Wednesday, 30 July 2014

When data gets Big, it becomes complicated

It goes without saying that we live in a data-rich era; data is no longer a scarce resource. The number of devices connected to the internet is growing every day, increasing the growth rate of data even further. Technology providers urge organisations to invest in IT infrastructure and software to capture all that data with the potential of generating new insights, competitive advantage and increased revenues. To capture these advantages, data needs to be transformed into actionable insights and requires organisations to develop the right analytical capabilities. However, technology and analytical capabilities alone will not be enough for organisations to benefit from all that data as changes to the business strategy will also be required. Cost of data has gone down drastically because the internet gave data an IP address, making data easily accessible and allowing for its massive growth. This reduction of cost will also impact the current way of doing business. It will cause the breakup of today’s value chains into smaller pieces, especially those impacted by internet connectivity, which increases the complexity of decision making. Therefore benefits from big data will only arise if organisations both change their strategy and invest in analytical capabilities.

Growth of data is immense

With the birth of the internet the distribution of information became much cheaper. As a consequence companies whose core business activity was in gathering and distributing information, like encyclopaedias or newspapers, were highly impacted. With access to the internet people had other means than leather bound books and paper to get informed. Moreover, information became accessible on the demand, was up to date and had a much lower cost. In these early years of the internet, the Web 1.0 era, information could only travel in one direction, towards the consumer (remember downloading your first MP3?). Web 2.0 enabled bi-directional information flows. With Web 2.0 came social media (Facebook, LinkedIn, Twitter), user generated content (the fact that you are reading this blog is an example of that), crowd sourced content (like Wikipedia) and collaboration (involving customers in product developments/improvements). What Web 3.0 will be about, who knows? But data certainly will play a major part in it. The internet caused the volume of available data to grow exponentially. The amount of data with an IP address will grow to 35 Zetabytes in 2020, IDC predicts. That’s a hundredfold multiplication of what is available today, an immense growth of data that will impact companies and their business models leading to new ways of creating and capturing value.


How data impacts strategy

That digital and data with an IP address have transformed businesses today is clear. Nobody buys an encyclopaedia anymore; we just look it up on Wikipedia. But how does access to information impact a business? Suppose that you run a business. As a business owner you need to hire workers and negotiate prices for the products you sell and the resources you buy. These activities require your time and access to information on hiring rates and prices for your products and sourced raw material. Each time you require them you need to go to the market which will result in transaction cost. A way to reduce transaction cost is to increase scale of your activities and become a firm. In his essay The Nature of the Firm Ronald Coase points out that increase in scale improves access to information and negotiating position. It allows for investment in processes and technology which raises efficiency and quality possibly giving you a competitive edge. With scale however, organisational cost increase due to coordination of activities within the firm. Successfully balancing organisational cost and transaction cost is what running a business all is about. Scale is an important factor to reduce transaction costs and leads to vertical integration of value chains. For example, when Starbucks acquires a 593-acre coffee bean farm, it gets control over its sourcing transaction cost. Transaction cost therefore is one of the driving factors for business strategy. Changes in transactions cost will therefore require rethinking of business strategy.

Big data increases complexity

A basic economic law implies that prices drop when a resource becomes less scarce; with big data therefore it’s evident that the cost of data will drop which lowers the transaction cost of a firm. With decreasing transaction cost, scale becomes less important, which challenges the vertical integrated value chain as the preferred business strategy. As a result value chains will fall apart, opening up opportunities for other participants. Wikipedia caused the encyclopaedia value chain to fall apart, increasing the total number of participants manifold. Another example is that of online ad display. The first ever online ad was issued in 1994 by AT&T which took only one party, Hotwired, to publish. The below chart shows the process of online ad display as it is today. The complete process from left to right takes place in just a few milliseconds.  Each of the parties has their own specific roll in the chain and can only play that part because data is readily available and at low cost.

With the rise of big data, transaction cost has dropped, invalidating the traditional vertical integrated value chain. It is expected, like in the encyclopaedia- and online ad business, network-like value chains will be become the standard with an increasing number of participants. This increase in the number of parties in a value chain has a counter side. With the increasing number of participants, the number of decisions also rises which increases the decision making complexity. This increase in complexity can only be dealt with if the quality of decision making improves. In the online ad business for example (now a multibillion dollarbusiness ), it is required to constantly measure and adjust advertising campaigns. A high return on marketing investment can only be achieved when advanced optimisation techniques are used, requiring business not only to invest in IT infrastructure but in analytics and optimisation capabilities as well. It shows that big data alone is not enough to be successful.

With digitisation and the internet, traditional vertical integrated value chains are challenged as the cost of data has plummeted.  As a consequence organisations need to rethink their business strategy. New business models show an increased number of participants making decision making more complex and requires the use of advanced analytics to capture the value enclosed in big data.