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When Does the Underdog Win?

Author

Listed:
  • Birger Wernerfelt

    (MIT Sloan School of Management, Cambridge, Massachusetts 02139)

Abstract

In several celebrated examples, incumbents with significant resources have been beaten, in their own core businesses, by young start-ups. We identify a general mechanism that explains how these entrants can succeed against seemingly impossible odds. Specifically, we argue that they circumvent the entry barriers by using new business models that do not depend on the hard-to-imitate resources protecting the incumbent. While the entrants are gaining experience with their business models, they develop their own hard-to-imitate resources, and these eventually allow them to expand into the incumbents’ core markets. We formalize the argument in a model, derive several comparative static predictions, and illustrate it with a number of examples. The mechanism does not work if the incumbents react immediately, but we will draw on the literature on corporate inertia to argue that three of the mechanism’s properties make it especially likely that incumbents will be slow to adopt new business models.

Suggested Citation

  • Birger Wernerfelt, 2022. "When Does the Underdog Win?," Strategy Science, INFORMS, vol. 7(1), pages 1-9, March.
    • Handle: RePEc:inm:orstsc:v:7:y:2022:i:1:p:1-9
    DOI: 10.1287/stsc.2021.0131
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