Racing The Tortoise And The Hare

 

We all know the classic tortoise and hare race. The tortoise starts slow and conserves energy while the much more agile hare speeds ahead, yet still loses. While this is a children’s tale, we are seeing an eerily similar competition unfurl in the tech and business landscape. The hare, in this case, is a small or medium size technology business and the tortoise is the old, large industry leader. Smaller players are relatively free from media and investor scrutiny and so are able to pivot quickly and gamble on new technologies. This enables them to reach and remain at the cutting edge. On the other hand, behemoth publicly listed companies are much more constrained and adopt new tech much later. They have policy, reporting, and investors hampering excessive risk taking. Moreover another reason this phenomenon exists is that they are profit seeking. Ironically, the successful of a startup is often not defined by this property, and is instead measured against the high-tech wares it has to show. Shareholders mandate managers to maximize their returns, and so these companies will often implement the wait-and-see strategy. This way they can profit in the short-term and then find a way into the party at a later point.

 

Why wait-and-see?

When there are large amounts of uncertainty (and billions of dollars) in strategic planning, business executives have a few paths to follow [1]: 1) Shape the future, 2) Adapt to the future, or 3) Reserve the right to play. These are ordered in terms of the level of pro-activeness required. Taking the first approach requires the business to be aggressive and wade into uncertain waters. They risk losing a massive customer base if the product or approach is not well-perceived, or even if the technology is too early for its time. This risk is exacerbated when you consider that customers tend to have sticky preferences and do not necessarily embrace new change (as they too have to get up a user learning curve). Fortunately (or unfortunately), startups and small businesses don’t have this problem. Therefore, trying to invoke change and disrupt is a no-brainer for them. They simply don’t have the economies of scale to compete with the big guys on vanilla products.

Business is rarely a winner-take-all situation – the pie is often split in many ways. Thus, high ranking executives will minimize business exposure by monitoring and just staying in touch with the game, while monetizing their current market position. AT&T has demonstrated a strong aptitude in executing such strategies. For example, they chose against embracing VoIP (voice calls over the internet) in the 1990s and continued to milk land-line phones as a cash cow. However, by remaining in touch with the popular trends, they re-aligned their strategy in the early 2000s and expanded their product offering into VoIP and internet providing. In fact, AT&T are again undergoing a similar transformation with its US$85bn big for Time Warner, which carries many lisence’s that would integrate with the streaming services they are developing.

Unlike the classic fairytale, where the tortoise is innocent, these multi-nationals are roided with money which allow them to join the game late while doing less to build the foundations.

Catching the tortoise sleeping.

Opting to take a slow approach in adopting new technology does however pose risks, and these cannot necessarily be escaped with money or muscle.

Firstly, there is a too late. Allowing competitors to reach a high level of momentum could mean that acquiring new technology is no longer an option. Moreover, if the incumbents do decide the M&A route, they are at risk of paying a substantial premium. Hence, the multi-billion dollar premiums required to purchase competitors could easily exceed the cost of developing the new technology themselves. This is further made complicated by regulators that may prevent consolidation in the market.

Next, if it’s not possible to throw money at the problem and fix it, the big players are at risk of starting a race from a long way behind. For example, licensing and patents may prevent players from simply copying and implementing new products, which could also reduce the impact of poaching human capital. If consumers are comfortable with the new change they may begin to swap providers, and so their sticky preferences may now become a hindrance to the business model.

 

Standing as outsiders it may be easy to point fingers at the traditional corporates, like car manufacturers, and call them boring and not cutting-edge. But hopefully the above might highlight why their strategies are necessary for their situation. Their expertise in bringing select products to market could actually benefit consumers by being cheaper and more efficient, however, their willingness to delay investment in new tech reduces competition and hence slows the speed of innovation.

 

Sources:

[1] https://hbr.org/1997/11/strategy-under-uncertainty

[2] http://time.com/4542446/att-time-warner-history/

[3] http://time.com/4542446/att-time-warner-history/