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Open Beats Closed : Four Principles for Doing Business in the Network Economy

Submitted by on January 2, 2009 – 2:49 pm14 Comments

Here are four key principles for creating a stronger business in the network economy:

Over the course of the next few posts I will be going into details on each.  This is the second post.

Open Beats Closed:
There are two readings to Open beats Closed

  • There is more untapped value outside your organization than inside – those that harness that value win.
  • Authenticity and Transparency are the coin of the realm on the Social Web.  Open companies are those that embody these principles in the way they do business.

Section One: There is more untapped talent outside your organization than inside.
Most of the “classic” Web 2.0 companies, Google, Wikipedia, Flickr and Amazon.com see their users as major contributors of value.   These companies inherently understand that Open beats Closed so let’s start with them before moving to examples of more traditional companies. (Disclaimer: you could write an entire book on how each of these companies leverage the network to build their business – below are examples to illustrate a general point.)

Google registers every click on a link as a “vote” for that link.  Google takes the aggregate of these votes to produce relevant search results for the next user (this is the essence of Web 2.0; programming systems that get better the more people use them).  Every search conducted on Google is teaching Google how to deliver a better customer experience.

Wikipedia is the largest encyclopedia ever assembled with a staff of only twenty-three full time employees.   All of the content is outsourced to volunteers and yet the accuracy of Wikipedia rivals Encyclopia Brittanica through a sophisticated set of system-imposed rules around editing.   The punchline here is that you can produce quality in mass collaboration provided you have the right boundary conditions in place.  For more on that check out the Harvard case study on Wikipedia.

Flickr allows anyone to upload photos but sets the default on those photos to “public” – meaning they can be shared with others.  This simple switching of the default creates an enormous reservoir of public photos (read: users adding value to the collective)…  Flickr then asks these same users to “tag” their photos with relevant keywords –  the job of classification is outsourced to the users themselves.  The result? Millions of accessible, searchable photos – uploaded, tagged and made available by the Flickr user community.  Most of them will have a Creative Commons license, meaning that you are free to reuse the image with proper attribution.   This phenomenon is devastating the stock photography business (source).
Try searching Flickr for nearly any image you can imagine – chances are you will find it.   An example, I own a home in a remote and relatively obscure village in France – there are 246 photos on Flickr (none uploaded by me) including this shot of my front door.

Yes, my front door.   While these photos may have existed before Flickr I would have had no ability to find them.   This is just one example.   There is an emerging world of goods (eBay) and services (Wikipedia, Flickr, Threadless etc.) produced by loosely affiliated groups of people that is becoming available to anyone with an Internet connection (1.6 billion as of this post).  As Kevin Kelly noted in his interview with me, we are just beginning to scratch the surface on how people come together to collaborate and get work done.

Amazon.com was one of the first web sites to allow its users (and not just customers) to rate and review the books themselves.   It turns out that ratings and reviews are extraordinarily helpful is assisting people when making a purchasing decision and have likely helped Amazon sell an enormous amount of books.  Amazon supplies a simple technology – users do the rest – and each successive customer gets a richer set of reviews to help them evaluate what they wish to buy.

So what does Open beats Closed mean for traditional business?
It is not just Internet based companies that are looking beyond their traditional boundaries for contribution and innovation.  Here are a few examples:

Proctor and Gamble uses Innocentive to put out calls for product development.  They set parameters of what they are looking for and let others do the R&D.  At this stage 35% of P&Gs new product innovations come from outside the company.  Where a closed company seeks all innovation from within, an open company seeks innovation everywhere.

The New York Times recently made a decision to syndicate content from three blogs, Read/Write Web, GigaOm and VentureBeat.  These blogs have a proven track record of building a discriminating audience; where a closed publisher would seek to write “all the news that’s fit to print” the NY Times is using an open strategy to harness the energy and quality content of the blogosphere. Smart move.
Intuit uses the aggregage knowledge of its TurboTax users to provide guidance for other users (e.g. “60% of people in your situation decided to list their dependents when filing…” etc.).   An open company harnesses the collective intelligence of its users.

On a more technical front, Best Buy recently opened a set of APIs – (for a fuller review see my Radar post from last September).  An API essentially “lets Web sites make their content easily available to other Web developers, who can import it, display it on their own sites and mash it up with other material.” (source NY Times)
Giving the developer community access to all the data that feeds Bestbuy.com creates the potential of creating your own, curated site on top of Best Buy’s catalog and supply chain. Imagine top Blue Shirts running their own online stores with select merchandise that they stand behind or imagine a thousand home-theater geeks and “go-to-guys” (and girls) extending their expertise and word-of-mouth via their own online stores.
Much needed breakthroughs in ecommerce usability (product and catalog navigation, visualization, design and findability) are now open to thousands of developers to work on. Best Buy will be able to bring that intelligence back into their organization. Where a closed company might see its data catalog as something to be jealously guarded, an open company like Best Buy sees an opportunity to capitalize on the ingenuity of the developer community.

For more on APIs see here
Key Insight: Leaders in this new network economy must look outside the organization for resources of all kinds. Traditional internal command and control is replaced by external influence, soft power and attraction.

Section Two: Authenticity and Transparency are the coin of the realm on the Social Web
As David Burk, CEO of Clear Ink likes to say, “The Internet is a cultural phenomenon – don’t go there without a guide.”  One of the big struggles companies have when trying to reach beyond their borders is understanding the culture that they are entering.   Open beats Closed is the literal injunction to be consistent with the norms of behavior on the Social Web; authentic, transparent and candid.
Violating these implicit norms (especially in marketing) can bring a rash of criticism that is spread by customers to other customers (see Walmart example here).  The epidemiological terminology surrounding the web, specifically the term “viral,”absolutely applies – just as you can create an army of evangelists, so too you can bring a plague upon your house.

Summing Up
In the age of open networks organizations finally have a scalable (meaning efficient at large scale) means to collaborate with the outside world on a critical series of issues:  innovation, product development, consumer insight etc.  And, let’s face it, there are more smart people outside your organization than inside. Leading companies like Google, Best Buy and Proctor and Gamble and the New York Times are pursuing open strategies to tap into informal networks of “outsiders” to get ahead.   Lagging companies are waiting for the case studies in their industry to come out before getting on board.
As we move deeper into the network economy closed companies are going to find it more and more difficult to survive against open companies.
(Note: The diagram above is a first attempt to capture this in an infographic.  I would love to have input on whether it captures the spirit of this post ). Based on comments from Hastings, I updated the graphic to show that the employees I reference are part of the “informal organization.”  In other words, they are not part of the traditional information flow inside of an organization.


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