Tag: perfect information

Where Competition Has Met It’s Match

On June 4, 2012

(update; as of November 2012, The Monitor Group headed by Michael E. Porter, the subject of this article, declared bankruptcy ending an era of C-Suite omnipotence strategy thinking. This article compares competitive strategy to collaborative strategy)

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The B-School staple “Porter’s 5 Forces” has been the mainstay of corporate competitive analysis since it’s creation in 1979 by World regarded Harvard Business School Professor, Michael E. Porter. Porter developed a model of industry analysis in his seminal book, Competitive Strategy: Techniques for Analyzing Industries and Competitors.

In short, a competitive company’s position in a market is threatened by five main forces acting on the corporate asset:

new competition,
substitute products or services,
bargaining power of customers,
bargaining power of suppliers,
intensity of competitive rivalries.

Any changes in these 5 forces would be cause for the company to re-evaluate their place in the market … thus leading to healthy consulting practices for strategists the world over.

The Rate of Change

In the 1990’s critics began to argue that Porter’s 5 Forces thesis assumes that the forces are static and non-related. At the time, the world was becoming more dynamic and more interrelated. For example:

Buyers, competitors, and suppliers can interact, and even collude.
Value cannot be created in the long run by constantly introducing barriers to entry
Participants in a market have the ability to plan and respond to competitive behavior.

As a result, they added another Force called “complementors” while introducing rudimentary game theory to explain the role of strategic alliances to the analysis.

Constant Change

Now in the year 2012, we routinely assume that all players can instantaneously access the same real-time dynamic market information from the cloud. We readily accept that all players will collaborate massively with whomever they want from anywhere in the World. As a result, we must assume that all five forces will change constantly and rapidly in real time.

Now imagine how 1990’s game theory would manage conditions where the company AND their competitors must continuously re-evaluate their position in a market under the circumstances of continuous change. In effect, nobody has the ability to compete with each other, they are competing with the game, therefore, they are cooperating to keep the game in play.

Is Collaboration Underrated?

If any player tries to introduce a barrier to entry, THEY risk get knocked out while the game continues without them. In fact, value is created by applications that remove barriers … and brokers are punished. All of these factors cause the game to self energize and improve as players preserve the asset rather than consume it.

The Value Game

It should not be surprising therefore that Porter’s 5 forces now resemble what we call the Value Game that we have described here (and here, and here). In the ultimate manifestation, however, The Value Game will play automatically through multiagent algorithmic game applications where tangible and intangible assets would be accounted equally in a Value Game. Individual would own, manage, and deploy their secret sauce of knowledge assets through their personal API that interfaces with the game that is most relevant to their highest abilities.

Where competition has met it’s match

Remember that little regarded fact of Capitalism: Markets are efficient where there is perfect information. This means that if everyone involved in a transaction has the exact same information as everyone else, the true supply can meet the true demand. Nobody ever said that this must be accomplished through competition especially if collaboration can do it better.

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How To Use Data Correctly

By Admin

On May 5, 2011

In General Information

There is a raging debate about data usage, privacy violation, and even epic technology data hacks. The reason is simple – data has value. Ultimately, data are convertible to value – in some form or another, including money. That means that data are a convertible currency. This is not necessarily bad, however, there is a right way and a wrong way to convert data into value.

The wrong way is to steal it from it’s rightful owners

You and I, by our motions, movements, communications and the pursuit of freedom and happiness create a huge amount of data. This belongs to each individual. When two or more people interact with each other – the data they create belongs to them, and nobody else. This is a very powerful relationship that others seek to exploit. Equally culpable are those who don’t protect their data and the data they share with people around them.

The right way to use data is to play a game

If you observe any game that people play – from children’s games to sports, and even gambling – they all have one thing in common. Each player has the same information as all the other players. The game is largely the ability to influence the information with data. Kids know the probability that a they will be tagged and influence their strategy accordingly – but they all play on the same field. In a basketball game, gravity behaves exactly the same for every player on the team. Poker players know the probability that their opponent will draw a flush – there are only 52 cards. Stealing Data is like slanting the playing field, stealing cards from the deck, or changing the influence of gravity.

Fair Market Value is a Value Game

The underlying assumption of market capitalism is that everyone has the same information. Two people holding the same Carfax report can have a rational and fair negotiation about the value of that used car. As such, the used car market is efficient. Package labeling, truth in advertising laws, and pharmaceutical disclaimers are an attempt to keep a market efficient so that the market can arrive at a “Fair Market Value”.

The Value Game

The Value Game being tested now at Social Flights is a real life game where real people fly to real places to do real things on real nice airplanes. There are no badges, tokens, little pink cows, wiggly worms, mayorships, or leader boards. The Value Game is a real economic game built on real data that real players create, own, and share only with other real players.

How to use data correctly

The Value Game will process a great deal of information to make Social Flights operate efficiently. Data must be normalized to calculate the probability that a flight will fill so that everyone can make a rational decision about price. Normalized data can be used to create a seat cancellation insurance policy to reduce price volatility. Normalized data can help travelers buy an option on game 7 of the World Series, before game 5 has ended. Normalized data can be applied so the player knows exactly how much of a discount to require from a vendor for accepting a coupon. Etc.

The Value Game does not need to know your name, address, phone number, or credit score to compile useful information. The Value Game does not even need to know such information about your friends, family, or professional relationships. Nobody needs to know your private information – unless they intend to use your data incorrectly. After all, thieves need to know who to restrict your data from – you.

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Treating the consequences, not the symptoms?

By Admin

On June 10, 2009

In General Information

Problems and opportunities are moving very fast. Problems are often so complex and so integrated across the globe that no single person can accumulate in a lifetime the experience needed to manage effectively. The “top-down” management structure no longer has a statistically relevant sample of prior experiences from which to make essential decisions. Actions without wisdom have unintended consequences for yet unknown victims.

The Wisdom of Management

Managers manage through experience. After many years in an industry, they can observe a situation and compare it to prior situations that they have encountered either through experience or formal education.

An effective manager can identify an issue, determine the probability that it will become a problem, and discuss the consequences of action or inaction. Then they make similarly calculated decisions that either solves or manages the consequences of the problem. The depth and breadth of a manager’s experience is called wisdom.

Duplicating Wisdom

In order to duplicate wisdom in a laboratory, scientists generate statistical events. By duplicating a scenario 20-30 times, a range of outcomes becomes statistically relevant for predicting future outcomes and identifying the way things can influence the outcomes. The idea behind the peer reviewed journals is to display the experiment to everyone for vetting. If it survives vetting, it becomes part of the human body of knowledge until otherwise challenged.

Managing consequences

The rate of change has become extremely high and problems too complex to manage. Vetting mechanism are breaking down like levies against the dam in industries such as Banking, Insurance, automotive, medicine, education, environment, etc. We are in a crisis of consequences where we can no longer manage the symptoms, only the consequences – forget about curing the disease.

Social Media: The Operating System of an Innovation Economy

The business plan of the new millennium will be the art and science of making information “less imperfect”. In a condition of perfect information, everyone associated with an issue has the same information as everyone else. Perfect information is what makes markets efficient and decisions rational. Agreement is perfectly mutual, supply and demand are perfectly aligned, all risks are perfectly predictable and cause and effect are perfectly transparent.

Wisdom of Crowds

No single human can accumulate enough experience in a lifetime to manage the totality of human problems. Perhaps the wisdom of crowds could be used to simulate one person that does. This cannot, however, be a random collection of people acting in haphazard process. The challenge is in finding the correct group of people who collectively replicate a condition of “perfect information”. Then we must transform the perfect information into knowledge. Finally, we need to transform that knowledge into innovation through entrepreneurial activity.

The Social Imperative

Social Networks need to form complete and detailed inventories of resident knowledge cataloged on a ‘bell curve’. Social Networks must codify social capital, creative capital, and intellectual capital so that scientific methods can be used to predict and assemble unique collection of knowledge assets that capture statistically relevant collections of experiences. That unique set of knowledge assets must then be deployed precisely in a market.

By all indications, this is the direction that the integration of social media is trying to go. It is now our social imperative that it gets there.

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Putting the System Back into Social

By Admin

On March 12, 2009

In General Information

Social Media is a demanding master with the uncanny ability to determine the absence or presence of checks and balances. As a self correcting market, what you do not say can have a greater impact than what you do say.

Of Profit and Peril:

There are great perils in getting social media wrong and great profit from getting it right. Kids posting negative images can be haunted forever. Corporations hawking wares can erode their brand. Egocentrics touting their own magnificence can find themselves isolated. Yet every day, people are controversial, people are selling stuff, and there are is no shortage of egomaniacs in social media space – what are they doing right?

Family Values:

Corporations and individuals are finding out that the social media space requires a much larger degree of disclosure than traditional media simply because markets are most efficient in an environment of perfect information – that is, when the buyer and the seller have the exact same information as the other when negotiating a transaction. Only then can the magic of supply and demand arrive at one correct “valuation”.

By contrast, an inefficient market of imperfect information cannot arrive at a true price, rather, somewhere in a range of prices. This is defined as volatility. When the price is unknown, transactions fail to occur, and markets devalue. Volatility is the enemy.

Perfect Strangers:

As entrepreneurs have increasingly perfect access to information, it is no longer a successful dominant strategy for corporations to withhold information. The corporation no longer competes with their nearest competitor; they compete with perfect information in the reputation market. So what may seem like the wisdom dance of an enlightened industrial complex is really a shrewd and long overdue acknowledgment that perfect information is in the best interest of everyone.

Neighborhood watch organization:

The next step for Social Media will be the most powerful manifestation of perfect information ever to be crowd sourced; systems of checks and balances. Where checks and balances are in place, information improves. If not, information decays.

An easy way to determine the presence or absence of checks and balances is to remove one element form the relationship and see if the other two become disassociated. Inversely, one way to creating checks and balances is to associate two elements by means of a third:

Triangulation:

1. Information, knowledge, and innovation; Without one, the other two have little value.
2. Social Capital, Creative Capital, and Intellectual Capital; Without one, the other two have little value.
3. Openness, communication, and accountability; Without one, the other two have little value.
4. Trust, self expression, and connections; Without one, the other two have little value.

Etc.

Putting the System back into Social

The difference between success and failure depend your ability to systemize the social media presence. Sound confusing? It shouldn’t be. When you think about it, there rules are not much different between managing social media relationships and off-line personal and business relationships.

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If It Ain’t Broker, Don’t Fix It.

By Admin

On February 25, 2009

In General Information

The function of the innovation economy is to improve information. This has the derivative effect of improving knowledge which, by definition, fuels more innovation. Monetization is easy if we simply improve information between any buyer and any seller in any market, anywhere.

…If it is, please do

For example, the job of a broker is to mediate the transaction between a buyer and a seller. There are real estate brokers, mortgage brokers, stock brokers, etc. Unfortunately, it is not always in the best interest of the broker to provide perfect information to both sides of the transaction. Rather, the broker provides the minimum amount of information needed to complete the transaction, within which they build their commission for rendering such filtration services.

Any B-school undergrad can tell you that a market is most efficient when the buyer and the seller have exactly the same information as the other when making a transaction; this is called “perfect information”. As such, “supply and demand” can do its magic. Resources of production can be perfectly allocated in the glorious capitalist system. The financial meltdown has shown us that the more complex the product is, the greater the deficiency in perfect information becomes.

The Holy Grail:

The great opportunity for social media is the ability to improve information in almost every transaction conceivable and create wealth. The next generation of social media strategists will rise to tremendous heights in this domain of the Innovation Economy. However, the Holy Grail of information improvement is the knowledge asset market itself:

For example: Corporations have a great deal more information about employees than employees have about corporations. People are encouraged to compete with each other, not to cooperate, for that carrot on a stick. They are trained to keep their salary a secret. The “job statement” is in a secret code language that is only understood inside the company, not in the general work force. Managers “broker” information by filtering it on the way up and on the way down the corporate structure. It is little wonder that corporations are having a tough time with the social media stuff.

When the layoff comes, the outsourcing begins, or the life change happens, the resume is often no better than a bingo card in a key word lottery. By the way, customers have even less information than the employees. Peanuts anyone?

The mothers of Invention

The knowledge market is the mother of all imperfect information markets. Social media is a single iteration away from greatly improving information in all knowledge markets. Nothing happens without applied human knowledge, as such, the potential capitalization of the next generation of social media applications is as big as the market itself – and it will challenge the very structure of the traditional corporation and associated filtration services.

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Economics of Innovation

By Admin

On September 16, 2008

In General Information

Every time humans invent better ways of doing things, the economy gets a little bigger. This is a simple idea. The cave dwellers discovered that they did not have to travel as much hunting and gathering if they could sharpen a rock enough to chop a tree down for firewood or for spearing animals. That same tool helped them to dig holes to plant seeds. By growing food and domestication animals, they could stay in one place and conserve energy. By living in cities, the division of labor led to more efficiency as the farmer, metal smith and rancher bartered their services. Enough surpluses were created so that a leisure class was free to develop philosophical thought leading to early scientific principals.

After a while, the invention of the printing press greatly advanced the availability of formal education. In the Early 1800’s, Eli Whitney stunned the world first with the cotton gin and then with his concept of “interchangeable parts” where he disassembled ten working muskets, scramble the parts and reassembled ten working muskets. What seems trivial today lead to great advances in the industrial revolution, becoming further refined in the manufacturing economy. Computers then ushered in the Era of Information followed by the knowledge economy that we live in today.

At each stage, there was a quantum leap in human productivity and financial wealth. Obviously the two are related.

If we look at this history from the big picture, we notice that each level of human development was derived from the prior level by integrating the tools of that prior level. As such, the knowledge economy was derived from the information era by integrating the computer tools leading to the Internet. The agrarian economy was derived from the hunter-gatherer tribes by integrating the wheel, wedge, and lever into agriculture and livestock. The industrial revolution integrated scientific principles from the Renaissance. This is fairly consistent.

If we look at this history from a microscopic view, we see that no single idea drove human development, rather, billions upon billions of little ideas from many diverse sources combined in unique ways to form larger ideas which then combined to form even larger advances eventually leading to those big innovations that we see as the milestones above.

Also, we notice that the over time, rate of change at which these ideas have been combining is getting faster and faster. The hunter-gatherer phase lasted 2 million years, The agrarian age lasted about 40,000 years. The scientific revolution lasted 1500 years. The knowledge economy is barely a single generation in play.

These are important concepts because later, when we build a mathematical model for the next economic paradigm, we will use a few tricks of calculus called the “derivative” and the “integral” to describe how things change over time so that we can measure and analyze productivity and wealth creation in the new economy.

Finally, we ask, what comes after the knowledge economy? There are two things that we can be certain of. The next great leap in economic development will be derived from the knowledge economy by integrating the tools that we developed in this knowledge economy. I strongly suspect that computer enabled society – or social networking will have something to do with it.

Welcome to the Innovation economy.

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The Next Economic Paradigm

Tag: perfect information

How To Use Data Correctly

Economics of Innovation

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