Encarta Companies: Victims of Disruptive Innovations

Encarta Companies

I recently spoke to you on the blog about calls disruptive innovations, which are innovations that affect an industry in such a way that they radically change its business model and status quo prevailing until its appearance. The victims of disruptive innovations are companies that I like to call "Encarta companies." In this article I will explain what Encarta companies are, how to detect them and what to do when we come across one.

What are "Encarta companies"?

"Encarta companies" are companies whose business model has been or will become obsolete as a result of disruptive innovation.

The term "Encarta company" comes from the famous competitive advantage that for decades was indestructible by its competitors. This company, in turn, was a victim of the arrival of the internet and Wikipedia, which caused this encyclopedia to disappear forever. Ironically, the Encarta encyclopedia was the victim of a disruptive innovation (the rise of the internet), but it also harnessed another disruptive innovation (the rise of the PC) to achieve success. This once again shows the danger of investing in tech companies.

How to detect an Encarta company?

To detect Encarta companies we have to analyze the influence of disruptive innovations in different companies and sectors to determine if these companies will be able to adapt to this change or simply disappear as a result of it.

In the event that the company has very difficult to maintain its profitability or even its survival, this is an Encarta company.

What to do if we find one?

Here I am going to be categorical, in 99% of cases you have to get rid of the company as soon as possible, since it is very likely that in a short time it will become a money-losing machine.

I can think of an exception, which I have never experienced, but which is worth mentioning in case it ever arises. To maintain the position or buy shares of the company that is or is going to be the victim of a disruptive innovation, it has to meet two conditions:

  • That trading below its liquidation value. That is, below its adjusted book value, also removing settlement expenses.
  • That the management team is aware of the situation and acts accordingly. The important thing in this case is that the management team does not waste the resources of the company in raising something that has sunk forever.

This is a very rare case, since managers are not usually aware of these problems and they tend to fight for everything to continue "as it has been throughout life." Therefore, I think the best thing to do in these cases is to forget about these companies so as not to experience what Microsoft experienced with its famous Encarta.

Recommended article

Encarta, an interesting case(Blog de Enrique Dans)