A Metamorphosis from Physical Media to Information —
The Newest Business Revolution

The flow of information has begun to supercede physical goods in the industrial world's latest revolution, according to author Larry Downes, Chairman of the Larry Downes Consulting Group.

He sites the example of a Wal-Mart store outside Tulsa that uses "new-generation" computing. As products move through the supply chain, tracking data is being transmitted from the packages themselves. The product label has its own power source and antenna that broadcasts information to receivers, identifies each item, and yet, costs only about 7 cents.

If companies find it cost-effective to put these miniature computers on every item they sell, the implications are huge.

Downes calls this "the age of disposable computing".

With the emergence of this and similar new technologies, there will be such a comprehensive flow of information about each that it will actually develop into a "parallel supply chain" consisting of information that describes its physical counterpart in precise detail. The potential value of this massive database will provide a competitor with leverage within its industry, including future products, services, and most critically increased profitability. A company's survival will increasingly depend on how well it manages this supply chain. In some cases, the information supply chain may even make the original tangible product obsolete.

He sites the example of the music industry, which assumed that physical media like tapes, CDs and packages were the currency of the business. But, along came the Web to deliver music digitally. In this "data becomes product" emergence stage the physical supply chain became unnecessary. Downes feels other industries such as banking, insurance, travel, and professional services will be next.

However, although the process has begun, this won't happen overnight. Downes has studied 100 companies in a wide variety of industries and identified three distinct stages of development for the new computing and the very real switch from dependency on tangible products to information as a driver of our economic growth.

The 1st stage is Efficiency - Companies use software to eliminate waste, improve internal information flow, and reduce cost.

The 2nd stage is Exchange - Buyers and suppliers connect their systems (through EDI or XML) to improve forecasting, financial and inventory management, production planning, and the purchasing process.

The 3rd stage is Emergence - The entire supply chain, including consumers, is connected, and provides opportunities for new products and services that use the information itself.

Your industry may also be going through these three stages now. For example, companies that operate business-to-business exchanges are creating a wealth of new information products as hedges, insurance, risk analysis, and other instruments in the financial sector. New offerings often come from start-ups, but current supply-chain participants could soon provide them. The automakers' parts exchange, as well as a supplier exchange for companies that make packaged goods, were built for a consortia of buyers and sellers pooling their own data for mutual benefit. Unique services beyond auctions--including escrow, insurance, and payment processing--have helped eBay turns a profit every quarter. While the process is very easy to visualize for companies whose business model is based on information, There may be an information piece for every tangible product. Over time this piece may generate more volume and greater profit (because its easier to scale) than the original product.

Downes has mapped the evolution into a three-phase approach to revolutionizing business:

Each metamorphosis stage requires its own organization.
Stage	Characteristics	Key technology requirement	Organization type	Key organizational requirement
Efficiency	Increased transparency	Pull data from existing internal systems to improve cost and productivity	Project team	Align and integrate technology and strategy
Exchange	Virtual markets	Pull data from key links in supply chain to improve market performance	Incubator	Strategic joint ventures with key technology and industry partners
Emergence	Integrated industries	Pull data from the information supply chain to create new products and services	Corporate venture capital	Visibility into emerging technology developments and relevant investment criteria
DATA: The Strategy Machine, 2002

Downes feels the companies that have made the most progress constantly generate new ideas and test them against each of the three stages. They may not have a single strategic plan, but they always look for options to apply new technology. It's the return on the whole family of possibilities, not any specific one that is important. And for the most successful, who don't wait to be "me to's," it's understood that some high-risk investments will have no return at all. He entreats us to take the most important and difficult first step; a change in attitude. Think about information as a source of new products and services for your company. Experiment with emerging technologies. Learn to see change coming from all three stages of metamorphosis, and develop strategies for each.

Larry Downes is chairman of the Larry Downes Consulting Group in Berkeley, Calif., author of The Strategy Machine (HarperBusiness, 2002) and co-author of Unleashing the Killer App (Harvard Business School Press, 1998).