Why keeping old technology can be a smart move for businesses

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In the world of business, we often hear that innovation is key to success.

Companies are always looking to adopt the latest technologies to stay ahead.

However, surprising new research shows that sometimes, sticking with older technology can actually be a smarter strategy.

A study in the Strategic Management Journal reveals a unique trend: firms that keep using old technology, while others rush to adopt new innovations, might face initial setbacks but can eventually thrive, even outperforming their more modern competitors.

The unexpected power of old technology

Professor Xu Li from the London School of Economics and Political Science explored this phenomenon.

He examined the traditional Chinese medicine industry in China during the 1990s, where he noticed something intriguing.

Some companies chose not to adopt new technologies like their competitors. Interestingly, these companies were often doing just as well, if not better, than those who were quick to innovate.

Li’s study aimed to understand why some businesses succeed by sticking with older technology during times of significant market changes.

What he found was that holding on to old technology can be a clever move, leading to improved business performance.

The U-Curve Effect

The research uncovered what Li calls a “U-curve effect.” Traditional Chinese medicine firms that didn’t adopt new technology initially saw a drop in performance.

This was because a few competitors began using new technologies, making the old ones seem outdated. However, as more and more competitors switched to new technology, these traditional firms began to recover and eventually reached new heights.

This rebound happened because there was less competition in the niche market of customers who still preferred the old technology. Essentially, these firms ended up with a monopoly in a smaller, yet loyal, customer base, as fewer companies were offering the old technology.

Li’s research challenges the common belief that new technology is always better. He argues that not every customer is eager to switch to the latest tech.

Sometimes, customers have a strong preference for older, familiar technology. The emergence of new technology can actually highlight this preference.

Another interesting point from the study is about market size. Commonly, it’s thought that a small market means lower performance for a company.

However, Li’s research suggests otherwise. In a small market with few firms serving it, a company can have more control and even charge higher prices, especially if they have a loyal customer base with limited options.

Old Tech as a Strategic Choice

Li’s findings offer a new perspective on innovation in business. It shows that not actively innovating doesn’t always mean a company is struggling or incapable. Sometimes, sticking with old technology is a strategic decision that can lead to better performance in the long run.

In conclusion, while innovation and new technologies are important, this research highlights the value of understanding your customers and market. In some cases, staying with older technology might not just be a matter of necessity, but a strategic choice that could lead to surprising success.

Source: Strategic Management Society.