There’s a related idea that isn’t quite worth a full essay:
I want to expand on the point about asymmetric opportunity cost as in the Google example to illustrate what I call the Incumbent Paradox.
Imagine an incumbent company in a tumultuous industry that is faced with a potentially-market disrupting paradigm shift every 5 years. The shift has a 75% chance of being ultimately irrelevant and a 25% chance of changing things enough to make the incumbent’s product obsolete.
Assuming the company can only pursue one paradigm, the rational move is to ignore every individual paradigm shift. It obviously makes sense to take the 75% chance of status quo dominance instead of risking it all on a pivot for a 25% chance to ultimately only reach the same market position they have now. The paradox is that despite only making rational decisions, over 30 years, there is only an 18% chance they won’t have been made obsolete [P(X = 0) for X ~ Bin(6, 0.25)].
This means that, given these assumptions, even fully rational and competent incumbents will eventually fail because of asymmetrical opportunity costs in moments of flux. The average time-to-failure can be approximated using the time between paradigm shifts (t) and the probability of obsolescence from each shift (p) in the simply relationship t/p. For a slow-changing company like the Guinness brewery, you can be around for hundreds of years. For a tech company like BlackBerry, not so much. In practice, companies can usually challenge the formulation and stay alive by hedging on new paradigms through acquisitions and internal R&D (Google AI/X, MSR, FAIR, etc.) or by having more accurate estimates on the likelihood of disruption. But not always! Sometimes, you’re forced to choose between two paths forward.
There’s a related idea that isn’t quite worth a full essay:
I want to expand on the point about asymmetric opportunity cost as in the Google example to illustrate what I call the Incumbent Paradox.
Imagine an incumbent company in a tumultuous industry that is faced with a potentially-market disrupting paradigm shift every 5 years. The shift has a 75% chance of being ultimately irrelevant and a 25% chance of changing things enough to make the incumbent’s product obsolete.
Assuming the company can only pursue one paradigm, the rational move is to ignore every individual paradigm shift. It obviously makes sense to take the 75% chance of status quo dominance instead of risking it all on a pivot for a 25% chance to ultimately only reach the same market position they have now. The paradox is that despite only making rational decisions, over 30 years, there is only an 18% chance they won’t have been made obsolete [P(X = 0) for X ~ Bin(6, 0.25)].
This means that, given these assumptions, even fully rational and competent incumbents will eventually fail because of asymmetrical opportunity costs in moments of flux. The average time-to-failure can be approximated using the time between paradigm shifts (t) and the probability of obsolescence from each shift (p) in the simply relationship t/p. For a slow-changing company like the Guinness brewery, you can be around for hundreds of years. For a tech company like BlackBerry, not so much. In practice, companies can usually challenge the formulation and stay alive by hedging on new paradigms through acquisitions and internal R&D (Google AI/X, MSR, FAIR, etc.) or by having more accurate estimates on the likelihood of disruption. But not always! Sometimes, you’re forced to choose between two paths forward.