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In Unchained Value, Internet expert Mary Cronin introduces a radically new strategic model for organization that she calls the "digital value system." It is focused not on static, internally focused "chains" but on dynamic, external webs of relationships that take full advantage of the power, flexibility, and opportunity of the digital arena.
One of the keys to the new model, she writes, is an understanding that the old strategy of hoarding information to maximize its value is no longer appropriate. "The Internet undermines competitive strategy based on information scarcity," she writes, "by making every Web site into a potential channel for free distribution of anything and everything that can be transmitted digitally."
"In a situation where secrecy has become almost impossible," adds Cronin, "the rationale for protecting information is less compelling, and the pressure to turn information into value as quickly as possible has increased."
In this excerpt, Cronin describes three degrees of information sharing that can help companies determine when it is to their advantage to share information openly and when to keep it under wraps.
Information sharing across all corporations, from the most restrictive type of dissemination to the most open, consists of three distinct forms of interchange, namely, information exchange, information access, and information pooling. Each of these plays an important role in business-to-business interactions but, as we shall see, makes very different contributions to the distillation of information and its conversion into action.
Information Exchange
Information exchange, the first degree of information sharing among corporations, deals in the minimal amount of information needed to conduct business at all and typically stays within the boundaries of what is required to take the next step in the desired transaction. Information exchange includes, for example, the transmission of specifications, order quantities, desired delivery times, and data attendant to the negotiation of price.
At the information exchange level of information sharing each firm typically sends and receives only what is required to consummate a specific deal with another member of the value chain. A defining characteristic of information exchange is that it is "pair-wise." That is to say, the information is specific to the business at hand and is not generally available in the same way at the same time to all business partners. When Acme quotes a price for widgets to Beacon on Wednesday for delivery on Friday, only Acme and Beacon know the details of this quote. The price and delivery schedule that Acme quotes to Capital on Thursday is not necessarily the same and in the pair-wise mode Acme ensures that Capital has no way of finding out about the offer just made to Beacon.
The information exchange process is easily captured by forms and templates because it is highly formalized and repetitive. Much of the data exchanged between companies at this level is simply details about a specific transaction that is covered by standing agreements and contracts. Acme and Beacon have already established the widget specifications and the general purchase terms. The only new information concerns availability, spot purchase price, and delivery schedule. This type of information has become the grist for electronic data interchange (EDI) because it requires almost no human judgment and can be managed by computers on either side of the exchange.
Even though it is routine and limited in many ways, information exchange yields value and in fact provides a hint as to why information sharing in general gives more than it takes. If companies were unwilling to quote prices or commit to delivery dates to anybody else, there would not be much of a marketplace. Firms have to share information to conduct business, and the predictability of this routine exchange lends itself to the type of efficiencies that can be harvested by EDI systems.
Making even the most routine information exchange as efficient as possible yields a secondary value. It reduces the bureaucratic friction in the business processes between two firms. This efficiency is created not by the information itself but rather by the trust that it comes wrapped in. What makes EDI work isn't the computer programs shared between the firms but the contract that they sign before the first bit travels down the wire. The contract creates the trust, which in turn makes the bits instantly and unhesitatingly actionable. In our example, Beacon has established a prior agreement with Acme about the size and performance of the widgets and will proceed to pay the agreed-on price for this shipment based on that existing contract. Trust is an information catalyst. It accelerates the process of turning the information into action. Lack of trust on the other hand is an action inhibitor. If information is not reinforced with trust in some form or another, then it will not be acted on for fear that the actions would prove to be wrong seen in the light of the correct information. If Beacon has to measure all the widgets before authorizing payment, that would certainly reduce the value of the information that the shipment had arrived.
Information exchange typically does not alter the relationship of the two organizations involved in the exchange nor change their place in the value chain. No reading is provided as to whether or not what one is selling or buying should be changed in any meaningful way. At this level, firms do not get to see very far into each other's business and are not motivated to consider how shifts in one company's internal processes might be of mutual value. All the firms see is essentially quantity ordered and price paid, and thus these are the only two variables that can be manipulated. How many do you want and what are you willing to pay? A firm can get better and better at what it does, but it receives few signals to do something different. The value chain and the role of each firm in it tends to remain stable, as does the relationship of each firm to the others as long as there are no significant changes in the external environment.
Information exchange leads to relationship optimization and the continuous improvement of the accuracy and efficiency of communications between each pair of companies. The relationship of each of the firms to each other is constantly adjusted so that that particular relationship—in isolation from all the other relationships—runs at peak efficiency. If this is the case, increasing the efficiency in one relationship may simultaneously decrease the efficiency in another, so if one does reach a steady state, it is one of uniformly distributed inefficiency rather than a marketwide minimum of inefficiency.
Information Access
At the second stage of information sharing, information access, the relationship between two firms engaging in business changes dramatically. Information access is characteristic of the strategy used by Dell, Ford, and other companies that have opened up their supply chains to outside participants. Once firms allow their suppliers and their customers to access internal operational databases, they are opening the door to a much more advanced level of partnership with these entities. Not only is information directly relating to a firm's external relationships to other firms exposed, but the information behind the decisions driving those relationships may also be available or easily inferred. Engineering drawings, product plans, market forecasts and projected needs and requirements are all pasted on the side of the barn for all participants to see. Of course, the process of information access can itself unfold in different stages and levels of disclosure. Perhaps the firm will start by simply letting a limited number of preferred suppliers have access to the relevant inventory information and production schedules in the corporate intranet. Ford, for example, expanded and streamlined its just-in-time supplier relationships by opening its intranet to the suppliers of key auto and truck components and letting those suppliers organize direct, as-needed delivery to the appropriate assembly plants. At a more advanced stage of information access, firms open themselves to full access, with the attendant openness to changing direction at the request of partners for the mutual benefit of all.
Dell has made the practice of shared information access into a finely tuned strategy for cost savings and efficiency in inventory and production management. By shifting the responsibility for inventory management and component assembly to its suppliers and partners, Dell has redefined the business model for the entire industry. This new model puts the squeeze on distribution channels and on manufacturers such as Compaq that have not been as aggressive in implementing shared information strategies. One frequently discussed benefit of this system is that Dell saves both time and money by moving responsibility to its suppliers in exchange for open access to information. Even more important in terms of shaping Dell's overall direction is the insight that mutual information access provides to Dell's management.
It is important to note that Dell does not limit itself to a one-sided type of information sharing, where the suppliers and customers see only the orders required for the specific assembly and shipment of a particular computer. This would be an actionable window into Dell, but it would not challenge Dell to rethink its internal decisions. Instead, customers are also allowed insider access to Dell's future product and development plans and are encouraged to share the same with Dell to better synchronize and meet each other's needs. Dell has dubbed this process "direct commerce integration" and notes on its Web site, "More than 30,000 companies now have customer pages on Dell's site, which include not only configurations their IT departments have approved, but also future product road maps, pricing guidelines, and just about any other piece of information that is relevant to a transaction." 1
With direct commerce integration, all the parties that access information through Dell recognize a mutual value in coordinating and occasionally changing development directions. As their business needs change, participants have a place to make that known to Dell One or two corporate customer shifts might not be enough to stimulate the computer company to respond with any major rethinking of its own development plans, but if hundreds or thousands of corporate customers start to register a particular need, the company will be in an ideal position to turn this insight into action much more quickly than its competitors.
Unlike information exchange, information access tends to equalize the information holdings of all of a firm's trading partners. Clearly there is an efficiency gain to the firm because now it just maintains one database and one access channel, whereas in information exchange, it had to manage the data for and the channel to each trading partner. But this IT savings is secondary to the real value of information access. An open access database says to the marketplace, "These are the facts, and these are my decisions. Conduct yourself accordingly." This invites the firm's trading partners to provide additional facts or to offer alternative analyses of the existing facts in order to affect those decisions. In effect, it invites these marketplace partners to share in the decision-making process and to actually improve the firm's factual foundation and thus to improve the firm itself.
Information access does bring some risks along with its benefits. Dell's plans and product line information are much more exposed to scrutiny and competitive response. But the value to Dell of opening up its internal processes to the marketplace is immense. It has allowed the company to totally rethink the process of computer manufacture and distribution and has given it a window into the development and technology plans of thousands of its largest and most important customers. As long as Dell is able to turn these insights into timely action, it will stay ahead of its competition because, even when they look at identical information, they will not be in a position to pull ahead. In a very real way, Dell's continuous information access has primed the company to be ready for constant action, and this effect is much harder to replicate than the information itself.
Whereas information exchange leads only to a limited benefit for each participant in the form of pair-wise relationship optimization, information access leads to firm optimization. The segmentation of the overall market remains fixed, but the information necessary for a firm to reconsider its role within that segmentation is now available. By gaining visibility into its trading partner's processes, a firm can make suggestions to better synchronize those processes with its own, yielding enhanced value for both. Partners can actually change the relationship between themselves rather than just tune a fixed relationship, and they can use these changes to establish a sustainable lead in the critical processes for their product.
Information Pooling
The third and, for the purposes of our discussion, most extensive form of information sharing is information pooling. At this stage, all firms in the value system contribute to and access a common database. Governmental statistics and industrial standards are obvious examples of information sharing through pooling. In the Internet context, information pooling is best exemplified by the rapid rise of infomediaries and Web portals that are focused on a particular industry. There are now thousands of such specialized vertical portals, or vortals, covering all the major industry sectors along with every imaginable product family, from cow embryos to molded plastic components and from batteries to blood plasma.
The primary objective and advantage of information pooling is cooperative action: competing firms work together to take inefficiencies, which benefit no one, out of the marketplace. The recent spate of industry consortia set up to deal with online standards and technology development is another prime example of information pooling. Consortia are creations of the information age. Common information wants to be converted into cooperative action, and traditional standards bodies were simply too slow in making this transformation. In fact, this is the quantum change in information handling that the Internet has wrought: it's not what you know; it's how fast you use it. Information does not deliver anything near its potential value until it has stimulated action.
With information pooling in place, not only do all firms in a digital value system see the same data, they cooperate in altering the values of the data. The reality represented by the data becomes the common platform—the given wisdom, the weltanschauung—that is assumed by the firms and hence all the customers of the market. Information pooling, therefore, leads to market optimization, and this may, in fact, mean market resegmentation. In effect, the firms in the market form an information-driven keiretsu. Raw, nose-to-nose competition declines, individual roles are assumed, and effort is spent on efficiently delivering a product with a minimum of intramarket friction and competition.
Figure 4.1 illustrates the progression we have described in terms of the amount of shared information and the degree of market efficiency achieved. As more companies join the Internet economy, the incentives to work toward efficient markets are on the rise.
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Given the characterization of information sharing and the description of the value created at each plateau, as shown in Figure 4.1, it becomes easier to discern the increasing value that is generated by information on the Internet. As we move from information exchange to access to pooling, two new kinds of information are brought into being. First, all market participants start to see global implications of the information rather than just local impact. This means they have a more complete and more accurate picture of the state of the overall market. Second, the position of the firms in relation to each other is revealed. X knows what Y knows, and Y knows what X knows, and X knows what Y knows about what X knows, etc. What X knows is part of the global state of the market. but it is meta-state. We can separate this information and its potential value from simply knowing the basic facts of how many widgets X sold.
The effectiveness of a market as seen by the customer is, however, not directly dependent on simply the amount of information that circulates within it. If none of the firms change their behavior based on different levels of information, then the information has no effect on the market. Changing the amount of information in the market or the distribution of information through the market does not of itself lead to a cycle of increasing value. What the customer cares about is the change—the responsiveness—of the market under various conditions. In the case at hand, the customer cares about the responsiveness of the market with respect to various degrees of information sharing. How do the three information sharing regimens perform on this benchmark? Table 4.1 ranks information exchange, information access, and information pooling in terms of the amount of information available and the incentive for action that it provides.
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In the information exchange regimen, information concealment is part and parcel of the overall culture of the market. Firms don't take very big chances because there simply is very little information on which to base change of any sort and there is no incentive to change. In fact there is every incentive not to change. A firm orders what it needs, gets the best price it can, produces for its customers, and goes back to the beginning. Even though there may be free-radical value in the interstices of the market, firms will never cash in on it because they can't find it.
In the information access regimen, information is plentiful, but there is only a weak call to action. Firms can see what other companies are doing and make suggestions for coordinated change, but they can just as easily simply engage in self-tuning and adjust their own behavior to optimize on a day-to-day basis.
In the information pooling regimen, firms have both the information and the incentive to act. Indeed each firm must act because action is the only basis of competitive edge. The market, just like a stock market, is driven by participants' taking advantage of information. In other words, the market becomes more and more like an open auction. Companies that are still at the stage of basic information exchange will be hard pressed to keep up with these developments.
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