Excerpts from "Net Gain"
John Hagel III and Arthur G. Armstrong

Electric Minds is proud to present excerpts from John Hagel III and Arthur G. Armstrong's Net Gain.

In "Net Gain," Hagel and Armstrong outline their vision of the evolution of the on-line economy. They discuss how much companies need to spend, what they can expect to gain and when, and what skills will be required to organize and grow a virtual community. They claim that virtual communities represent an entirely new business model, and predict that over the next ten years, these on-line groups will be responsible for changing traditional industry structures and the organizations within them.

Commercial enterprises are relative newcomers to the on-line world, and so far few of them have made money there. Most businesses on the Internet and other networks today do little more than advertise their wares on "billboards" on the World Wide Web in the hope that a passing surfer will stop long enough to buy something. These old-media advertisements, dressed in their new-media clothes, are only one indication that marketers have yet to discover the secret to unlocking the revolutionary potential of the Internet and other networks.

Such diverse vendors as flower distributors, booksellers, liquor companies, and manufacturers of durable goods have rushed to develop sites on the World Wide Web where visitors can obtain information about the company and its products and send electronic messages. Some of the more sophisticated commercial sites allow visitors to play games and order products electronically. But rarely do these sites encourage communication between visitors to the site.

Like every communications network, the Internet is all about establishing and reinforcing connections between people. By giving customers the ability to interact with each other as well as with the company itself, businesses can build new and deeper relationships with customers. We believe that commercial success in the on-line arena will belong to those who organize virtual communities to meet multiple social and commercial needs. By creating strong virtual communities, businesses will be able to build membership audiences and use those audiences to bring in revenues in the form of advertising, transaction fees, and membership fees.

Some readers may argue that the Internet is not yet ready to meet the needs of their particular industry or market. Others may believe that the commercial potential of electronic commerce is unproven. Such skepticism is understandable given that as yet few businesses have discovered how to generate traffic at a Web site, let alone how to do business with customers when they get there or how to gather the kind of information from those customers that will interest other advertisers and vendors in participating in the site. These skeptics might argue that it won't be worthwhile competing on electronic networks until the economic model is more proven.

Understandable as their doubts may be, we suspect such skeptics have yet to understand fully or take into account the laws of increasing returns and the ways in which they're changing the rules of the game in manufacturing, service, and knowledge-based industries.

As Microsoft proved most spectacularly, harnessing the power of increasing returns means "the more you sell, the more you sell."

Of course, the converse is also true: increasing returns make it all the more likely, if you are on the losing end in a market, that you will fall farther behind. That's why preemptive strategies become so important in markets where increasing returns prevail; if you don't get there first, you may be too late. As the saying goes in Silicon Valley, "Speed is God, and time is the devil."

Who Benefits From Virtual Communities and Why

Power to the customer

Five defining elements of the virtual community business model combine to deliver this powerful value proposition:

1. Distinctive focus: Virtual communities are identified by a specific focus, to help potential members readily understand what kind of resources they are likely to find there and to help community organizers determine the full range of resources likely to be required to meet members' needs. For example, the focus may be on a geographic area (say, Atlanta or Paris), a topical area (sports or foreign affairs), a vertical industry (law firms or plumbing supply manufacturers), or functional expertise (market research or purchasing management).

2. Capacity to integrate content and communication: Virtual communities provide a broad range of published content (including, where appropriate, advertisements and vendor information) consistent with the distinctive focus of the community, and they integrate this content with a rich environment for communication. Communication capability;through bulletin boards on which members can "post" messages accessible to all, chat areas where real-time written "conversations" are conducted, and e-mail;allows members to maximize the value of this content, enabling them to clarify their understanding of the content by communicating with its publisher and to evaluate the credibility of the content by communicating with each other.

3. Appreciation of member-generated content: In addition to published content, virtual communities provide environments for the generation and dissemination of member-generated content. This is perhaps the single most empowering element of a virtual community. It gives members the capability to compare and aggregate their experiences, which in turn creates for them a fuller range of information and a perspective independent of vendors and advertisers on the resources that are important to the members.

4. Access to competing publishers and vendors: Virtual communities are organizing agents for their members. As such, they will seek to aggregate the broadest range of high-quality resources possible, including competing publishers and vendors, and to maximize the information and product options available so that their members can make more informed, cost-effective decisions on what resources they need.

5. Commercial orientation: Virtual communities will increasingly be organized as commercial enterprises, with the objective of earning an attractive financial return by providing members with valuable resources and environments through which to enhance their own power. It is precisely this profit incentive that will shape the evolution of virtual communities as vehicles to augment the power of their members. Members will value this power and richly reward the community organizers that deliver it to them most effectively, abandoning those which compromise on this value proposition. It is in giving a net gain in value to their members that community organizers will realize a substantial net gain of their own.

Customers aren't the only ones who stand to benefit from virtual communities. Vendors will find in the virtual community a powerful vehicle for expanding their markets;as long as they don't let competitors or an independent third party beat them to the punch by capturing the primary loyalty of their customers.

Virtual communities help vendors expand their markets on two levels: through capabilities that are unique to the virtual community business model and through capabilities that are more broadly available in network-based environments. Elements specific to virtual communities that help vendors expand their markets include the following.

• Reduced search costs: Vendors and customers can find each other more easily because virtual communities provide an environment for aggregating relevant participants and information about those participants.

• Increased propensity for customers to buy: Customers perceive less risk and experience more excitement. By aggregating a broad range of information and options for its members, community organizers help to reduce the perceived risk of purchase. By providing an engaging environment where members interact with each other, as well as with vendors, excitement around "hot" products can be quickly generated.

• Enhanced ability to target: Virtual communities will accumulate detailed profiles of members and their transaction histories, not only with a single vendor but with multiple vendors across an entire product category. Ownership of these profiles is likely to shift over time to the community members themselves and will be accessed by vendors only on terms established by individual members. Nevertheless, members, assisted by the community organizer, will have significant incentive to provide selected vendors with access to this information.

• Greater ability to tailor and add value to existing products and services: Access to integrated transaction histories and the ability to interact with customers and potential customers improve the vendor's ability to understand individual buyer needs. By aggressively using this information to tailor products and to create product and service bundles, vendors can both expand the potential customer base and generate more revenue from each customer.

• Lower capital investment in bricks and mortar: Many vendors will not have to build costly branches or retail outlets to reach and sell to target customers in an on-line environment.

• Broader geographic reach: Vendors will be able to reach much broader customer segments, freed from geographic constraints.

• Disintermediation potential: Given both the reduced need for investment in bricks and mortar and the enhanced ability to capture information about their end customers directly on-line, product manufacturers and service companies will be in a better position to deal directly with their end customers without the assistance of traditional intermediaries (retailers, wholesalers, distributors, or brokers).

The Challenge of Change

Coming to a new understanding of where value can be created will require perhaps the greatest cognitive leap for the organizer of the virtual community. This is because recognizing the new source of value creation means switching allegiance: those organizations most firmly aligned with their members, those that represent members' interests in dealing with vendors;not those which see their mission as helping vendors to sell more effectively to customers;will be in the best position to capture value. The business model thus shifts from one in which the organization "pushes" products or services on target customers toward one in which it acts as an agent for customers, representing and championing their interests as they seek improved access to resources. In this way, virtual communities create "reverse markets," where customers seek out vendors and deal with them on a much more level playing field in terms of information access. This shift in power has three key implications:

1. Members must be given the tools necessary to wield their new power.

2. Members must be given ample opportunity to wield their new power.

3. Members must be given the chance to maximize the value they receive from information about themselves.

Join the discussion of "Net Gain" in the Wealth of Networks conference.

Reprinted by permission of Harvard Business School Press. Excerpt from Net Gain by John Hagel III and Arthur G. Armstrong. Copyright © 1997 by McKinsey & Company, Inc.; all rights reserved.

clm said:

What strikes me as important about WebTV is that it is a proof of concept for the notion that the "client-side" can itself be implemented using a client-server model and extremely inexpensive clients. Or, another way of saying it, WebTV exploits the three-tier model of distributed app deployment.

Microsoft (and others) have been promoting this model for quite some time.

Join the conversation!

Most Active Topics:

Topic 30 The Global Brain

Topic 29 The Information Revolution - Paradigm Shift or Paranoid Shaft?

Topic 18 Knowledge Workers: Leading, Keeping

All Wealth of Networks Topics

About the authors

Click here to
buy "Net Gain."

As Microsoft proved most spectacularly, harnessing the power of increasing returns means "the more you sell, the more you sell."

The benefits of the virtual community go to both customer and vendor. The benefits to customers flow from the very characteristics that define a virtual community. The benefits to vendors have to do with new opportunities to expand their markets.

The virtual community organizer must focus on two imperatives to deliver the value proposition: aggregating members and aggregating resources relevant to members. These two imperatives in turn suggest a third: aggregating information profiles about members' use of the network and the transactions they carry out on the network.

Bridging the profound gap between the way traditional businesses are run and the way virtual communities will be built and run represents the single greatest challenge for senior management of existing companies. Most will need to adopt a mental model very different from the one they have in place. They'll need to rethink their notions of where value can be created and how they can capture value.

Platform Wars III: Clone Wars
The early years of personal computers: Apple, IBM, and Microsoft battle for control of the desktop.

Excerpts from "Net Gain"
Excerpts from "Net Gain," by John Hagel III and Arthur G. Armstrong.

Platform Wars II:
The Great Game
Share dominance: the business battle for all the marbles.

Complete Archive