Here is an excerpt from an article written by John Sviokla for the Harvard Business blog. To read the complete article, check out other articles and resources, and/or sign up for a free subscription to Harvard Business Daily Alerts, please visit [email protected]
Five Keys to Creating an Information Advantage
The value of having superior information has been true throughout human history. I believe that in addition to the analytics movement, which my friend Tom Davenport has so beautifully documented, an information advantage actually derives from a more comprehensive set of principles — great analytics being one of them. Let’s take a look at the case of a scion of the legendary Rothschild family.
Mayer Amschel Rothschild (1744-1812) developed a small fortune lending money and handling the shipment of bullion during the Napoleonic Wars (1799-1815). As his wealth grew, he dispatched his five sons to different cities throughout Europe (London, Paris, Frankfurt, Naples and Vienna) and set up a pan-European network of messengers and carrier pigeons so they could quickly gather information that might affect their investments. Rothschild ran a decentralized empire, but with tight controls. Each son was allowed to make the optimal decisions regarding investments in his country, but information was kept tightly within the company by the family bonds and arranged marriages with close relatives.
Just as investors watch Warren Buffet to see what they can learn, the Rothschilds developed a reputation for being in the know and were carefully tracked by speculators looking for where to place their bets. During the Battle of Waterloo, the stakes were particularly high. Speculators knew that if the Seventh Coalition (consisting of Britian, Russia, Prussia, Sweden, Austria, The Netherlands and a number of German states) won, the era of uncertainty caused by Napoleon’s expansion would be over. Britain would become the dominant force in European politics, and the ensuing political stability would drive up financial markets and the value of investments throughout Europe. The Rothschilds knew this, too.
Shortly after the battle ended, and long before anyone else knew the outcome, Rothschild began selling stocks. Speculators and traders assumed this meant Napoleon had won the battle at Waterloo, which started a mass sell-off. When prices crashed, Rothschild used his agents to buy up everything they could and he turned his small fortune into a colossal one. Although the SEC might not have approved of his innovative tactics, Rothschild demonstrated the power of asymmetric information — having knowledge that no one else has yet.
Rothschild used five tactics to get his information advantage:
1. He created a network of data gathering that allowed him to possess data others lacked;
2. He used the best technology (pigeons) in a new way to help in the data gathering;
3. He analyzed the implications of the data with insight and precision;
4. Once analyzed, he considered how to best use these insights to his advantage — in this case, he knew the market would be watching for his movement — and therefore used his information first to drive down prices, first, before buying. If he had simply bought in, his advantage would not have been maximized.
5. He had great timing and execution.
Today, Wal-Mart has a superior data network that allows them to sense and respond to the marketplace in a way that is impossible for others to replicate. The investment banks who perform high frequency trading use their access and analysis to create massive profits. UPS moves about 6% of the US GDP and if they were willing to use their data for investing purposes — which they are not — they could make a fortune.
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John Sviokla is vice chairman of Diamond Management & Technology Consultants, Inc. He is a former professor at Harvard Business School in Marketing, MIS, and Decision Sciences.
To read the complete article, check out other articles and resources, and/or sign up for a free subscription to Harvard Business Daily Alerts, please visit [email protected]