Why Technology Giants Struggle in Entirely New Fields: Five Factors

Here is my analysis of several reasons technology giants generally struggle to succeed when entering a completely unfamiliar field: 1. They do not see it, dismiss it, fail to understand it, and then run out of time. Large companies find it hard to commit resources to small projects that initially look insignificant. 2. They cannot afford to lose. Many technology giants are publicly listed. Even a 10% decline in revenue would be a disaster, potentially sending the share price down and the CEO out the door. Capital markets expect the revenue and profits of these listed companies to move in only one direction: up. Most large companies entrenched in their markets would rather die slowly than cut off their generous profits overnight. They have grown fat on the current market environment and cannot imagine a world in which they no longer sit above everyone else. Consider Skype, a startup from the small European country of Estonia. How did it shake the telecom giants that dominated their respective territories? The traditional telecom giants had secure market positions, enormous capabilities, ample funding, and plenty of advantages. Long-distance calls brought in billions of dollars in revenue each year and provided steady cash flow. They also continued investing in technological development. Skype had voice over Internet Protocol (VoIP) technology and simply offered internet communications services. Those telecom giants had mastered the same technology before Skype was founded, but never thought of using it to undermine their own businesses. Skype used VoIP to offer free long-distance calling and acquire users, then charged for calls from its users to destinations outside its network. With technology that was not particularly new but a completely new business model, Skype defeated the telecom giants on their own turf. Microsoft ultimately acquired Skype for US$8.5 billion. 3. Resources are hard to allocate to small, completely unfamiliar projects. Resources are scarce inside large companies too. A new project that is still burning cash and contributing little revenue has a very difficult time competing for resources against highly profitable cash cows. Getting people, money, or other resources is never easy. It usually takes a CEO making a unilateral decision, insisting on it, lending strong support, and forcibly moving an unfamiliar project several levels up the priority list. That can also leave other departments watching skeptically to see just how impressive the project really is. 4. Talent inside large companies is often free to move. Technology giants generally take a relatively open approach to talent: employees can apply to transfer to departments they find more interesting or promising. In a small startup, everyone concentrates on making its one small project work. In a large company, however, talented employees may weigh financial rewards, a sense of achievement, and influence, then request transfers to the departments offering the best development and promotion prospects. Those are usually not marginal startup projects. 5. A large company CEO’s attention is scarce. A CEO may think a project is important at a particular moment and raise its priority. But the CEO has far more than one or two issues and decisions to consider: hundreds of items may arrive from different departments each day. Over time, the CEO may no longer be able to give these marginal projects undivided attention.