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 / Spring 2007 / Issue 46(originally published by Booz & Company)


Lessons of the Last Bubble

Finally, the market for RFID tags plus the supporting systems and services totaled $2.7 billion in 2006, and forecasts predict growth to $26.2 billion over the coming decade. Since the invention of the technology, nearly 2.4 billion RFID tags have been sold across a wide range of industries. But few people realize that the invention dates back to 1944. Many small bets with a mix of successes and failures have occurred during the intervening years. Wal-Mart’s commitment to RFID technology may now produce the tipping point that triggers widespread adoption. This could lead to bigger bets going forward. At the same time, 62 years of exploration have already identified the most fertile terrain, and the competitive gains from RFID may not be as massive as many observers predict.

Test All Assumptions
Karl Popper, a leading scientific philosopher of the 20th century, argued for challenging conventional wisdom: “By criticizing our theories, we can let our theories die in our stead.” A new business venture is a theory tested in the real world. We should test many such hypotheses, but we should also test our assumptions even before we let the market prove or disprove our business theory. In the dot-com heyday, smaller bets would have given more insight into how to bet more wisely the next time, and the munificent capital of that era might not have been squandered so much. Proving that something does not work — falsifying a hypothesis — can be even more valuable than finding supporting evidence. Popper also noted that “no matter how many instances of white swans we may have observed, this does not justify the conclusion that all swans are white.”

During the dot-com bubble, large sums of money went toward big bets on first movers intent on getting big fast. Observing some big successes in businesses with network effects or scale economies, investors concluded that all of the swans were white. In reality there were also black swans — and a fair number of geese, ducks, and egrets as well. The market results — and societal results — would have been better had the capital been more patient and had it gone into a more diverse range of exploratory investments. Although more businesses would have failed, the failures would have been smaller and would have provided less costly lessons. Multiple smaller experiments would have generated far more insight into the real drivers of value creation on the Internet and produced more exploration of the undiscovered terrain.

Uncertain times abound; despite Marx’s claim of inevitability, business managers can avoid repeating the past. The dot-com era taught us that testing ideas with small bets and constantly challenging conventional wisdom offer the best path to finding the right market timing. Whatever the current uncertainties facing your market — nanotechnology, green energy, Indian and Chinese enterprise, or something else altogether — don’t allow your future to become tragic or farcical. History does not have to repeat itself.

Reprint No. 07102

Author Profiles:

Tim Laseter ([email protected]) serves on the faculty of the Darden Graduate School of Business at the University of Virginia. He is the author of Balanced Sourcing (Jossey-Bass, 1998) and coauthor, with Ron Kerber, of Strategic Product Creation (McGraw-Hill, 2006). Formerly a vice president with Booz Allen Hamilton, he has more than 20 years of experience in operations strategy.

David Kirsch ([email protected]) is assistant professor of management and entrepreneurship at the Robert H. Smith School of Business at the University of Maryland. He is the author of The Electric Vehicle and the Burden of History (Rutgers University Press, 2000), a study of the electric car. He also directs the Web site, a collection of documents about the birth of the dot-com era.

Brent Goldfarb ([email protected]) is assistant professor of management and entrepreneurship at the Robert H. Smith School of Business at the University of Maryland. He is the author of several academic articles on the economics of new technologies and markets.

Also contributing to this article was Angela Huang, an associate with Booz Allen Hamilton in Cleveland. 
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