Interaction between Incumbent while Entrenched and Modern while Agile Companies at a Freezing Moment of Time

Abstract

This paper aims at designing a game-theoretical model – without any unrealistic assumptions – to study the competition between a company that is operating under an old paradigm that continuously exploits its established competitive advantage, and a modern, agile company that anticipates and adapts to market changes. By looking at the 2 2 competition of the companies, established are several results on how the incumbent while entrenched company loses its competition to the modern company. Then by including a customer into the interplay of the two companies, analyzed is the dynamics of competition between the two companies and why the old-fashioned company has to become modern by adopting the philosophy of transient competitive advantages. Specifically, this paper shows when the old-fashioned company could invest in raising the entry barrier in order to protect its customer base, and when such investment would be useless. Practically, this work provides useful guidelines for when firms that are incumbent in their markets should start to prepare to ride turbulent waves of a paradigm change, and what modern firms should constantly scan with respect to their environments for the next breakthroughs in order to design and to implement their next competitive advantages.