Platt Perspective on Business and Technology

Technology as the tide that raises all boats – and the narrowing of the competitive edge

Posted in outsourcing and globalization, strategy and planning by Timothy Platt on April 12, 2012

Technology advances and the development of business best practices in their implementation can and do create competitive advantage. And that observation is usually as far at this line of discussion is taken – with a focus on the individual business and almost as if were operating in a vacuum. When competition is examined in closer detail, development of technology advances and of business best practices in their implementation tend to diffuse outward from their initial developers and implementers – innovators and pioneer adaptors, to the marketplace in general and to every business that feeds products and/or services into it.

• With diffusion, innovation and its adaptation serve to level the playing field but at new and more competitively challenging baseline levels, creating new and more effective norms as to what constitutes baseline average competitiveness just for staying in business at all.

And as an abstraction, this observation covers much if not most of the rest of a usual discussion of the issue of innovation, at least insofar as it shapes business and marketplace evolution. I recently read an account of a multi-generation dairy farm, and how each succeeding generation has adapted new technologies and new farm and business practices, and grown their operations in scale – just to see real bottom line reductions in income from their effort.

They raise and maintain more head of cattle, and produce more pounds of milk per cow on average every day. Their dairy operations have been made leaner and more cost-effective and both overall and on a per-head-of-cattle basis. Their processing and refrigeration, and other hardware systems have reduced their rates of spoilage and other sources of loss to a minimum and they can and do ship their products out about as quickly and efficiently as are currently possible and for any operating, state of the art dairy farm operation. And they sell to a geographically wider marketplace. But the current owner’s father brought in a better overall income from this business than his son: the current owner/operator achieves, and his daughter is facing the prospects of seeing this same decline as she prepares to take over the family business as her father retires.

Competition from large dairy producing operations in New Zealand is cited in the paper I read, as are a number of other factors that are held responsible for this slow but consistently steady diminution of the bottom line as source of profit and income for this farm family. And I am sure that the factors are all in fact significant. I freely admit, just picking up on this one detail I cite here as causally contributing to this problem, dairy product competition from New Zealand, that I have seen butter and other food products labeled as coming from there in a great many countries. Global connectedness in supply chain and distribution systems can and does serve to reduce prices by increasing supply available in any given local and at any given time of year. But I am going to focus here on a “none of the above” factor not accounted for there or included in the white paper I read.

• As improved technical and business process best practices are developed and as they diffuse through industries and marketplaces to become the new standard and in what is done and how, and in what is expected this in effect redefines what it takes for a change to even qualify as an innovation.
• Mathematically and just considering bottom line return on investment capabilities, any effective innovation in this type of maturing industry is going to have to bring a proportionately larger increase in the absolute scale of extra value returned and certainly if it is going to have to create at least some minimal proportional increase in realized return on investment over the current industry norm. Expressing this at least semi-numerically, if the operational standard is represented on a scale as being at a 10 and for current industry practice you might only need a same-scale efficiency increase of one or two to yield a significant proportional increase in effectiveness and a significantly distinctive, notable increase in return on investment. But as that and other innovations add to the operational effectiveness and to market expectations and the norm of operational effectiveness reaches 100 on that scale as an industry standard, no one would even notice a nominal increase of just one or two, and 10 or 20 would be needed if a new innovation were to individually stick out like that older, earlier one did in its less competitive marketplace.
• Innovations with time have to be more and more pronounced and extreme in their per unit sold increase in operational effectiveness and in return on investment, if they are to stand out from the background noise of ongoing market fluctuations and present themselves as being true innovations at all.

If diffusion of improved technology and more effective ways to implement it raise all boats, they also raise the threshold that any advance will have to offer if it is to stand out from the statistical flux of marketplace activity and the norm that has to be achieved simply to stay in the market at all.

• This means as a market develops and matures, and as best practices are created and diffused out to become industry standards, pressure increases to find progressively more definitive new sources of competitive value – and this means greater need to find blue ocean marketplace innovations.
• And together, all of this means marketplaces and consumer demands evolving faster and faster, and more and more profoundly and for every business in them that would retain let alone grown significant market share and profitability – if any one business is to stand out from the crowd.
• With time and as industries and markets mature, this becomes impossible for businesses that remain in those industries and that continue to serve those markets.
• And the only real breakaway from this is in development of blue ocean strategies and game changing new markets – at which point this entire process begins again.

Basically, what I am arguing here is that the cumulative force of innovation and its diffusion create the breaking forces that bring marketplace and industry development and innovation to an eventual halt, and as long at the customer-facing marketplace remains essentially unchanged. And any real pressures to break out of this hold require breakthroughs into new markets through technology and/or implementation improvements that are sufficiently novel so as to completely change the game.

And this brings me back to the dairy farm story I began this with. Basic dairy products are not likely to change all that much. New types of products might be and probably will continue to be developed that would effectively increase the consumer base for them, and certainly with dairy products used as raw materials for other and perhaps more processed goods. But this is an industry that is in all likelihood going to become more and more difficult to compete in – except through massive economy of scale and that is where I turn back to all of those millions and millions of packets of New Zealand-branded butter that show up globally.

You can find this series and related postings at Outsourcing and Globalization and also at Business Strategy and Operations and its continuation page Business Strategy and Operations – 2.

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