Since the advent of the Internet, firms have enjoyed unprecedented flexibility to reveal information to competitors, customers, and suppliers. In this new technological environment, firms can implement transparency strategies by using information strategically to compete. In the online travel sector, for example, the business strategy of meta-search travel agents like Kayak is to provide a comprehensive view of products and prices to travelers. Other companies, like Priceline, use opaque mechanisms to conceal product features until after purchase. This article offers foundations and guidelines for sound transparency strategies that are the result of over six years of field observations and empirical research.
Prior to the Internet, firms were limited in their ability to strategize with information. For example, in the auto industry, auto dealers used to define the sales process and control much of the information provided to customers. Now, with a few clicks on car-buying website Autobytel, prospective buyers can compare dealer prices and car features. Moreover, they can see the invoice price that a dealer paid to the manufacturer for instance, the price a Cadillac dealer paid for a new Escalade. An informed consumer can then go to the Cadillac dealer armed with this invoice price and negotiate from a position of strength.
In the travel industry, four legacy Global Distribution Systems (GDSs) have historically controlled electronic distribution and market information. These systems construct airline offers through the complex, dynamic process of combining fares and flight schedules. Now, there are innovative and advanced technologies that threaten to displace the legacy distribution systems, and they offer a powerful and advanced platform that airlines and travel agencies can use to sell travel products.
More generally, there is a structural increase in the availability of information, supported by advances in technologies to store, process, and display data. Aggregators like Autobytel in the auto industry and Travelocity in the travel industry provide comprehensive search results for product offers and market prices. In turn, consumers have more market information than ever before, and they can even share their purchase experience and satisfaction via social networking sites.
Why does this trend matter? Changes in the availability of information can impact consumer behavior, demand, market prices, and the dynamics of competition. In particular, Internet technologies enable competition with information. However, there are two flawed reactions that established brick-and-mortar firms tend to adopt:
Naïve Strategy #1: Being Passive. At one extreme, firms assume the cat is out of the bag and there is not much that can be done to manage and control information. Managers take a passive approach as they observe third parties aggregate and reveal market information from supplier websites, government agencies, consumer reports, and postings from existing customers.
Naïve Strategy #2: Denial. At the other extreme, firms retrench to protect their turf and maintain the status quo. These firms operate in denial of the reality that consumers are better informed by browsing the web. Managers take actions to keep the cat in the bag, not realizing that the cat is already out! Therefore, significant resources are spent trying to thwart an inevitable trend. This reaction is based on the fear that information empowers competitors and consumers. For example, the widespread availability of price information may lead to price-sensitive consumers and price wars, and the subsequent erosion of firm profits.
One consequence of these naïve strategies is that established firms inadvertently lay fertile ground for the emergence of new competitors.[1] The passive approach makes markets vulnerable. For example, airlines initially underestimated the role of the online channel in travel distribution and participated only through their own airline portals. Meanwhile, in the mid-1990s, Microsoft launched Expedia as one of the first online travel agencies, successfully penetrating the travel distribution sector. Upon their realization of the significant role the online channel was starting to play, airlines reacted by launching transparent online travel agencies (e.g., Orbitz in the United States and Opodo in Europe). Meanwhile, travel suppliers in denial mode originally tried to control the transparency of the online channel by exerting their power over product offers and market prices to influence the design of third-party sites.
Today, more than half of travel bookings in the United States are done online,[2] but due to the naïve strategies of existing players, much of the benefit was reaped by technology companies and start-ups that previously had no place in the industry. In the United States, for example, Expedia is the largest online travel agency.[3]ITA Software emerged as a key player that supplies pricing and search engine technologies, successfully entering the market of the previously untouchable GDS firms.[4]Kayak, a start-up launched in 2004, aggregates travel offers from online travel agencies and airlines portals, and is now the largest online meta-search site in the industry.[5]
Other information-intensive industries have experienced similar transformations. For example, in financial services, initially established firms rejected the notion that online brokerages would become mainstream, yet today it is second nature for many individual and institutional investors to use the Internet as an information source. Large financial services firms reacted only after the consolidation of ventures such as TD AMERITRADE and E*TRADE, and the successful entry of search engines like Yahoo! Finance and Google Finance.
Foundations of Transparency Strategy
The level of transparency in a given market depends on the degree to which a product or service can be represented in digital form and on the degree of competition.[6] For example, online transparency levels have increased faster for industries like leisure air travel and equities markets and to a lesser extent for corporate travel and bond markets.
Figure 1. Market Transparency Levels by Industry Profile
Either way, many firms in these industries passively observed this trend or reacted against it, in line with the above naïve strategies. However, a handful of firms proactively capitalized on the opportunity to compete with information. These firms use one or more of the following four strategies.
1. Full Transparency
Firms with full transparency strategies deliberately compete for customers with information. Companies like Orbitz, Kayak, and Charles Schwab have implemented full transparency about product offers and prices via the Internet. Online jewelry store Blue Nile developed a site that focuses on educating consumers about how to purchase jewels. The goal is to attract consumers who demand complete information and generate their loyalty. However, a well-informed consumer can be price-sensitive and demanding, which motivates alternative strategies to provide less information.
2. Bias
This is a strategy whereby a firm only displays its product offerings or biases online. A typical source of bias is a company’s portal or corporate website, which displays only its products and emphasizes quality, image, and service. Alternatively, firms can negotiate preferential treatment for displays of their product offerings in electronic marketplaces or general search engines, for example, bidding for preferential display in Google search results.
Information biases can be used to lure customers by withholding competitive information or by making it difficult to purchase from competitors. For example, bidders compete for preferential displays in Google’s keyword search results. Also, auto insurance company Progressive lists competitive offers next to its quotes, yet there is a purchase option only for Progressive’s offers. The risk of offering biased information is that customers who value full and equitable information may be lost to vendors that employ full transparency strategies.
3. Distort
The Internet provides the ability to distort or obfuscate information. One option is to develop product offers and prices that make valuation and comparisons difficult for consumers. For example, airlines have implemented complex pricing structures and ad-hoc promotions to make it difficult for travelers to correctly ascertain prices over time. Another option is to provide inaccurate or outdated information. One of the risks of obfuscation strategies is that they may raise ethical or legal concerns.
4. Conceal (Opaque)
A fourth strategy is to conceal market information. In these opaque strategies, the intention to conceal is rather obvious, so customers will expect something in return. For example, Hotwire is an opaque online travel agency that offers clearance fares. Travelers are not able to see the airline name and the itinerary of the trip offered until after purchase; in return, the fare is discounted.
This set of strategic options is like the white, red, blue, and yellow of colors; all of the possible combinations represent the set of strategies that a firm can adopt for any piece of private information. However, this is easier said than done for three reasons:
There are many dimensions of information that firms can strategize with, such as product features, prices, inventory, costs, internal procedures, and policies.
Different informational dimensions affect one another, so policies should not be implemented for each one in isolation. For example, price information can influence the ability of consumers to decipher production costs, and product information can affect market prices.
Information intended for some may be unintentionally exposed to others. For example, much of the information provided to consumers online is likely to be spotted by competitors. Therefore, the sheer number of decisions that should be made and the interdependencies between them may seem overwhelming.
Sound Transparency Strategies for the Information Age
The following are guidelines to implement sound transparency strategies, based on observations of effective online transparency moves by firms in different industries.
1. Have a strategy.
Many firms do not have a transparency or similar strategy, such as a policy for information disclosure, other than clearing procedures headed by legal departments. In the information age, it is very important to have a deliberate transparency strategy that influences information disclosure policies throughout the firm, and particularly through its online presence.
Photo: Franck Boston
2. Develop and implement online selling mechanisms and information portals.
Successful transparency strategies are based on calculated investments to develop online selling mechanisms and information portals. Lack of technical expertise is no longer an excuse. Today, there are numerous options to outsource the development of information portals and e-commerce sites at reasonable costs.
3. Participate (only) in electronic markets that fit the strategy.
Another option to develop an online presence is to strategically participate in existing electronic marketplaces or third-party sites. The key is in selecting ones that are in line with the firm’s transparency strategy. For example, auction sites such as eBay provide transparency about prices offered by other buyers, while posted-price mechanisms such as Amazon do not. Firms should be aware of the implications of different marketplace designs in making their choices. Additionally, online intermediaries often change their website designs, so it is important to monitor their transparency levels on a regular basis to evaluate whether they still fit the strategy.
4. Monitor and react to competitive moves in the transparency space.
Today, with simple changes in lines of code, a competitor can modify its transparency level, so competitive positions in the transparency landscape are continuously shifting. Firms should develop processes to monitor competitors’ moves as their transparency strategies evolve.
5. Link transparency strategy to IT strategy.
Policies for information disclosure cannot be effectively implemented without the right technology an information technology (IT) strategy is the building block for any transparency strategy. Website design and other software development projects should take the existing transparency strategy into account. A firm’s IT infrastructure should be designed based in part on the information disclosure policies of the firm. For example, when Orbitz launched its online selling mechanism with a strategy of full transparency, it was backed by innovative technologies that enabled the display of price and product offers in a matrix format that was unlike any of the existing interfaces in the industry.
Initially, following these five guidelines will be an onerous task. The difficulty is that ownership of information disclosure policies is elusive within an organization. Pricing departments price, marketing departments advertise, and accountants track expenses. That much is clear. But who owns the decisions to disclose information? Is it CIOs? Marketing? Sales? General managers? CEOs? Corporate lawyers? One of the key underlying factors to following the first guideline having a transparency strategy at all is developing processes internally so that there is coordination across departments and accountability. A very interesting avenue for future research will be to study how the firms that consistently implement successful transparency strategies are able to do so.
[1] N.F. Granados, R.J. Kauffman, and B. King. “The Emerging Role of Vertical Search Engines in Travel Distribution: A Newly Vulnerable Electronic Markets Perspective,” Proceedings of the 41st Hawaii International Conference on System Sciences (January 2008).
[2] PhoCusWright, Inc. “Online Bookings Will Surpass Offline Bookings for the First Time in 2007,” December 14, 2006. http://www.phocuswright.com/library/pressrelease/310. (no longer accessible).
[3] comScore. “netScore Traffic Data Reveals Internet Usage Slows from May to June,” July 16, 2001, http://www.comscore.com/press/release.asp?press=32. (no longer accessible).
[4] N.F. Granados, R.J. Kauffman, and B. King. “The Emerging Role of Vertical Search Engines in Travel Distribution: A Newly Vulnerable Electronic Markets Perspective,” Proceedings of the 41st Hawaii International Conference on System Sciences (January 2008).
[5] N.F. Granados, R.J. Kauffman, and B. King. “How has Electronic Travel Distribution Been Transformed? A Test of the Newly Vulnerable Markets Theory.” Journal of Management Information Systems, 25, no. 2 (Forthcoming in fall 2008).
[6] N.F. Granados, A. Gupta, and R.J. Kauffman. “The Impact of IT on Market Information and Transparency: a Unified Theoretical Framework,” Journal of the Association for Information Systems, 7, no. 3 (March 2006): 14878.
Nelson Granados, PhD, is an associate professor of information systems at the Graziadio School of Business and Management at Pepperdine University. He received his PhD in information and decision sciences, M.S. in applied economics, and MBA from University of Minnesota. His research on market transparency has received multiple awards, including the 2007-2009 Julian Virtue Professorship, the “Best Publication of the Year” by senior scholars of the Information Systems field, and the “2006 Best Paper of the Year” awarded by the Journal for the Association for Information Systems. His work has appeared in multiple IS journals, including MIS Quarterly, Information Systems Research, Journal of Management Information Systems, and Decision Support Systems. His research has also appeared in premier news outlets such as the Wall Street Journal and Financial Times. Prior to his academic career, he worked as an airline revenue manager in Japan, the U.S., and Europe, and was also a product manager for enterprise systems at IBM Colombia.
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