Can you
think of an innovation that looks very promising, especially because so many
others have started using it? Can you recall any such innovations that have
been disappointing? In consumer markets, cold-press juicers have spread widely
and have been marketed by their positive health effects, but there is now
evidence that they do more harm than good. Their sales are slowing. In business
markets, airlines have long known that larger airplanes were better, and were
lining up to buy the giant Airbus 380 and the slightly smaller Boeing 747-8,
but they stopped after realizing that the new generation wide-body aircraft
were more economical.
There are
many cases like this, including worse mistakes than these two. This raises the
question of how firms can quickly understand that a new innovation will disappoint,
and can stop themselves from adopting it. This was a question I examined in a paper in Strategic Management Journal on the fast ferry innovation, which was
briefly popular but soon proved to be a very specialized type of ship. The problem
with fast ferries is that they were too fast and too heavy (they carry cars as
well as people). Making such a combination go fast is a significant engineering
feat, but it is also very expensive, and few routes can charge high enough ticket
prices to make it profitable.
Shouldn’t this
have been easy to discover? Not really. Fuel prices fluctuate, and maintenance
costs are hard to estimate in advance. It is a lot easier to make the cost
calculation after buying and operating a ferry (or a few ferries), but then it
is too late. Still, the shipping firms learnt how specialized fast ferries were,
and it took “only” about five years for this knowledge to spread. Importantly,
the shipping firms learnt from each other.
Here is how
it happened. Each firm that started using fast ferries accumulated experience
with the costs, and this experience must have leaked. We know this because sales
of fast ferries made additional sales to nearby shipping firms less likely. Some
firms gave up on their fast ferries and sold them in the second-hand market (at
a discount, of course), and this also made additional sales less likely. Resales
seem like even stronger reason not to buy, but actually the effect of giving up
was about the same as the effect of using a fast ferry. Firms learn from the
high costs just as much as they learn from resales.
This is a
natural finding except for one important detail. If a firm is operating an
expensive piece of equipment with disappointing results, it will soon be clear
that selling it is the best option. But, in order to sell it without losing too
much money, it is important that the costs are kept hidden. This means that the
information about the high costs must have leaked from the shipping firms using
fast ferries despite their best efforts to keep them hidden.
Inter-organizational
learning is hard to stop. Firms learn from the mistakes of other firms,
even the mistakes that they try to keep hidden!
