#001: Why Technology Matters a Lot Less Than You Think

Show Notes

Episode Contents

 

In this episode we will explore :

  • Why companies, especially in Germany are focusing on the wrong thing when it comes to “digital transformation.
  • Why the over-reliance on technology can massively hurt your company. I’ll do this by citing various examples from vastly different industries and fields.
  • Why companies are not and will not become innovative by using technology and why there's very little opportunity to gain a lasting competitive advantages against competitors,
  • The very dangerous assumption of why, despite the increased importance of IT, this does not translate into a lasting competitive advantage,
  • What distinguishes proprietary from infrastructural technologies,
  • How competitive advantages erode over time, by looking at past technologies,
  • What makes IT a simple commodity input and not a strategic advantage to enterprises,
  • Why companies need to focus on threats rather than opportunities and should keep IT expenditure in check,
  • Why companies should not be first-movers and why there’s no shame in following your competitors when it comes to adopting new IT technologies.

 

Summary

 

Why Technology matters a lot Less than you Think

  • Don’t rely on technology to solve your fundamental or essential problems or to compensate your inadequate competencies in your company.
  • Technology is only an ENABLER that will amplify the skills or core competencies of your company.
  • Learn the fundamentals first and get the essentials out of the way first before you even THINK about technology.
  • Simply having access to technology doesn’t make you a better artist. Having a paint brush doesn’t make you Picasso. Just because you buy the most advanced camera doesn’t make you a pro photographer or simply buying a formula 1 race car doesn’t make you Michael Schumacher.
  • Just because a certain technology makes skills more accessible, doesn’t make it any easier and can even disadvantage beginners that are still learning the fundamentals skills to reach a pro level. Restricting access to features and fancy tech would be a much better option.
  • But the increased accessibility to technology creates an even bigger problem. Now that technologies such as videography are much more accessible, it has also created a lot more competition. Now, everyone is creating high-quality 4K content.
  • Having constraints or putting them in place helps people become more creative - especially in innovation. There’s a German proverb that illustrates this point very well: “Not macht erfinderisch.” (Necessity begets ingenuity.)

 

Why the increased importance of IT does not translate into a lasting competitive advantage

  • Agencies, digital consultancies and technology companies have strong, vested interests in selling technology products and services to businesses.
  • Most CTOs hire IT & strategy consultancies to help them better utilize their IT and to differentiate themselves to gain an advantage from their competitors.
  • Behind this view lies a very faulty and dangerous assumption, one that assumes that because the importance and availability of IT has increased, so too has its strategic importance.
  • For technology or any resource to be truly strategic and able to create a sustained competitive advantage, it needs to be scarce not ubiquitous and do something competitors don’t have or simply can’t replicate.

 

How competitive advantages erode over time - A brief history lesson

  • Proprietary technologies are owned by a single company e.g. pharmaceutical company that has a patent for a specific active ingredient. If competitors find this technology hard to replicate then a company has a long-term strategic advantage that enables it to earn higher profits than its competitors.
  • Infrastructural technologies provide far more value when shared than when used by a single company e.g. railroads. The value created by keeping this technology priority is insignificant compared to when its shared.
  • These inherent characteristics and economics of infrastructural technologies, make it inevitable that technologies such as railroads, telephone lines or electricity will be shared and become part of the business infrastructure.
  • In the beginning, infrastructural technologies acts more like a proprietary technology, due to the fact that in these early stages is often limited in terms of access through physical limitations, intellectual property rights, high costs or simply a lack standards. It’s only during this time a company can gain a competitive advantage over its rivals.
  • Managers falsely believe that the advantages of infrastructural technologies will continue indefinitely. But once the buildout begins to subside, the opportunity to gain a competitive advantage have mostly vanished.
  • By simply reducing a competitive advantage to the superior use of technology actually does companies a huge injustice. Their advantage comes from very distinctive and basic business models which were often developed before the use of any particular technology.
  • The potential for technology to create a strategic and differential competitive advantage for a company deteriorates as it becomes more accessible and affordable to all market participants.

 

Why IT is the ultimate commodity

  • IT shares all the characteristics of in infrastructural technology. Its inherent characteristics make it the perfect a commodity, perfectly reproducibly at the byte level, lending itself to even faster rates of commoditization.
  • The distinguishing or superior use of technology will erode by outsourcing IT processes and will bring other companies to competitive parity. Once the process has been automated or outsourced, the additional returns from new advances diminish very quickly.
  • The internet has accelerated this commoditization of IT by providing a distribution channel for generic software and massively decreasing costs and thus democratizing computer technology. It has also leveled market entry barriers for competition. Even the most advanced IT system quickly becomes available for all.

 

Why companies should not be first-movers in adopting new IT

  • Competitive advantages that derive from the characteristics of infrastructural technologies are only possible in the early phases, which are associated with high cost and a lack of standardization.
  • The barriers that proprietary applications and systems can provide in the early stage against competition can dissolve quite rapidly, quickly turning the competitive advantage into a liability rather than an asset.

 

What should companies do?

    • Companies should focus on threats rather than opportunities.Once a technology or any resources becomes critical to stay competitive, but insignificant to the strategy, the risks it creates become more important than the benefits it can provide.
    • If companies can't capitalize on the use of new technology to defend this advantage for a significant period of time in order to pay back those higher costs of being a first-mover, then it makes more sense to wait until the costs have come down.
    • Let your competitors make the mistakes and take on the risks as the technology matures and standards become more reliable. As costs decrease you can achieve the same level of capability for a fraction of the cost. For this reason alone, companies need to pay much more attention to the ROI on their IT investments.
    • Studies on corporate IT spending clearly show that more IT spending rarely translates into better company performance.
    • Unfortunately, there are no short cuts in life. Sure technology can make things simpler to start and more accessible for more people, but will not make you an expert. If there is a technology that can accomplish this, then that market would be flooded with experts, driving prices down or it would be automated all together.

 

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Why Technology matters less than you think

 

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Episode Transcript - Click to Expand

Note: This transcript of the episode was machine-generated and has not been edited for correctness. It’s provided for your convenience when searching. Please excuse any errors.

[00:00:37] Host (David C. Luna): Welcome back. This is another episode of innovational correctness. And in this very jam packed episode, we will explore why companies, especially in Germany, are focusing on the wrong thing.

[00:00:49] When it comes to digital transformation. Why the over reliance on technology can actually massively hurt your company. I'll do this by setting various example

[00:01:00] from vastly different industries and fields. Why companies are not in, will not become innovative by simply using technology and why there's little opportunity to gain a lasting competitive advantage against your competitors.

[00:01:12] And then we'll take a look at the very dangerous assumptions of why despite the increased importance of it that does not necessarily translate into a lasting competitive advantage and what distinguishes proprietary. From infrastructural technologies, how competitive advantages he wrote over time by looking at some past technologies, what makes it a simple commodity input and not a strategic advantage to enterprises?

[00:01:38] Why companies need to focus on threats? Rather than opportunities and should keep it expenditure in check. And finally why companies should not be first movers and why there's no shame in following your competitors when it comes to adopting new it technologies. So as you can see, we have a lot of ground to cover, but don't be afraid.

[00:01:58] I'll take you along for the ride and [00:02:00] explain the concept. So as we move along. So without further ado, let's get cracking. So to start, I want to discuss why I think companies, especially in Germany, are focusing on the wrong thing when it comes to technology. And I'll explain why I believe technology matters a lot less and many want to believe and to do this, I'll be citing a few examples, but before we go into detail, I think we can all agree that technology has been a major driver for progress and has been hugely beneficial to us human species.

[00:02:29] It has also allowed us. To create one of the most powerful mediums ever devised by human intelligence that allowing us to look up any information we want or to communicate with anybody in the world and near real time. And we can even send beams and cat videos to companies and completely destroy their productivity if we so wish.

[00:02:46] But despite all these possibilities that's we have through technology. We have often had the tendency to over rely on technology to solve our problems. And the first example, that I would like to cite is the U S military. Now I want to get into any [00:03:00] politics and I want you to completely ignore any animosities you might have.

[00:03:03] Yeah. It's the military or that particular country I'm simply using this. Example to illustrate a point. I'm sure we can all agree that the U S military is one of the, if not the most powerful and technologically advanced militaries in the world, but the greater, the strength, the greater the weakness as an old adage goes.

[00:03:21] And by being so technological, we focused the U S over realize in design overconfident when it comes to such technology. And we've seen this in the Afghanistan war. Where the U S had trouble with asymmetric warfare or also called guerrilla warfare, despite being so massively, technologically advanced compared to its enemy.

[00:03:41] Ironically, the Pentagon has already recognized this problem of over reliance on technology back in the Vietnam war. During this war, the defense department saw a much higher loss rate. In air combat when they compared it to previous Wars. So consequently reach research was conducted to find out the causes of these shortcomings.

[00:04:00] And one study concluded that the problem was one of technology and responded by upgrading its F four Phantom to jets. That was the jet they used at the time. But another study came to a very different conclusion. It concluded basically that. The problem stemmed more from inadequate air combat, maneuvering, or dog fighting skills in layman terms.

[00:04:20] Hence the U S Navy fighter weapons school or top gun as it's known, was created to specifically focus on the essential and fundamental skill necessary to win air combat fights. Now, the second example I would like to cite. Is photography and videography smart has been flooded with exciting new innovations, such as video drones from DGI stabilized gimbal or mirrorless cameras that often rivaled the performance of traditional DSLR in all.

[00:04:50] This has continued to essentially democratize photography and videography making the skills to create high quality. Content more accessible to more people, as well as making it much more affordable as well. You can see that young people are getting into the spacing, creating their own content, but you can see an increasing amount of people focusing on more on technology rather than skill, just think of YouTube videos where YouTube is review the newest feature of the newest cameras.

[00:05:18] And even though they have. Smooth and cool gimbal shots in their videos. The end result is often still very incoherent and messy. These people simply fail to learn and apply the fundamentals of relying more on technology to compensate for that. The lack of skills is creates an even bigger problem because.

[00:05:35] The technology made videography much more accessible. It has also created a lot more competition. Now everyone is creating high quality content and thus the quality of content goes down. The more people go into the space. So to stay ahead, you need to focus and stuff. Start with the fundamentals and to drive this point home even further, I had a friend back in high school and she wanted to enter a photo competition, but was [00:06:00] afraid that her.

[00:06:00] 10 year old camera was just too old to actually be eligible to win. So I encouraged her to still enter the competition because in my humble opinion, I thought she was a really good photographer because she knew the basics. She knew the exposure triangle. She did excellent composition of photos and that she shouldn't really be worried about her camera because it's just not the camera that makes the photo, if that were the case.

[00:06:23]then I just need to buy the most expensive camera and I'm automatically a pro photographer. how easy would that be? And long story short, she won the petition by a fair margin. Now, before you think about investing into new technology or platforms, learn the fundamentals before you apply more technology, because what the hell are you doing?

[00:06:40] It doesn't make sense to spend thousands of euros into high quality camera gear. Before you haven't even developed your own style. Do you like landscape? Do you like street photography? Maybe you don't even know that. So buying the best camera does nothing for you. If you lack the skills, the same applies for companies, German companies in particular focus too much on [00:07:00] technology and spend lots of time analyzing what technology they should build their platform on or what digital products they should build with a specific technology.

[00:07:09] All this is completely irrelevant for the first, second, or even third step instead. Get the fundamentals. Essentials out of the way first, what does the customer need not want? What does the customer value the most and why? And what are the major pain points that your customer has spent at least two, three months at minimum on these questions and actually listen to the customer before you assume, you know what the problem is.

[00:07:32] Now, this brings me to my third example, which is airport security. We've all been to airports. And a good example to illustrate this point is the Ben-Gurion international airport and Israel. This particular airport has been the target of several terrorist attack yet. No attempts to hijack a plane departing from Ben Gurion airport has ever succeeded.

[00:07:52] So do the Israelis achieve such an art, some track record? they don't use any highly advanced technology despite them using [00:08:00] basic x-ray scanner. There security mainly relies on the. Human factor. So police officers and Israeli defense force soldiers, uniformed and undercover, and tried to maintain a high level of visibility and vigilance.

[00:08:12] They also employ highly trained officials that conduct interviews with boarding passengers and based on their psychological responses will further question them up to an hour. If needed and even American airports officials regularly hire Israeli security consultants because their methods are so effective authority.

[00:08:30] These terrorist attacks branded, they also do use highly controversial tactics, such as racial profiling, but my point still stands. Now another example I went to cite is 3m corporation that produces adhesive tape and packaging, among other products. And they were looking for a new type of packaging.

[00:08:49] So they conducted customer interviews and were asking customers what their problems were with packaging. Now, the funny thing is they realized later on is. The customer didn't really articulate [00:09:00] their main problem because they took it for granted. That packaging looks always rectangular. So I packaging where a package always has a rectangular form.

[00:09:08] So they didn't articulate that because they just assumed that's the way things have to be. So the point I'm trying to get across is don't assume, what the customer wants and build the product or hell platform. Often the customer, it does not know what they want. They can't even. Collate it. So you have to find out not what they want, but what they really need.

[00:09:28] And so essentially three M cat, a packaging, which just glued two pieces together and would form around the product. You were packaging. So pretty clever. That's also something you have to keep in mind. And a lot of companies tend to focus more on the technology and the solution side, instead of actually doing the fundamentals and doing the homework.

[00:09:48] And the last example I went to site. Comes from India. And it's the story of the double Wallace. And it's a couple of others basically constitute a lunchbox delivery and return system that delivers hot lunches from homes [00:10:00] or restaurants to people that work in India. Now, the interesting part here is that the double Wallace, so the people delivering and conducting the food delivery service are mostly completely illiterate.

[00:10:10] They use no technology whatsoever and they use a color coding system, but they're so effective. At delivering lunches from a to B and yet from these approximately 200,000 lunch deliveries every year, just for Mumbai, they hardly make any mistakes. Despite the double welders, as being deliberate and having just a simple color coding system to bring the lunch from a to B quite amazing.

[00:10:32] So what did we learn from these examples so far and what are the key learnings? That's we should take away from all of this. for one, and this should be the most obvious one don't rely on technology to solve your fundamental or essential problem, or try to compensate your inadequate competencies of yourself or your companies.

[00:10:50] And remember where that technology is only in enabling and we'll amplify the skills or car or competencies that your company has. Or the lack thereof.

[00:11:00] So learn the fundamentals first and get the essential out of the way first, before you even think about technology. And for the more simply just having access to technology, doesn't make you a better artist.

[00:11:11] Having a paint brush, doesn't make you Picasso, just because you buy the most advanced camera, doesn't make you a pro photographer or simply buying a formula one race car. If you could afford one, it doesn't make you Michael . Now this seems obvious, but just because a certain technology makes. Skills are more accessible.

[00:11:27] Doesn't make it any easier and can even be a disadvantage to beginners that are still learning the fundamentals skills to reach a professional level. So restricting access to features and fancy tech would actually be a much more, better option for beginners because they're not confused by option trends and features instead, maybe.

[00:11:46] And for which we stay at the example of photography, exposure, triangle have three dials and you're done and then learn the fundamentals. But the increased accessibility of these technologies creates an even bigger problem. now that we have all these technologies [00:12:00] such as videography that are much more accessible, it has also created a lot more competition has flooded the market with content.

[00:12:06] Now everyone is creating high quality content in 4k having constraints or. Putting them in place helps people become more creative, especially when it comes to innovation. There is an old German proverb that says naught offender. So necessity begets ingenuity, and there is a very hard truth in that. So to sum it up, there are no shortage.

[00:12:28] Cuts in life. Sure. Technology can make things simpler and to start and make things more accessible for me or people, but it will not make you an, if there is a technology that can accomplish this, then that market would be flooded with experts driving the prices down, or it would be automated altogether.

[00:12:46] So you see, you need to do the one that focuses. On the fundamentals and gets that right, and is a professional in, at that level, you can give them good technology and he will create amazing results, but the other way around [00:13:00] does not work. And we often tend to forget that especially companies now let's discuss why companies are not in, will not become innovative, but just by simply using technology or it, and why there's very little option to needy to gain a lasting competitive advantage against your competitors.

[00:13:16] So essentially why it is very important or even crucial, but it doesn't really matter. Now let's explore that thesis in a little more detail before we continue. We should actually first start to define and clarify a few important terms that I'll be using. Throughout this episode, when I use the term it or information technology, I use it in the most basic form, which includes technology used for storing retrieving trends and even manipulating data.

[00:13:44] And when the model generic term technology is used, I will refer to the technology such as hard, where that are used within the context of it. So if you think you will be. Innovative by simply using technology as a competitive advantage. That's [00:14:00] going to last, then you're in for a rude wake up call now most agencies and digital consultancies.

[00:14:05] Yeah. And technology companies for that matter would probably strongly disagree with that argument for obvious reasons. They wouldn't want this idea to be broadly seminated among informed companies as this would reduce their product or service to a mere commodity. Now, remember the fr management companies have vested interest in selling lots of it, products and services to businesses, especially with all the hype around digital transformation.

[00:14:30] Now, nowadays, every company has something to offer for this over-hyped and almost. Overused topic. And of course these vendors are going to market there. Technology offerings is something with which companies can gain a competitive advantage, but let's be honest. Competitors are quite good at copying technological innovation, but let's start from the beginning and explain my reasoning behind the Sargent.

[00:14:55] So why does the increased importance of it? It not directly translate into a lasting [00:15:00] competitive advantage? ever since the invention of the first microprocessor in the, 1960s. I believe, it created many technological breakthroughs ranging from personal computers, PCs lands, smartphones software.

[00:15:13] And of course the internet, all of which have transformed the world in one way or another. And today, no one would probably dispute that these tech technologies have become the backbone of our economy. It connects individuals and local businesses to their supply chains and to customers, they serve.

[00:15:30] Around the globe in almost all revenue today comprises or are derived from Peter technology and companies have come to view this technology as absolutely critical for good reasons, to conduct their business. This fact is also reflected by gardeners worldwide its spending forecast, where I T expenditure has projected to be 3.6.

[00:15:50] Trillion dollars in 2018. Now company's relationship with it goes actually much further than simple spending figures. How executives [00:16:00] essentially view it today has also completely and dramatically change over the past 30 or even 40 years. Before top executives regarding the computer as the, a glorified typewriters, lower ranks, meaning secretaries and data analysts from their job.

[00:16:17] Back then, it was actually pretty rare for a C level executive team touch computers themselves. And even today, you're still on rare occasions. Obviously CCOs have their secretaries print out their emails for them fast forward till today. And all this has dramatically changed C level executives. Not only view it as a strategic advantage with which they can gain a competitive edge by incorporating yeah.

[00:16:41] Into their business model. But also with the recent digitalization movement, this view has also been much more pervasive. Most CTOs even hire it in strategy consultants to help them leverage their it investments to differentiate themselves and gain an advantage. From their competitors, [00:17:00] but behind this, you lays a very faulty and dangerous assumption.

[00:17:04] One that assumes that because the importance and availability of ATM is increased. So too has its strategic importance. Yeah. We know this assumption, granted seems very plausible and even intuitive. It's still wrong. What makes technology or. Any resource for that matter, truly strategic and creates a sustained competitive advantage is not it's ubiquity, but it's scarcity.

[00:17:25] And this is an important point. A company can only gain a competitive advantage when it does something that their competitors don't have, or simply can't replicate. Now, granted, some companies use technology more intelligently than others, but that's certainly true. And a valid point, but that's also true for any other business resource.

[00:17:44] So this fact in itself does not tell you whether the resource itself provides any kind of strategic advantage or has any kind of strategic value. Now let's look at how additive advantages you wrote over time and we'll use [00:18:00] history. as a teacher, before we can actually go into detail about the erosion of competitive advantage, we need to distinguish two terms.

[00:18:07] One is proprietary technology from infrastructural technology and in simple terms, proprietary technology are owned by a single company. A good example of this would. Be say a patent that is held by, for example, a pharmaceutical company for a specific active ingredient in a drug, the same applies for a process or any kind of material.

[00:18:29] So if a manufacturer develops in innovative process or material that its competitors find hard to replicate, it has a longterm strategic advantage makes sense. As long as it can, as long as this remains a protected and proprietary technology. It enables this company to earn higher profits than its competitors.

[00:18:47] Now, infrastructural technology on the other hand provide far more value when it's shared than when it's used by a single company until illustrate this point. Let's assume a company in the early 19th century had all the [00:19:00] technology patents to create a railroad. This would allow it's a build a proprietary railroad network.

[00:19:06] Between its supply chain and its factories using its own trains and carriages. And it would probably operate much more efficiently than with multiple operators involved. But for the economy, for me as a whole, the value created by such a scenario would be insignificant compared to the value it would create by an open railroad network, connecting much more companies and potential buyers and customers.

[00:19:30] These inherent characteristics in. Economics of infrastructural technology, make it almost inevitable that technologies such as railroads, telephone lines, or even electricity will be shared with awe and become part of the overall business infrastructure. And one important point to make here is in the beginning, an infrastructural technology X more like proprietary technology.

[00:19:52] And this is due to the fact that. Technology in the early stages is often limited in terms of access through physical limitations, intellectual property [00:20:00] rights, high count costs, or simply a lack of standards. And during this time a company, you can actually use this technology to gain a competitive advantage over it.

[00:20:08] And this is exactly what happened during that. The construction of the first electric power station in the 1880s. And the electrical grid in the early 20th century, electricity was still very scared for timeframe and as such manufacturing, it was that we're able to use electricity by building their factories close to the power generating station gained in an advantage over its rivals.

[00:20:30] So by having a superior grasp of new technology companies can steal market share from their competitors. Again, the early introduction of electrical power as an exempt excellent example, up until the 19th century, most factories right on water pressure, steam to operate their machines. Power came from a single fixed source.

[00:20:50] So essentially a water wheel mounted to the side of a mill and required a complex setup of gears to distribute it to each individual machine [00:21:00] throughout the factory. However, when electric generators became I'm available, many factories simply. Adopt them as a replacement for their single power source, using them to power their existing system of gears manufacturers that recognize the potential of the new technology.

[00:21:15] However, realize that the electricity could easily be connected directly to the machine itself. And by installing electric motors in their machines, they were able to throw out the inflexible and very expensive gear systems, making them overall more efficient. Then they're slower counter parts or their competitors, but beyond helping companies operate more efficiently, infrastructural technologies also enable large market changes as well.

[00:21:40] During the construction of the first railroads, it was all already possible to transport goods over. Long distances via steamships. So most companies assumed that REL transport would just be an incremental improvement, the steamship, however, the greater speed capacity and reach of these trains fundamentally changed the American [00:22:00] industry.

[00:22:00] Instead of simply shipping raw materials. It became commercially to ship finished products. Okay. Over long distances, essentially creating the mass consumer market. Companies that were quick to capitalize on this opportunity, built large scale mass production factories, which really allowed them to put smaller and local factories out of business.

[00:22:21] The problem, however, is that managers and CEOs falsely believe that these advantages will continue indefinitely, but in reality, these advantages just from infrastructural technologies, only long lasting, very briefly, once such technology begins to have broad appeal. It's. Build out in maturity increases at an almost exponential rate, as we've seen with railroads, telegraphs, and even power lines.

[00:22:44] So essentially the question becomes how long can your, or it company keep those advantages? Prietary as we've seen up until now it's very important to take into account the development over time where technology becomes more standardized and as [00:23:00] innovation progresses, it's ability to provide these companies with a disk.

[00:23:04] Action or a distinctive advantage that can be used to defend against their competition fades. Once the buildup begins to subside the opportunity to gain a, the competitive advantage from my particular technology have mostly vanished as the investment and increases. So does the competition, okay. Two more overall capacity falling prices making the technology broadly accessible and much more affordable.

[00:23:28] So at this point, The market forces users to adopt the universally agreed standards, rendering proprietary alternatives, obsolete, even more, both technology in its use often in the form of a best practices essentially become commoditized. So for a short period, these infrastructural technologies can indeed provide innovative companies with real competitive advantages.

[00:23:50] But as the availability of these technologies increases and their associated costs decrease, they quickly become. Commodities from a strategic [00:24:00] standpoint, he don't really matter anymore. And the same thing is happening with today's digital techniques, the cost of storage, cloud computing and other services have not only become it's more affordable, but also accessible to almost all the same is also currently happening with technologies such as machine learning, artificial intelligence, you name it.

[00:24:18] Think of machine learning, AWS or AI via Google cloud. What is a strategic. Resource will quickly become a commodity and a simple cost of doing business. That must be paid by all, but does not really provide any unique advantage over other participants. Now I'm sure that, and he will agree with part of the argument.

[00:24:38] Now that technology is becoming a commodity in certain areas, but there's innovation happening. Other levels and that combining technology and innovation really does lead to a competitive advantage. These people will also sometimes cite few, a few examples from companies that they perceive to be ahead of the competition because they use technology so effectively.

[00:24:58] And yes, without a question, there are [00:25:00] advantages when companies are very adept or very good at utilizing technology, but by simply reducing their competitive advantage to the superior use of technology actually does them a huge disservice. Instead their competitive advantage comes from a very distinctive and basic business model, which were often developed before the use of any particular technology.

[00:25:22] A lot of the innovative use of technology, as well as many other resources and processes are needed to increase and strengthen a company's advantage. So as you can see, it is actually the ultimate commodity and has all the characteristics. Of an infrastructural technology, its inherent characteristics lend itself to actually even more or race of commoditization.

[00:25:45] So in simple terms, okay. Tea is a digital transport medium by which information is essentially carried from point a to point B just like railroads or power grids, carry goods and electricity. And as such, it is much more valuable when it's shared than [00:26:00] when it's used in isolation. And if we take. Brief look at the history of it.

[00:26:04] We can also see that interconnectivity and interoperability have increased over time from large mainframes and timesharing models to standard PCs and yeah, and the internet itself, and each evolution created more centralization today's enterprises, try to avoid commerce customizations of their it systems.

[00:26:24] As the benefits would massively be outweighed by the cost of isolation. It is highly scalable. And in most cases at virtually no or little cost to a point where proprietary systems and application, they're almost doomed to fail, it can actually be considered the perfect commodity, perfectly reproducible at the byte level.

[00:26:43] And when companies buy a standard software application, they actually also purchase business processes. Embedded into that software as well, making sure these two essentially replicable. So the cost saving and benefits of interoperability from generic applications are [00:27:00] outweigh the advantages of customization.

[00:27:02] In most cases, once a company outsources, a process, they're essentially giving it away to a vendor who can then replicate it. For many different companies and including yours . So if you're a company that distinguished itself by the superior use of processes, your traditional advantages will erode by simply outsourcing it processes and we'll bring other companies to competitive parody.

[00:27:27]there's a catch 22 if I ever saw one, but the actual large productivity gains come much earlier. But the first iterations of that technology sure. Might take some time. And it usually does to change a company's organization and processes to take advantage of those technologies. But man, once the process has been automated and the additional returns from the new advances in the end that the process automation goes down very quickly.

[00:27:50] One can observe this. Progression of commoditization in hardened software, moving from fairly complex to more standardized hardware or from fairly [00:28:00] complex enterprise application to simple standard software. And the internet has even further accelerated this commoditization of it by essentially providing a distribution channel for generic software.

[00:28:11] It's almost the norm for companies to fulfill all their, it needs by purchasing. Web based services from third party vendors, similar to how they currently buy electricity or telecommunication services, large technology businesses, such as Microsoft or IBM, or even trying to position themselves as it utilities, providing companies with all their essential business applications.

[00:28:34] Lastly, Moore's law predicts that the number of transistors will double every two years increasing the. Available processing power at a fraction of the cost. Now over the last decades, Moore's law has actually shown us exactly that technological progress, whereas advances at an exponential pace, but at the same time, the cost of this technology comes down almost equally as fast.

[00:28:56] So these massively decreased costs have [00:29:00] essentially democratized computer technology, but also leveled market entry barriers. For competition, even the most state of the art it system quickly becomes available for all to enjoy. So it shouldn't come to a surprise that it hasn't only closely mimic the buildout of past infrastructural technologies, but has also been equally as impressive.

[00:29:21] And yeah, we'll continue to see infrastructural innovation, but this infrastructural will be shared by. All companies and it will become much more reliable and more efficient over time. And they're not going to be proprietary to a single business. Now let's move on to why companies, they should not be first movers when adopting new technology or it, yeah, just like previous infrastructure.

[00:29:42] All technology provided earlier adopters with competitive advantages in the early build-out phases. When it could still be owned similar to proprietary technology. This was the case when mainframe computers were still in use some of these innovative systems use [00:30:00] preparatory software that ran on mainframe computers effectively locking out competitors, leading to better financial results for companies that could utilize them.

[00:30:08] These competitive advantages are only possible because they capitalize on character. The risks of infrastructural technology that are common in the early stages, which are mainly associated by high cost and the lack of standardization. Now, some of these example that have gained such advantages in the past where American airlines with its Sabra reservation system, federal express with its package tracking system or writers with it, financial information network in the 1970s.

[00:30:37] They were all able to gain a specific advantage to leapfrog the competition in one key area. But the barriers that proprietary applications and system provided in the early stage against competition can actually dissolve quite rapidly sometimes within just a few years. Making it very unattractive to end users and uneconomical to their owners.

[00:30:59] Now this [00:31:00] quickly leads to the competitive advantage to become a liability rather than an asset. Now, nowadays, the opportunity of gaining it advantages are already decreasing. Best practices are becoming replicated in software or otherwise and charged you'll find industries and markets that will continue to evolve and some will completely transform similar to what we've seen in the music or media industry.

[00:31:24] If it's one thing that history has taught us over and over again, it's that the power of infrastructural technology to transform industries and markets always decreases as technology becomes more accessible to all. Now, obviously nobody can predict exactly when a buildout of a particular infrastructural technology near it gets.

[00:31:42] And, but there are many Indians caters that show that the buildout is closer to its end and rather than its beginning. And I'll name a five. Five examples when the technology outperforms or over satisfy customer needs, or also leaving room for disruptors to enter the market. That's one sign. [00:32:00] Second sign is the price of fundamental.

[00:32:02] It needs has reached level where it's affordable to almost everyone, not most, but almost everyone. Third, the total capacity has met or is outstripping the demand or fourth point, is it vendors try to position themselves as commodity suppliers or even as utilities, think of Microsoft or even IBM.

[00:32:22] And lastly, the most obvious sign is when the investment. Bubble pups. Even in this environment, there might still be a few companies left that are able to gain an advantage from highly specialized application. But those will remain the exception rather than the norm. So what should companies do instead?

[00:32:38] Now, when we take a look at how infrastructural technologies have evolved throughout history, we can clearly see that these technologies have stopped to provide the basis for any real competitive advantage. But yet these technologies are still extremely important in that all companies have to maintain competitive parody and have to continue to invest large sums of money, but [00:33:00] their ability to distinguish themselves from the competition diminishes.

[00:33:04] So focusing on threats rather than opportunity is one strategy companies are not going to gain any longterm competitive advantage through the distinctive use of technology, but they can certainly put themselves at a disadvantage by using it carelessly yours. Disregarding things like security or other vulnerabilities, and therefore companies should spend less on technology and instead focus more on threats rather than opportunities.

[00:33:29] And if it's one thing you should learn from this podcast episode, it's this, once the technology or any resource for that matter becomes. It's essential to stay competitive, but insignificant to the overall strategy. The risk equation it's becomes more important than the benefit it provides. no nobody or no company.

[00:33:48] Yeah. The world builds its strategy around the usage of electricity, but even a short blackout can have devastating effects. The same applies to it. Systems, even small, a small disruption in its operational or a [00:34:00] security ability can have debilitating effects on a company. In civic cases of the company can lose its ability to make whatever and deliver products, damaging its reputation, and often costing them millions of dollars or a year olds.

[00:34:13] Now the task of ensuring what. Critical wrong is certainly not as sexy as speculating about the next big thing or blockchain, but arguably the more crucial one, but the more important task I'll buy, not the obvious one is overspending on it, which brings me to my second point or something strategy on what to do is keeping it spending in check and having a little bit of patience.

[00:34:35] Now there are many examples of companies introducing SAP, for example, that have gone bankrupt from this decision. Yeah. Yeah. Essentially overspending on this particular technology. Even though it is a commodity and its costs continue to fall. the fact that I T is essentially integrated into every major business function also means it will continue.

[00:34:54] Do you consume large parts of corporate spending budgets? Simply staying in business often requires [00:35:00] large. Investments in it. So therefore it's important to distinguish essential investments from the ones that are unnecessary or even counterproductive. So again, when a resource becomes critical to stay competitive, but insignificant to the strategy, the risk it creates becomes more important than the benefits it can provide.

[00:35:19] If a company can't. Capitalize on the innovative use of a new technology to defend this advantage for any significant period of time in order to pay back those higher upfront cost for being a first mover, then it makes much more sense to wait until the costs have gone down. Now there's no shame in letting your competitors make.

[00:35:39] The mistakes take on the risks as technology matures and standards have become more reliable while at the same time the costs go down and you can achieve the same level of capability for much less money, think of a new car versus a car that has only been. Used for a couple of weeks, how the costs go down, but you had essentially the same [00:36:00] car.

[00:36:00] All companies need to employ the strategy and all they need to do is a little bit of patience. So in most cases, this is the tortoise beats, the Hare. Now on a more practical level, companies need to pay. Much more attention to the RLI of their it investments. Even years ago, the processing power of computers and the features of the most used applications have, I think reached a level that is more than sufficient for say, 90% of the employees.

[00:36:26] And in addition, more and more applications are becoming available or are available as well. Surfaces only requiring a simple web browser to use. I personally use Google docs for almost everything. Now, spite this fact companies continue to spend roughly the same amount on hearted software upgrades, and instead of looking for cheaper or even open source alternatives.

[00:36:45] But let's be fair. There's also, this is also due to the fact that it vendors have become extremely good at convincing enterprises to upgrade their more than adequate it systems. Companies similar to consumers have a, what we call a fear of missing out or [00:37:00] FOMO for short on the newest technology.

[00:37:01] There's this fear that they will be left behind with old legacy technology. However, in most cases, these peer fears are completely unfounded. Still executives are worried that by being cheap, when it comes to it is going to hurt their established position. Now some studies of corporate, it clearly show that more spending rarely translates into better.

[00:37:21] Company performance. Even the CEO of Oracle, Larry Ellison has admitted this fact way back in 2002, he said, companies should be looking at the way to improve their it systems while spending less on it. Most companies spend too much and get very little in return. Now it seems that the old adage is right.

[00:37:41] It's not how much you spend, but how well you spend a good example of this philosophy is a Walmart. Walmart never invested in the most state of the art technology, but instead waited until. Still the standards and the best practices were stablish essentially letting their competitors burden the risk and high cost of the new technology, and [00:38:00] simply overtook the rivals by spending much less and getting more in return.

[00:38:04] So it's better to follow than to lead when it comes to it expenditure now to wrap up jam packed episode, cause there was a lot to unpack. let's see. So many would argue and believe that it is. Become the most transformative technology in history. I would argue that's just not the case. If you take a look at how companies operated before, you can clearly see that technologies such as electricity, for example, had a much more dramatic impact.

[00:38:29] And if you disagree, I would ask you if I forced you to pick. Between your smartphone or all of your light bulbs or running water in your house, you'd probably get rid of your smartphone case in point. I'm not saying that it hasn't had a tremendous impact on our society, but companies tend to put it on a pedal stool 90 or any technology is not magically great wanting to solve the underlying and fundamental problem just because you buy the most advanced camera.

[00:38:54] Doesn't make you a pro photographer, simply buying a formula one race car. Doesn't make you. [00:39:00] Michael Schumer. As I mentioned before, technology has the tendency to amplify existing skills and core competencies or the lack thereof. However, there are no shortcuts or free lunches in life, even with today's technology.

[00:39:13] Furthermore, if companies continue to only focus on digital technology, it automatically implies that they already know the solution before they've identified the underlying customer need. Sure. If all you have. Is a hammer focusing on digital technologies, everything is going to look like a nail. the solutions always go right to be related to digital technologies, C Maslow's hammer for reference.

[00:39:36] Now, the important thing to remember is that if you're trying to gain a competitive advantage by solely focusing, hang on technology, you're not only putting blinders on, but also shooting yourself in the face. In the process. What if something that has nothing to do with technology gives you a much more effective and competitive advantage.

[00:39:52] You'd miss that opportunity to identify this potential solution, simply because you were focusing on digital technologies and nothing else. [00:40:00] Now, most companies granted will completely disagreed. My recommendations are making, but that's to be. Affected the majority will always follow the herd and claim the or not.

[00:40:09] But if you follow the herd, you will eat well. Let's just say it's not grass. So this concludes this episode. If you enjoyed this episode, I've added some additional content, long form articles, videos, and other resources in the show notes. And if you would like to follow us, links are also in the show notes.

 


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