The Z Curve and IT Investment

May 27, 2004

One of the toughest challenges facing companies is figuring out when to invest in a new information technology. Should we move aggressively, assuming the high costs and risks of being an innovator in hopes of gaining an outsized reward? Or should we hold back, waiting for the technology to become more standardized and better established, with lower costs and risks? One way to think through the question is by gauging the likelihood that an early-mover strategy will translate into a meaningful, profit-creating competitive advantage.

A good starting point for such an analysis is the S Curve. That’s the famous line, in the shape of an elongated S, that plots the adoption of a valuable new technology. It looks something like this:

As the curve indicates, the uptake begins slowly. When first introduced, the new technology is unproven, expensive, and difficult to use. Standards haven’t been established, and best practices for usage have yet to emerge. Just a handful of technically adept first movers begin experimenting with the technology during this formative period. But once the value of the new technology becomes clear, the adoption curve shoots upward as vendors and users rush to invest in the technology, technical and usage standards emerge, and prices fall. Soon the technology is essentially ubiquitous, with only a few laggards and Luddites holding out. The S is complete.

The S Curve is usually used to illustrate the adoption of popular consumer technologies like radios, TVs, and DVD players. But the pattern applies equally well to widely adopted business technologies, from electric motors to fax machines to computers. When looked at in a business context, moreover, the rapid uptake of a new technology reveals important implications for the technology’s strategic value—it’s capacity to set one company apart from the competition.

In particular, it’s easy to see that all the things that push a new technology up the S Curve toward ubiquity—heavy investment, standardization, homogenization, price deflation, best practice diffusion, consolidation of the vendor base—also erode its ability to distinguish one company from others. As ubiquity grows, strategic potential shrinks. This relationship can be illustrated graphically by adding another line to the S Curve chart—what I call a Z Curve—that plots the technology’s potential for providing competitive advantage. Here’s what that looks like:

This pattern of evolution can, furthermore, be usefully divided into three stages:

In the initial “Proprietary Advantages” stage, the technology can be used by an individual company as, in effect, a proprietary resource and can thus be the basis for a lasting advantage. The high cost, risk, and difficulty of using the technology during this stage provide strong barriers against competitive replication. It can take years for rivals to catch up. When American Airlines built its Sabre reservation system, for instance, the IT infrastructure was at such an immature stage that the system created a strong competitive barrier.

But as the pace of adoption picks up in the second, “Diminishing Advantages” stage, the technology’s potential for providing a durable competitive edge declines precipitously. Innovations in the technology diffuse rapidly throughout industry. Finally, once the technology reaches ubiquity, in the “Weak Advantages” stage, its strategic potential is largely spent. It becomes a cost of doing business that all must pay but that provides distinction to none. Rapid technological innovation often continues at this stage, but the advances quickly become part of the general infrastructure and are thus shared broadly. They aren’t held proprietarily by one company.

By thinking about where information technology lies along the S and Z curves in your industry, you can make wiser choices about the timing of investments. If IT is relatively early in its rollout, being a pioneer can make sense because it can give you a lasting edge. But if it’s fairly far along the curves, you’ll rarely be able to recoup the high costs of being an innovator—competitors will be able to catch up too quickly. The better strategy is to be patient, waiting for standards to solidify, costs to fall, and best practices to emerge. Let your competitors assume the big risks of being first movers.

The trap that executives often fall into is to continue believing a new technology can bring competitive advantage after its strategic potential has eroded. That can entice them to invest too much too quickly, leading to wasted money and even disastrous failures. As you make decisions about investing in new information technology today, you’d be wise to think hard about where your business lies on the Z Curve. It may be later than you think.

A shorter version of this article originally appeared in eWeek.

Digital Renderings

Past issues

The Z Curve and IT Investment