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Understanding Technological Shifts: Business Effects and Strategic Responses
Business Essentials · Chapter 1: The Business Environment and Ethical FoundationsSection 1.2 · lesson 2 of 10513 min · free with a free account
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In this lesson
How new methods and tools reach a business, and how it can answer.
- Explain the four channels of technological effect
- Distinguish sustaining from disruptive change
- Use adopter groups and attributes to judge uptake
- Weigh five strategic responses and their risks
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The Business Environment and Ethical Foundations
Understanding Technological Shifts: Business Effects and Strategic Responses
Some forces change what a business can charge. Technology can change what a business is. This section treats technology as an external force, acting on a business from outside. We start with the four channels through which it arrives. Then we separate two very different kinds of change, sustaining and disruptive. We look at why sensible, well-run firms so often miss the second kind. Next comes adoption. Who takes up a new technology, when, and what predicts the speed. Then the five strategic responses a business can choose, each with its own risk. And we close on two hard questions. What technology does to jobs, and what a small firm should do.
Technology As A Force
Four Channels of Effect
For business analysis, technology means the methods, tools, and knowledge used to produce and deliver value. That is much broader than information technology, which means computing and communication systems. A refrigerated truck is a technology in this sense. So is the standardized shipping container. So is a new welding method, or a scheduling app. Each changed what some businesses could offer. Information technology gets its own treatment in chapters seventeen and eighteen. Technology reaches a business through four channels. First, it changes what can be produced. A new material or process makes a product possible, cheaper, or better. Second, it changes how things are produced. The cost, speed, and quality of the work behind an offering. Third, it changes distribution and selling, by opening or closing routes to the customer. Fourth, it changes what customers expect. Faster service from one business becomes the expectation for all of them. That fourth channel is often the most damaging, because it works even if the business adopts nothing. A hardware store that never changes its methods still gets compared with the ordering its customers use elsewhere.
Two Kinds Of Change
Sustaining Versus Disruptive
Technological change is not all of one kind. Sustaining change improves an existing offering, along the dimensions current customers already value. A faster engine in a vehicle is sustaining. So is a sharper display in a device. Established businesses are generally good at this, because it strengthens ties with customers they already have. Disruptive change is different in kind. It brings an offering that serves a different set of needs. Often it is simpler, cheaper, or more convenient. And at first, it performs worse on the measures the established firms and their main customers care about. That is exactly why it gets dismissed. It grows among people who were overlooked, or over-served, in a segment the incumbents do not value. Then it keeps improving, until it meets what the mainstream requires.
Figure 1.2.1
Watch the Rate, Not the Start
The standard picture of this puts performance on the vertical axis, and time on the horizontal. Both scales are illustrative. Neither carries units. A dashed line traces what mainstream customers actually require. It rises only slowly. The incumbent's performance climbs steadily, pulling further and further above that requirement. The disruptive offering starts well below the requirement. At first, it looks harmless. But it improves faster than the requirement rises. Eventually it crosses the line, at the marked point. From there, it is good enough for the mainstream. So the danger is not where the entrant starts. The danger is its rate of improvement, relative to the requirement it is approaching. That changes the question a manager should ask. Not how good is it now, but how fast is it improving.
Reading The Evidence
A Lens, Not a Prediction
This framework deserves an honest description of its evidence. It was built largely from detailed studies of particular industries. It explains some well-known displacements convincingly. But critics raise several points. The cases were examined after the outcome was already known. Many offerings that looked disruptive at the start never reached the mainstream. And some incumbents that seemed to be disrupted adapted successfully. The term has also spread far beyond its original meaning. It now gets applied to almost any successful newcomer. Used strictly, it names one pattern. An initially inferior offering, serving a different need, improving until it threatens the mainstream. So treat the framework as a lens that raises questions, not as a prediction. It cannot tell you in advance which new offerings will follow that path.
Rational Failure
Why Incumbents Respond Badly
Established firms often respond badly to disruptive change. The reasons are rational, not foolish. First, existing customers do not want the new offering. So listening to customers, usually sound advice, points away from it. Second, the new offering is usually less profitable at first. A firm that funds its best opportunities ranks it low. Third, the firm's processes, skills, and relationships fit the old way. So the new offering looks hard to deliver, too. Each argument is sound in the present. The trouble is that all three assume the present will continue. Here is a composite case. Tamsin is head of product at Corwin Instruments, a fictional maker of professional audio recorders. A smaller company starts selling a low-cost recorder that connects to a phone. Its sound is poorer than any Corwin product. It sells to hobbyists, and to people starting their own online programs. None of them are Corwin customers. No studio customer has asked for anything like it. So Tamsin puts the budget into the flagship recorder. Within a few product cycles, the cheap recorders satisfy small production companies, Corwin's fastest-growing customer group. The dismissal was rational on every measure Tamsin used, and still wrong. The better question was where the new product would be in three cycles, and who would be buying it then.
The Adoption Pattern
Five Groups of Adopters
Not everyone adopts a new technology at the same time. The adoption pattern sorts adopters into five groups, by how early they take up an innovation. Innovators come first. They tolerate imperfection, and value novelty for its own sake. Early adopters follow soon after. They want a strategic advantage, and will accept some risk. The early majority waits for a record of working. It wants evidence, and support. The late majority adopts once the technology is standard, often out of necessity or pressure from others. Laggards come last. Their delay may be a sound judgment that the old way still suits their needs. So lateness is not always resistance for its own sake. The groups matter because they need different things. A product that satisfies innovators may be far too rough for the early majority. So a business that reads early adopter success as proof of mainstream demand can be badly misled.
Predicting Adoption
Five Attributes That Set the Pace
Whether a technology is adopted, and how quickly, is predicted by five attributes. Relative advantage is how far it is seen as better than what it replaces. Compatibility is how well it fits existing values, habits, and equipment. Complexity is how hard it is to understand and use. Here, more complexity slows adoption down. Trialability is how far it can be tried on a small scale, before anyone commits. Observability is how visible its results are to other people. Four of the five speed adoption as they rise. Complexity is the one that works in reverse. A technology can be clearly better, and still stall, if it is hard to try or hard to see working. So the attributes work like a checklist. The weakest one tells a business where to concentrate its effort.
Table 1.2.1
Scheduling Software at Fernhill Landscaping
Here are the five attributes applied to one case. Fernhill Landscaping is a fictional firm with eight employees. It is weighing cloud-based job scheduling software. Relative advantage is moderate to strong. Shared crew schedules replace a wall calendar and phone calls. Missed appointments are costly, and the improvement is easy to describe. Compatibility is moderate. Crews work outdoors and carry phones, but not laptops. The software fits the phones, but not the habit of giving verbal instructions each morning. Complexity is weak to moderate. Each crew leader must learn a new app, and their comfort with software varies. So training time is a real cost. Trialability is strong. A month-to-month subscription with a trial lets the firm test it on one crew. Observability is strong too. Owners and customers both notice fewer missed jobs, which encourages wider use. Put together, the likely obstacle is training, not the value of the tool. And that points to a phased rollout, starting with one crew.
Strategic Responses
Five Ways to Answer a Shift
A business facing a technological shift has five broad responses. Each carries its own risk. It can adopt early. That gains a lead, and shapes what customers expect. The risk is committing to a technology that is immature, or soon superseded. It can wait, and adopt proven technology, letting others absorb the cost of learning. But customers may have moved on. It can acquire the capability, by buying a business or hiring people who have it. That is fast, but costly, and integration is hard. It can partner with an outside firm. That limits investment, but creates dependence and shares the benefit. Or it can exit, withdrawing from the affected market. Exit is sometimes correct, when the shift removes the basis on which the business competes. It is a considered choice, not a failure. Being early costs something, and so does being late. Neither cost can be seen when the choice is made. Early adopters pay for immaturity. Higher prices, defects, and the risk that the standard settles elsewhere. Late adopters pay in lost customers, and in catching up once the change is obvious. Hindsight makes the timing look obvious. So judge a choice by its reasoning, given what could be known then. That principle returns in subchapter one point six.
A Contested Question
Technology and Employment
Does technological change reduce employment, or increase it? The question is disputed. It is best understood by stating each side at its strongest. The displacement argument says technology replaces tasks that people used to do. The workers affected are often not the ones who fill the new roles. And the transition can impose severe, lasting costs on particular occupations and places, even if the overall effect is benign. The creation argument says technology lowers costs, which raises real incomes and spending. It creates new products and industries, with jobs that could not exist before. And history shows employment adjusting over time. The disagreement has two parts. The empirical part asks how many jobs are lost and created, in which occupations, and how quickly. Bureau of Labor Statistics data on employment by occupation are the usual starting point. But they cannot fully separate technology from other causes. The normative part asks what society and employers owe the workers who bear the transition costs. That is a question of values, not measurement. This section takes no position on either part.
Small Business
One or Two Attempts
For a small business, the whole problem is sharper. It has limited capital. It cannot buy every new tool, or hedge by placing several bets at once. A large firm can fund a dozen experiments, knowing most will fail. A small firm gets one or two attempts. So the sensible move is to favor choices that can be reversed. Subscriptions, rather than purchases. Pilots with a single crew, rather than firm-wide rollouts. And technology that solves a problem the business already knows it has. It also helps to watch what customers, suppliers, and peer businesses are adopting. The pressure that matters most usually arrives through them. That links back to the fourth channel. Expectations move, whether or not the business does.
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