26 Apr 2011 Back

How to Use Information for Competitive Advantage

Competitive EdgeRESEARCH: In times of seemingly unlimited sources of information and tools to analyze it, how can executives utilize this to retain a competitive advantage in the business world? Kellogg School of Management’s Professor Michael J. Mazzeo recently looked into this in his article “Information for Competitive Advantage—Three Central Issues.”

According to him, given the size of organizations and their global reach, it has become almost impossible for managers to know everything that is going on within their organization. Yet having the right information is critical for everything from strategic decision making to operational excellence. In businesses of all sizes, firms can use effective policies for obtaining the best possible information from both inside and outside of their organizations as a basis for sustainable competitive advantage.

To illustrate the use of information for competitive advantage Mazzeo focuses on three issues:

1. Recognizing and minimizing information bias;

2. Using information for accountability and incentive; and

3. Empowering key people to gather information.

Dealing with Information Bias

Using the example of investments, Mazzeo says that in a company with a dozen divisions, it is senior management’s responsibility to decide which divisions should receive investment funds and house the growth projects for the firm.

The division heads that have the information that the CEO would need have their own incentives. These individuals have a vested interest in theirs being the division in which the company’s hot project is housed because it is not only good for the firm, it is good for their own careers and the careers of their team members. This may generate an incentive to put more spin on information about the division’s results or capabilities than a neutral party would report. In other words, there is no such thing as “pure” information. Information is always biased in some way depending on the incentives of the person delivering it.

Companies are starting to do some exciting things about information bias, such as experimenting with prediction markets in an effort to alleviate it altogether. An example of this is presidential election markets, in which individuals can place bets on a candidate based on information they get from any number of sources. Similarly, financial markets also process information to arrive at an appropriate value of a firm.

Some organizations have even applied the idea of prediction markets to use information obtained within a firm to seek, for example, the probability that the firm will reach a particular target in terms of customers. If there is a prediction market in which individuals in the organization who have information can in some way provide it, the information can be aggregated, resulting in less biased information flowing to the decision makers. This will allow the CEO to make better investment decisions in the long run.

Information for Accountability

To operate effectively, managers need to keep their teams accountable and provide incentives for individuals within the teams to perform. Again, information is critical in order to appropriately evaluate how organizations are operating and to provide the metrics that can reward the good efforts of people. For example, it is often difficult for organizations to tell based on just a poor outcome whether a person is simply doing a bad job, or whether the person is making the right efforts but the strategy did not work out because of uncontrollable factors. To do that requires good information about what was done and what happened as a result. This is important because incentives are based on performance and to judge performance strictly on outcomes may be both unfair to the employee and unproductive for the organization.

It is a challenge for CEOs to distinguish bad outcomes that were based on good decisions but bad luck, from bad outcomes based on bad decisions. The reverse is also true; it would be wrong to reward good outcomes that were the result of bad decisions and good luck.

A good example of this comes from the oil industry; corporate boards that wanted to make their senior managers accountable for their strategic decisions often provided monetary incentives to leaders based on what happened to the stock price. In the oil industry it turns out that the value of oil company stock tracks very closely to the price of oil, and no individual executive has any control over the price of oil. So the fact that stock price was used to provide incentives was a mismatch. They did well because of something out of their control, but perhaps they could have done even better.

Companies can be more successful if they can go beyond just looking at the outcomes to use additional information to extract the effect of the decision from the effect of the uncontrollable factors. The goal is to find ways to separate skill and effort from luck and good fortune in the outcomes of management decisions. While there may never be enough data to control for all the uncontrollable factors, with better information about each element of the strategy, we can limit the number of unknowns.

Information and the Value of “Nonproductive” Work

Recognizing the importance of information, successful companies make information gathering an important part of the job for key people in their organization.

Mazzeo and his team interviewed an engineering company in Pueblo, Colorado, that specializes in GPS technology. GPS signals cannot penetrate buildings, so this company figured out how to get the signal from the roof to the inside. As a result, companies that manufacture equipment that uses GPS technology no longer have to go outside to test it.

When the CEO was asked about his success, he said that he spends most of his time talking to potential customers and listening to their needs. Even their sales force is tasked to talk to their customers, not to necessarily sell them on something, but to learn about their businesses and what they need. That in turn leads to conversations between the salespeople and the engineers about solutions to problems for which they know there is a market.

Information gathering through communicating and listening can lead to better decisions about where to invest a firm’s money and effort. It comes from what might look like unproductive employee time.

Successful companies are willing to invest in gathering information through what some might see as unproductive work. This calls for people who are good listeners and experts in information acquisition to be filling those roles.

In conclusion, paying careful attention to acquire information that is needed to arrive at sound decisions and designing strategies to gather it is what will yield a competitive advantage to executives everywhere.

Mazzeo is an Associate Professor in the Department of Management and Strategy at the Kellogg School of Management, where he also teaches  executive education programs.

View Kellogg School of Management's profile on IEDP here.

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