A Different Game: Wharton Book Explores Managing Emerging TechnologiesPublished: June 07, 2000 in Knowledge@Wharton
Newspaper editor H. L. Mencken once observed that "There is always an easy solution to every human problem neat, plausible and wrong." Nowhere are simple truisms more tempting or more likely to be wrong than when it comes to the Internet and other emerging technologies. A new Wharton book takes a deeper look at the "different game" of managing emerging technologies.
What makes emerging technologies a "different game"? Higher levels of uncertainty and complexity, accelerating speed and competency-destroying change are among the characteristics that make managing emerging technology businesses distinct from managing established technology firms. Managers who want to succeed in this environment, therefore, need to take innovative approaches to issues such as technology assessment, strategy, marketing and organizational design, write Wharton marketing professor George Day and Paul J. H. Schoemaker, research director of Wharton's Emerging Technologies Management Research Program. The two are editors of Wharton on Managing Emerging Technologies.
New tactics may be a matter of life or death for many established players. Gene therapy, electronic commerce, intelligent sensors, digital imaging, micro-machines, superconductivity and other emerging technologies shift the rules. "This is exhilarating for the attackers who can write and exploit the different rules of competition, especially if they are not encumbered by an existing business. For incumbents, however, emerging technologies are often traumatic," write Day and Schoemaker.
Wharton on Managing Emerging Technologies is one of the first broad, research-based views of this new competitive terrain. It draws together the perspectives of 26 experts in strategy, marketing, public policy, management, alliances and organizational design. The research began in 1994, before the rapid rise of e-business, when a group of Wharton faculty founded the Wharton Emerging Technologies Management Research Program. The initiative involves corporate partners and academic researchers working together to explore strategies and better understand this new competitive environment.
Avoiding the Traps: The market position and resources of incumbent firms should give them an advantage over newcomers. Yet many incumbents have a poor track record developing and managing emerging technologies. What goes wrong? Day and Schoemaker cite four traps that have been identified through research and discussions with managers and a set of strategies for avoiding them. The four common traps for incumbents are:
- Delayed Participation: When faced with high uncertainty, it is tempting and perhaps rational to just "watch and wait." But incumbent organizations tend to wait too long. When IBM considered adding the Haloid-Xerox 914 copier in 1958, its primary concern was whether the existing electric typewriter sales force could handle the product. IBM rejected the opportunity. The new business is evaluated through the frame of the existing business, so managers fail to see its potential. First-generation products, such as digital cameras, are often inferior to products they replace; consequently it is easy for managers to dismiss these infant technologies. Instead, we need to look more carefully at how the market will evolve as the technology matures. In winner-take-all markets, these delays can be serious or fatal.
- Sticking With the Familiar: Even if incumbents initially defer participation, they must at some point choose whether and how to participate in the emerging technology. Often they choose to stay with the familiar for too long even when there are compelling arguments for making a change. When Encyclopedia Britannica was approached in the late 1980s to license its content for CD-ROM delivery, it elected to stay with the familiar printed-page technology. The company lost 50% of its revenue between 1990 and 1995 due to inroads made by CD-ROM technology. Most people are averse to risk and dislike ambiguity so they stick with the familiar. If the familiar business is losing ground to e-business, then this could leave the company stuck in a low-growth part of the market.
- Reluctance to Fully Commit: Even when companies overcome the tendency to delay participation (trap 1) or stick only with the familiar (trap 2), they may still make just a halfhearted commitment. One study of 27 established firms found that only four entered aggressively while three didn't participate at all in a threatening technology. The majority made a modest initial commitment that gave the entrants from outside the established industry time to secure a strong market position. Some of these small bets may actually be well-considered real options, but very often it is timidity or weakness of will. The entrepreneurial rivals, who have staked their fortunes on success, are committed to the death.
- Lack of Persistence: Suppose, however, that an established firm has managed to avoid the first three traps and made significant investments in a new emerging technology. Will it have the fortitude to stay the course? Large companies, when facing pressure for quarterly results, soon loose patience with adverse results. One study found that 8 of 21 established firms that entered markets in which emerging technologies were succeeding subsequently withdrew, and most did not resume their efforts until the viability of the new product was demonstrated by outsiders. At that point it was usually too late to achieve leadership. Missed forecasts and dashed hopes are a common part of the gestation of new technologies that eventually succeed. Incumbents are often too quick to pull the plug on these ventures when they go through these growing pains.
Strategies for Success: How can incumbent firms avoid these traps? The authors present four strategies that can help companies steer clear of these pitfalls:
Attending to Signals from the Periphery: Emerging technologies signal their arrival long before they bloom into full-fledged commercial successes. However, the signal-to-noise ratio is initially low so one has to work hard to appreciate the early indicators. This means looking past the disappointing results, limited functionality and modest initial applications to anticipate the possibilities. Look for new entrants and unfamiliar customers or at university research. The future of the music business may not be defined by the major entertainment companies as much as by the students in the college dorms downloading MP3 files. Even if there is no existing market for the product, you can look at potential by examining the needs that could be filled. For example, Xerox determined that there was a market for one million fax machines in the 1970s by examining the extent and frequency of urgent written messages. (Unfortunately, it bet on the wrong technology computer-to-computer to meet this need.)
Building a Learning Capacity: A second approach to escaping the traps of emerging technologies is to keep learning as an organization. The diverse sources of information from the periphery create plenty of noise, so the challenge is to absorb this information and transform it into knowledge. To do this Schoemaker and Day say organizations need to build a learning capacity characterized by: an openness to a diversity of viewpoints, within and across organizational units; a willingness to challenge deep-seated assumptions of entrenched mental models while facilitating the forgetting of outmoded approaches; and continuous experimentation in an organizational climate that encourages and rewards "well intentioned" failure.
Maintaining Flexibility: Developing organizational flexibility is the third way to escape from the traps of emerging technologies. The greater the organization's flexibility, the lower the cost of making a commitment and the lower the cost to reverse direction. This is similar to using flexible rather than fixed manufacturing systems, where it is very inexpensive to retool a plant. Developing a strong set of options and capabilities that can be applied in a variety of contexts allows the company to change direction rapidly and efficiently.
Organizational Separation: The fourth strategy to avoid the traps of large incumbents is to take the emerging technology business outside of the main corporation into a separate unit. The more the emerging technology initiative can operate from a smaller, entrepreneurial mindset, the less it will be held back by the inertia, controls, risk-avoidance and big-firm mindset that leads to the four traps discussed above. By creating an isolated nursery, the company protects the emerging technology business from infection by microbes that, while not dangerous to the large firm, can be deadly to the new venture. GM's Saturn division, Roche's Genentech, Thermo Electron and a variety of other firms have used this separation to give their new ventures the independence they need to flourish.
Living With Paradoxes: One of the most important capabilities for firms in managing emerging technologies effectively is the ability to live with paradoxes, Day and Schoemaker write. Among these paradoxes:
- A strong commitment is necessary but you also have to keep your options open: Andy Grove of Intel has argued that it takes all the energy of an organization to pursue one clear and simple strategic aim especially in the face of aggressive and focused competitors. For example, Intel decided early on not to enhance the TV set to put all its energy behind the computer chip. On the other hand, committing too early can mean going over a cliff. Managers need to hedge their commitments by creating a portfolio of options where the commitment of additional resources is subject to attaining defined milestones and resolving key uncertainties and then moving quickly.
- Winners are often pioneers, but most pioneers fail: A paradox that follows on the first is that the only way to arrive first in a new territory is to be a pioneer, and yet pioneers more often than not end up at the bottom of a gulch with arrows in their backs. Apple was ahead of the pack in introducing the Newton PDA, but was rewarded with poor performance, low sales and derision in Doonesbury. The big rewards come from being a pioneer, so long as you survive, but patience is needed to increase the odds of success. Sometimes you need to move forward quickly and other times set up settlements along the way.
- Strategies should build on existing competencies but organizational separation is often required for success: Often fledgling projects need to get out from under the weight of large organizations to flourish, but they can be so set apart that they become completely disconnected. Xerox PARC created the graphical user interface, but others benefited from it. Saturn created a different model for its organization but General Motors didn't absorb the lessons. IBM went outside to build the PC and found Microsoft and Intel running away with its business. Day and Schoemaker note that companies need to develop new organizational forms that are "ambidextrous," running existing business in one way and new businesses according to a very different model. "Like parenting a teenager, the new venture has to be given enough freedom to experiment but still be kept within the family," they write.
- Competition is intense and brutal, and yet winning requires collaboration: Competition for emerging technologies can be brutal. With winner-take-all markets and firms that have staked their entire future on success, failure often is not an option. At the same time, no emerging technology company is an island. The success of a new gene therapy may depend on far-flung networks of researchers in specific fields. The success of a new information technology standard depends on upstream and downstream adoption by suppliers and customers. Managing alliances and other partnerships is one of the central activities in successfully developing and commercializing emerging technologies. And the structure of these relationships determines the payoffs from the process.
"An important part of managing emerging technologies is the ability to live with paradox and its associated ambiguities," Day and Schoemaker write. "Simple, absolute answers are few and far between. And if there were simple answers, the rewards of winning in this game could not be great since many players would master the necessary strategies and tactics. It may be the ability to live with these ambiguities and to continually identify them and think through them that is one of the most important skills of managing emerging technologies."