Capturing Value From Free Digital Goods

Scientists refer to portions of the universe that they know exist but can’t easily measure as “dark matter.” As direct measurement is difficult, they study the indirect gravitational effects or galaxy rotation speeds to understand the phenomenon. Similarly, in the digital economy a broad range of “dark” elements are free and essentially limitless, and traditional tools can’t measure them.

One of the best-known examples of this phenomenon is Wikipedia. People use Wikipedia at no charge, and the content is created primarily by contributions from volunteers. Because no money changes hands (except for donations to help pay for technical infrastructure and office staff), Wikipedia has almost no direct impact on gross domestic product (GDP). Moreover, because Wikipedia has replaced physical and digital encyclopedias that people paid for, it has likely had a negative impact on GDP. Nevertheless, Wikipedia provides significant value for consumers, even if its economic worth is difficult to measure.

For companies, tapping into a faceless crowd for contributions to their innovation or production process can be daunting. Managers worry about the quality and availability of product support, and about security and intellectual property issues. And there are serious questions about who’s responsible if or when something goes wrong. However, in my research I’ve found that companies have opportunities to capture substantial value by using digital goods created by external communities and even greater value by paying their employees to give back and help build such goods, even if competitors are able to use them for free.

Consider open source software (OSS), which is produced through crowdsourcing, is generally free, and is critical to the digital economy. Over the past decade, OSS, long considered the purview of geeks, has played an increasingly important role at companies. More than 60% of web servers run OSS, and many of the technologies used for big data analytics are open source. In recent studies, I have found that using OSS and contributing to its creation allows companies to capture value more efficiently.

Effects on Productivity

There has been a long-running debate about whether OSS truly saves companies money. Although the software is free, it has limited official support and can require specialized technical knowledge to implement. However, until this point, the productivity impact independent of any cost savings has gone unexplored. For my forthcoming article in Management Science titled “Open Source Software and Firm Productivity,” I measured the productivity impact of managers’ decisions to use free and open source software by examining data on technology usage from 2000 to 2009 at more than 1,500 U.S. companies in industries such as manufacturing, technology, and retail.

The results showed an important dichotomy: Companies that were heavy IT users or in IT-producing industries (such as computer manufacturing, software publishing, and data processing) saw an immediate positive impact on productivity; other companies showed no productivity increases in the year of adoption and only small increases later. For IT producers, an increase in the amount of free OSS used at the company led to a moderate, but significant, increase in value-added productivity. The results were similar for heavy IT users. The positive impact on productivity from using OSS was larger for smaller companies, for which capital availability was apt to be an issue. In the paper, I argue that these benefits arise from both the cost savings associated with OSS and the ability of the company to tap into the collective wisdom of the crowd.

Learning by Contributing

In addition to being consumers of OSS, some companies support its creation — even paying employees to contribute to it. In another forthcoming article (in Organization Science) titled “Learning by Contributing: Gaining Competitive Advantage Through Contribution to Crowdsourced Public Goods,” I look at the impact of this type of support in practice. Although it has long been argued (by Michael Porter, Jay Barney, and others) that a company’s competitive advantage is tied to its unique resources or capabilities, as the economy becomes more information-based, companies need to take greater advantage of free digital goods. Given that such goods are available to anyone, it’s incumbent upon companies to find ways to use them strategically as inputs into their innovation and production processes.

Although paying one’s employees to create a good that competitors can use for free might seem counterintuitive, evidence suggests that contributing to public goods teaches companies how to capture value by using them more effectively than those competitors that don’t contribute. This is especially likely with regard to OSS, where contributors receive feedback from the crowd, much of it from people who have expertise in that piece of OSS.

To explore how this works, I paired the technology usage data from a subset of companies in the Management Science study with data from the Linux Foundation on code contributions to Linux, the world’s largest OSS project. The results show that contributing companies were able to capture up to 100% more value from usage of OSS than their noncontributing peers, and that higher levels of employee contribution led to greater productivity. The benefits came primarily from content contributions, where contributors wrote the code, as opposed to editorial contributions, where contributors approved code written by others. This seems logical: Editorial contributions tend to come from more-senior members who already have a great deal of experience and have less to learn than newcomers.

These findings have important implications for managers making technology-related decisions within their enterprises. It’s likely that companies in IT-producing industries and companies that are heavy IT users already have assets, such as an IT labor force and IT infrastructure, that will allow them to realize productive value from implementing OSS. Other companies may benefit as well, but their productivity boost will depend on how quickly they can develop the ability to extract value. Given that small companies appear to derive bigger benefits from using OSS, large companies may want to evaluate the potential benefits carefully before changing existing IT infrastructure.

The advantages of contributing to the creation of OSS are clear. Odd as it may seem to pay employees to create software that competitors can use for free, doing so enables companies to add to their technological capabilities and gain an advantage. Companies that support crowdsourcing activities are likely to benefit from using crowdsourcing communities to promote innovative ideas that feed into the production process, potentially leading to further competitive advantage over their rivals. In addition, supporting crowdsourcing activities also contributes to societal welfare and helps society progress to the next stage of the digital revolution.


MIT Sloan Management Review

Social value, procurement and a smart city vision

“Smart cities are cities that utilise the Internet and Digital Technology to enhance the quality of life, performance of services and reduce costs by optimising energy consumption. The focus is on creating a framework with good connectivity and access to real time information for setting up an efficient management system that establishes a relationship between citizens, service providers and administrators.

It ensures that citizens actively engage in improving the overall productivity and sustainability of services by equipping cities with basic infrastructure” (Aakash, 2017). Smart Cities market is projected to grow from $ 386.55 billion (€311.28 billion) in 2014 to $ 1,386.56 billion (€1116.57 billion) in 2020, at a CAGR of 20.48% over the forecast period (Aakash, 2017).

In summary:

The application of a wide range of electronic and digital technologies to communities and cities.
The use of ICT to transform life and working environments within the region.
The embedding of such ICTs in government systems.
The territorialisation of practices that brings ICTs and people together, to enhance the innovation and knowledge that they offer (Aakash, 2017).

The smart city model can focus on a variety of areas: public transport, green spaces, waste collection and social sustainability, says Brian Bishop, CEO, Data Performance Consultancy Limited.

London is driving smart innovation in areas such as public transport through working with start-up companies like CityMapper (CityMapper, 2017).

Bristol created the Smart Energy City Collaboration to capture, analyse and act on smart energy data for the benefit of people and businesses across the city (Cse, 2017). Manchester has established a “smart quarter” (Triangulum) to pursue the objective of becoming one of the largest knowledge driven low carbon districts in Europe (Triangulum, 2017).

It is important to realise the relevance of the community and therefore not isolate or create “silos of data” as has been the practices over decades of government services. The word “Interoperability” must now be the focus of delivery and this should run through to all services across a region.

Through the introduction of a Smart City infrastructure the ability to strategically manage city wide services becomes more sustainable, “Information is a source of learning. But unless it is organised, processed, and available to the right people in a format for decision making, it is a burden, not a benefit.” (Pollard)

By facilitating this you could then deliver any future potential devolution plans. This will also allow for continual improvement strategies and build the world’s first true Smart City and the benchmark for all cities to follow. Procurement needs to be the central pillar that you build this around.

ONS (2016) report the public sector spends approximately £268 billion (€303.96 billion) per year, equivalent to 14% of GDP. Taking a strategic approach to government procurement presents the opportunity to support investment in innovation and skills, strengthen UK supply chains, and increase competition – by creating more opportunities for SMEs. This means creating the right conditions to put UK supply chains in the strongest possible position to compete for contracts based on best value for the taxpayer.

The public sector can use its demand – particularly when its needs are novel or complex […]

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The Social Responsibility of Business Is to Create Value for Stakeholders

Freeman
Elms

R. Edward Freeman is a professor of strategy, ethics, and entrepreneurship at the Darden School of Business at the University of Virginia. He tweets @re_freeman. Heather Elms is an associate professor of international business at the Kogod School of Business at American University in Washington, D.C.

On Sept. 13, 1970, economist Milton Friedman suggested that, as the headline to his essay in The New York Times Magazine put it, “The Social Responsibility of Business Is to Increase Its Profits.” While we hear from many executives about additional social responsibilities, all too often those executives will revert back to arguing, “…but our first social responsibility is to maximize shareholder profits.”

Businesses that want to be successful in the 21st century need to be saying and doing something else.

Here’s what we argue: The social responsibility of business is to create value for stakeholders. That means its customers, suppliers, employees, and communities, as well as its shareholders.

The stakeholder approach aims to create a new narrative about business — a new story — that enables great companies to make our communities and our lives better through the creation of stakeholder value, rather than simply profit to shareholders. The story includes a recognition that if we want the outcome of business to be a more responsible capitalism, it requires stakeholders to value business responsibility.

Why We Need a New Story

The Great Recession of the late 2000s should have made one thing abundantly clear: The way we have been encouraged to think about business is no longer appropriate — if it ever was. In the 21st century, there is too much complexity and too much uncertainty for a focus on “maximizing profits this quarter” to work very well. The landscape is littered with companies that tried this, and they simply did not understand — either because they could not understand or refused to understand — the complex consequences of their actions. This led to the demise of investment banking company Lehman Brothers, the bankruptcy of automotive company General Motors Corp., and the crash of countless smaller businesses. It cost U.S. citizens trillions of dollars.

If you add to these debacles a whole series of high-profile, far-reaching scandals (Enron, Madoff, Wells Fargo, Volkswagen), where unscrupulous companies and their executives acted for themselves while pretending to do what was in the shareholder’s interest, the old story simply collapses. We can no longer afford to accept that businesspeople will be only self- and shareholder-interested, greedy little bastards divorced from the societal context in which they are embedded.

And to be clear: Cobbling together ideas like “corporate social responsibility” is ineffective. Friedman was wrong nearly 50 years ago when he argued that the only business of business is to make profits for shareholders, but he was right when he urged businesspeople to stick to business. Notable executives like former General Electric CEO Jack Welch have agreed. “On the face of it, shareholder value is the dumbest idea in the world,” Welch told the Financial Times in 2009. “Shareholder value is a result, not a strategy. … Your main constituencies are your employees, your customers, and your products.”

The New Story Spotlights Stakeholders, Not Just Shareholders

In reality, the only way to make profits is to have great products and services that customers want because those offerings make their lives better. Profits follow from having suppliers who are committed to making a company better, and employees who are inspired to work together to create something of value. And if a business is not a good citizen in its community, at least in a free society, people will use the political process to regulate the business closely and even prevent it from operating within community borders. Stakeholders are interdependent, and everyone who runs a great business knows that.

The new story of business is about creating as much value for all these stakeholders as possible, and this of course includes creating profits for shareholders. In the global economy, customers, suppliers, employees, communities, and financiers — shareholders plus bondholders plus banks and other sources of capital — are all intertwined. The winning business models of the 21st century figure out how to get these interests going in the same direction, with as few trade-offs as possible.

Organizations that compromise the interests of one stakeholder with the interests of another quickly find that, in today’s world, there is simply no place to hide. Someone will figure out how to do the business better without the trade-offs.

Today’s business world yields “continuous creation,” not the old story’s “creative destruction.” Many resources may be limited, but human ingenuity and imagination are not, especially when inspired by a sense of purpose. Think about Amazon (and its recent acquisition, Whole Foods Market), Genentech, Apple, Facebook, and Google — all are high-purpose, stakeholder-oriented companies, based on creating value for multiple stakeholders. No business is perfect, and every business can improve, but it is time to end the myth that Wall Street is disconnected from Main Street. Get executives focused on value creation for real people, and products, services, and jobs will appear.

We know that one immediate reaction of many executives of public companies will be, “Oh, but my fiduciary duty is to shareholders.” Not so. Legal precedent suggests that courts have granted companies a great deal of flexibility in how they balance their stakeholders, including shareholders, in the interests of the business. We see similar flexibility worldwide. Capitalism works because entrepreneurs and managers figure out how to get the interests of many going in the same direction.

The stakeholder approach sets forth a new conceptualization of business, in which business is understood as a set of relationships and management’s job is to help shape these relationships. Business is about how customers, suppliers, employees, financiers, communities, and managers interact to create value, and there is no single formula for balancing or prioritizing stakeholders. Creating that balance is part of what management is all about, and it will be different for different companies at different times.

The New Story and Stakeholder Responsibility

Business is designed to meet demand. The danger of both the old story (shareholder profit maximization) and the new story (stakeholder value maximization) is that there are some activities in which business should not engage. If, for instance, consumers value only the cheapest product or service, and it is enabled only by depriving employees of any value (and perhaps much worse), then businesspeople must engage their ingenuity and imagination. They need to be inspired to create competitive products and services that create value across the board — for employees as well as consumers, and other stakeholders as well.

This can be done — business is certainly capable of motivating the interests of consumers, employees, investors, and other stakeholders toward one option over another. Business drives demand for technological innovation: You probably didn’t know that your smartphone would be able to do as much as it does, but now that you do, would you ever go back to a flip phone? In the same way, business can drive demand for responsible capitalism by offering responsible options for all stakeholders.

Stakeholders need to respond to these options. Consumers need to purchase responsible products and services. Employees need to choose to work for responsible employers. Suppliers need to provide for responsible buyers. Investors need to finance responsible opportunities. And communities need to welcome responsible entrants and help to sustain responsible incumbents. Responsible capitalism depends on responsible behavior from both business and its stakeholders.

The New Story and the Future of Business and Capitalism

Capitalism is simply the greatest system of social cooperation that we have yet invented. It allows free people to cooperate together and create value for each other in a way that no individual can do alone. Business can be a part of solutions to societal problems, rather than a cause — witness Tesla and renewable energy, IBM and smart cities, and recent startups like Milk Stork Inc., based in Palo Alto, California, which provides an option for mothers who travel for business to get breast milk home to their children.

Let us aspire to these kinds of businesses, and others that create value across stakeholders, rather than settling for value only to shareholders. Let us benefit from the implications of a better way to think about business.


MIT Sloan Management Review

The Digital Age Takes Over: Top 5 Predictions for Reshaping Value in 2018 and Beyond

What’s happening in technology? How is technology changing society and business? Check out 5 predictions that will reshape how value is created and determine the winners of the digital age.
IoT – Cisco Blog