LONDON What do Leica, Olivetti and the Swiss watch industry have in common? All these companies and industries encountered difficulties in achieving the technological shift from mechanics to electronics, despite recognizing the threat at an early point.
In Switzerland, more than 1000 small watch manufacturers went out of business in fifteen years from 1970 to 1985. At the same time, the number of employees in the industry decreased from 90,000 to 30,000. Given that the quartz technology was invented in Switzerland, it is somewhat surprising that the Swiss had so much trouble handling the technological shift.
After having sold its electronics division to General Electric, Olivetti suffered greatly when electronic calculators came to the market in the early 1970s. The same thing happened at camera company Leica. In 1997 the company launched a digital camera with 75-megapixels and then decided to cut off digital development.
This seemingly irrational behavior of first recognizing the electronic threat and later on cutting down on development has in fact taken place in many other companies. Facit, a Swedish manufacturer of mechanical calculators, explored electronics in the 1950s and even developed transistorized computers. This work was stopped in the 1960s and consequently, the firm suffered when calculators became electronic. Polaroid invested extensively in digital imaging in the 1980s and stopped these initiatives in the mid 1990s. Instead, the company spent more money on marketing its traditional cameras, which generated good results in the short term.
When sales of digital cameras exploded in the late 1990s, Polaroid turned from record profits into bankruptcy in record time. The same pattern occurred at the legendary Swedish camera manufacturer Hasselblad, who invested heavily in digital imaging in the early 1990s, and then cut it off when a new owner decided in 1997 that the company should instead focus on film-based photography. Needless to say, Hasselblad was also threatened by extinction only a few years later.
The evidence above suggests that the more crucial electronics became for the long-term survival of a company, the less was spent on it! This pattern is frightening, because it means that firms act against what in hindsight appears to be the only way to survive. So, why does this strange behavior take place time and time again in so many industries?
I would like to highlight three reasons why such counter-intuitive decisions have often been taken.
Firstly, in an old, established and successful company a dominant logic and a corporate culture become deeply rooted. Landmark events of success and expansion define the identity of the firm. Thus, technologies and initiatives which are not compatible with the deeply embedded corporate culture are usually not appreciated.
At Olivetti, the electronic developers had to hide their activities, since they were not appreciated by the ‘mechanical establishment’ at the company.
The second reason is that the new technology does not draw upon the existing competence base of a company. Over time, manufacturing, R&D, product development and operations become better at making mechanical products. However, with a technological shift, all these structures, skills and processes do not contribute to any economy of scale. Resistance to a competence-destroying shift is therefore rational for most people, since their individual skills will not be useful anymore.
An engineer who used to develop electronic products at the mechanical firm Facit once said: “the cogwheels in the mechanical calculators were the soul of the company.” This mechanical soul is also what prevented the company from surviving.
Thirdly, the new technology may not initially satisfy the demands of a firm’s established and traditional customer base and thus, there is no obvious financial logic in developing an initially inferior technology.
The following quote about the new owner’s decision to cut off digital development at Hasselblad gives a good illustration: “The costly development of a digital camera has been sold. Thereby the company saves 15 to 18 million SEK that can be invested into conventional cameras and then adapt them to digital technology.”
Why is one development project regarded as costly and another one as an investment? Under conditions of disruptive change, companies who listen carefully to their customers may be led in the wrong direction.
The three reasons mentioned above taken together imply that electronics was illegitimate in those companies which were, in fact, in desperate need of it for their survival. Competence in mechanics seems to create incompetence in electronics. Initial explorations of the new technology were repelled by the corporate immune system and starved in the internal competition for resources.
With hindsight it is easy to see that there are companies and technologies that became victims of their own competence.
Christian Sandström is a PhD student at
Chalmers University of Technology in
Gothenburg, Sweden. His research concerns
disruptive innovation and the challenges they present for established firms. Most of his work can be found at www.christiansandstrom.org.
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