Be careful with investments in the digital sector: the fiberglass paradox

You know how it is: new companies keep popping up, seemingly out of nowhere, with a new technology or a modified application of a technology, shaking up existing markets and displacing established players. Many will reply: “Well, it’s the digital revolution, that’s just the way it is.” Others will say that the management of existing companies are sleeping through the digital transformation and are not mentally prepared to make the necessary changes. But it’s not quite that simple. Why not?

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In one of my last jobs, we had a development site in eastern Slovakia. We flew there regularly to discuss projects and processes on site and generally spend time with the team. The office was rented in the building of the city’s leading local ISP and one day we were given a short tour of the company and got to know the products and services. What was very surprising was that a very fast fiber optic internet connection was available in almost the entire city area (around 260k inhabitants). What’s more, the offer included telephony and TV. All at a price that was significantly lower than in Switzerland after adjustment. That was in 2008, when we in Switzerland did not yet have any bundled offers from Swisscom and Co. and only very few on-premise fiber optic connections. Why was that the case?

The lowest possible amortization requirement creates room for flexibility

The answer is almost banal. While Switzerland, for example, has maintained a comprehensive and well-maintained telephone network for the last 50 years and invested heavily in it, little of the same has happened in Slovakia. Slovakia was communist and protectionist until the 1990s. When the country opened up in 1998 and gradually modernized, there were no expensive networks to amortize. This, in turn, created economic space to build new infrastructure with new technology. So the reason why the city had fibre to the home while we were dreaming of it here was simply because there was no infrastructure based on old technologies to amortize. Super easy, right? For me personally, this effect has become known as the “fiberglass paradox”.

As a result, I repeatedly encountered situations where precisely this mechanism played a major role. For example, there was this customer who had invested huge sums in an eCommerce platform and was now unable to act in purely economic terms because he first had to amortize the existing solution. The choice was agonizing. Either write off a large part or lose out on the market in the medium term. Or when I hear that dam projects are amortized and designed for 50 years. You want to shout to those responsible: Don’t you expect more from the technological future? Experience plays no role here, as this experience is based on completely different technological conditions.

The speed of technological development has always been and continues to be underestimated.

All of these examples have one thing in common: those responsible vastly overestimate the duration of a technology’s life cycle. This is particularly the case in the digital sector. So you can’t be too careful with investments. Of course, caution does not mean not making investments, cutting back or delaying them, but rather keeping the amortization period of projects as short as possible. This allows you to remain agile and flexible and ultimately successful on the market.

Financial and “intellectual” investments

There are now two fundamentally different investments that can be made in a company. One is the financial investment. On the other hand, there is also the intellectual investment. By this I mean the knowledge base and mindset of the employees in the company. To a certain extent, this also has a payback period. This is because it is defined and self-regulated by the corporate culture. As a decision-maker, you would therefore do well to convey and exemplify a culture to your team that values technology positively and is very open to technological change. Only then will the team correctly assess new technology and use it for your company.

Market leaders therefore find it difficult to adapt to technological/digital change because they have to amortize either existing financial or intellectual investments. New players are starting from a blank sheet in this respect. In the majority of cases, this seems easier at the moment. Companies such as Ikea, Migros, Swiss Post and Starbucks show that even large established companies are succeeding in transforming themselves accordingly.