When sticking to old technology can be a strategic move

Technological innovation – especially disruptive innovation – is often declared the best strategy for a company. But new research published in Journal of Strategic Management found that as competitors adopt new technologies in some markets, firms that stick to the old technology may experience an initial decline before actually recovering and even reaching new heights.

While the rise of discontinued technology does pose a threat to replace old technology, it also further exposes niche segments where companies can establish themselves with customers who prefer old technology.

The analysis by Xu Li, a professor at the London School of Economics and Political Science, used archival data from China’s traditional Chinese medicine industry in the 1990s. In his interviews with managers in the field, he found that some chose not to innovate with their competitors. In many cases, Li finds that these companies do just as well, if not sometimes better, by not making changes. Inspired by these conversations, Li chose to investigate under what conditions a firm might benefit from a lack of innovation.

Li found some previous research on why companies would stick with older technologies, but none that explored why — during disruptive market changes — firms sometimes manage to survive and even outperform within a small niche with old technologies. What Li’s paper showed was that sticking with old technology can in some cases be an effective strategy that ultimately improves firm performance.

The data showed a U-shaped effect for traditional Chinese medicine firms that chose not to adopt new technology: A decline in performance began when several competitors began to release new technology, but later recovered and reached new heights as most competitors had adopted the new technology and exited the old technology market. But the lack of competition in the niche from consumers who preferred older technology essentially gave these firms a monopoly within a smaller market because there were fewer competitors left.

“Although the new technology is often better in terms of functionality, that doesn’t mean that every single customer or customer segment will be willing to switch to the new technology,” Li says. “It’s important to understand what customers like about your product. We tend to assume that if a firm introduces something new, then customers must value the new thing or novelty of the offering. But this is not always true. The emergence of new technologies may actually reveal people’s preferences for something older.”

The research also refutes the idea that when a market is small, a company won’t perform better – but that depends on how many companies still serve that niche. If only a few firms are left to serve this market, one company has much more power to charge higher prices among loyal customers with few other options.

“When you see a company that’s not actively innovating, we tend to believe that the company must be either incompetent or suffering—that’s always a bit of a negative tone,” Li says. “Sometimes staying with the old technology can actually be a strategic choice, because that way it can also lead to better performance.”

Courtesy of Strategic Management Society