It's not just generals who fight the last war. Executives do, too.

As executives start to struggle for supremacy in electronic commerce, many are using outmoded tactics. In particular, executives are mistakenly resorting to saturation advertising to build their brand and customer base on the Web. A recent study estimated that companies spent $351 million on on-line advertising in the first quarter of 1998, some 2 1/2 times the year-earlier figure. Much of that money went for exclusive advertising rights on high-traffic "portals" such as AOL and Yahoo. Because of the misguided notion that a few portals will evolve into the equivalent of the three big TV networks, some companies are absolutely fixated on them. Disney is spending almost half a billion dollars to buy 43% of Infoseek and promote it. AT&T offered $30 billion for AOL and was turned down.

Broadcast advertising was the weapon of the last war. It was designed to exploit television's captivating hold on viewers. The Internet, though, isn't just a broadcast medium, and the heydays of the portals are limited.

Sure, the Internet lets companies broadcast messages. The Internet also lets customers respond quickly to advertising. But, with the Internet, the customer is in control. He can easily filter out or ignore ads. And—this is the part that most companies underappreciate—customers can communicate with each other about the companies that want to sell to them.

The Internet creates types of dialogue that differ profoundly from broadcast advertising. To benefit from the change, companies need to stop focusing on portals and start building "communities of value."

Companies can create communities of value by collaborating with customers to generate new classes of products and services. Companies can also position themselves in the center of communities where customers benefit by collaborating with each other. Some of the principles for constructing communities of value may seem odd—they include "celebrate the negative"—but the effort will be worthwhile because of the enduring relationships that will be built with customers.

Here are four of the principles:

GIVE AWAY AS MUCH INFORMATION AS YOU CAN. Even though we've been conditioned to protect information, nowadays it will likely become available no matter what we do. Better to just give it away. Doing so will let you make up for its loss, because you can use your gift of valuable information to draw people to your site.

Playboy, for example, saw that its magazine readers were scanning and distributing Playmate pictures over the Internet, so it started giving them away on its own site. Once people reach Playboy.com, the company offers them greater access to photos and interviews for $60 a year. So far, 28,000 people have signed up. Playboy's site also sells videos, music, and Playboy-branded merchandise, making electronic commerce its fastest-growing area. [See interview with Christie Hefner, Playboy's chief executive officer.]

CELEBRATE THE NEGATIVE—NOT JUST THE POSITIVE. Once you draw visitors to your site, encourage them to talk about how you're doing. Make sure other customers can see and comment. This principle means giving customers a venue to complain, so be ready to take your lumps where you deserve them. But you'll learn a lot, both from your good and your bad experiences. As long as you intervene quickly to address problems, you'll also impress customers with your confidence and responsiveness.

Celebrating the negative might seem counterintuitive, but recognize that troublesome issues won't go away just because you ignore them. The problems may wind up publicized in a forum that is out of your control, such as the Web site set up by a frustrated United Airlines customer. His Web site, www.untied.com, soon attracted other angry United fliers, whose collected stories of poor service would make any company cringe.

UNLEASH THE COLLECTIVE WISDOM. In other words, help community members share knowledge with each other.

Web pioneer Firefly.com launched an early killer app by offering music recommendations to community members based on rankings provided by those with similar tastes. Firefly created a snowball effect. Each new member, each new ranking made the whole system that much more robust for the next potential user. The collective-wisdom technique is now being applied in numerous retail categories, such as books and movies. The sharing of results information applies to many service industries, too. The Buyers Health Care Action Group in Minneapolis, for example, has members rate their satisfaction with medical clinics and hospitals and shares the results with members.

ENSURE VALUE FOR THE COMMUNITY, NOT JUST YOURSELF. This may seem obvious—a member won't stay in a community unless he gets something out of it—but even some well-known communities don't always follow this principle. AOL, for instance, may be hurting itself through its raft of high-profile deals with advertisers. Members may feel that AOL is abusing its role as community organizer by essentially selling members to the highest bidder. AOL has experienced this sort of reaction before. When it said it would sell member phone lists to merchants, Chief Executive Steve Case received so much e-mail in the following 24 hours that he reversed the decision.

Amazon.com, the poster child of electronic commerce, is also taking risks. Amazon has assembled a network of 100,000 Associate sites, which refer book buyers to the Amazon site. But these are all one-way referrals. Amazon provides no links back out to other sites. It also strictly controls all conversations among its visitors, limiting their ability to share opinions and information. As one Associate puts it, Amazon comes across as a greedy casino-like operation with no clocks on the walls and exits that are hard to find.

The four principles I've laid out have proved hard for many executives to accept. They're accustomed to a broadcaster's control of its information and brand message. But, in the world of the Internet, customers will have an awful lot more information and may have as much control over your brand as you do. So you have to adapt.

I often tell the story of a prominent beer maker that asked a colleague whether it was time to establish a Web presence. A simple Web search found that there were already thousands of enthusiastic consumers with Web pages carrying information about our client's product. The company's initial reaction was to demand that the unauthorized Web sites be taken down. Finally, we convinced the beer maker that such public displays of affection are a dream come true.

Building such devotees into a community based on sharing and trust can produce relationships that last a lifetime—or at least a lot longer than relationships based on advertising. The most successful brand managers in the world of electronic commerce will be the ones that enhance and channel community energy, rather than fear it.

Mr. Mui is executive editor of Context and a partner with Diamond Technology Partners. Following the principles of this article, he and Larry Downes give away the entire text of their recent bestseller, Unleashing the Killer App: Digital Strategies for Market Dominance, at the killer app community Web site, www.killer-apps.com. He can be reached at chunka@diamtech.com.