It’s time to unlearn the lessons of Big Tech.
For 20 years, the Silicon Valley giants and their competitors have set the standard for business success with simple strategies: innovate fast and woo customers. Speed, rather than perfection, and reach, rather than profit, proved to be keys to establishing dominant positions that enabled them to fend off, crush, or buy potential competitors.
Entrepreneurs everywhere took notice, and the assumption that scaling and achieving profitability would be the easy part spread far beyond the Internet platforms from which these ideas originated.
Investors, desperate for growth and yield amid historically low interest rates, were only too happy to prioritize the promise of growth over short-term gains. During the pandemic, the trend went extreme as the shares of companies with big dreams and equally big losses soared to dizzying heights.
Those days are over. Inflation and rising central bank interest rates have changed the financial calculus. When investors can earn measurable returns on bank deposits and high-quality bonds, speculative investments that promise growth lose their edge. Google, Amazon, and Facebook’s stock prices are down between 40 percent and 60 percent year-on-year, and their more recent emulators have fared even worse. A Goldman Sachs index of unprofitable technology companies has fallen 77 percent since its peak in February 2021.
There’s also a growing sense that the key challenges of our time – improving health, reducing carbon emissions, basically anything that involves a real world and not a purely digital product – will require a different approach.
Most of Big Tech has gotten rich with software that is easily updatable and basically free to distribute widely. Such online innovations rightly place a high value on “quick failures”: getting a product to market quickly, building a following, and fixing the bugs later.
The same just doesn’t apply to a car, a drug, or even a new flavor of packaged meat. They must work flawlessly and meet regulatory standards right away. Production sites and distribution networks cannot be conjured up from scratch or simply changed after the fact.
In the physical realm, an innovator can see their lead dwindling in the face of competition from rivals with manufacturing and distribution experience. Tesla discovers this the hard way. Tesla’s share of the US electric vehicle market has fallen to under 65 percent from 79 percent five years ago. S&P Global Mobility predicts it will fall below 20 percent by 2025 as other manufacturers bring electric trucks and cheaper models to market faster than Tesla can build new factories.
“The real world is just more chaotic. Even if you have a great car, you have to build it in a factory. You have to find land, you have to zone it. you have to find people. It’s not something that can be AB-tested,” says David Millstone, co-CEO of Standard Industries, a private industrial conglomerate.
Standard’s effort to acquire Tesla’s residential solar panel business is a case in point. After years of hype, Tesla reportedly installed an average of 23 solar rooftops for a week earlier this year, or about 1,200 installations per year.
When Standard’s second GAF Energy factory opens in 2023, it will produce enough shingles to clad 50,000 roofs per year. These cheaper solar shingles can also be installed by a conventional roofer with a nail gun instead of a professional. Still, scaling hasn’t proven easy, even for a company that’s already the world’s largest manufacturer of roofing materials. Like many American companies, GAF has encountered a labor shortage. Eventually, it had to start a training program that prepares military veterans, prison escapees and at-risk young people for work in the housing industry.
The third big mistake big-tech emulators made was assuming first-time customers would stay. Too many digital services and e-commerce companies believed their rapid growth during the pandemic lockdowns heralded a lasting surge in sales, rather than a one-off extraordinary surge that quickly petered out in the face of renewed competition. Pandemic high-flyers like Zoom Video Communications, Delivery Hero, and Peloton are brought back down to earth.
“In technology in general, and in software in particular, the network effect is a potential source of advantage, but . . . The stock race model doesn’t work in many other sectors,” said David Garfield, Global Head of Industry at AlixPartners.
Taking your time to find the right product sounds a lot less exciting than “move fast and break things”. But for most companies in most industries, it’s almost certainly the ticket to more sustained success.
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