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Tom Nixon

Edge Competencies: An essential economics lesson

If you’re wondering why Sun bought a company that gives its software away for free; why Google’s market capitalisation is currently $187 billion; and yet Yahoo! is rumoured to be considering shedding thousands of employees, you need to read Umair Haque’s essay on edge competencies. It was written two years ago, and virtually every day I’m seeing evidence of this theory being a powerful force in economics.

I’ll do my best to explain the basics, and give some examples for those who don’t have time to read the essay (writing this helps me to fully grasp the concept too.)

The central idea is that until recently, corporations have needed to focus on their ‘core competencies’. These are the things they do in-house to create value for customers and ultimately make a profit. Yahoo’s core competency when it first launched as a search engine was to employee humans to review websites, then maintain a searchable database of pages so users could find what they were looking for. The website had huge traffic, and their holy grail was to sell banner ad deals for the homepage at a million dollars a pop. These are all core competencies.

But the Internet, with its near infinite connections between information and people has led to a new type of competency. One that harnesses value that’s created in the wild, outside of the corporation. We’re talking about networks, markets and communities.

Google realised that you don’t need human editors to review websites because there’s already a huge amount of editorial happening out there on the web (authors creating hyperlinks between pages) which could be used to determine which content is most relevant for particular searches. This is an edge competency in action. In this case, to leverage the value created by a network to build value for itself (quality search results).

Once they’d established themselves as the worlds most popular search engine, Google monetised their position by creating a market for online advertising where anyone could bid for keywords. With smart software (Google Adwords) to run the market, they could sit back and allow supply and demand economics to dictate prices. This highly automated system allowed Google to make a few bucks here and there from all kinds of niche keywords, that add up to an incredible amount of revenue. Google have never sold an advert on their homepage.

mySQL are the creators of the open source database used by thousands of application developers worldwide. They give the software away for free which has enabled them to build a huge community of developers who are using and improving their software. They’re able to leverage the value created by this community by selling the software to certain clients who would prefer to have a direct relationship and support with the creators. Sun CEO Jonathan Schwartz writes:

Facebook gives its products away for free, too. They make money on ads, we make money on service, support and infrastructure. MySQL has a big business, growing very rapidly. Investing in the future has more value than buying the past – which is why the latter so often comes at a discount.

Leveraging networks, markets and communities is all about understanding where the value is. There is latent value out there waiting to be tapped into, which is a huge opportunity to companies who can build edge competencies. At the same time, this new value can completely disrupt certain old business models.

The music business is a classic example: An industry based on distribution is being disrupted by filesharing, social networks and digital downloads. There’s a huge amount of value out there which can spread the word about amazing new music and give bands access to potentially enormous global audiences. But at the same time it threatens the traditional model of selling music in a physical format. The choice they have to make is either to attempt to resist the tide or figure out new business models to leverage the value in the networks, markets and communities outside of the corporation. Seth Godin has some fantastic ideas about this that you can apply to many other industries.

Umair would argue that it’s not even a choice. Resisting the tide is an impossibility so it’s a case of adapt or die. But for smart companies who build edge competencies, there are good times ahead.

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  1. hey tom – you’re spot on – good new value lies in people power and deriving new insights by enabling people to work on stuff. but where did your man umair learn to write…univ of cyberpunk?!

    Posted 24th January 2008 at 10:37 pm | Permalink
  2. This is an idea that also crops up in, amongst other things, systems theory and permaculture.

    Posted 25th January 2008 at 9:43 am | Permalink
  3. Jim

    I’m no economist, but I look at like this: The market is the most efficient way of using resources that we know. The firm is less efficient, but keeps the coordination overhead low. The internet brings down the cost of coordination, so we don’t need firms as much as we once did.

    Posted 27th January 2008 at 5:45 pm | Permalink