Marketing Strategy and the Internet:
An Organizing Framework
P, Rajan Varadarajan
Manjit S. Yadav
Texas A&M University
Competitive strategy is primarily concerned with how a
business should deploy resources at its disposal to achieve
and maintain defensible competitive positional advan-
tages in the marketplace. Competitive marketing strategy
focuses on how a business should deploy marketing re-
sources at its disposal to facilitate the achievement and
maintenance of competitive positional advantages in the
marketplace. In a growing number of product-markets, the
competitive landscape has evolved from a predominantly
physical marketplace to one encompassing both the
physical and the electronic marketplace. This article
presents a conceptual framework delineating the drivers
and outcomes of marketing strategy in the context of com-
peting in this broader, evolving marketplace. The pro-
posed framework provides insights into changes in the
nature and scope of marketing strategy; specific industry,
product, buyer, and buying environment characteristics;
and the unique skills and resources of the firm that as-
sume added relevance in the context of competing in the
evolving marketplace.
In a growing number of product-markets, the competi-
tive landscape has evolved from a predominantly physical
marketplace to a broader marketplace encompassing both
the physical and the electronic marketplace. The emer-
gence of the electronic marketplace has been associated
with a number of developments, including the following:
9 Greater information richness of the transactional
and relational environment
Journal of the Academy of Marketing Science.
Volume 30, No. 4, pages 296.312.
DOI: 10.1177/009207002236907
Copyright 9 2002 by Academy of Marketing Science.
9 Lower information search costs for buyers
9 Diminished information asymmetry between sellers
and buyers
9 Electronic spatial proximity of buyers and sellers
9 Greater temporal separation between time of pur-
chase and time of possession of physical products
purchased in the electronic marketplace
9 Greater temporal proximity between time of pur-
chase and time of possession of digital products pur-
chased in the electronic marketplace
Paralleling these developments, the business literature
has witnessed a number of new additions to its lexicon
(e.g., e-business, e-commerce, e-procurement, e-services,
e-customer relationship management, e-alliance partner
relationship management, e-supplier relationship man-
agement, e-supply chain management, etc.). Concur-
rently, scholarly research in marketing has focused on
such issues as new models of communication (Hoffman
and Novak 1996), buyers' and sellers' incentives to partici-
pate in the electronic marketplace (Alba et al. 1997; Burke
1997; Grewal, Comer, and Mehta 2001), and the migration
of products to the electronic marketplace (Peterson,
Balasubramanian, and Bronnenberg 1997; Yadav and
Varadarajan 2001). The contextual relevance of factors
such as industry structure characteristics (e.g., market dis-
persion and market thinness), product characteristics (e.g.,
product digitizability), and buying environment (e.g., in-
formation search costs) for competing in the electronic
marketplace have also been explored in recent research
(Alba et al. 1997; Bakos 1991, 1997; Balasubramanian,
Krishnan, and Sawhney 2000; Benjamin and Wigand
1995; Blattberg and Deighton 1991; Burke 1996;
Gurbaxani and Whang 1991; Hoffman and Novak 1996,
1997; Lynch and Ariely 2000; Rayport and Sviokla 1994).
Contributions from strategy (e.g., Porter 2001), manage-

ment information systems (e.g., Adam and Yesha 1996;
Huber 1990; Malone 1997; Malone, Yates, and Benjamin
1989; Weill and Broadbent 1998), economics (e.g., Bakos
199 t, 1997; Brynjolfsson and Seidmann 1997; Gurbaxani
and Whang 1991; Shapiro and Varian 1999), and technol-
ogy (e.g., Clark 1996; Oliver 1996) complement the above
research streams in marketing.
Against this backdrop, this article focuses on the impli-
cations for marketing strategy of a competitive landscape
that is evolving from a physical marketplace to one encom-
passing both the physical and the electronic marketplace.
More specifically, our objectives are to
delineate the nature and scope of competitive mar-
keting strategy in reference to competing in the
physical and the electronic marketplace; and
develop a conceptual framework that delineates rep-
resentative industry structure, firm, product, buyer,
and buying environment characteristics pertinent
to competing in the physical and the electronic
marketplace.
The remainder of this article is organized as follows.
First, we provide a brief overview of the evolving elec-
tronic marketplace and extant perspectives on competitive
strategy. Second, building on extant literature, we present
a conceptual framework focusing on selected drivers and
outcomes of competitive strategy. Third, we present a re-
finement and extension of the general framework by delin-
eating certain additional industry structure, firm, product,
buyer, and buying environment characteristics that are par-
ticularly pertinent to competing in an electronic market-
place (and, by extension, in the new competitive landscape
that encompasses both the physical and the electronic mar-
ketplaces). The proposed framework focuses on new chal-
lenges and opportunities for ongoing producer firms
(legacy businesses) as they seek to understand the implica-
tions of the evolving marketplace for competitive market-
ing strategy.
THE ELECTRONIC MARKETPLACE:
CONCEPTUALIZATION AND EVOLUTION
Conceptualization of
the Electronic Marketplace
The Intemet, a rapidly expanding global computer and
communications infrastructure, has facilitated the emer-
gence of computer-mediated environments that serve as
electronic marketplaces for buyers and sellers. Bakos (1991)
defined the electronic marketplace as "an inter-organiza-
tional information system that allows participating buyers
and sellers to exchange information about prices and prod-
uct offerings" (p. 296). According to Barrett and
Varadarajan, Yadav/ STRATEGYAND THE INTERNET 297
Konsynski (1982), interorganizational information sys-
tems span organizational boundaries, linking firms to their
customers and/or suppliers. This view of the electronic
marketplace, while useful, appears restrictive in two
respects. First, the term interorganizational information
system seems to suggest an infrastructure created by and
for organizations. In reality, the role played by consumer-
controlled access devices (e.g., personal computers and
personal digital assistants) continues to increase. There-
fore, in conceptualizing the electronic marketplace, the
broader term networked information system seems more
appropriate than the seemingly restrictive term inter-
organizational information systems. Second, the nature
and scope of activities that occur in the electronic market-
place often extend well beyond the "exchange of informa-
tion about prices and product offerings." In fact, what
often transpires after the exchange of information--a
transaction and other activities related to the transaction--
represent important functions that are also facilitated by
the electronic marketplace and should, therefore, be noted.
While the specific implementation of such functions may
vary across firms, any conceptualization of the electronic
marketplace must more fully encompass the scope of
activities that may occur in such a setting. Accordingly, we
conceptualize the electronic marketplace as a networked
information system that serves as an enabling infrastruc-
ture.for buyers and sellers to exchange information, trans-
act, and perform other activities related to the transaction
before, during, and after the transaction. A brief elabora-
tion of this conceptualization follows.
As can be noted, an electronic marketplace performs
essentially the same set of functions as a physical market-
place--both bring buyers and sellers together. While they
both share this important common purpose, electronic and
physical marketplaces do have certain distinguishing
characteristics. The most obvious salient difference, of
course, is that the enabling infrastructure is electronic
rather than physical. This difference, in turn, leads to a
number of other differences that are worth mentioning.
For instance, variations such as the following are increas-
ingly prevalent in the electronic marketplace: private elec-
tronic marketplaces that serve either multiple buyers and a
seller (e.g., buyers purchasing tickets directly from an air-
line's Web site) or multiple sellers and a buyer (e.g., sellers
participating in a live reverse auction at a prespecified date
and time in response to a call for bids posted by a buyer).
Such variations can occur in the physical marketplace as
well, but they can be scaled much more readily in the con-
text of the electronic marketplace. A second distinguish-
ing characteristic pertains to the increasingly prominent
role played by other participants in the electronic market-
place--entities other than buyers and sellers who provide
value-added services to buyers and/or sellers. For exam-
ple, interacting with other marketplace participants may
involve activities such as a buyer accessing information
298 JOURNALOF THE ACADEMYOF MARKETINGSCIENCE
about product quality and price of competing brands com-
prising his or her consideration set from an entity other
than a seller (e.g., an informediary) and engaging in a con-
versation about product quality and price of competing
brand offerings with past and prospective buyers in an
electronic chat room. Again, while such interactions can
also occur in the physical marketplace, their prevalence
and scalability are greater in the electronic marketplace.
As the electronic marketplace evolves, additional distin-
guishing characteristics relative to the physical market-
place may emerge and thus deserve close attention. How
this evolution is likely to occur is the focus of the next
section.
Evolution of the
Electronic Marketplace
The concept of interactivity is crucial for understanding
current buyer-seller activities in the electronic market-
place and how these activities may evolve over the years.
Hoffman and Novak (1996) distinguished between unme-
diated interactivity (e.g., direct face-to-face communica-
tion between two individuals) and mediated interactivity
(e.g., communication between two individuals facilitated
by a device). Steuer (1992), a communication theorist,
defined mediated interactivity as the "extent to which
users can participate in modifying the form and content of
a mediated environment in real time" (p. 84). In the context
of a computer-mediated environment, interactivity would
refer to a user's ability to alter the environment experi-
enced via a computer (Hoffman and Novak 1996). Yadav
and Varadarajan (2001) reviewed extant work in the area
and defined interactivity in the electronic marketplace as
"the degree to which computer-mediated communication
between entities comprising the marketplace is (a) bi-
directional, (b) timely, (c) mutually controllable, and (d)
responsive" (p. 6). With technological advances currently
occurring in the realm of connectivity (i.e., how consumers
and firms connect with and participate in computer-medi-
ated environments), even higher levels of interactivity can
be envisioned in the future (Cairncross 1997).
According to Fidler (1997), understanding the evolu-
tion of different forms of media technologies can provide
clues about how buyers and sellers may embrace (or resist)
higher levels of interactivity in the electronic marketplace.
Fidler described the evolution of three types of media tech-
nologies: document domain (print), interpersonal domain
(telephone), and broadcast (radio, television). Fidler noted
that media technologies seem to incubate for many years
(even decades or centuries in some cases) before they have
a widespread impact on the marketplace. In the document
domain, it took almost 300 years before the steam press
brought automation to the Gutenberg press and facilitated
its rapid expansion. In the broadcast domain, the first ama-
teur radio broadcast occurred in 1906, but it was not until
FALL2002
1920 that Westinghouse's first commercial radio station
went on the air (see Hanson 1998 for an interesting
account of how the radio industry evolved in its early
years). The popular press described the radio as "a fad that
seemed to come from no where [and grew] with almost
stunning suddenness" (Douglas 1991:190)----even though
radio technology had been evolving for more than two
decades. FM technology, developed in 1936, languished
until the 1960s, when it was resuscitated by congressional
legislation (the 1967 Public Broadcasting Act) that ush-
ered in the era of public broadcasting in the United States.
Finally, in the interpersonal domain, the telephone market
remained quite restricted until the key patents expired in
1895 and allowed independent phone companies to enter
the market.
As the electronic marketplace represents a merging of
different forms of media (which Fidler 1997 referred to as
mediamorphosis), it is also instructive to study consumer
adoption of previous generations of similar products and
services. VCA (Video Corporation of America), a joint
venture of Knight-Ridder and AT&T, attempted to bring
the document domain to television in 1983 with a service
called Videotron. Subscribers to this service, which used a
setup box on their television set, could access financial, lo-
cal, and national news. It was discontinued in 1986 after
receiving a disappointing response from the market. Simi-
lar services met the same fate in England (Prestel) and
Germany (Bilderschirmtext) but succeeded in France
(Minitel) (see Mayntz and Hughes 1988 for details related
to these early attempts at providing online information ser-
vices). Reviewing such historical evidence, Fidler (1997)
concluded that
however society and media may change, we can be
reasonably assured that they will embody and build
upon the experiences of the past, as they always
have. By letting history be our guide, we will see that
the forces shaping our future are essentially the
same that have shaped our past. (P. 7)
Recognizing the potential relevance of extant literature
and perspectives, the next section provides a broad over-
view of competitive strategy and the drivers and outcomes
of competitive strategy. In a subsequent section, we build
on this foundation and delineate additional characteristics
and considerations that merit attention in the context of the
evolving marketplace.
DRIVERS AND OUTCOMES
OF COMPETITIVE STRATEGY
Strategy exists at multiple levels--corporate, business,
and functional---of an organization. Corporate strategy
refers to a firm's choice of businesses to be in. Business or
competitive strategy refers to how a particular business in a
 Varadarajan, Y a d a v / S T R A T E G Y A N D T H E I N T E R N E T 299

FIGURE 1
Competitive Strategy: Drivers and Outcomes

2. Industry Structure
4. Product Characteristics Number of Competitors
9Goods vs. Services Size of Compehtors
Industry Concentration
9Search vs. Experience
Market Growth Rate
vs. Credence Goods Entry & Exit Barriers
9Tangibles Dominant vs.
Intangibles Dominant Products
8.

9
Macro
Environment
L
1. Competitive Strategy 6. Marketplace
7. Financial
-Social Performance Performance
9Generic Competttive Strategy
,Legal 9Market Share & Growth *ROI
*Product Strategy 9Earnings Growth
,Regulatory "Promotton Strategy 9Sales & Growth 9Shareholder Wealth
*Pricing Strategy
9Customer Satisfaction

l
9 *Distribution Strategy
9Customer Loyalty
.Infrastructure
.Technological
5. Buyer and Buying
Environment Characteristics
3. Firm Characteristics,
9Individual vs. Organizattonal Skills & Resources
9Non-trivial Information Search Costs
9 Size
9Non-trivial Information 9 Brand, Customer & Channel
Asymmetry VlS-~t-vls Seller Equity
9 Positioning Skills
9Low Cost Transparency
9 Segmentation Skills
9One-to-Many Communicauon Model

N O T E : Ellipses ( . . . . . . ) d e n o t e that the d r i v e r s / o u t c o m e s are i n t e n d e d to be illustrative r a t h e r than c o m p r e h e n s i v e . R O I = return on i n v e s t m e n t .

firm's portfolio of businesses chooses to compete in the industry structure, firm, product, buyer, and buying envi-
marketplace. At the functional level, marketing strategy ronment related variables that are particularly relevant
(or competitive marketing strategy) refers to how a busi- considerations in regard to competing in the electronic
ness chooses to deploy marketing resources at its disposal marketplace.
to facilitate the achievement of competitive positional Building on extant research in marketing, strategic
advantage(s) in the marketplace. The centrality of pattern management, and industrial organization economics fo-
of resource allocation to competitive strategy is evident in cusing on understanding, explaining, and predicting busi-
a number of conceptualizations and definitions of strategy. ness performance, we present a framework delineating the
For instance, Hofer and Schendel (1978) defined strategy relationship between the following (see Figure 1):
as the "fundamental pattern of present and planned
resource deployments and environmental interactions that 1. competitive strategy pursued by the business,
indicates how the organization will achieve its objectives" 2. structural characteristics of the industry in
which the business competes,
(p. 25). Barney (1996) defined strategy as "a pattern of
3. distinctive skills and resources of the firm,
resource allocation that enables firms to maintain or
4. characteristics of the product offerings of the
improve their performance" (p. 27). business,
Building on the extant literature, this section provides 5. characteristics of buyers and the buying envi-
an overview of the embeddedness of the competitive ronment,
strategy of a business in the industry structure, firm, prod- 6. marketplace performance,
uct, buyer, and buying environment. In the next section, 7. financial performance, and
we present an exposition of how competitive strategy in 8. macro environment.
an electronic marketplace can also be viewed as embed-
ded in these same factors. However, while the factors The proposed framework constitutes an attempt to de-
remain the same, we draw attention to certain additional lineate certain key linkages between competitive strategy
300 JOURNALOF THE ACADEMYOF MARKETINGSCIENCE
and its drivers and outcomes. The intent here is to parsimo-
niously organize extant works and perspectives focusing
on these linkages. After briefly reviewing this framework,
we use it as a foundation for our subsequent discussion of
competitive strategy, drivers of competitive strategy, and
outcomes in the context of the electronic marketplace (see
Figure 2).
Competitive strategy and performance (Links 1 ~ 6
and 6 ~ 7). As noted previously, the purpose of competi-
tive strategy is to achieve a competitive positional advan-
tage (differentiation and/or cost advantage) in the
marketplace. Achieving competitive differentiation and
cost advantage entails performing activities comprising
the value chain in ways that lead to differentiation of a
business's offerings from its competitors' offerings and at
a lower cost relative to competitors, respectively. The
sustainability of competitive positional advantages is a
function of the characteristics of the firm's skills and re-
sources underlying the strategy (i.e., the extent to which
the underlying skills and resources are rare, valuable,
nonimitable, and/or characterized by the absence of equiv-
alent substitutes) (see Barney 1991). A business's compet-
itive positional advantages, in turn, affect its marketplace
performance (e.g., market share, market share growth rate,
sales, sales growth rate, customer satisfaction, customer
loyalty) and financial performance (e.g., return on invest-
ment, earnings growth rate, shareholder wealth).
Industry structure characteristics and competitive
strategy (Link 2 ~ 1). Industry structure refers to the eco-
nomic and technical characteristics of an industry that de-
fine the context in which competition takes place.
Research in industrial organizational economics, strategic
management, and marketing lends support for the link be-
tween the structural characteristics of the market in which
a business competes and the competitive strategy pur-
sued by the business. For instance, the structure-conduct-
performance (SCP) model (Bain 1956) views industry
structure as determining the behavior (conduct/strategy)
of businesses in an industry, and conduct as determining
industry performance. Conduct/strategy, in effect, is
viewed as merely reflecting the industry environment in
which a business operates. For example, to the extent that
concentrated market structures are conducive to facilitating
oligopolistic coordination among competitors, it could re-
sult in lower output, higher prices, and higher rates of retum.
Firm-specifc skills and resources and competitive
strategy (Link 3 --~ 1). A firm's unique skills and resources
are a major determinant of its choice of competitive strat-
egy at the level of individual business units. Competitive
business strategy entails leveraging the firm's unique
skills and resources to perform the various activities in
the value chain in ways that differentiate a business's of-
ferings from its competitors' offerings and/or at a lower
FALL2002
cost. The resource-based view ofthefirm suggests that the
sustainability of the competitive advantage of the busi-
nesses in a firm's portfolio is a function of the core compe-
tencies of the firm (Barney 1991; Hunt 2000; Prahalad and
Hame11990). A firm's core competencies are based on the
collective learning in the organization and built around re-
sources that are valuable, rare, difficult to imitate, and not
easily substitutable (Barney 1991). As noted by Prahalad
and Hamel (1990), "The real sources of advantage are to
be found in management's ability to consolidate corporate-
wide technologies and production skills into competencies
that empower individual businesses to adapt quickly to
changing opportunities" (p. 81).
Product characteristics and competitive strategy
(Link 4 ---) 1). There is a long history of research in mar-
keting and economics focusing on the competitive strat-
egy implications of the characteristics of a product. The
vast body of literature in marketing on product and brand
management, as well as on innovation and new products,
provides valuable insights into the linkage between prod-
uct characteristics and marketing strategy. Seminal
works highlighting the differences between goods and
services (Shostack 1977), tangible and intangible prod-
uct attributes (Levitt 1981), and search, experience, and
credence attributes of products (Darby and Karni 1973;
Nelson 1970) also provide valuable insights into the link-
age between product characteristics and the competitive
strategies of businesses.
Buyer and buying environment characteristics and
competitive strategy (Link 5 ---) 1). The literature in mar-
keting focusing on the role of buyer characteristics and
buying environment characteristics on competitive strat-
egy is also vast and extensive. Starting with Webster and
Wind's (1972) call for studying the differences related to
individual and organizational buying processes, a large
body of research has emerged over the years that seeks to
provide insights into the competitive dynamics of business-
to-business environments (see Keep, Hollander, and
Dickinson 1998 for a historical overview). Research fo-
cusing on the interconnectedness of the information envi-
ronment prevalent in a marketplace and the competitive
strategies of businesses can be traced to the early work of
Stigler (1961) and Ackerlof (1970). Stigler's analysis of
markets, characterized by nontrivial search costs, contin-
ues to inspire research efforts in the area (e.g., Dickson and
Sawyer 1990; Urbany 1986). Ackerlof's notion of infor-
mation asymmetry in the marketplace (which gives an in-
formation advantage to sellers over buyers) also has served
as a foundation for a large body of subsequent work (e.g.,
Rao and Bergen 1992; Urbany, Dickson, and Wilkie
1989). Building on the drivers of competitive strategy de-
lineated in Figure 1, in the next section, we focus on the
drivers of competitive strategy in the physical and elec-
tronic marketplace.

INTEGRATING THE INTERNET
INTO COMPETITIVE STRATEGY:
A CONCEPTUAL FRAMEWORK
Integrating the Internet into a business's competitive
strategy and competitive marketing strategy is increas-
ingly becoming an imperative, with the market environ-
ment evolving to encompass both the physical and the
electronic marketplaces. Figure 2 provides an overview of
selected industry structure, firm, product, buyer, and buy-
ing environment characteristics that assume added rele-
vance in the context of competing in the evolving hybrid
marketplace. It should, however, be noted that the factors
delineated in Figure 1 continue to be relevant consider-
ations from the standpoint of competing in the electronic
marketplace in and of itself, as well as in the broader mar-
ketplace encompassing both the physical and the elec-
tronic marketplaces. In Figure 2, Links 8 ---) 2, 8 ~ 3, 8
4, and 8 ---) 5 are shown as dotted lines. These linkages
serve to highlight technological developments that have
necessitated the need to revisit extant perspectives relating
to Links 2 ~ 1, 3 ---) 1, 4 ~ 1, and 5 ~ 1. A more detailed
discussion of these linkages follows.
In response to the change in the frame of reference for
competitive strategy from "How to compete in the physi-
cal marketplace?" to "How to compete in the physical and
the electronic marketplace?" businesses have instituted a
number of changes in their competitive marketing strate-
gies (i.e., their pattern of deployment of marketing re-
sources). Illustrative of such changes are the following
(see Box 1 in Figure 2):
1. Changes in resource deployments manifesting
as relative emphasis on traditional channels ver-
sus electronic channels (i.e., the Internet) for
9 providing product-related information to
customers,
9 communicating with customers,
9 promoting to customers,
9 transacting with customers,
9 distributing digital/digitizable products, and
9 customer trial/sampling of digital/digitizable
products.
2. Changes in resource deployments manifesting
as greater emphasis on
9 marketing directly to customers in the electronic
marketplace versus through intermediaries (tradi-
tional, electronic, and/or hybrid intermediaries),
9 market pioneering (first to market), and
9 strategic alliances.
3. Deployment of resources in an attempt to lever-
age the potential of the Internet for innovations,
customization, and augmentation in the realms
of product, price, promotion, and distribution
(e.g., product innovations, customization, and
augmentation).
Varadarajan,Yadav/ STRATEGYAND THE INTERNET 301
. Deployment of resources in an attempt to lever-
age the potential of the Internet to pursue new
business models and competitive strategies. "~
The potential of the Internet can be leveraged for en-
hancing the effectiveness of a business's competitive strat-
egy as well as the efficiency of its operations. The absolute
amount of marketing resources a business chooses to allo-
cate toward competing in the electronic marketplace, as
well as the allocation relative to the resources allocated to
competing in the physical marketplace, will therefore be
affected by both efficiency and effectiveness consider-
ations. Complementing Box 1 in Figure 2, Table 1 pro-
vides an overview of how businesses might leverage the
potential of the Internet to enhance the effectiveness of
their marketing strategy and the efficiency of their market-
ing operations in the evolving hybrid marketplace. As in-
dicated in this table, with the exception of the actual
distribution of nondigital/nondigitizable products, effec-
tive and/or efficient deployment of all other marketing mix
elements can be enhanced by leveraging the potential of
the Internet.
We next focus on selected linkages (drivers of competi-
tive strategy) delineated in Figure 2. While we recognize
that a business's competitive strategy decisions will realis-
tically be based on a multiplicity of considerations, in this
initial exposition, we limit our discussion to linkages
between specific drivers of competitive strategy delin-
eated in Boxes 2, 3, 4, and 5 and competitive strategy (Box
1). Our goal is to develop the logic underlying these link-
ages generally rather than describe all possible relation-
ships between pairs of variables depicted in Figure 2.
Industry Structure Characteristics
and Competitive Strategy
Market thinness, customer dispersion, and relative em-
phasis on competing in the physical versus the electronic
marketplace. Among the structural characteristics of a
market that favor placing greater emphasis on competing
in the electronic marketplace vis-~t-vis the physical mar-
ketplace are market thinness and customer dispersion
(Gupta and Chatterjee 1997). Thin markets, such as the
market for antique cars, tend to have undesirable proper-
ties for both buyers (e.g., lack of choice) and sellers (e.g.,
inability to locate buyers). The electronic marketplace,
due to its effectiveness in bringing potential buyers and
sellers together, is conducive to improving the working of
thin markets. Dispersion of customers over a wide geo-
graphical area, as opposed to concentration in one geo-
graphical area, results in a market that is thin on the buyer
side at the local level. A business focused on a local market
may not be viable due to the small number of potential
buyers in that market. However, by leveraging the poten-
tial of the Internet, a seller, by aggregating buyers dis-
302 JOURNAL OF THE ACADEMY OF MARKETING SCIENCE FALL 2002

TABLE 1
Leveraging the Potential of the Internet for Enhancing Marketing
Strategy Effectiveness and Marketing Operations Efficiency
Product Class
Digital and Dtgitizable Intangibles-Dominant Tangibles-Dominant
Productsa Productsb'd Productsc'd
Leveraging the potential of the Internet for the following:
Information provision to prospective buyers Y Y Y
Communicating with prospective buyers
(prepurchase and/or postpurchase) Y Y Y
Customer service and customer relationship managemente Y Y Y
Market research Y Y Y
Product innovations Y Y Y
Product customizationf Y Y Y
Promotion renovations Y Y Y
Promotion customizationf Y Y Y
Pricing innovations Y Y Y
Price customizationf Y Y Y
Distribution innovations Y Y Y
Distribution customizationf Y Y Y
Transaction processing Y Y Y
Product distribution y Ng Ng

NOTE: Y = yes; N = no. As indicated in the table, while the Internet is not a viable channel for the actual product distribution (i.e., physical transportation)
of nondigitizable products (whether intangibles-dominant or tangibles-dominant products), it is a viable medium for, and/or a facilitator of, every other
marketing-related activity delineated in the table.
a. Software, music, videos, books, newspapers, magazines, financial information, etc. Although digitizable, in some instances, customers' preference
may be for the product in a nondigital format (e.g., books).
b. Air travel, car rental, hotel accommodations, etc.
c. Automobiles, appliances, computers, entertainment electronics products, real estate, etc.
d. Finer distinctions within intangibles-dominant and tangibles-dominant products can provide further insights into the viability of the Internet as a me-
dium for, and/or facilitator of, the marketing-related activities delineated in the table. For instance, tangibles-dominant products can be further distin-
guished as products that are light (weight) and/or compact (volume) versus those that are heavy and bulky. All else equal, lower fulfillment costs associated
with high value, light weight, and compact products make them more conducive to being bought and sold in the electronic marketplace.
e. As in ECRM (electronic customer relationship management).
f. Although customization at the level of an individual buyer may be feasible, the economics of customization and the buyer's level of interest in custom-
ized products (e.g., for products such as toothpaste, soap, detergent, etc.) are factors that should be borne in mind.
g. Based on a broader construal of a product as an "augmented product," it could be argued that certain elements of an augmented product can be digitized
(e.g., reviews of books, virtual tours of real estate properties) and distributed through the Internet. We include them here under "distribution innovations."
Product distribution here refers to the actual distribution of the core product.

persed over several local markets, m a y be able to create a
viable c u s t o m e r base and cater to their needs in the elec-
tronic marketplace.
Network externalities, tippy markets, and market pio-
neering. Network externalities (or effects) refers to the
p h e n o m e n o n of a product b e c o m i n g increasingly valuable
to its present and potential users as the n u m b e r of others
who adopt, own, or use the product (i.e., the size of the net-
work) increases. For instance, as the installed base of fax
machines increases, so does the usefulness of the device to
each individual with access to the service. For markets
characterized by n e t w o r k effects, the market pioneer, b y
cultivating a large user base for its product offering prior to
the entry of competitors, can achieve a competitive advan-
tage. Such effects are often observed in the case of m a n y
c o m m u n i c a t i o n technologies (e.g., telephones, fax ma-
chines, e-mail). Product digitizability, by facilitating net-
worked intelligence (i.e., products being able to interact
with each other and with individuals) (see Tapscott 1996),
can increase substantially a product's functionality. The
greater the order of m a g n i t u d e of n e t w o r k effects, the
greater the importance of market p i o n e e r i n g as a source of
c o m p e t i t i v e a d v a n t a g e for digital p r o d u c t s v i s - a - v i s
nondigital products.
Network effects exist at multiple levels:
9 market exchange level (e.g., e B a y . c o m vs. A m a z o n .
c o m and Yahoo.com auction sites),
9 industry standards level (e.g., W i n d o w s vs. Mac Op-
erating System; V H S vs. B e t a m a x format VCRs),
9 b r a n d level (Word vs. WordPerfect word-processing
software).
Consider network effects as a source o f first-mover advan-
tage at the electronic market exchange level. All else
equal, sellers will be more predisposed to list to sell their
products at electronic market exchanges with the most
 Varadarajan, Y a d a v / S T R A T E G Y A N D T H E I N T E R N E T 303

FIGURE 2
Integrating the Internet Into Competitive Strategy: A Conceptual Framework

12. Industry Structure

i 4. Product Characteristics .MarketThinness

9Customer Dispersion
i -i~roduct Digitizabdtty | .Network Externalities
9Market Tippiness
:-................ P -Dtsaggregatability [
.Channel Structure
-Aggregatablhty /
9 Cost structure
9 Primary-Complementary Space 1. Competitive Strategy
8. Macro 9Product Tangibility
Environment 9Relative Emphasts on Traditional
-Remote Information Provision and Electronic Channels for: 6. Marketplace
.Pohttcal 9 Volume-Weight-Value -Providing Information to Customers
Performance
9Product Perishability -Communicating with Customers 7. Financial

t
.Social
-Transacting 9Market Share & Growth
Performance
9 -Distributing 9Sales & Growth 9
-Trial/Sampling 9Earnings Growth
9 9Customer Satisfaction
9Relative Emphasis on: 9Shareholder Wealth
.Economic -Marketing Direct vs Intermediaries 9Customer Loyalty 9Other indicators
-Market Pioneenng & Alliances
9 V
9Leveraglng Electronic Channels for: 9Other Indicators
-Product Innovation/Customization
.Technological 5. Buyer and Buying -Pricmg Innovation/Customization
.Other~ Environment Characteristics -Promotion lnnovatton/Customization
-Dlstrtbunon Innovation/Customization
9Competing in Fundamentally New Ways
9Dlrnlmshmg Informanon Search Costs
i .................. 9D~rnmlshmgInformanon Asymmetry
9IncreasingCostTransparency 3. Firm Characteristics,
9Many-to-Many Commumcatlon Model
Skills & Resources
9 Resources
..................................................................................... ..... 9IT Resources and Information
Processing Slolls

N O T E : Ellipses ( . . . . . . ) d e n o t e characteristics d e l i n e a t e d in Boxes 1 to 5 in F i g u r e 1. R O I = return on i n v e s t m e n t ; I T = i n f o r m a t i o n technology.

buyers, and buyers will be more predisposed to look to buy to describe such markets (Frank and Cook 1995), this is
at electronic market exchanges with the most sellers. The somewhat of a misnomer as a number of (albeit, very
above behavior of sellers and buyers can be mutually rein- small) competitors can in fact coexist with a dominant firm
forcing. Network effects at the industry level for digital in such markets (Economides and Flyer 1998). Shapiro
products are attributable to systems tending to evolve and Varian (1999) suggested that a market's likelihood of
around (competing) standards. The associated high tipping depends on two factors: (1) consumer demand for
switching costs can lead to the market pioneer enjoying a variety and (2) economies of scale. While consumer
competitive advantage (see Shapiro and Varian 1999). demand for variety can be high for certain types of digital
Farrell and Saloner (1985) showed that a standard, once products (e.g., entertainment software such as computer
established, exhibits "inertia" (i.e., it is difficult for the and video games), it can also be low (e.g., for productivity
market to adopt another standard). When some users do tools such as word-processing software). When consumer
move from one dominant (but inferior) standard to another demand for variety is low, users tend to develop loyalty
emerging (but superior) standard, they experience "tran- toward familiar products that get the job done. Digital
sient incompatibility" (Farrell and Saloner 1986)--that is, products are generally characterized by considerable
they are temporarily part of a smaller network that lacks economies of scale as the reproduction of product compo-
the network externalities of the dominant standard. Net- nents with a high level of digitization is associated with
work externalities at the brand level are also driven by sim- relatively low incremental costs. Furthermore, due to sup-
ilar considerations in that a network of users of one brand ply-side effects of network externalities (Katz and Shapiro
competes, in effect, with networks represented by users of 1985), the total cost of serving an installed base of users
other brands. may in fact decline as the installed base expands (largely
Tippy markets refer to markets that tend to tip in favor of because the expanding installed base attracts additional
just one firm. While the term winner-take-all is often used firms that produce spare parts, supplies, and other value-
304 JOURNALOF THE ACADEMYOF MARKETINGSCIENCE
adding services). Shapiro and Varian noted that pioneering
advantage is more likely to be sustained in product-markets
characterized by relatively low demand for consumer vari-
ety and high economies of scale.
Channel structure characteristics and marketing di-
rectly to customers. An inverse relationship can be ex-
pected to exist between concentration at the intermediary
level and the propensity of producers to transact directly
with customers in the electronic marketplace (i.e., resort to
disintermediation). An indicator of concentration at the in-
termediary level is the percentage of industry sales ac-
counted for by the largest intermediaries. In the United
States, the airline industry is characterized by low concen-
tration (high fragmentation) at the intermediary level (i.e.,
several thousand travel agencies that are small in size, rela-
tive to the size of commercial passenger airlines). In such
industries, producer firms face fewer deterrents to shifting
an increasingly larger proportion of their marketing re-
sources to marketing directly to customers in the elec-
tronic marketplace. Illustrative of an industry that is
characterized by high concentration at the intermediary
level is the small electrical home appliances industry (e.g.,
electric irons, toasters, and blenders). Here, a few large re-
tailers in the United States (e.g., Wal-Mart, Target, Home
Depot, and Lowe's) account for a significant percentage of
the producer industry's sales. In such industries, there is a
lower likelihood of firms in the producer industry commit-
ting substantial resources to transacting directly with cus-
tomers in the electronic marketplace. High concentration
at the traditional intermediary level, as well as their atten-
dant ability to retaliate, is conceivably a deterrent to firms
in the producer industry pursuing a direct-to-consumer
strategy in the electronic marketplace. Established pro-
ducers in industries characterized by high concentration at
the traditional intermediary level are likely to be more se-
lective in their choice of a direct-to-consumer strategy in
the electronic marketplace. For instance, a producer that
implements a direct-to-consumer strategy involving a lim-
ited product line (e.g., refurbished products, niche prod-
ucts, replacements parts, etc.) is less likely to encounter
retaliatory actions from traditional intermediaries.
Firm-Specific Skills and Resources
and Competitive Strategy
As shown in Figure 2, the development and nurturing of
two firm-specific skills and resources assume consider-
able importance in the context of competing in the elec-
tronic marketplace:
Information resources involve the nature and
amount of information possessed by the firm about
individual customers.
FALL2002
Information technology resources and information-
processing skills involve the ability of the firm to use
information technology (IT) resources and informa-
tion-processing skills to gain insights about individ-
ual customers and use this knowledge to customize
its future interactions with these customers.
A firm's skills and resources in the above two catego-
ries are key strategy enablers in that they determine the abil-
ity (or lack thereof) of a business to pursue certain compet-
itive strategies in the electronic marketplace. Glazer
(1991), in his analysis of information- and technology-
driven changes in the marketplace, discussed the increas-
ing strategic significance of information as an organiza-
tional asset. He argued that information (often originating
as transaction-related data that firms can capture) could be
used to reduce costs and increase revenue. Information-
intensive firms, in Glazer's conceptualization, acquire and
use information toward this end to a greater extent than
their competitors. Porter and Millar (1985) discussed the
implications of information-intensive value chains that are
characterized by a large number of "value activities" in-
volving the processing of information (relative to the pro-
cessing of physical inputs). They also documented the
increasing prevalence of information-intensive products
(i.e., products that require a large amount of "information
content" to facilitate their purchase and use).
A firm's information assets and information-process-
ing skills and resources critically affect its ability to pursue
certain marketing strategies as well as make better deci-
sions in the realm of various marketing mix variables. For
instance, a firm's ability to engage in suggestive selling
(recommending products to an individual customer based
on perceived similarity with the purchase patterns of
other customers) depends on its information assets and
information-processing skills and resources. Similarly, in
the area of pricing, the information assets and information-
processing assets of a firm determine the extent to which it
would be able to engage in more fine-tuned price discrimi-
nation (e.g., inferring buyers' price sensitivity from their
Web navigation and purchase behavior and offering prod-
ucts at prices customized to the level of individual buyers).
A firm's IT assets and capabilities are also a critical deter-
minant of its ability to pursue other strategies in the realm
of pricing such as dynamic pricing (e.g., changing the
price at which a product is offered on the basis of prevail-
ing supply and demand conditions).
Firms with superior information assets and information-
processing assets may eventually be able to pursue market
segmentation to its logical limits--segment size of one.
Not surprisingly, firms are being advised to diagnose their
one-to-one capabilities by assessing their ability to

identify, differentiate, and interact with individual custom-
ers and to develop customized product offerings (Peppers,
Rogers, and Doff 1999). Increasing interest in managing
customer relationships and measuring customer lifetime
value (Berger and Nasr 1998), besides reflecting a shift
in focus from groups of consumers to individual con-
sumers, also highlights the imperative for firms to focus
on developing superior information assets and information-
processing assets.
Finally, as information-intensive environments are
characterized by frequent and unpredictable changes
(D'Aveni 1999), it is important to emphasize the need for
constantly renewing a firm's set of skills and resources.
Specifically, a finn's dynamic capabilities (Eisenhardt and
Martin 2000; Teece, Pisano, and Shuen 1997) that result in
the creation of new skills and resources pertaining to the
management of information-based assets need careful
scrutiny when competing in the electronic marketplace.
While extant work has highlighted the significance of cre-
ating such information-based assets (e.g., Glazer 199 I), it
remains unclear how these assets can be created and nur-
tured most effectively. Eisenhardt and Martin's (2000)
observation regarding the equifinality of dynamic capa-
bilities (i.e., different paths may lead to similar out-
comes) implies that each firm must seek out best prac-
tices but also leave room for experimentation with
alternative approaches.
Product Characteristics
and Competitive Strategy
Product digitizability and relative emphasis on compet-
ing in the electronic versus the physical marketplace.
Product digitizability has important implications for com-
petitive strategy due to the potential for augmentation of a
product that conversion into digital hardware or software
offers (see Balasubramanian et al. 2000 for an extended
discussion). For instance, products amenable to being dig-
itized offer considerable potential for
9 product customization (e.g., developing a custom-
ized readings packet for a course comprising book
chapters from different textbooks, made available
either in print or digital version),
9 product innovation (e.g., creating new services such
as audio and video on demand), and
~ product enhancement (e.g., offering to subscribers of
the print version of a business magazine privileged
access to certain sections of the publication's Web
site that are not accessible to the general public).
Digital products and products amenable to being digi-
tized also offer considerable potential for aggregation
Varadarajan, Yadav/ STRATEGYAND THE INTERNET 305
(e.g., a dictionary and thesaurus being subsumed within
a word-processing software) and disaggregation (e.g., a
chapter of a textbook or a song in a CD collection).
Products created through disaggregation can be mar-
keted as micro products as well as reaggregated to create
other macro products (e.g., a customized CD that is a
compilation of songs from different CDs). Product
disaggregatabitity, while presenting opportunities for
firms to generate new revenue streams, also presents asso-
ciated challenges such as pricing of micro products, cost-
effective mode of distribution of micro products, and
guarding against the threat of cannibalization of macro
products from which the micro products are derived.
Abell's (1980) schema for defining the scope of a busi-
ness in terms of customer functions served, customer
groups served, and technologies used is relevant to under-
standing the implications of product digitizability for
competitive strategy. In some instances, alternative analog
and digital technological solutions for satisfying a specific
customer need may coexist (e.g., e-books and printed
books; a roll of film being processed and delivered to the
customer as pictures on paper, on a CD as digitized pic-
tures, or digitized and stored at a Web site for the customer
to access and selectively print or electronically forward).
In other instances, the analog technological solution to
satisfying a customer need may eventually be displaced
by a superior and/or cost-efficient digital technological
alternative (e.g., the print version of an encyclopedia
being displaced by a Web site and/or a CD version). Such
dynamics, in turn, can be expected to affect a business's
relative emphasis on the physical versus the electronic
marketplace.
As a result of increasing product digitization, the primary-
complementary product space has broadened well beyond
analog primary--analog complementary products (e.g., razor
and blade cartridge) to encompass the foUowing:
9 analog primary-digital complementary products
(e.g., car telematics and digital music services),
9 digital primary-analog complementary products
(e.g., digital navigation services and alternative ac-
cess devices such as cell phones and personal digital
assistants), and
~ digital primary-digital complementary products
(e.g., e-mail and stock alert services packaged for
wireless delivery).
The insights that extant literature provides into the market-
ing strategy implications of complementary products
(e.g., price bundling, joint sales promotion, marketing alli-
ances) were, for the most part, developed in the context of
analog primary-analog complementary products. The rel-
evance of these insights in the context of other pairings of
306 JOURNAL OF THE ACADEMY OF MARKETING SCIENCE
primary and complementary products delineated above is
somewhat limited. Contrast, for instance, complementary
digital products consumed in the virtual marketspace with
analog complementary products consumed in the physical
marketplace. Compared to stand-alone analog comple-
mentary products that tend to retain their distinct identity,
a number of digital and digitizable complementary prod-
ucts tend to be subsumed and seamlessly integrated into
more aggregate digital products (e.g., products such as
free e-mail service, Web search engine, and an information
portal and a shopping portal being integrated in a Web
browser). Such considerations suggest that exploration of
the feasibility of acquiring providers of complementary
products and/or forging alliances with a larger network of
providers of complementary products (e.g., an Internet ac-
cess provider forging alliances with a large number of pro-
viders of content and marketers of goods and services)
assumes added importance for businesses competing pri-
marily in the virtual marketspace vis-h-vis the physical
marketplace. 3
Product tangibility, remote information provision, and
relative emphasis on competing in the electronic versus
the physical marketplace. Product tangibility refers to the
relative dominance of tangible attributes relative to intan-
gible attributes in a product. In general, tangible attributes
that require tactile feedback may be difficult to communi-
cate in electronic settings (e.g., a fabric's texture). How-
ever, tangible attributes that have some degree of
standardization (e.g., neck size of men's shirts) can be
evaluated with relative ease. Also, in a repurchase situa-
tion, buyers may feel comfortable evaluating attributes
that do require tactile feedback (Alba et al. 1997). For
some products, physical proximity may be essential for
providing the information needed. Nevertheless, even
products for which buyers need large amounts of informa-
tion to facilitate evaluation, acquisition, and use are likely
to benefit more from the information search capability of
the electronic marketplace. For example, by undertaking a
virtual real estate tour, a prospective buyer may be able to
reduce the consideration set to a smaller and manageable
number. The electronic marketplace also facilitates trial
and/or sampling of digital/digitizable products (e.g., the
first chapter of a book, the basic version of a video game,
or selected clips from a soon-to-be-released CD/DVD) at
a considerably lower cost to the firm vis-?~-vis the physi-
cal marketplace. In certain instances, facilitating product
trial in the electronic marketplace may allow a firm to of-
fer to prospective buyers the option of trying its complete
product offering prior to making a purchase decision
(e.g., free trial of software for preparation of personal in-
come tax returns and seeking payment only when the user
is ready to print or electronically file a copy of the com-
pleted tax return).
FALL 2002
Product volume-weight-value characteristics and po-
tential of the electronic marketplace. The volume-weight-
value characteristics of a product can affect a firm's rela-
tive emphasis on the physical versus the electronic market-
place. As pointed out in Table 1, the economics of
fulfillment of transactions that occur in the electronic mar-
ketplace favors products that are less bulky and command
a high price relative to transportation costs, but it may be
inefficient for bulky products that have a low value/weight
ratio. Niche e-retailers such as Ashford.com (which spe-
cializes in high-end watches and jewelry) capitalize on the
economics of performing fulfillment activities in the elec-
tronic marketplace for certain types of products.
Product perishability and relative emphasis on compet-
ing in the electronic versus the physical marketplace.
Product perishability refers to the degree to which product
value declines due to the mismatch between when the
product is produced and when it is consumed. The decline
in product value can be viewed from the perspective of a
buyer (in that the product suffers a loss in utility) and a
seller (in that the seller is unable to recover this loss in
product utility). While practically every product has some
degree of perishability, the value of some products (e.g.,
fashion and seasonal merchandise, financial information)
is more likely to decline as the time between production
and consumption increases. In the case of many services
where production and consumption must occur simulta-
neously (e.g., airline seats, hotel rooms), product
perishability is very high. Naturally, the key to operating
effectively in a perishable product category is to develop
mechanisms that will enable the seller to (a) anticipate
when product supply is likely to exceed demand and (b)
implement promotional mechanisms (such as discounts)
that will clear the market when available supply exceeds
prevailing demand. The electronic marketplace, by virtue
of inexpensive and highly scalable communication link-
ages between buyers and sellers, is ideally suited for devel-
oping such mechanisms.
Buyer and Buying
Environment Characteristics
and Competitive Strategy
Significant changes are occurring in buyers and the
buying environment as a result of the increasing reliance of
buyers and sellers on the emerging electronic marketplace.
For instance, Haubl and Trifts (2000) noted that the avail-
ability of sophisticated interactive decision aids in online
buying environments is likely to alter how consumers
search for product information and make purchase deci-
sions. Research by Lynch and Ariely (2000) shows that
lowering buyers' search cost for information on product
quality is conducive to lowering buyers' price sensitivity

TABLE 2
The Evolving Hybrid Marketplace and Associated Changes in the Buying Environment
Characteristic of the Buying Environment
Principal sourcesof information
Sourcesof credible/neutralinformation
Amountof informationavailableto buyersabout
price and nonpriceattributesof competingproductofferings
Informationasymmetrybetweensellerand buyer
Buyerrelianceon proxies(e.g., brand name) in the absence
of objectiveinformationon productquality
Ease of informationsearch
Qualityof information
Organizationand structuringof information
Ease of comparingand evaluatingalternativesin the
buyer's considerationset
a. In additionto traditionalwordof mouthand mass media.
b. Relativeto the physicalmarketplace,an informationsearchcanbe donewithgreatereasein thehybridphysicalandelectronicmarketplace.Otheritems
that followshouldbe interpretedsimilarly.
when products are differentiated. Such efforts serve to
highlight sellers' need to adapt to changes in buyers' infor-
mation search and buying behavior as a consequence of
changes occurring in the buying environment. Table 2 pro-
vides an overview of changes in the buying environment as
the competitive landscape shifts from a predominantly
physical marketplace to a physical and electronic market-
place. As indicated in this table, every stage of buyers'
decision-making process--search, simplification of the
choice set, evaluation, and final choice--is likely to be
affected as the role played by the Internet increases. The
nature of these changes and their implications for competi-
tive strategy are discussed next.
Diminishing information search costs. Beginning with
Stigler's (1961) seminal analysis, search costs have been
recognized as an important determinant of buyers' decision-
making process in the marketplace. Information econom-
ics, which examines consumer behavior under conditions
of incomplete price knowledge in imperfectly competitive
markets, assumes that consumers are aware of price dis-
persion in the marketplace and that they engage in price
search as they seek a lower asking price. This search pro-
cess is subject to diminishing returns, and an optimal ter-
mination of the search is determined by equating marginal
search costs with marginal returns of search.
It has been shown that in commodity markets (at equi-
librium), sellers charge the same price---one that would
have been charged by a monopolist (Salop and Stiglitz
1977). In such markets, even a modest increase in search
costs enables sellers to increase prices and profits. When
buyers' search costs vary in commodity markets, a mixed-
price equilibrium may result (i.e., both low-price and high-
price sellers emerge). Differentiated markets are
Varadarajan, Yadav/ STRATEGYAND THE INTERNET 307
Physical Marketplace Physical and Electronic Marketplace
Traditionalwordof mouth(WOM)and ElectronicWOM and new mediaa
mass media
Few Many
Limited Extensive
Considerable Diminishing
Considerable Diminishing
Greaterb
Better
Better
Greater
characterized by heterogeneous buyer preferences and
product characteristics. Hotelling's (1929) work modeling
choice in differentiated markets suggests that sellers are
able to increase prices when (1) consumers' search costs
increase and/or (2) consumers' perceived costs associated
with not selecting the "ideal" product increase.
Using the broad framework of information economics,
Bakos (1991, 1997) examined the implications of dimin-
ishing search costs in the electronic marketplace. The gen-
eral finding is that reduced search costs lead to increased
price competition between sellers and, consequently,
lower average prices. Bakos (1997) made a distinction
between search costs associated with price information
and nonprice information (e.g., product attributes related
to product quality). While declining search costs associ-
ated with price information increase pricing pressures on
sellers, declining search costs associated with nonprice
information dampen pricing pressures on sellers.
Surviving and prospering in an environment character-
ized by declining search costs will require considerable
skill and new thinking on part of the firms. As noted above,
it appears likely that there will be increased industry-level
pricing pressures. However, even in this environment,
there will be opportunities to preserve (and perhaps even
increase) profit margins. Profit margins may be preserved
by cutting costs, segmenting the market more astutely and
precisely, and implementing price discrimination and
dynamic pricing that more effectively capture consumers'
surplus. The analysis presented by Bakos (1997) suggests
that facilitating consumers' access to the type and amount
of nonprice information disseminated in the marketplace
can reduce pricing pressures. Of course, the effectiveness
of this approach is likely to vary considerably across firms
(depending on the specifics of nonprice information that is
308 JOURNALOF THE ACADEMYOF MARKETINGSCIENCE
disseminated by an individual firm). Firms that can make
credible claims regarding the superiority of their nonprice
attributes will be able to combat pricing pressures more
effectively than other firms.
Diminishing information asymmetry. An exchange is
viewed as characterized by information asymmetry when
the parties participating in the exchange are unequally in-
formed about pertinent details regarding the exchange. For
example, while a buyer may learn about the quality of a
product after it is purchased, the seller may have access to
this information prior to the exchange. Markets character-
ized by information asymmetry facilitate the emergence of
branded products offered at premium prices, ensuring a
certain level of predetermined quality to buyers. Sellers of
branded products charge premium prices that reflect the
higher production costs (if any) and also "yield a normal
rate of return on the foregone gains from exploiting con-
sumers' ignorance" (Klein and Leffler 1981:624). Infor-
mation asymmetry also leads to more concentrated
markets with higher prices because it is difficult for new
entrants (that seek entry by offering lower prices) to make
credible claims pertaining to the quality of their products.
The likelihood of market concentration increases in product-
markets where experience and credence attributes domi-
nate search attributes.
To a large extent, information asymmetry results from
buyers' (a) inability to evaluate a product prior to purchase
and/or (b) inability to access appropriate information due
to high search costs. The emergence of the electronic mar-
ketplace can affect both factors. Buyers not only can learn
how to evaluate a product (e.g., which attributes are more
diagnostic of overall quality), but they can also access the
evaluation of other buyers who may already have pur-
chased and used the product (through electronic word of
mouth). As a result, information asymmetry can be
expected to decline significantly as buyers and sellers
increase their reliance on the electronic marketplace.
Sellers of branded products will be under pressure to jus-
tify the price premiums they have traditionally charged in
the physical marketplace. Justifying and maintaining price
premiums can be accomplished by making a renewed
commitment to continuous innovation and by educating
existing and prospective buyers about the superiority of a
given product. In segmented markets, firms can explore
opportunities to develop a value proposition that justifies a
premium pricing approach in selected market segments.
However, one consequence of declining information
asymmetry is that firms wilt have to work considerably
harder to develop and pursue such premium pricing
opportunities.
Increasing cost transparency. The emergence of the
electronic marketplace is also affecting information asym-
metry regarding costs. Sinha (2000) suggested that buyers'
FALL2002
increased participation in the electronic marketplace cre-
ates cost transparency--that is, it enables buyers to infer
(among other things) sellers' cost-related information. In-
creased participation in the electronic marketplace leads to
more exposure to price information, which, in turn, may
provide clues about costs. As discussed above, informa-
tion asymmetry regarding quality enables sellers to offer
branded products that seek to reduce buyers' uncertainty.
Buyers may be willing to pay a premium for this reduction
in uncertainty, but the magnitude of this premium cannot
be judged fully unless buyers have access to firms' cost-
related information. Once the magnitude of this premium
is ascertained, it can serve as a basis for making assess-
ments about price fairness. Access to cost information also
enables buyers to evaluate the plausibility of a competi-
tor's claim that its lower priced product is comparable in
quality to an incumbent's offering. Thus, by facilitating
the entry of credible lower priced competitors, increased
cost transparency can spur price competition in the mar-
ketplace. Some pricing strategies (e.g., price bundling) can
partly disguise price (and thus cost) information regarding
individual products. However, in the long run, firms must
accept the reality of increasing cost transparency. As in the
case of information asymmetry regarding quality, devel-
oping and offering a superior value proposition to buyers
through sustained innovation is perhaps the only effective
strategic response to increasing cost transparency in the
marketplace.
Changing communication model. Finally, many
changes occurring in the buying environment can be
traced to changes occurring in the underlying communica-
tion model. Hoffman and Novak (1996) suggested that the
traditional one-to-many model of communication (one
firm transmitting standardized content to segmented buy-
ers) is being replaced by a many-to-many communication
model (firms and buyers transmitting customized content
to each other). One important implication of this change is
that buyers are abandoning the relatively passive role that
has been traditionally assigned to them in the communica-
tion process. Moving away from being mere recipients of
firm-generated content, buyers are demonstrating a keen
interest in developing and exercising greater control over
the communication they receive and generate.
According to Hoffman and Novak (1997), this commu-
nication-related shift has profound strategic implications.
Consider increasing electronic word of mouth, for exam-
ple, which is just one manifestation of how communica-
tion patterns are changing in the marketplace. The ease
with which buyers can spread the word about a firm (both
favorable and unfavorable) has spurred a new type of
buyer activism. Buyers are sharing experiences with one
another and, increasingly, expect that firms will pay atten-
tion and respond appropriately. The well-publicized

design and/or quality problems in Intel's original Pentium
chip (the so-called "floating point" problem, which could
result in erroneous answers to division problems) were
first revealed in a seemingly innocuous posting on a com-
puter bulletin board. Intel's initial response was to assure
computer buyers that the likelihood of this specific error
was so small that a broad product recall was not warranted.
Eventually, with negative publicity spiraling out of hand
largely due to electronic word of mouth, Intel announced a
broad product recall to address this problem.
Buyers' increasing involvement in the communication
process also has implications for how firms conduct need
assessment studies in the marketplace, design and test new
products, and make marketing mix decisions. Buyer activ-
ism can either be a threat (when ignored by an unrespon-
sive firm) or an opportunity (when a responsive firm har-
nesses buyers' ideas and sentiments to address existing
problems and develop new initiatives). Indeed, the market-
ing concept--a philosophy of putting customers at the
center of all of the firm's activities---can be (and should
be) embraced more fully in a communication environment
where a meaningful, more interactive conversation with
customers becomes possible (Hoffman and Novak 1997).
Insights gleaned from these conversations can then serve
as a basis for determining unmet needs in the marketplace,
obtaining rapid feedback on new product concepts, and
developing and implementing a more customized market-
ing mix.
CONCLUSION AND FUTURE
RESEARCH DIRECTIONS
Marketing strategy as a field of study is primarily con-
cerned with understanding, explaining, and predicting the
marketplace behavior of businesses in the realm of deploy-
ing marketing resources at their disposal to facilitate the
achievement of competitive advantage and their contex-
tual underpinnings. Regardless of whether a business is
competing in the physical marketplace, electronic market-
place, or both, certain fundamental tenets are likely to en-
dure. Among other factors, businesses are likely to
continue to base their competitive strategy decisions on an
analysis and understanding of factors such as the of the
following:
9 the industry in which the business competes (e.g.,
concentrated vs. fragmented markets),
9 the unique skills and resources of the firm (e.g., su-
perior alliance management skills and a large cus-
tomer base),
9 the company's product offerings (e.g., goods vs.
services),
9 the buyers (e.g., businesses vs. households),
Varadarajan, Yadav/ STRATEGYAND THE INTERNET 309
the buying environment (e.g., high vs. low informa-
tion search costs), and
the macro environment in which the firm operates
(e.g., legal, political, regulatory, social, cultural,
economic, and technological factors).
Building on the extant strategy literature and the
emerging literature on e-commerce, this article advances a
conceptual framework highlighting the role of the Internet
as an enabler and driver of competitive marketing strategy.
As shown in Figure 2 (Box 1), competing in the evolving
hybrid market environment calls for a broader construal of
the scope of marketing strategy. Key to such a broader
construal is recognizing the potential of the Internet as an
enabler of marketing strategy, a strategic tool whose po-
tential is gainfully leveraged to enhance the effectiveness
of a business's competitive marketing strategy. The link-
ages from Box 8 (specifically, the information technology
dimension of the macro environment) to Box 1 (competi-
tive strategy) through Boxes 2, 3, 4, and 5 (industry struc-
ture, firm-specific skills and resources, product
characteristics, and buyer characteristics and buying envi-
ronment) delineated in Figure 2 serve to highlight the role
of the Internet as a driver of competitive strategy.
Future Research Directions
Further refinement of the proposed conceptual frame-
work and empirical research building on the proposed
framework constitute promising avenues for future re-
search. For instance, the change in the competitive land-
scape (from a physical marketplace to one encompassing
both the physical and the electronic marketplace) can be
expected to evoke a multiplicity of responses from buyers
and sellers. Broadly, these responses can be characterized
as follows:
1. First-order effects
A. Supply-side effects: Changes in seller behavior
B. Demand-side effects: Changes in buyer
behavior
2. Second-order effects
A. Demand-side effects: Effects of changes in
seller behavior on buyer behavior
B. Supply-side effects: Effects of changes in
buyer behavior on seller behavior
The scope of the article in its present form is largely limited
to first-order effects and points to the need for future re-
search focusing on second-order supply-side and demand-
side effects. Both cross-sectional and longitudinal investi-
gations are needed to empirically examine the relation-
ships depicted in the proposed conceptual framework. The
proposed conceptual framework also serves to highlight
future research in the following broad areas:
310 JOURNAL OF THE ACADEMY OF MARKETING SCIENCE
1. The impact of the Internet on the drivers of com-
petitive strategy (i.e., industry structure, firm
characteristics and skills and resources, product
characteristics, and buyer characteristics and the
buying environment).
2. The performance consequences of changes in
the competitive strategies of businesses in re-
sponse to the opportunities afforded by and chal-
lenges posed by the evolving hybrid marketplace.
3. A unique and distinctive characteristic of the
Internet in regard to digital products is its dual
role as both a distribution channel and a promo-
tion channel. In contrast, for the most part, the
distribution and promotional channels for mar-
keting of goods in the physical marketplace are
distinct. Extant literature focusing on issues re-
lating to distribution and promotion has also, for
the most part, evolved as distinct streams.
Against this backdrop, exploration of issues and
questions pertaining to the use of the Internet as
both a distribution and promotion channel for
digital products constitutes a promising avenue
for future research.
4. For legacy businesses in particular, competing in
the evolving hybrid marketplace implies effec-
tive and seamless integration of the business's
interface with its customers in the physical and
the electronic marketplace. Although our focus
here was limited to marketing strategy content-
related issues, we nevertheless recognize the
importance of strategy formulation process and
implementation effectiveness-related issues
from the standpoint of competing in the evolving
hybrid marketplace and the attendant need for
future research.
NOTES
1. In the interest of completeness, the links relating to both drivers
and outcomes of competitive strategy are shown in Figure 1. However,
our primary focus here is on the drivers. In Figure 1, with the exception of
firm characteristics (Box 3), all other boxes are shown at the business unit
level. The underlying rationale is that in the case of a multibusiness firm,
the unique skills and resources of a firm deployed to compete in a particu-
lar business arena are also the unique skills and resources of the focal
business. Collectively, the variables enumerated in Boxes 2, 3, and 4
denote "supply-side drivers," and those enumerated in Box 5 denote
"demand-side drivers."
While our primary focus here is on selected drivers of competitive
strategy (Links 2 ~ l, 3 --* 1,4 ~ 1, and 5 ~ 1), it should be noted that ef-
fects m the opposite direction are also conceivable. For instance, a bus~-
ness's competitive strategy can affect the structure of the industry in
which it competes (i.e., Link 1 --* 2) when efficiency differences between
competitors in an industry lead to the exit of marginal competitors, and
the number and size of competitors in an industry are affected. Link I --4 3
is affected when the strategy pursued by a business leads to the firm accu-
mulating certain valuable resources (e.g., brand equity, customer equity,
and channel equity) and skills (e.g., product innovation and brand posi-
tioning skills). These resources are likely to be leveraged by the firm dur-
FALL 2002
ing subsequent time periods to enhance the competitive positional advan-
tages of its present and new product offerings (i.e., Link 3 ~ 1).
It is also conceivable to envision linkages between the drivers of com-
petitive strategy delineated in Figure 1--for instance, heterogeneity of
demand affecting the heterogeneity of supply as a consequence of the
strategic actions of competing businesses in an industry (Link 5 --~ 1 --~4)
(see Dickson 1992).
In the interest of space, we do not discuss the direct impact of the
macro-environmental factors on competitive strategy (Link 8 --4 1).
However, in a later section, we highlight the impact of macro-environ-
mental changes (specifically, technological changes related to the emer-
gence of the electronic marketplace) on the other drivers of competitive
strategy delineated in Figures 1 and 2.
2. Resource deployment activities related to Items 1 to 3 can be la-
beled broadly as sustaining innovations (Christensen and Overdorf 2000)
in that they seek improve the effectiveness of existing organizational pro-
cesses and strategies. Disruptive innovations refer to developments that
suggest fundamentally new ways of competing, frequently involving
new organizational processes and strategies. A wide variety of initiatives
by new entrants in the business-to-consumer sector (e.g., eBay.com,
Pricehne.com) and in the business-to-business sector (e.g., Freemarkets.
com) highlight the disruptive opportunities available in this regard. In-
cumbent firms also have shown a keen interest in developing such initia-
tives (e.g., Covisint, an ambitious business-to-business [B2B] initiative
in the automotive sector that is cosponsored by prominent incumbents
such as Ford, General Motors, and DaimlerChrysler). While we make
references to such developments where appropriate, a comprehensive
discussion of disruptive innovations in the context of the electronic mar-
ketplace is beyond the scope of this article.
3. In regard to the discussion pertaining to digital primary~ligital
complementary products presented here, we gratefully acknowledge the
insights shared by Dr. Venkatesh Shankar.
The authors are grateful to Dr. Tom Ingram for sharing his insights on
this issue.
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ABOUTTHEAUTHORS
P. Rajah Varadarajan is a distinguished professor of marketing
and the Ford chair in marketing and e-commerce in the Mays
Business School at Texas A&M University. His research and
teaching interests are in the areas of strategy and e-commerce.
His research on corporate, business, and marketing strategy-
FALL 2002
related issues has been published in the Journal of Marketing,
Journal of the Academy of Marketing Science, Academy of Man-
agement Journal, Strategic Management Journal, and other lead-
ing journals. He is coauthor of a textbook titled Contemporar?;
Perspectives on Strategic Market Planning. Dr. Varadarajan
served as editor of the Journal of Marketing from 1993 to 1996.
He currently serves on the Board of Governors of the Academy of
Marketing Science and as editor of the Journal of the Academy of
Marketing Science.
M a n j i t S. Yadav is an associate professor of marketing and
Mays Faculty Fellow, Department of Marketing, Mays Business
School, Texas A&M University. He obtained his Ph.D. in mar-
keting from Virginia Tech. His research focuses on electronic
commerce, firms' pricing strategies, and consumers' price per-
ceptions. He has published in a number of journals, including
Journal of Marketing Research, Journal of Consumer Research,
Journal of the Academy of Marketing Science, and Sloan Man-
agement Review. He is a member of the Editorial Review Board
of the Journal of the Academy of Marketing Science. At Texas
A&M, Dr. Yadav developed and currently teaches a graduate
course (Strategic Foundations of E-Commerce) dealing with the
strategic challenges and opportunities in the emerging electronic
marketplace. He served as cochair of the American Marketing
Association's 2001 Faculty Consortium on Electronic Com-
merce held at Texas A&M University.