, such as Jensen (1989), the LBO representsa shift towardthe more effective types of relationshipsbetween sourcesof finance and managementfound in Germany and Japan. Ironically,Japan's long and serious ecomists, is causing its corporationsto begin looking more and more similar to U.S. corporationsof the past.
econofrom Western nomic depression, coupledwith pressure
FIGURE 4 of Transactions in the Intermarket Network Organization
with memberfirms and are the principalsource of long-term debt and equity capital for the network. (This feature of close connections and reciprocity between financial and manufacturingfirms is also prominent in the networked afeconomies of Italy and Germany).5The manufacturing disfiliates have large vertical networksof subcontractors, tributors,and satellite companies. We define the enterprise group networkas follows: affiliAn enterprisegroupconsistsof institutionalized ations amongfirms thatoperatein severalrelatedand centeredarounda bankand tradunrelated industries, maning company,and held togetherby interlocking and agements,sharedresources strategicdecisions,periodic patternsof collective action, and strong social ties. The enterprise network is a coalition of independent firms, but its members are bound together by an elaborate patternof lateralties at all levels. The ties include extensive cross-investmentand reciprocityin buying and selling. The threemajorbankscontrolapproxi5Forexample,Germany's partly mately60%of the sharecapitalof the largercompanies, of the and investments partly through holdings theircusthrough and German thebanks under tomers law, manage voteon). (which, is Buttheirinterest notso muchin sharepricesandcapital gains, to do are becauseinvestments longtermandthe banks not intend to sell. The bank'sincomefromcompanies whichit is the hausservices,such as lettersof bankcomes through everyday-type 1991). stockownership Drucker than rather through (see credit,
amountof equity that a commercialbankholds in a member to company is proportional the loan, fee, or otherbusiness it does with the member.Manufacturing companiesalso maintain equity cross-holdings in the banks and place their own and employee accountswith them. Likewise, manufacturing companies buy raw material from the tradingcompany in to proportion the amountof finished goods the tradingcompany sells. The interdependenciesof the networkreach beyond economic relationshipsand include strong interconnections of culture and identity among the employees of memberfirms. Despite the elaborate network connections, the enterprise groupsalso made inefficient investmentdecisions. The burdenof these decisions was felt after the boom years of the 1980s, and they often are blamed as the majorcauses of Japan'spersistingeconomic depression. Finance may have been a scarce and concentratedresource in the past, but investmentvehicles and information systems have become sophisticated, and capital moves much more freely across borders.Consequently,we believe financial synergies will offer less intermarket efficiency or competitive advantagesin the future.Even the LBO may be a short-livedform. In the global marketsof tomorrow,marketing and technology will representthe principalsources of and uncertainty dynamism,as well as the principalopportunities. Successful networks are likely to be those that can leverage marketing and technological synergies. Although the financial implicationsof marketingdecisions will be inThe Network Economy/155
creasingly importantin networkdevelopment,we arguethat the control of capital will be less important. The Role of Marketing in the Intermarket Network. In the typical intermarket network,marketingis practicedin the same manneras in a vertical network.The focal firm in each manufacturing division develops its own marketingcadistribution,brand image, and promotionalpropabilities, grams. Power in the network centers aroundthe financial firms. There appearsto be little effort to exploit brandsynergies or networkwidemarketingefficiencies. The intermarket networksalso failed to leverage the extensive experience of the sogo shosha in global operations and information management.As the keiretsu companies turnedmore and more to technology and productleadership strategies, the sogo shosha should have transformedinto marketingcompanies for the network;they, ratherthan the financial companies, should have emergedas the coordinating hub of the network. Marketingaccounts for an increasingpercentageof the delivered price of productsand services. Efficiency in marcompetitiveadvantagesin the fuketing will offer important ture. Even independentfirms in the United States have discovered important synergies through marketing alliances and comarketingprograms.Coordinated marketingin intermarketnetworksalso will offer significantadvantagesin designing relationshipmarketingincentives and programs. Whatwill be the criticalfunctionsfor the marketinghub of an intermarketnetwork?We believe the strategic plane has shifted to marketing,technology,and informationmannetworkswill createsyneragement. Successful intermarket gies in one or more of these areas.The marketingfunction will need to be proficientin all the areasrequiredto coordinate vertical networks successfully, that is, engineering knowledge to coordinatetechnical transactionsand investments and skill in the social sciences to manage multilateral negotiations, interorganizational harmony,and networkwide cultural norms. In addition, marketing in the network increasinglywill be shapedby the folintermarket lowing realities. Multilateral marketing. A significant opportunity for marketing in intermarketnetworks lies in brokeringcomplex, nontraditional deals among nations, for example, trade(e.g., helping and barter,countertrade, "third-country" a Malaysian firm sell rubberin Chile). Global transactions and such as switch trading,buy backs, counterpurchase, offset agreements (Stern, El-Ansary, and Coughlan 1996, p. Multilateral 528) involve complex financial arrangements. an extensive global network of informarketingdemands mation-gatheringand processing offices staffed with requisite marketing,informationmanagement,technical, and financialexpertise. It would be ideally positionedto engineer multilateral exchanges of surplusproductsacross two, three, four, or more markets.Some keiretsumanagersvisualized a for similar transformation the networks'tradingcompanies. One executive observed: sort become of a multithe Ultimately, sogoshoshashould and with national opcorporation its subsidiaries affiliates the throughout eratingin widely diversifiedindustries reworld.It shouldplaythe roleof a satellite: gathering, 1561 Journalof Marketing, Special Issue 1999
on information economnecessary layingandtransmitting as ic andhuman activities, well as money,goodsandresources Gerlach 1992,p. 141). (see Marketingas driver of technology. More and more industries are experiencing the effects of technological convergence. The later part of the twentieth century has been dominated by digital convergence. The marketfor personal computers continues to converge with television, telecommunications, and the Internet. Polaroid's long reign in the instant photography market is being challenged by the instant technology of digital cameras. Its competitors now include, for example, Nikon from the conventional camera market, Sony from the electronic home products market, Microsoft and Adobe in photographic software, and manufacturersof printers such as Hewlett-Packard. The twenty-firstcentury is said to belong to biotechnology. Convergenceeffects already are visible in the agriculture,food, and healthindustries.Firms in the chemical (e.g., Monsanto, Dow Chemical, DuPont), pharmaceutical(e.g., Hoechst, Rhone-Poulenc,Novartis), and seed (e.g., Pioneer Hybrid) industriessuddenly find themselves facing one another and a host of biotech start-ups,resulting in a flurryof mergersand alliances. Marketingin the intermarketnetwork will need to develop strong technology-forecastingtools to map shifts in marketstructureand to be more aggressive in driving network configuration to match changing structures. It will need to organize coalitions among firms from relevant primary technologies and take the lead in shaping product standardsfrom a consumer viewpoint. Marketingwill need to be a more aggressive driver of marketsand technology thanin the past. Strategicmarketingtheorywill need to shift from predictingwhich technologies are likely to be successful, given consumer needs and preferences, to predicting how consumer needs and market boundaries will evolve, given various technological futures. Integratedfinancial marketing. Successful intermarket networks are likely to be those that integratethe financial and marketing functions. The kinds of strategic decisions marketerswill make requiresuch an integration.Multilateral global transactionsinvolve complex financing in an often volatile currency exchange environment.Organizing technological coalitions in the face of shifting marketstructures demands sophisticated investment analysis of long-term marketpotentialand revenue flows in the face of uncertainty. Marketingtheory and decision models will benefit from more directly incorporatingfinancial theory and models. For example, there appears to be considerable scope for modeling and evaluatingmarketingstrategydecisions using financialoptions theoryand the capital asset pricing model. E-marketing.Finally, the continued growth and globalization of electronic marketing promises to be the single biggest threatand opportunityfacing almost every industry networks,with their in the twenty-firstcentury.Intermarket multiproduct,multi-industryofferings, will have an advantage in marketingdirectly to consumers over the Internet. They are in a strongerposition to provide customer search shopping convenience; bundle products and promotions;
and offer frequency and cumulative incentives, relational safeguards. programs,customerservice, and reputational
Networks Designed to Optimize Customer Opportunity

The opportunity network is organized around customers ratherthan suppliers.At its core is a marketingorganization specializing in collecting and disseminating market information about customers, markets, and suppliers. It negotiates, brokers, and processes transactionsand coordinates custom purchasesand projects for customers. It plays the key role in regulatingproduct standards,network security, and exchange behaviors for its customers and participant supplier companies. The quality of its market knowledge (about consumers,consumption,and lifestyle-relatedinformation, products, and suppliers) represents its primary source of coordinatingpower.The goal of the focal marketing firm is to obtain the best match between customerneeds and availableproductsand services at the best value. We define it as follows:
networkis a body of customersorA customeropportunity ganized arounda centralinformationcompany that serves as a clearing house for the marketingtransactionsit brokers and regulateson behalf of its membercustomersand participatingsuppliers, which representa range of products, technologies, and services.
trum of their supply needs. Initially, customers were restricted to participatingsuppliers, but this is changing. The logic of opportunity networks is to optimize customer choice. Thus, they tend to evolve away from restricted,supplier-oriented networks to more open, customer-oriented networks.Networksthat startedas single-source sales channels, such as United Airlines's flight-booking system Apollo, quickly gave way to industrywide channels, such as AmericanAirlines's Sabre system. The Sabre group is now division and has evolved into a customeropan independent portunitynetworkcalled Travelocity. The Role of Marketing in the Customer Opportunity Network. As opportunitynetworks evolve, they are likely to follow two broaddirections.For business products,and to a lesser degree for custom consumerproducts,the core competency of the focal organizationis knowledge-not just information, but expert knowledge about product technology and the technology of use. The firm will have specialists on its staff who can graspcomplex technicalissues, possess an exof tensive understanding worldwidesuppliersand theirtechnical peculiarities and capabilities, and are able to broker custom solutions for buyers. networkwill consist of a global netSuch an opportunity work of marketingoffices and informationcenters connected togetherby satellite and a computerizedinformationsystem. The marketing offices operate as semiautonomous brokerage firms dealing among themselves, similar to a computerizedstock exchange. At one end, consumer needs and inquiries,marketintelligence, and economic trends are monitoredand fed into the system. At the otherend, the marketing company is hooked into a worldwide directory of suppliers of products, with all relevant informationabout product specification, custom design possibilities, prices, existing inventoryand locations, productiontime, and terms of trade. Existing and potential matches between customer needs and suppliers are sorted by expert system software and instantlyrelayedto marketingoffices to negotiate transactions. The negotiationscould be conducted in a matterof hours by linking together online customers, network marketing offices, financial or design specialists, and suppliers of productsor technology. The transactioncan be completed and simultaneouslyspliced into the supplier'sor network company's distributionand delivery systems. In this form, the marketingfunction may reach its highest level of developmentas a customerconsulting function. Just as professional relationships, such as doctor-patient, lawyer-client, or financial consultant-investor,are infused with the best interests of the customer, the marketingconsumer relationshipwill become dominantover the marketing-producerrelationship.Because they are dealing with multiple supply options ratherthan marketingone company's products,marketingconsultants will be positioned to design custom productstailoredto the customer's need, put these up for bid before (or negotiatewith) suitable suppliers worldwide, and place the order with the best source. In Figure 5, we portraythe patternof exchanges in a business opportunitynetwork (Type I). Because the main function of the firm is centered on brokeringknowledge, it The Network Economy/157
networksincludedirectPrototypecustomeropportunity marketingcompanies that use various media, such as dedicated television channels, 800-numbertelephone lines, and the Internet,to marketa wide variety of consumerproducts (e.g., Citibank'sComp-U-Store).These companieshave folstore model of generalmerchandising lowed the department but emphasize hard goods. The new breed of customeropportunitynetworks includes firms such as Amazon.com, eTrade,Travelocity,andCDNow thatprovidetheircustomers access to practicallythe entire output of an industryor use category throughthe Internet.They are electronic versions of the "categorykiller."However, network structuresover the Internetare in an early stage of evolution. Varioustypes of access and search services (such as America Online and Yahoo) are creating giant networks that link consumers, eretailers,and thousandsof direct channelsoperatedby manufacturers.And companies such as GeoCities have organized large electronic interest groups, or "virtual communities,"and are networkingthe communitieswith related commercial interests. Evolution of opportunitynetworksin consumermarkets is hamperedbecause of uncertaintyas to the pace at which consumers will switch to e-shopping. Manufacturersare faced with the dilemma of having to protect their physical channels while they hedge their bets in the electronic marketplace. In contrast, opportunity networks are growing rapidly in business markets.Networks such as Baxter Travenol in hospital supplies, McKesson in pharmaceuticals, and Sysco in food supplies were among the first opportunity-typestructures (see also Malone, Yates, and computernetworks Benjamin 1989). They used proprietary to link thousands of customers in a particularindustry to thousandsof suppliers representingalmost the entire spec-
FIGURE 5 Organization of Transactions in Business Opportunity Networks (Type I)
will need to screen prospective suppliers continually, test their products,and become an agent in the industryfor setting standards and certifying quality. Consequently, the productassortmentis likely to be large but focused on a use category and related technologies, for example, robotic industrialmachineryor industrialmetals, alloys, and fabrications. Similarglobal networksalso may emerge for complex consumerproductssuch as electronic systems for the home and small businesses. In contrastto business networks,there is no limit in theory to the width and depth of assortmentsthat the opportunity networkercan broker for commodities and relatively standardizedconsumer goods. Instead of depth of knowledge about productand use technology,the core competency of the networkcompany here is the efficient processing of transactions.One scenario is that the marketingof standardizedproductswill approximatethe operationof a cominto a gimodity exchange, reducingthe global marketplace ant electronic tradingpit (Kuttner1989). The core functions of marketingin such networkswill revertto the rudimentary marketfunctions such as facilitatingperfect information, product standardizationthrough sorting and grading, and regulatingthe termsof trade.In this event, the worldof business will have made an incrediblefull circle to nearly perfectly competitive marketsafter more thana centuryof profailure"and increasingverticalintegration. gressive "market Marketingwill shift from organizingproductassortmentsto organizingmarkets. are Historysuggests, however,thatsuccessful marketers those that can differentiatetheir productsand services and thus establish buffers against direct price competition. Excessive price competition in electronic marketscould be injurious to productquality and innovationbecause it is difficult to verify or promote intangibles throughthis medium 158 / Journalof Marketing, Special Issue 1999
(Alba et al. 1997). This suggests an alternativescenario in which marketingseeks a differentialadvantagefrom organizing consumers and consumer informationinstead of organizing marketsand productinformation. Organizing marketing around the consumer offers at least three importantopportunities.First is the opportunity to capitalize on informationabout consumers as a business asset and, on the basis of its marketvalue, realize appropriate economic rents for consumers for the use of this information. The informationalso could be used to shield consumers, who so choose, from unwantedadvertising.Second is the opportunityto provide consumers with content and use informationpertainingto products. Consumers would have access to productperformancedata,repairand warranty histories, customer comments, sale prices, and promotional offers. For example, customers of Amazon.com can access media reviews and readercomments and get recommendations for gifts. Third is the opportunityto facilitate such interaction by organizing consumers into lifestylerelated virtual communities (Hagel and Armstrong 1997), such as communitiesof retirees, sports fans, or outdoorenthusiasts.Gardeningenthusiastscan join sites such as Garden Web, where other gardenerscongregate and exchange experiences and tips, share ideas, request seeds, and ask questions of one another. In Figure 6, we depict the structureof consumer opportunity networks(Type II). At this stage of evolution, various functions of the marketingcompany, such as providing Internetaccess, search engines, demand aggregation,and entertainmentand content information and managing consumer communities, are being performed by independent firms. We predictthese will coalesce rapidly.Already,there has been a spate of mergers.Some, such as that between the search engine Lycos and the Home Shopping Network or
FIGURE 6 Organization of Transactions in Consumer Opportunity Networks (Type II)
I~~~~~~~~~~~~~~~~~~
between Walt Disney and Web portal Infoseek, have the character of traditional vertical integration. In contrast, search engine Yahoo's purchase of GeoCities (one of the largest virtual communities, with 40 different neighborhoods such as Yosemite for nature lovers and Hollywood and Broadway for movie and theater buffs) and Broadcast.com (the largestproviderof television, radio,and other entertainment over the Web) is more along the lines we predict opportunitynetworkswill evolve. What will be the major marketingchallenges and core Thereis a networker? functionsof the consumeropportunity dramaticchange in moving from marketingas seller's agent to marketingas consumeragent. Here, we focus on the three with the most sweeping effects: marketingas Infomediary, brandmediator,and managerof consumercommunities. Mediating information.The InternetconfrontedmarketThis ing with the prospect of large-scaledisintermediation. fear was short-livedbecause commerce on the Internetwas The future may beovercome rapidly by reintermediation. to infomediation.Marketingwill face one of its biggest long ethical dilemmas as the battle over consumer information versus privacy is waged on the Internet.Consumerinformation is a valuable business asset, yet its owners receive no economic rents for it in the currentmarketingmodel. This presentsan opportunityfor the emergenceof Infomediaries, consumers firms that collect informationfrom participating and make it availableto companieswilling to pay for the informationin the form of price or value benefits for the consumers (Hagel and Singer 1999). The opportunitymay be greater for the network company to assume a more consumer-privacy-orientedrole in the information exchange process. The company would offer secure portals and protective software and facilitate financial transactionsso that customers could search commercialWeb sites without personal informationbecoming known to the sites and without the risk of monitoringagents ("cookies")being implantedin their computers.SuperProfileand PrivaSeekare among the first Web-basedInfomediarystart-upsto emerge, and financial services companies such as Citigroup and First USA, with their large existing databases,are experimentingwith the concept. The opportunitynetwork, with the consent of its memmarketber consumers,also could performmany traditional functions for supplier firms. These functions might ining clude marketingresearch,profiling and segmentation, new product testing, the creation of advertising, and targeted communications.At a time when consumersare increasingly sensitive about being botheredat home and skeptical of the use to which informationaboutthemselves is put, it will firms and their advertisbecome difficult for manufacturing ing and researchagencies to performthese functions. Thus, the opportunitynetworkermust to safeguard its and role and image as consumerrepresentative remainindependent of supplier companies. The disclosure that AmaThe Network Economy/159
zon.com had been selling prominentdisplay space to publishers rattledinvestors and consumers. The most valuable stock in tradeof the opportunitynetworkis consumertrust. The networkwill need to createspecial mechanismsfor nurturingtrustand establish clear contractualobligations to its members in terms of protectionand use of member information (e.g., what happens if the networker is bought or merged?). Brand mediation. Brokering information about consumersis only one side of the informationequation.The Infomediaryhas an equally importantrole to play in mediating information about product performance, uses, new technologies, and consumerexperiencesand lifestyles. In an electronic marketplace, with its low entry barriers, consumers will be inundatedwith productalternatives,product information, and multiple channel alternatives. The consumer is faced with a lot more choices and informationbut not necessarily with the ability to make betterchoices. Thus, a major opportunityfor the networkeris to minimize the consumer'seffort in searchingfor, evaluating,and negotiating the best value. Sheth and Parvatiyar(1995) argue that consumers often enter into loyalty relationships with marketersto reduce choices. The network company will screen suppliers,evaluate their products,compare and rate them, and collect informationon productperformance and consumer complaints.Some observersbelieve this will lead to the deathof conventionalvendorcentric brandingbecause Infomediarieswill be ideally positioned to develop customercentricbrands(Hagel and Singer 1999). However, in developing brandassociationsand interestsof its own, the company risks a potentialloss in the degree of its objective orientationto its consumersand their trust. Consumer opportunitynetworks will change the way productsare marketed.All but the most differentiatedsuppliers will find it increasinglydifficult to marketdirectly to consumers. More companies will find that consumer marketing is similar to marketingto professionalfirms, for exproductsto doctors. The ample, marketingpharmaceutical task is to market the supplier's capabilities, products, and unique benefits to the network company, which then analyzes its consumerdatabaseto evaluatethe fit of the product with the needs and profiles of its memberconsumers. At other times, supplierswill find themselves facing reverse markets. The network companies will become marketers of aggregateddemand. Business firms receive large savings from suppliers for quantity orders and exclusivity arrangements.Similarly, network companies will consolidate consumer needs-for example, the travel or grocery needs of a networkfor a year-and seek bids from qualified suppliers.Supplierswill marketby bidding. Managing customercommunities.The asset structureof networkis foundedon the trustof the consumeropportunity members.The mechanismsthatare fundamenits consumer tal to building trust and commitment among firms (e.g., Achrol 1997) can be used to structurethe relationshipbetween marketerand customer.These mechanisms,including of transparency information,self-regulation,rich social interactionsamong members, and a sense of involvement in determiningthe future of the relationship,do not function 160/ Journalof Marketing, Special Issue 1999
well in vertical or hierarchical systems. To flourish, the mechanismsrequirethe creationof a customercommunity. A customercommunity is a body of consumerswho are involved with a company in a social relationship.They are involved because the productrepresentsa significant aspect of their lifestyle and because they can enhance their satisin faction by participating information-and experience-rich exchanges with the company and among themselves. The key feature is the ability of customers to interact among themselves. It is also the key distinction between conventional one-to-one relationshipmarketingprogramsthat focus on strengtheningvertical relationships with customers and the concept of relationalnetworks. Japan's intermarketnetworks were the first to develop large customercommunities.The networkstake care of virtually all needs for food, clothing, housing, medical care, travel,insurance,credit,and leisure for almost a million employees and theirfamilies. Networkmembershipdetermines the beer they drink, the car they drive, where they invest their savings, and even whom they marry.Services provided by the Sanwa group include marriagefacilitation,tennis and baseballtournaments, study groups, and art classes. of Marketers recreationalvehicles (RVs) have been earof ly practitioners relationalnetworkingin the United States. They hold largeconventions at which thousandsof RV owners congregate to socialize, exchange experiences, and participate in seminarson RV ownership and recreation.They organizesight-seeing caravantoursthat owners can join and enjoy as a community. It is difficult to get customersto contributethe time, energy, and commitmentto form viable customercommunities arounda single brandof productunless that productis significant in defining a particularlifestyle (RVs) or pastime (gardening,cooking, auto repairing).There are exceptions, of course, such as the strong brandcommunities identified with Apple Computers, Harley-Davidson, Shiesedo, and Nintendo (Kotler 1999). But in most cases, opportunitynetand works offering productsof many manufacturers covering the full range of needs of a customer segment (elderly customers) or interest group (outdoor enthusiasts) have a betterchance of developing committed,interactive,and participative communities of customers. These communities become partof the marketingnetworkthroughmembership rules they themselves formulateand regulate. Customer communities are not self-sustaining and require considerable maintenance.Travelocity employs 110 telephone representativesand answers some 1000 e-mail questions a day. But this kind of corporatemaintenanceis expensive and too hierarchical.Typical Internetcommunities are maintainedby the enthusiasmand energy of one or more communityleaders.The task is to formalize and motivate this grassroots leadership.Thus far, many organizing firms have been able to get away with offering the leaders special recognition and titles. For example, community leaders in Canadianbeer marketerLabat's networkare recognized on Internetboardswith a crown next to theirnames. But at some point, it is likely that community leaders will need to be rewardedfinancially,either with stipends tied to group membershipor with a percentageof sales generated throughtheircommunitygroup.An interestingvariationis a
programby GeoCities that allows "citizens"to open their own electronicstore fronts(for a small monthlyfee) in their neighborhoodsand use GeoCities' order-processing system (for 5% of sales). networksintegratedwith customercommuOpportunity nities representthe most dramatic scenario of change for marketingin the next millennium.If it should work out this way, the implications for marketing theory, research, and practice are revolutionary.Markets will be marketers,and marketingwill become a two-way activity. Practically all the tools of micro analysis will need to be overhauled,not merely from individual- to dyadic-level concepts, but beyond that to network-level concepts that encompass fullfledged customercommunitieswith theirown political,economic, and social processes.
Conclusion
As the twenty-firstcenturydawns, the Industrial Revolution is fast giving way to the InformationRevolution.Many giant, vertically integratedmanufacturingfirms, which were the productof the IndustrialRevolution, are morphinginto internal and external networks. These managed networks promise superior informationprocessing, knowledge creation, and adaptive properties to conventional firms. But they also create unique operating environments distinguished by reciprocity, interdependenceof ties, and nonhierarchicalmeans of control. The theory of networkswill draw more on sociological theory and the politics of coalition behavior than on neoclassical economic theory and power-dependent explanations. As network forms grow and multiply,many theoretical and managerialquestions will arise. For example, are networks that consist of stable relationships among singlesource partnersmore flexible in adaptingthan networksof Are competing multiple partners?6 strong,single-sourceties with suppliersmore effective for knowledge generationand transferacross technological interfaces?Are weak, multiple ties more effective in processing informationacross diverse interfaces,such as the marketinginterfacewith customers? Are membersmore committedand less opportunistic netin works with strong "family" values? Are more committed networksslower to adaptto discontinuouschange?What is the trade-offbetween how flexible a networkis and how cohesive its social norms are? How strong are the consumer relationships forged by transparencyof information,selfregulation,social interaction,and involvement in determining the firm's consumer policies? Are such relationships strongerthan relationshipsbased on financial incentives?
6The U.S. auto industryis creatingan electronic networkcalled the Automotive Network Exchange (ANX), which will link together all auto manufacturersand several thousand automotive suppliers(Evans and Wurster1997). This industrywideopportunity network will reduce information asymmetry and switching costs, intensify competition, and improve efficiency (estimated savings are $1 billion a year). But this representsan abruptreversal of the industry'srecentmoves towardclose, single-sourcerelationships with suppliers.The question is, what will ANX do to relationships that involve technology development and cooperative design?
Because network organizationsare at an early stage of evolution, it is prematureto hypothesize about which network structureis likely to predominatein which industryor environment. But a few generalizations can be ventured. The layered networkstructureis likely to be most appropriate for firms in consumergoods industriesin which product and productiontechnologies are relatively simple (e.g., cereals, detergents,cosmetics) and marketstend to change in small ways. The internalmarketnetwork will be the structure of choice for companies in more technical fields in which it is necessary to maintainin-house expertise in various core technologies (e.g., automobiles,air services). Vertical marketnetworks are likely to predominatein markets in which competitiondemandsleadershipin productioncost as well as productinnovationand in which marketingis often the criticaldifference(e.g., personalcomputers).The intermarketnetwork is not industry-specificbut may be culture-specific (being a product of the consensual culture of Far Eastern economies). These networks may loosen their cohesiveness and adopt more internalmarket processes as they emerge from the prolonged economic depression in Japan.In the West, the preferredmode of intermarket organizationis throughconglomeratefirms, thoughthe degree of conglomerate diversification and interdivisionalsharing of resources is decreasing. The Type I opportunitynetworks are likely to be successful in marketsfor industrialproducts or complex, custom, or highly differentiated consumerproducts, whereas the Type II will predominate in consumer nondurables,relatively standardized products,or differentiated productsthat consumersare comfortableevaluating by specifications.Both types are adapteduniquelyto those consumer segments that are comfortable conducting business throughelectronic media. It goes without saying that network organizations also have their limitations. For example, close-knit, reciprocal relationships among firms can undermine objectivity and lead to ill-advised investmentsand myopic strategies.Many analysts believe that so-called crony capitalism is responsible in large measure for the severe economic problems afflicting Asian economies. But it is open to inquiryhow fallible investments and strategic decisions are with arm's-lengthbanking,the internalcapitalmarketof the multidivisional firm, the fraternalbanking systems of the Far East and Germany,or the hybrid model of the new LBOtype corporations.Each has a differentdegree of access to ability to assess a firm's strategyand privileged information, management,and long- versus short-termorientation.What seems clear is that the natureof commitment in networks slows down the process of renewal when catharticsolutions are called for (contrast, for example, the handling of the bankingcrises broughton by the collapse of real estate bubbles in the United States and Japanin the 1980s). The implications for marketing management in each type of network organizationwere discussed in the article. and To summarize,the two most important general implications are as follows: More and more marketing activities will be characterizedby the managementof interorganizational relations.The firm has dissolved into a networkof internal units, suppliers, allies, and distributors.Even customers will enjoy an increasing capacity to become The Network Economy/161
organized.In addition,marketingwill be more a consumerconsulting function than a marketerof goods and services. In all the networks,marketingoperatesless in the service of a given function or unit than it does on behalf of the marketplaceas a whole and its customers.It is likely we will experiencepower transferto a more organizedconsumer.Such a consumer environmentwill exacerbate some latent conflicts between producersand consumers,and it will be marketing's role to mediate these conflicts. The very nature of network organization, the kinds of theories useful to its understanding,and the potential impact on the organization of consumption all suggest that a paradigm shift for marketing may not be far over the horizon.
Appendix
From Hierarchy to Networks in the Military The hierarchicalline-and-staffbusiness organizationowes its genesis to the elaboratecontroland planningsystems developed by the militaryto managethe largestorganizedoperation in human history, the Second World War. Today, even this bastionof hierarchyis crumblingin the face of the networks.The following is the power of information-based scenario of what future Marine operationsmay look like, some of which were tested in a recentexercise in California called "UrbanWarrior." The Marines burst from their landing craft, M-16s held high, vests stuffed with ammunition, and a computer the size of a spreadhand strappedto their chests. The computer screen pops open like a foldout tray.It directly connects
each Marine by satellite to the entire Marine Corps and supporting units. On a color map, it shows each Marine where he or she is and where his or her buddies are. When they move, their respective dots move with them. Soon, the Marine will be able to plug laser range finders or a digital camera with cross-hairs into the network. If a Marine locates an enemy target, it is immediately visible to everyone-fellow Marines in the field and in the command room, the pilots in the attack jets overhead, the artillery gunners and tacticians manning the precision missiles aboard naval ships over the horizon. These data could be enhancedwith informationfrom robots in the field and tiny, almost invisible, unmannedaircraft.Back in the command center, computers integrate all these reports in a three-dimensional picture of the battlefield. This is command,control, and execution in real time. It makes every soldier in the field a commander("the strategic corporal")and gives every general a God's-eye view of the flexibility, battlefield.It will give the Marinesunprecedented and speed of response. It will make redundant adaptability, the many layers of the traditionalmilitary hierarchy,from it lieutenantsto colonels, and transform into a reflexive, selfon organizinghumannetworkthatcan metamorphose the fly. Although the new network structuresare technologyladen systems, plannersrealize thatthe key elements to their success are the teams and informalhumannetworksthatoperate the technology. Human networks are bound together by patternsof trust.Mafias, sororities,and militaryplatoons all demonstratepredictablepatternsof trust, sometimes almost a religious fervor,guiding what they do and how. (Garreau1999)
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Marketing in the Network Economy Author(s): Ravi S.

Ravi S. Achrol & Philip Kotler

146 / Journalof Marketing, Special Issue 1999

horizontal that networks seekto leverage *Intermarket synergies across industries;and

aroundcustomer that are organized networks *Opportunity

Internal Networks Designed to Open Firms to Their Environments

FIGURE 1 The Layered Network Organization

FIGURE 2 Organization of Transactions in the Internal Market Network

TECHNOLOGY SALES TONONCOMPETING MANUFACTURERS

Networks Based on Maximizing Vertical Synergies

FIGURE 3 Organization of Transactions in the Vertical Network

152 / Journalof Marketing, Special Issue 1999

Networks Designed to Exploit Intermarket Synergies

econofrom Western nomic depression, coupledwith pressure

FIGURE 4 of Transactions in the Intermarket Network Organization

Networks Designed to Optimize Customer Opportunity

FIGURE 5 Organization of Transactions in Business Opportunity Networks (Type I)

FIGURE 6 Organization of Transactions in Consumer Opportunity Networks (Type II)

of 162/ Journal Marketing, Issue1999 Special

The Network Economy/ 163

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