Why Are Older Firms Slow to Adopt New Technology?

The Harvard Business Review notes that “literature on this subject is enormous. Much of the early work focused on the adoption rate of new technologies following an S-curve, with some users going early, a lot in the middle, and some following late. These models assume that it takes a while for companies to find out about new technology and, once they do, for their employees to assimilate and use it. Robotics is a good example: It’s obvious that it can increase productivity, but it takes some know-how to put robots to work.”

“Organizations develop processes through repeated problem solving. When a firm gets started, its founders solve problems for customers, and as they grow and establish routines, these ways of working come to embody their organizational capabilities. Managers constantly try to fit new market needs to existing processes and routines. Sometimes they are a fit, but often they are not. They can even require cultural change, which is difficult for established organizations.”

So what should established companies saddled with conventional equipment do when new technology appears?

“The first thing they should do is distinguish between “functional” and “economic” obsolescence. Functional obsolescence occurs when an asset does not support competitive capability. Economic obsolescence means your depreciation schedule, which is set by local tax law, says the asset is at the end of its accounting life. The challenge is not to let residual book values of equipment get in the way of having the most competitive capabilities. Several U.S. commercial airlines and automakers failed to address this challenge along the way and ultimately had to resort to an extreme measure — bankruptcy — to deal with their obsolete assets. Clearly, this is not an exemplary approach. In contrast, foreign airlines like Emirates and Singapore Air hold on to their fleets for much shorter times. Their younger average fleet age gives them a more competitive product.”

“Other alternatives are leasing or aggressively selling older equipment. Still another is moving the older equipment to less-demanding applications or to plants in emerging markets. One plastic products maker I visited did this with their conventional, hydraulic-drive injection-molding equipment when a new generation of electric-drive technology that allows for more precise control and better quality appeared. A major semiconductor firm I know cascades older equipment to less-demanding, trailing fabs.”

Related research from the University of Chicago examines the effect of aging on organizational innovation.

“As the technological environment changes, a firm must update its understandings and develop more appropriate routines. Yet there are many reasons for organizations to be biased toward incremental improvements in existing routines, rather than abrupt, radical changes in organizational processes. A growing number of empirical studies have shown that introducing significant changes in organizational routines is risky, as change upsets existing balances of power and patterns of interaction between the units of the firm and can degrade performance. Without compelling evidence of the inferiority of existing routines, firms are unlikely to substantially modify seemingly successful procedures. Rather, changes in the blueprints for behavior will tend to be incremental.”

“Our results, therefore, point to one reason why periods of rapid technological change are often associated with the emergence of new organizations and the failure of many established firms. In these times, the increasing gap between older organizations’ innovative capabilities and the technological frontier creates opportunities for new firms whose internal routines are better aligned with the current state of technology. In fact, we believe that the inability of established firms to adopt and incorporate major technological changes is one of the most important factors giving rise to bursts of high-technology entrepreneurship.”