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June 16, 2007

Transparency as a Competitive Advantage

I believe it was in my entrepreneurship class that our instructor said 70% of a company's market value was derived from its intellectual property.  If you were to open up all of your intellectual property and allow the world to scrutinize it, would 70% of your value suddenly deteriorate?  Or could you make your business more valuable by showing the world the "crown jewels"?

It seems that logically if you show all of your competitors everything that you're doing, your company will be left in the dust as they keep their trade secrets and integrate yours to boot.  You've lost your entire competitive advantage right?  Could any positive consequences come from this?

I can see a couple potential positives from it: increasing the quality of one's products and services, increasing employee retention, having a faster rate of innovation, and decreasing consumer cynicism.  Having a policy of transparency can potentially increase the quality of the company's products.  Viewing what has taken place in the open source community, if you open up the source code of a piece of software, suddenly tens of thousands of eye balls are able to scrutinize the code, test it, and find more bugs than would be found by the company's own bug testers.  For the pharmaceutical industry, opening up all of their clinical trials to more scrutiny by the scientific community would allow the companies to potentially increase the quality of their drugs and the targeting of it.  It would also allow the company's to avoid negative publicity, such as happened with Merck a few years ago.

The policy of transparency would also create a greater incentive for the brightest minds to want to work for the company, because they would be able to share ideas and innovations with their peers at other institutions, which would spur further innovation.  An anecdote from the book I just read, Science Goes to War, talked about how the warring city-states of ancient Greece adopted a policy that their scientists could freely talk amongst themselves.  Scientists were less likely to defect from their city-state, because they would be able to discuss their discoveries with the brightest mines regardless of which city-state they were a part of.  Seeing as the quality of a company's employees are an incredible source of competitive advantage (they are the ones that develop the innovations), it would help to both recruit and retain the brightest people, potentially decreasing the costs associated with recruiting and retention.  The increased rate of innovation would occur from the dialogues the employees would hold with others not at the company, but that we're extremely knowledgeable in the field of interest.

The policy could also help to decrease consumer cynicism.  To pick on the pharmaceutical industry again, consumers complain a lot about high drug prices and don't always see the correlation between drug cost and care received (the same can go with the health care industry in general).  A policy of greater transparency could help to decrease consumer cynicism toward the industry by not only informing consumers as to what drugs are on the market, but which ones did not make it and why.  If the company also broke-down it's expenditures on the various failed drugs it would allow it to show consumers why they need to pay the higher prices for the successful drugs, compensating for all the failed R&D. 

Also, with the transparency of the failed trials, the companies could allow academic researchers to continue to run tests on the drugs in different settings and see if any of them allow for the drug to be successful.  if it ends up being successful, the company can then sell the drug to the designated market, leasing the intellectual property if need be.

With all of these taken into consideration, it might be worthwhile for companies to test a policy of transparency with respect to their company and the market and/or field of study.

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