Transparency as added value

Table of Contents

Toggle

Dumplings with meat inside.

Imagine five packs of dumplings lined up on a shelf. They all have the same price and similar packaging. The first pack is cardboard. The second one differs from the first with its transparent packaging, and both simply say “dumplings.” The third pack includes an approximate list of ingredients, such as: flour from grains, vegetable fat, flavoring identical to natural. The fourth pack provides a detailed list of ingredients, while the fifth pack not only lists the ingredients but also includes the address of a webcam set up in the production area, a page with a detailed recipe, and a link to “live” accounting records showing exactly what the dumpling factory purchased from suppliers.

Question: Which dumplings would you prefer to buy? Let’s rank them in order of preference and assign scores from 1 to 100. It turns out that the more reliable information we have about the dumplings, the higher the demand for the product.

In other words, the initial condition of the problem—that all packages have the same price—can and should be modified. More “transparent” dumplings can be sold at a higher price since the demand for them is greater. This means that a simple way to increase the added value generated by a business—from consulting to steel rolling—is to ensure its transparency, quite literally.

New is well-forgotten old.

Did I just share something new? Yes and no.

Yes, because the very idea of transparent business seems to contradict both the theory of information asymmetry and the established practice where, for example, some soft drink manufacturers continue to fervently believe that their “trademark” is the secret recipe of their beverage, which has long since become a “secret known to all.” In other words, the entire marketing department of one of the largest global companies believes that the success of their business and consumer preferences is ensured by an air of mystery surrounding the ingredients of the product that people consume. They think that as soon as they publish the recipe for their drink, millions of clones will rise from the ashes and start competing with them. Meanwhile, a leader in the parallel beer market doesn’t worry about the fact that thousands of brewers around the world are making beer. The issue isn’t in the recipe, but in economies of scale and strong marketing support. This is a case where money triumphs over evil.

No, because the idea of transparency has long been embraced by the food service industry. There are layouts for cafeterias and restaurants where customers can see the kitchen. Naturally, this requires more attention to cleanliness and proper food handling procedures. At the same time, it also creates added value. A cafeteria where the kitchen is visible right behind the serving area instills more trust. This type of layout emerged in the mid-20th century in response to “urban legends” about meat patties made from toilet paper and chefs urinating in the pots.

You can also watch live how the ground meat sold in the supermarket is made, with the meat processing area behind glass. Do you remember such stores in Kyiv? Can you name at least one?

In the Middle East, bakeries are almost always set up in a way that allows customers to see how the bread is made and the hands that knead it.

So why hasn’t the practice of transparency become widespread yet? The answer lies in a) the theory of information asymmetry that I mentioned, and b) the fact that the words “up to now” are key. It’s time to change the paradigm, and I will explain how to do this and why the time has come.

Asymmetry of information.

George Akerlof at work “The ‘Lemon’ Market: Uncertainty of Quality and Market Mechanism” в. in 1970 He built a mathematical model of a market with imperfect information. He noted that in such a market, the average price of a product tends to decrease, even for products of perfect quality. It is even possible that the market could collapse to the point of disappearing.

Due to the imperfections in information, dishonest sellers may offer lower-quality (cheaper to produce) products, deceiving the buyer. As a result, many buyers, aware of the low average quality, will avoid making purchases or will only agree to buy at a lower price.

It turned out that the less customers knew the truth about a product, or rather, the more the truth differed from the propaganda, the greater the seller’s profit. The end of the 20th century was marked by an approach focused on maximizing information retention. The monopoly on information became the only tool of power for the ruling class throughout history, a point that Jared Diamond did not forget to mention in his book “Guns, Germs, and Steel.” Meanwhile, all self-respecting companies expanded their staff with advanced security services, which ultimately protected the companies from themselves.

A simple example – last year I applied for an analyst position at a dying bank that starts with the letter “N.” I applied just for fun – they had two challenging Excel tasks as a test, which I solved in half an hour and sent them my answers.

I was thoroughly checked by the security service. In the end, I was already at the stage of “bring your employment record,” when I simply asked what exactly the security service had found out about me, considering that everything could be discovered by typing “Roman Petrov” into Google. The answer was, “We don’t have the internet. It was turned off for security reasons.” Of course, if they had it, they wouldn’t have even thought to invite me for a salary of 3,000 hryvnias, simply by finding my resume.

The theoretically sound solutions to the problem of information asymmetry, such as mandatory product certification, licensing of activities, and the establishment of government oversight bodies for consumer protection, have not eliminated the problem but merely shifted the resource of information asymmetry from the hands of capitalists to those of bureaucrats. These bureaucrats, along with corporate bureaucrats, have formed the current ruling class – a bureaucratic elite – ultimately confirming that capitalists no longer rule the world and making it extremely difficult to label the existing social order as capitalism.

A striking example of the desperate struggle of the ruling class for information resources, given its obvious futility, is the modern war against “piracy” and the establishment of a copyright cult. This struggle is doomed to fail simply because a new ruling class is emerging to replace the bureaucracy, and we are moving towards a bright future. A bright future because it is transparent.

What is happening in the market? F. Kotler, a kind of dinosaur from the last century, referred to it as “Turbulence” or Chaotica, expressing his view on what is happening, and… Don Tapscott (Don Tapscott) and Anthony D. Williams coined the term “Wikinomics.” The latter authors demonstrated how mass collaboration is changing the world, while Kotler pointed out, and I quote: “THE WORLD has entered a new stage of the economy. National economies are deeply interconnected and interdependent. Commercial activities are conducted through streams of information moving at the speed of light via the Internet and mobile phones. This new stage brings remarkable benefits in the form of reduced costs and accelerated production and delivery of goods and services. But every coin has its flip side. There is a significant increase in the level of risk and uncertainty faced by both producers and consumers.” He then highlighted, among other things, the following risks:

It is important to understand that F. Kotler, the founder of marketing, understood better than anyone else that added value is created from the difference between the true properties of a product and its “legend.”

If we try to summarize Kotler’s concerns in two words, it would be this: No matter what technologies or manufacturing know-how a producer has, they will inevitably…

A) They will become outdated very quickly.
B) They will be replaced by technologies that completely change the market.
They will be instantly copied by competitors, who…
G) just the sea and a whole lot of darkness and
D) Advertising will compete with consumer reviews.

From the Life of Dinosaurs

Look at what happened to the know-how of Kodak or Agfa in the field of film production. Was it worth keeping those “secrets”? But who knew that digital would catch up to film in quality in just five years?

Look at the history of Macs and PCs. Apple has always been lagging behind simply because it kept information sealed off rather than sharing it. It only pulled ahead in the last few years by betting on an operating system that traces its lineage back to FreeBSD—a free Unix-like operating system. This operating system, in various modifications, is installed on the iPhone, Mac, and iPod.

Look at the fate of DRM protection on DVD discs. Ultimately, the protection in the form of regional locking became a problem for honest users rather than for those who were copying movies.

Just 20 years ago, the closed nature of software code was considered normal and taken for granted. Now, companies are criticized for this lack of openness, and the very closedness of software code has become a critical characteristic that hinders its development in certain niche markets.

But these were all examples of how technologies that completely change the market left large companies, which keep their secrets, with little time to maneuver. While large companies still have a reason to maintain asymmetry, for small producers who cannot allocate significant resources for security, it loses all meaning.

Wikinomics

Where did the problem of having a large number of small consumers come from in the first place?

A. We are witnessing an acceleration of scientific and technological progress, which leads to two factors: First, the frequent change of technologies, which deprives large corporations of their flexibility, and second, the strengthening of the capabilities of small producers compared to large ones. A simple example: the advent of photo printing technology has led people to gradually forget what a “photo studio” is in the sense it existed just five years ago. Now, anyone can print their own photos at home using relatively inexpensive equipment.

And this example is not an isolated case. Everyone can see how quickly the number of car manufacturers has increased. What’s the reason for this? It’s because if you have the money for a couple of robots and contracts for supplying components, you can already start small-scale production. This phenomenon often goes unnoticed, even though the car manufacturers are gradually dispersing their production capacities across a large number of small assembly plants.

You can already brew beer at home. You can also, if you want, work with metal without worrying about three-phase power or dragging around a welding transformer that causes voltage drops throughout the house. And so on. This is all part of what’s called the verification of the economy. In an increasing number of areas, independent and thriving businesses a) do not rely on economies of scale; rather, the advantages of economies of scale are smaller compared to the flexibility of the business and its focus on specific niches, and b) can be operated without hiring labor—using household labor instead.

Of course, if we compare, say, the production of spoons using mass stamping and using, for example, a 3D printer, the former seems cheaper at first glance. However, upon closer inspection, when we factor in administration, distribution, and logistics costs, it turns out that it’s more economical to buy a spoon at a local “spoon shop” or even print one at home when the previous one gets lost, rather than purchasing it at a supermarket or as part of a set.

B. The second factor is that the development of the financial system has made it possible to disregard a common issue for any business: the need for startup capital. Now, the concept of “market entry threshold” has become quite virtual. For markets dominated by large players, such as the airline industry or automotive manufacturing, there will always be major investors, such as state stabilization funds. For smaller markets, there are banks and private investors.

Let’s add the factor of labor migration from company to company into this mix, and we will create a wonderful picture of the world where there is simply no room for secrets, and any successful innovation is instantly copied by everyone around.

The only way to survive is through constant movement. Just as a cyclist doesn’t seek stability in stopping, companies shouldn’t get stuck in preserving the status quo; they should keep pushing forward with innovations to be the leaders that others look to for inspiration, rather than the ones who follow.

Summary: We are entering market conditions where having certain business ideas or technological secrets gives a company only a relatively small temporary advantage, which quickly disappears once the first product hits the market. The patent system no longer functions as it did in the past, especially for small manufacturers who simply cannot afford lengthy legal battles.

Moreover, the large number of small suppliers leads to consumers losing sight of the differences between two products, relying solely on the one criterion they understand – price.

Here we realize that in a competitive market, and we’re even talking about hypercompetition as mentioned earlier, information asymmetry works in favor of unscrupulous producers. The acceleration of technological progress and hypercompetition make previous methods of reducing asymmetry—such as signaling quality to consumers through branding, building reputation, and having licenses and certificates—less effective. What brands, licenses, and certificates can we even talk about when the technology used to produce a product may only be relevant for a couple of years? Who can guarantee that by revealing our technology to an official, we won’t end up with a powerful competitor tomorrow, especially one backed by government support? If not a predator looking to crush our business and then buy it out from under us, allowing us to remain as managers under a “benevolent” uncle?

So, the old methods of reducing asymmetry are no longer effective, consumers are confused and don’t know where to buy a product or service, and the market is becoming increasingly competitive. The asymmetry supported by know-how and patents is no longer working. What should be done?

As I mentioned at the very beginning – it’s about opening up. If we don’t control the process, we need to take the lead. If you have a secret, you should act as if your competitors have already discovered it and as if there is an even newer secret that you don’t have.

Presumption of disclosure of information

Any stamp saying “for internal use only” already means “for competitors’ awareness.” A real-life example from my experience: When I was preparing a commercial proposal for a very large and serious bank, I needed figures from their business plan to demonstrate the economic effect of my proposal using their own numbers. I only had to make three phone calls, and soon I had a “confidential” presentation in my inbox. My informants only had my word that it wouldn’t go any further. And it didn’t. But what’s the point of spreading these open secrets? In the end, when I presented to the bank’s board, I said, “According to our analysts’ estimates, you will be able to issue XXX plastic cards next year, which means…” and received a lot of compliments directed at “our analysts.” Did the bank employee do something wrong by sharing this “secret” with me? No. Does it mean that competitors can’t assess indirect signs and arrive at the same figures? No. So why keep secrets?

An example from world politics is WikiLeaks. It’s the same principle – if the information is sensitive to disclosure, you should act as if it has already been revealed. If you really need to maintain confidentiality, you should mask the leak rather than fight against it. The CIA killed Osama bin Laden the very next day after NATO dropped a bomb on a residential area, killing Gaddafi’s young granddaughter. Was it a coincidence? Who remembers that atrocity now? But people remember bin Laden.

What to do?

There’s really no need to do anything anymore. We are living in an age of new technologies. We are experiencing a truly catastrophic information revolution. Who watched the launch of Atlantis live? Can you believe that I can get a live video feed of the fuel tank of a launching spacecraft right from my home, and even rewind it to see what I missed?

In the past, you had to think through marketing communication methods to showcase the benefits of your product or service to consumers. Now, you can simply set up a webcam right where the product is made.

If you conduct training sessions, broadcast live what happens during them. Are you baking bread? – there should be a live stream from the bakery on your website. Do you make plastic windows? – show how hard and responsible the work is for those handling the profiles. A consumer who understands what they are paying for will be happy to pay.

Do you want to be an employer of choice, attracting the best talent from the market? Show what your office is like; otherwise, all your investments in working conditions will only be known to those already hired, not to those considering a job change.

You are a designer – show the process of creating a sample or illustration. People who see the logo think you just took it and drew it. They don’t see what ended up in the trash and can’t appreciate how you worked and what decisions you made. Take a look at the content on the Studio Lebedev website. They don’t hide anything at all. At least, that’s the impression you get, and in any case, simply visiting the site will give any competitor valuable insights, lessons, and knowledge that other design firms guard so carefully. And who is the market leader?
Are you a chef? Tell us how and what you use to prepare your food. Competitors won’t start doing the same thing with the same name, and even if they do, it will just be a copy because the market will know that the real thing is only with you. People have seen how you did it first and invented it. Moreover, the most important thing that competitors can’t replicate is you. Consumers are actually buying you. So be yourself, show where you are in your product. That can’t be copied.

You all now have a tool that allows you to reduce asymmetry, specifically to increase profits rather than the other way around. Today, right now, we are on the brink of a paradigm shift in business – instead of hiding important information from consumers, we should be showing it. Consumers are willing to pay for that.

Remember the evolution of armor and projectiles. The projectile always eventually triumphed. And both world wars were fought by soldiers without armor. Speed and maneuverability proved to be more important than the breastplate, which didn’t offer much protection against bullets anyway.

Dinosaur Marketing

A simple question: Do you like it when something like “100% orange” is written on the juice, and then in green on green it adds the word “nectar”? Are there really people who think that this should appeal to someone and that consumers want to be deceived? How much easier would it be to just be honest? Consider this as a consumer before placing a product like milk in 980 ml bottles on the shelf.

What is really happening? In reality, there is a product and there is a price. By removing the unnecessary, one can use the formula:

Money + Transaction costs = Product cost + advertising.

The seller, wanting to get money from you, may well play with the second part of the formula. It has been much easier so far to invest money in advertising rather than in the product itself. The consumer had no voice. And where they still have no voice, this continues. The seller is limited by law, for example, the requirement to indicate the weight of the product on milk packaging (specifically – Vim-Bill-Dan, “Cheerful Milkman”). But the seller resists with all their might, writing this weight in small print and packaging, say, milk in three packs, prominently displaying “3 for the price of 2” in large letters, so that the insert in the overall packaging with this inscription covers the note that the milk package contains not 1000 ml, but 950. They have cheated and will continue to cheat. The seller’s smile is still cheaper, and not many people go to the market with their own scales. Why?

Because you pay for a product not just its price, but also for the effort involved in gathering information about it. This is part of transaction costs—an often overlooked but quite significant aspect. The more a person values their time, the less likely they are to stand and choose a product from the shelf. Or worse, to calculate which market has the best price for which product and where it’s more cost-effective to go, taking transport costs into account. And when buying carrots, they might not only bring a scale but also a mass spectrometer. People strive to minimize their costs, assuming a more or less uniform quality of the product; they focus on price—not by running around to all the sellers, but by taking a “market snapshot,” visiting 2-3 places to understand what they perceive as the average price for the product. The deeper the true information about the product is hidden, the less effort a person will expend to uncover it. They will choose something over nothing, guided by emotions rather than analysis. They might pick the smile of the “Cheerful Milkman,” or go for what others have bought, or choose something that is more expensive (thinking it’s of higher quality or more prestigious), or conversely, something that no one else has picked. In any case, they will have a method.irrationalchoice, as rational choice is too expensive.

This is what marketers take advantage of. Simple math and nothing personal. “We’re not fooling you. We add propaganda to the product on one side and increase transaction costs on the other.”

Mass spectrometer at the market.

At the same time, if the consumer is provided with complete information about the product, they would practically buy carrots not only with a scale but also with on-site mass spectrometry analysis. In this case, the carrots would be purchased specifically from such a seller. The price would matter little, as what the buyer sees would no longer be just carrots, but rather a set of fertilizers and pesticides. From the perspective of the formula described above, the consumer would be willing to pay a higher price for the same product, as it reduces their transaction costs.

Is a mass spectrometer expensive? What if it were free? Or cheap? Would you buy carrots at a market from a vendor without scales? Even if they told you a specific price for a specific bag of carrots, but you didn’t know the weight? Of course not. The same would happen in a market where everyone had mass spectrometers; no one would buy anything without on-site analysis.

Again, why aren’t there things like mass spectrometers? Because it has been cheaper to keep information hidden and to amplify propaganda than to fully disclose it. In addition to the costs associated with commercial secrets (which are obvious in the form of espionage and hidden in the form of a fear of openness), transparency also required expenses for its technical provision.

But today, propaganda is becoming increasingly expensive and less effective. In the mass market, propaganda no longer means anything, and to exaggerate, you can’t sell more than one copy of a failed product. Everyone will immediately know about the poor quality and the discrepancy between the product and its advertising. You can hide information and play spy games as much as you want, like Nokia does with Eldar Murtazin, but that won’t boost sales anymore.

Today, the material efforts to ensure transparency are becoming increasingly accessible. As I mentioned at the beginning of my report, anyone can install web cameras in the workshop and put the accounting system online. However, not everyone even considers such possibilities, and unfortunately, in our environment of constant struggle for information between businesses and the ruling elite, this is not always safe. It is essential to develop procedures and plan projects for information disclosure in such a way that it is maximally transparent without jeopardizing the company’s well-being.

It looks simple. But the business lacks experience in disclosure. It has the opposite experience and a huge machine for the reverse process – closing. Have you thought about disclosure yet? That means you already have questions for me about how to do it.

Acceptance of the Inevitable

Now let’s talk about the acceptance or rejection of the idea of transparency. First, about the inevitable: Whether you like it or not, Facebook has already been invented. If your product is worthy of consumers’ attention, everyone will know about it immediately. And, as it often goes, bad news spreads like wildfire. Primates tend to warn their peers about danger, while a tasty banana is much more comfortably snatched up in secret. In this case, social media works against you. The quality must be impeccable by default. You no longer need to wait for a dishonest competitor hiding behind asymmetry to fall victim to social media. Instead, you need to show what makes you better and how you do things—demonstrate what your competitor struggles to showcase. After all, you are already doing things well, and there’s nothing to be ashamed of.

If there are bad news, take control of them yourself. You will stop the rumors, show your openness, willingness to answer all questions, fix the issue, and ensure it doesn’t happen again. It’s quite simple, really. If you own a café, you can write on your blog that you had to throw out a batch of fish today and what you did to prevent it from spoiling next time. Otherwise, you might have to worry that a disgruntled employee will post pictures of rotten fish on their blog with comments like, “Look what they’re feeding you here.” Bad news is also necessary because overly positive “social media activity” has already started to wear thin. Describe the problems in your business. Make your customers root for you. Let them see you as “Dynamo” or “Shakhtar,” not just another mini-church where everything is fine and the boys in the church choir… well, I got sidetracked there.

Understand this once again – you no longer have, and will never have, time to build a PR strategy and reputation management policy. Your reputation must be impeccable from day one. And it can only be impeccable if you fundamentally have nothing to hide and there is no ground for speculation. For example, if an official is accused of bribery, people are likely to believe it. But if that same official is actually honest and is being accused by colleagues who want to get rid of him and continue stealing comfortably, he could somehow organize his own transparency: refuse cash, publish his transaction history online, provide honest income declarations, and share with the world what he bought and when, as well as where he was at any given time. With a webcam in his office, it would be impossible to fabricate a truthful slander against him. Transparency is the foundation of security. Yet we still think the opposite.

For many of us, the idea of transparency is unpleasant in itself. We value privacy. We support data protection laws that, in reality, are not about protecting personal data but about legitimizing the monopoly of intelligence agencies over personal information. Why is that? How quickly can we come to understand that privacy is harmful both for business and for individuals? This is actually a separate topic, and I can address it outside the scope of this presentation while answering your questions. So, questions?