The "free" business models popularized in the digital world by companies such as Google, Adobe, and Mozilla are spreading to markets in the physical world. How should established companies respond? The authors have found that some are too quick to offer free products of their own. Many more either don't move quickly enough or simply fail to respond at all, even when they have the resources to win a head-to-head battle. Consider the reluctance of almost all U.S. newspapers to counter the attack on their classified advertising business from Craigslist. To determine the level of threat posed by a free-product rival, a company should assess the rate at which its own paying customers are defecting versus how quickly the entrant's user base is growing. Most incumbents can fend off the assault by introducing a better free offering and generating revenues and profits through up-selling, cross-selling, selling access to their customers, and bundling the free product with paid offerings. Embracing free strategies is not easy for managers at established companies. One obstacle is the profit-center structure, which makes it impossible to consider a product's revenues and costs separately. Another is the cost accounting system, which is not good for identifying the actual expense of generating additional offerings. To overcome these challenges, managers can push profit responsibility up, push revenue and cost responsibilities down to separate groups, and step back from the cost accounting system. They may find pricing flexibility they didn't realize they had.

This is an MIT Sloan Management Review article. Many companies keep their suppliers and partners at arm's length, zealously guarding internal knowledge. Toyota Motor Corp., however, embraces its suppliers and encourages knowledge sharing through established networks. Toyota has developed interorganizational processes that facilitate the transfer of both explicit and tacit knowledge. The three key processes revolve around supplier associations (for general sharing of information), consulting groups (for workshops, seminars, and on-site assistance from Toyota), and learning teams (for on-site sharing of know-how within small groups). With Toyota's help, suppliers have fine-tuned their operations until, compared with their work for Toyota's rivals, they have 14% higher output per worker, 25% lower inventories, and 50% fewer defects. Quality improvements enable Toyota to charge price premiums for its products. Toyota's experience suggests that competitive advantages can be created and sustained through superior knowledge-sharing processes within a supplier network. The authors believe those principles have applicability in other types of alliances, too, including joint ventures. In fact, they contend that establishing effective interorganizational knowledge-sharing processes with suppliers and partners can be crucial for any company. The authors claim that knowledge sharing with suppliers is the reason for Toyota's dynamic learning capability and might be the company's one truly sustainable competitive advantage.