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Second wind: Some traditional businesses are thriving in an age of disruptive innovation

Second wind: Some traditional businesses are thriving in an age of disruptive innovation

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Jun 14th 2014 | From the print edition

KARL MARX’S adage about all that is solid melting into air has never seemed more apposite: even staid businesses such as law firms and universities are threatened by technology-cum-globalisation. But look at the air more closely and you can see some strange objects floating around: Swiss watches, Montblanc fountain pens, Harris Tweed jackets, Folio Society books and old-fashioned sailing boats. Management gurus may tell people to bow down before the great god of disruptive innovation. But some companies are cheerfully doing the opposite—preserving or resuscitating traditional technologies and business models.

Ryan Raffaelli, of Harvard Business School, has examined these examples of “re-emergent technologies” in detail. The most striking example is the Swiss mechanical-watch industry. In the 1970s it was almost washed away by a tide of cheaper and more accurate digital watches. Today the industry is more successful than ever, providing the country’s largest source of exports after pharmaceuticals and machinery, and the engine of its revival is the old-fashioned wind-up watch.

There are plenty of other examples of re-emergent technologies. Sales of fountain pens collapsed in the 1950s with the arrival of cheap ballpoints; since the mid-1970s they have enjoyed a steady revival. Trams looked destined to become nothing more than tourist attractions in proudly quaint cities such as San Francisco and New Orleans (where you can still take a Streetcar Named Desire). But 30 American cities have either installed new tram systems or have plans to do so. They are even coming to two cities which did their best to bury them in the early 20th century, Detroit and Los Angeles. Sales of vinyl LPs in the United States have increased from almost nothing in 1993 to more than 6m in 2013. The number of independent bookshops is rising for the first time in decades. Harris Tweed more than doubled its output between 2009 and 2012, to over 1m metres. Your columnist added to the list by leaving his fetid cell in The Economist and walking 20 yards to Emma Willis’s shop in Jermyn Street, which produces all of its clothes in a small factory in Gloucester, including shooting socks made on a Victorian sock loom.

How do businesses go about reviving old technologies in the face of so much innovation? Mr Raffaelli argues that the key to success lies in redefining the product’s value and meaning. Swiss watchmakers redefined their products as status goods rather than a means of telling the time. That they are so much harder to make than digital watches added immeasurably to their desirability. Independent booksellers are redefining themselves as communities where people who care about books meet and socialise. Trams are re-emerging as a green solution to both pollution and urban sprawl: a striking number of the cities that are adopting them are formless sunbelt cities.

This redefinition demands a careful balance between tradition and change. Revival businesses often need to cultivate a close relationship with their craftsmen and customers, who may see themselves as guardians of a great tradition rather than mere employees or consumers. The Swiss watch industry arguably survived only because collectors kept paying record prices for watches at auctions and skilled craftsmen refused to abandon the old ways: when Zenith decided to throw away its mechanical watchmaking moulds at the height of what Swiss refer to as “the quartz crisis”, one old-timer decided to store them in a shed instead, wheeling them out once again when the luxury market took off. Revival businesses need to peddle their back-story remorselessly. The Harris Tweed Authority is doing a particularly good job of spinning its tale about the Outer Hebrides and the islands’ hardy band of weavers who turn local wool into versatile cloth in exactly the same way as their forefathers did.

However, while peddling their traditions and reassuring customers and craftsmen that they are holding true to them, revival businesses also need to be willing to change. Nicolas Hayek and Ernst Thomke saved the Swiss watch industry from impending death by applying a succession of electric shocks. In a series of deals they brought together a bunch of ailing businesses into the mighty Swatch Group, whose sales last year reached SFr8.8 billion ($9.5 billion). They fought back against cheap digital watches by first redefining Swiss watches as fashion items, with Swatches, and then redefining them as luxury items, with brands such as Breguet, Blancpain and Omega which sell watches for six-figure sums. Politics & Prose, a thriving independent bookshop in Washington, DC, is remodelling itself as a factory as well as a café-cum-lecture hall, installing a printing press for customers to print their e-books. Revival industries need to be willing to take tough decisions: for example, sacrificing market share to new entrants while holding firm on price. They also have to be ready to reorientate themselves to new markets: the Chinese have proved enthusiastic buyers of Western heritage goods.

The cunning of tradition

The success of these re-emergent technologies also has important lessons for how we think of disruptive innovation. New technologies do not simply displace old ones. Some old technologies, like sailing boats and paper books, have an enduring appeal; some, like watches, can redefine their value; and some, like condoms, can get a new lease of life for unexpected reasons. In addition, people do not just buy something because it provides the most efficient solution to a problem. They buy it because it provides aesthetic satisfaction—a beautiful book, for example, or a perfectly made shirt—or because it makes them feel good about themselves. This suggests a paradox: the more that disruptive innovations like the internet boost the overall productivity of the economy, the more room there will be for old-fashioned industries that focus on quality rather than quantity and heritage rather than novelty. Sometimes the best way forward is backwards.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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