There is a lag of time between when a new technology exists and when it becomes commercially applied. In 1997, Wal-Mart was approached to implement an automatic-cart collector system that relied on magnets to automatically sort shopping carts and reload them into the store. Wal-Mart executives declined, as the technology was rudimentary and would be subject to significant maintenance overhauls with no guarantees that the operating system wouldn’t have to be regularly overhauled.
When a business contemplates adding a new technology, it must address whether the need is permanent (i.e. why invest in a technology system if the problem wouldn’t exist three months from now?). And if the need is permanent, there needs to be some assurance that the new technology will address the problem on an ongoing basis.
The answer to the first question is the easy part of the analysis. Most technologies for sale are directed at problems that persist.
It is the second issue that deserves the heavier analysis.
When Warren Buffett shut down Berkshire’s textile mills in New England, he did so because there were different technologies coming out every eighteen to thirty-six months. As a capital allocator, he needed to improve because his competitors were doing so. But three years later, a brand new system would need to be installed.
When you go from VHS to DVD to streaming, it matters how much time passes between each switch.
In the 1990s and early 2000s, it was common for corporate executives to invest in new operating systems based on the promise of how it would solve the problem. But enough companies have made purchases in 2015 only to have someone come along in 2017 and mention that the 2015 version is obsolete.
If change happens to quickly, it can discourage corporate investment. McDonald’s may not want to outfit 34,000 stores with kiosks for card payments if everyone is going to be paying through their phone by 2020.
There is a paradox of sorts created by the creative destruction of technological advancement. If technology advances come too quickly, businesses will be deterred from making the high upfront costs if there is not a belief that the same technology will be in use two years from now.
Originally posted 2017-12-11 01:20:48.