Firms have a configuration of
assets, resources and market positions which are often unique. They are
something that cannot be translated into other contexts easily. Once a market
position is obtained, it becomes difficult to reposition the firm. Similarly,
the assets are configured to a certain market position and are aligned to work
in pursuit of the interests of the market position thus obtained. This is
precisely a reason why many firms fail to make the cut when faced with
technological changes. There might be a strong innovation culture yet the
ability to commercialize might be constrained because of the configuration of
assets and resources. For instance, Xerox set up the Paolo Alto Research Centre
(PARC) to work on the avante garde technology and did manage to do very impressive
work in terms of technologies developed. Yet none of them could be commercialized
by Xerox. In fact, while many technologies have gained significant traction in
the market, they are hardly associated with Xerox. Incidentally, SMS developed
in Nokia for internal communication yet as its successor flourish all over the
world, they are anything but associated with Nokia.
Therefore one might wonder what
would basically go against the innovation paradigm that forces the firm into a
myopia often attributed to the founders or the marketing mix. Despite the
marketing myopia problem suggested by Theodore Levitt, the problem does not
disappear. Similarly, every founder grapples with what Tim Wu would call
founder’s myopia. The example of Encyclopedia Britannica would be in order. For
more than two hundred years, Britannica was the most authoritative of the
encyclopedias. There was hardly any challenger to the same. Even to the present
day, it must be argued when it comes to the authenticity and authority of
information and as knowledge repository nobody comes closer to it. Wikipeda’s
advantage has been the ease of access besides the swift mechanisms to edit any
errors if discovered. The top down approach of Britannica prevented frequent
corrections of errors.
Britannica’s success was attributed
to the ground sales force which did extensive selling. The fact it lasted two
hundred years was underscored by the fact, it generated lot of customers who
bought it despite its price. To many, in the middle and developing world.
Britannia was something to envied of, perhaps got a glimpse in book exhibitions
or libraries, or in the book shelves of those neighbors or classmates who
perhaps could afford to buy one such copy or so. Britannia believed its success
to be the outcome of the authority in which it presented the information on almost
everything in this world. There was hardly any repository that could match the
depth and breadth in a world where richness and reach were subject to a terse
unavoidable trade-offs.
In 1993, Microsoft began giving a CD
of an encyclopedia Encarta as a free complement with purchase of personal
computers. It was the beginning of the PC revolution and the Microsoft DOS and
later Windows were the default the operating systems barring exceptions. The Bill
Gates era seemed a perfect opportunity for Microsoft to leverage this market.
Encarta was not something new. There was one encyclopedia Funk and Wagnalis
whose non-exclusive rights were purchased by Microsoft. The softer version of
the same morphed into Encarta. If compared in their print versions, Funk and
Wagnalis was no match to Britannica. Yet as the softer version came on board,
this seemed to have an impact on the sales of Britannica. Britannica found it difficult
to understand why its sales were down and customers shifting to Encarta given
the quality differentials. It too began to offer CD version of Britannica as a complement
to print version. Yet it did not have any impact. The answers were surprising.
Contrary to perception, it was not
for the authority and authenticity that people purchased Britannica but because
it was good for their children. Essentially, the sales were output of an arm’s
race among parents to secure something good or rather best for their children. Britannia
was thus good and therefore has to be purchased just that in the 1990s, the
arms race shifted to the personal computers. Computers were believed to be good
for children and every parent decided to invest in the same for their kids
setting off some arm’s race. In the arms race, Encarta was a complement and
thus there was little need for the parents to reinvest in Britannica. Thus the
PC became a substitute for Britannica causing the drop in the sales of the
latter. The failure on the part of Britannica was due to the lock-in of
resources and market positions in a certain configuration.
There were interests of the firms
and there were interests of the sales team that was working on the ground. Over
a period of time ranging into decades, the two interests had locked into each
other. More precisely, the interests of the firm had got locked into the
interests of the sales force on the ground. The firm’s interests would have
been best served by securing the first mover advantage in the internet era that
was just unfolding. Yet to the sales force, the incentive mechanism lay in the
number of hard books sold. This would mean a death knell for their incentives
in case of a shift online. They perhaps had sensed the shifts in people’s
preferences but they chose to postpone the inevitable. They chose to delay it
so as to maximize their incentives. Since the firm’s assets and resources were
locked into the positions of the ground force, the firm could simply not gather
the changing wind directions and adapt suitably.
There exists a differentials in the
interests among the firms and the individual agents which does lead to
misalignment and thus agency costs. Yet in this context, the agency costs were
perhaps an outcome of the firm locking itself into its sales team and perhaps
those agency costs turned into an existential crisis. In fact Encarta soon fell
by the wayside replaced by Wikipedia which emerged from nowhere and in an
accidental manner. The lesson that one gathers in the Britannica episode is not
just about divergent interests leading to failure in achievement of collective
welfare but the lock-in of interests that would fail the invisible hand within
the firm.
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