Platt Perspective on Business and Technology

Technology as the tide that raises all boats 3: long term and short term value and sustainability

Posted in outsourcing and globalization, strategy and planning by Timothy Platt on November 25, 2012

This is my third posting to a series that I began as a single stand-alone posting in April of this year (see Technology as the Tide that Raises All Boats – and the narrowing of the competitive edge: now reframed as a series Part 1, and the more recent Part 2: the challenge of securing an infrastructure technology advantage.)

I began this series with what might be considered a contrarian approach in which I argued that technology advancement can limit competitive advantage – and that certainly applies when, for example, all competitors are expending available resources into developing the same capabilities and acting reactively in doing so and in essentially the same ways. I went on in Part 2 to discuss breaking away from that type of competitive bottleneck, to create competitive advantage in the midst of ongoing marketplace, and industry and sector-wide change. My goal here is to step back and consider competitive advantage from two very distinct vantage points: that of the individual business and that of the marketplace and overall economy that it functions in.

• Success when viewed strictly from one of these perspectives can become more a source of risk than of advantage.
• And long-term advantage calls for wide-ranging awareness of perspective.
• To stress the point I am raising here, focusing on just one of these perspectives: that of the individual business and its needs can cause long term risk and loss and even for that business.

So far I have written this in the abstract and that means my opening remarks probably sound a bit trite. My working example here and the reason why I decided to write this posting can be found in computer algorithm-driven, high speed programmed trading of stocks and other investment instruments and in businesses that pursue that as the basis for their business models. And the two perspectives I have in mind here are:

• The short-term and immediate here-and-now perspective as pursued within those individual trading businesses, and
• The perspective of the investment trading industry as a whole, and beyond that consideration of the entire economy as a whole, which of necessity are longer term.

It is perhaps telling that as soon as specific contexts and applications are invoked here, seeming complexities arise and what started out as trite and obvious in principle, becomes anything but in practice and application.

Reconsidering the line of reasoning that I presented in Part 2 of this series, high speed trading businesses have been building themselves into a competitive advantage limiting technological bottleneck in which less and less is gained for each quickly matched advance in trading speed. These businesses seek to accumulate significant profit from the penny and even fraction of a cent of extra profit that they can bring in per share traded, from getting their trades in first. But this business model and revenue generation approach is self-limiting for value achievable as trades are made in progressively shorter timeframes.

• A point is reached where making that trade in that next smaller fraction of a second does not add any additional return on investment from improved profits per share, or per overall transaction.
• But progressively faster and more automated trades are progressively less easy to monitor in anything even vaguely approaching real time, and that means progressively greater risk if anything goes wrong and for whatever reason in the trading execution. And an emerging flaw in the underlying trading algorithms used can quickly spell disaster.
• And when things do go wrong, individual trading businesses face risk of significant loss, and both from direct and immediate cash flow challenges and from loss of credibility.
• And when too many businesses are competing in this progressively faster trading market and one business fails in its trades, this can and will skew the entire market for high speed trades, and can avalanche into affecting overall stock and other investment valuations and for the entire market. We have seen that happen, and I simply cite the Flash Crash of 2010 as one possible example of a phenomenon that has recurred several times since.

So the technology behind high speed trading continues to advance and at a fast rate, but in many respects this entire business model is coming to look more like a mature or even a moribund industry – a technological dead end insofar as new technology innovation that simply follows the same ongoing trajectory can at best only yield progressively smaller net of risk returns on investment.

My goal for this posting is not to offer a blue ocean alternative to the business model and technological dead end of high speed trading, even if I do have a few ideas for moving beyond that basic business model. I do not write this to propose that anyone hold a wake for this business model either, as it will not simply disappear – it is just that it is will remain a niche market of limited, even if still real potential. My purpose in this posting and in this series is to sound a cautionary note that technological advancement per se does not guarantee anything in the way of success or of competitive edge in securing it. The right technology implemented in the right way for its business context can, but technology innovation per se does not always create the golden opportunities that it is marketed with. And even seemingly successful implementations can create more problems than benefits.

I am going to finish this series at this point, and at least for now, though I am sure to come back to related issues in further postings and series to come. Meanwhile, you can find this series and related postings at Outsourcing and Globalization and at Business Strategy and Operations – 2, and also see Business Strategy and Operations.

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