Increased information-sharing is altering the traditional dynamics of a firm
The swift diffusion of the internet exceeded the expectations of its most passionate supporters. In relatively short period of time, the conventional margins of society-economy-political interface underwent a transformation. A by-product was materialization of new business models and dismantling of industrial era driven narratives. Technology itself is not deterministic; its impact is a product of user behavior.
Alternative narratives emerge setting in process a metamorphosis of the dominant organization ecology. The constraints imposed by the physical economy are being unchained. Curiosity makes us explore the likely patterns emerging in the digital Gaia. No doubt, volumes of literature have emerged on the digital horizon. Noted authors Don Tapscott and Anthony Williams in their book Macrowikinomics describe current system as driven through networks leading them to describe its economy as resting on networked intelligence. To them collaboration, openness, sharing, integrity and interdependence are the key success determinants in the networked information economy.
Firm exists due to the presence of transaction costs. The vertical firm functioned as power structure with clear demarcation of rank, status, accountability, importance etc. If there was a market for organizational hierarchies, Coasian firm would command a lion’s share. Yet in recent times, organizations like Wikipedia etc demonstrate the presence of alternative edifice. Further, best talent may not be available under a single roof.
To sustain and press home the competitive advantage, leveraging the networks built outside the orthodox boundaries of the firm become exigent. This underpins collaboration. Firms like Local Motors (USA) allow the users to design and assemble cars themselves. Threadless.com allows the users to submit and vote on designs of t-shirts, the most popular being manufactured in the given year. Arguably, the success of Chinese motorbike firms like Lifan and Zongshen might be attributed to greater supplier involvement in design and production.
Furthermore, platforms like Facebook and Twitter generate huge quantum of information, indirectly reflecting a collaborative effort of users. Ironically, content creation on these platforms is a payoff of the user self interest, culminating in the resultant network externalities. Hierarchies have not disappeared but the formation and organization of hierarchies differ in great degree from the traditional turf. Vertical firm might not disappear in the immediate future nor may cede large territory; they do face competition from alternative power structures which one can term as hyperarchy.
In his Independence Day address, Prime Minister Narendra Modi called for construction of toilets in all the schools across the country. In a departure from the past, within matter of hours, the Ministry of Human Resource Development (MHRD) put on its website the status of toilets in schools across the country . There was real time data available on public utility. If any corporate or non-government organization were to adopt a school for construction of toilets, they would know exactly where and what are the requirements. Imagine if this were extended to host of services which government is expected to deliver like public health, education etc.
This defines openness. Openness gets associated with transparency, flexibility, expansiveness, engagement and so on. In Europe a platform like Eye-on-Earth gives the real time data for environmental indicators like pollution levels etc. In India National Train Enquiry System (NTES) gives real time (with some lag) on the movement of trains across the country. Given the availability of infrastructure, organizations are compelled to disclose data to their customers, vendors, citizens etc.
Information being confined to closed doors is being replaced by access to information as the default position. Critics do argue openness may not generate competitive advantage in the long run, yet the consequences of non-disclosure may be too high. Organizations that shy away from engagement with their stake holders be it vendors or the customers might find ground beneath them sinking quite fast. Market pressures and not regulations or statute induce organizations to open up their corridors of information.
Organizations possess intangible assets, much of which remain confidential. Often firms underutilize these assets. A possible reason is the firm’s inability to succeed when confronted with unfamiliar configuration of assets. Yet, these assets normally remain highly confidential. At times, sharing this information with rest of the community can confer certain advantages. Implied conversion of information into ‘commons’ through user agreements, licensing, spin-offs etc might be a good value proposition.
An underlying premise of open source software is the release of source code and allowing it being modified. This expedites the elimination of customer lock-in. NASA shared data of spatial exploration like maps of Martian craters to amateur astronomy community. Space research, encumbered by high capital costs with little explicit return on investment, makes sharing fertile as it diffuses these high capital costs. Further, results were swift and more accurate in comparison to traditional internal process.
Firms often follow what is termed as funnel based innovation approach. They may explore multiple leads but few innovations make it to the market. These can be the source of potential revenue through licensing and royalty fees etc. in industries like electronics, biotechnology etc. with high intellectual property (IP), and where legal battles are found to have limitations. Akin to mutual fund, evidence seems to suggest balanced IP approach with some protected and some shared might generate higher value.
On the New Year’s Eve, while the country was partying, the Indian Coast Guard was busy neutralizing a terror boat either smuggling weapons or planning an attack itself. As the news broke out the day later, the usual suspects were in full force terming the boat as belonging to petty smugglers or even worse a boat lost course in rough weather. In the world of yesteryears, not only the narrative might have gone unchallenged but possibly internalized as the central plot. Yet the vigilant social media called the bluff in the matter of hours. Sites like opindia.com were brutal in demolishing these conspiracy theories.
Leveraging information asymmetry to ensure the imposition of a narrative desired by a few is increasingly difficult. This is the premise for the idea of integrity. Lies, damned lies and statistics are countered. Integrity violations by political parties, business, nonprofit organizations etc are not only exposed in the social media, intensity of the resultant damage too is high. Further host of new business models that have sprung up ranging from Uber to Airbnb demand the presence of integrity across sectors. Reputation determines the ability to counter the possibility of adverse selection.
The spillovers diffuse faster and spawn host of new ecosystems. The information chain alignment would comprise of independent agents yet linked by fine thread akin to dominoes. Organizations have to be prepared for the externalities generated by others actions and likely implications of the same on their own organization.
It would be flawed to assert an absence of these principles in the industrial information narrative. Internet facilitated diffusion of organizational grassroot narratives in challenging the governance one. The expansiveness of information production resulted in opportunities for utilizing information in the manner organizations feel best to secure competitive advantage or negate the disadvantages if any.
Collaboration and sharing illustrate the limitations of Coasian theory of the firm besides pointing to life outside the Porterian value chain. Openness answers to an extent the problem of information asymmetry. Similarly besides redressing information asymmetry, integrity seeks to resolve adverse selection. Interdependence stresses on externalities and spillovers. These new fundamentals seek to situate the knowledge topography on a higher pedestal. They answer problems that insert limits on the reach of the market. While perhaps expanding market boundaries outward suggest liveliness, it would be prudent to remain guardedly optimistic at present.
Prashant Kulkarni teaches economics, a digital economy and globalization at a leading B-School. His area of interest lies in dissecting resource contestations and human behavior at the intersections of digitization, urbanization and globalization.
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