Why Do Established Business Models Often Get Disrupted by Newcomers Rather than Market Leaders?
Nokia had the idea and even a tested prototype for a touchscreen long before it hit the market, but it was someone else who launched it into production. Do you think Mercedes was unaware of the potential of electric cars? Why do we use a keyboard layout based on typewriter design, which is inefficient? Did you know that some scientists believe steam engines could have been developed more effectively than internal combustion engines if not for the accidental outcome of a certain competition? Who knows, maybe in some parallel universe, German is the official language of the United States…
In game theory, there is a concept called Nash Equilibrium, where market players balance each other out. The thing is, there are several such points, and transitioning from one point to another can occur through significant stress or the accumulation of critical mass…
You can learn more about Nash Equilibrium here:
https://www.investopedia.com/terms/n/nash-equilibrium.asp
Below is a financial model for launching a new innovative enterprise. I won’t go into specific calculations. I’ll briefly describe what the model illustrates.
When a market leader implements technological innovation, the NPV (Net Present Value) of their organization increases. However, innovation means a better product at a lower price, and with sufficient scale, as competitors also get involved in the process, it leads to a new equilibrium price level… This new equilibrium in prices means a radical decrease in the NPV of the old enterprises/technologies held by existing leaders…
The model shows the optimal scale for the new enterprise, conditionally 200 million units, which increases the total NPV, but if this scale exceeds 280 million units, the total value of the organization will fall, and management will face significant challenges…
Understanding this conceptual model is important not only for leaders to know the scale at which to contain innovation but also for new players to understand the critical threshold they must exceed to disrupt the existing business model…
Photo Source
Principles of Corporate Finance – by F. Allen, R. A. Brealey, & S. Myers