Business Perspective

Business Side of Things


Innovation is a wonderful thing. Without innovation you probably wouldn’t be connected to the internet via your personal lap top right now browsing through thousands of websites. History is filled with stories of innovation that never stop amazing us. People have been chasing after innovative things since day one always trying to come up with something new and unheard of. Businesses are pretty much the same way. It’s in their nature, because people are the main engine of every business.

Businesses have to deal with disruptive technologies (innovation) throughout their existence and figure out a way to make a profit out of it. Sounds fairly simple, right? History proves quite the opposite. Just pick an industry. Any industry. How about a mechanical excavation industry that was completely wiped out by a disruptive technology known as hydraulics?

Story


The excavation industry was dominated by steam powered machines in the 1920’s. There was about 30 companies that were in this business at the time. By late 1920’s when gasoline power machines came along, only 23 out of 30 managed to cope with this new technology (the rest ran out of business and became obsolete). Not bad right? This is not the end of our story. In the 1960’s the introduction of hydraulics completely wiped out the industry leaders of that time. Only 4 out of the 30 companies managed to make a switch to a disruptive hydraulics technology, the rest are in the past. Companies that were leaders of that time were all entrants to the industry of excavation, and you probably know of them today as: John Deere, Caterpillar, Hitachi etc.

Lessons


The moral of the story is that many businesses fail to adjust and cope with innovation. It is the ultimate struggle that every business needs to deal with. Sometimes even the best management teams are unable to save the lost product line, business unit or even a company as a whole. Innovation can be a double-edged sword and that is why well managed companies can become obsolete. The very reason industry leaders are so dominant is because of their excellent practices and strategies deployed in their past, but those same strategies can disable them to deal effectively with innovation in the years to come. There are many examples of great companies failing to adjust to new technologies. Consider an example of IBM and their dominance in the mainframe market. However IBM was years behind the minicomputer revolution, which did hurt the company in the long run- even though they were able to adjust years later. We can give more examples like this, but the whole point is that innovation can be deadly even for major players in the industry. Understanding the principles of disruptive technologies and their impact on businesses can be extremely beneficial to you as an investor. One of the greatest investors of all time said:

It’s wonderful to promote new industries, because they are very promotable. It’s very hard to promote investment in a mundane product. It’s much easier to promote an esoteric product, even particularly one with losses, because there is no quantitative guideline.”- Warren Buffet

Why should you as an investor care?


You as an investor have some very simple rules to follow- and that is to be disciplined, well grounded in your investing knowledge, and patient enough not to jump when Mr. Market says “jump”. As you can see, when it comes to innovation, businesses have their own battles to fight and you should be smart and let them fight those battles for you. This means refraining from trying to guess who is going to become the next Microsoft. If you would like to find out more about what innovation looks like from investor’s perspective, read this.

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