As part of his attempt to develop precise mathematical descriptions of how objects move, the seventieth century French philosopher René Descartes began with the idea that the total “quantity of motion” in the universe is conserved.
Descartes envisioned his idea of the conservation of motion as one of the fundamental governing principles of the entire cosmos. Newton’s laws of motion are, in fact, modeled on Descartes’ original concepts. Newton’s primary contribution was to restate Descartes ideas more fully, and with much better mathematics.
Today, we recognize that most of the fundamental laws of physics have to do with conservation principles. In particular, the conservation of energy, the conservation of momentum, and conservation of angular momentum.
The law of the conservation of momentum states that if no resultant force acts on a closed system of objects, the momentum of the system remains constant in magnitude and direction. This is true no matter how intricate the system and no matter how many components it has. Furthermore, the law applies to all objects in universe, from the largest spiral galaxies to the smallest subatomic particles.
If you recall from our last post (If Your Position is Everywhere, Your Momentum is Zero), the momentum of an object (p) is defined as the product of its mass (m) and velocity (v) by the equation:
p = m · v
The momentum of a system of “n” objects is simply the vector sum of the momenta of the individual objects in the system.
p System = ∑ mi · vi = m1v1 + m2v2 + m3v3 + … mnvn
This simple but powerful equation raises the question for today’s exploration: If (as Michael Porter suggests), an industry can be viewed as a complex system of forces, in situations where there are no net external forces acting on the system, does the law of the conservation of momentum apply?
Before we attempt to answer that question, it may be helpful (and even fun) to take a quick look at the principle of the conservation of momentum as illustrated by Richard Garriott, a former game developer and the sixth private citizen to fly in space. In the following two minute video blog, Richard demonstrates the principle from within the zero gravity environment of the International Space Station.
(As an aside, the basic physics behind the propulsion of the Soyuz rocket which carried Garriott into orbit is also based on the conservation of momentum.)
Industries as Isolated Systems
In addition to brilliantly illustrating the principle, Richard’s video blog actually provides those us who can’t afford a $30M ticket to fly to the International Space Station with a powerful “visual” model for thinking about industries as isolated systems.
In business school we’re taught that industries develop along a predictable, cyclical path, which includes the following five stages:
Embryonic: new products, high price, slow growth, weak revenue and high-risk investments.
Growth: growing sales, significant profitability and lack of competition.
Shakeout: slowing growth, intense competition and early stages of consolidation and declining profitability.
Mature: little or no growth, industry consolidation and relatively high barriers to entry.
Decline: falling demand, sales and negative growth. Companies that have the strongest competitive advantages remain in the industry and fight for market share.
Industries tend to consolidate during the Shakeout phase, when emerging market leaders initiate mergers and acquisitions (M&A) in order to rapidly expand market share. Conversely, mature and declining industries consolidate in order to survive.
Garriott’s illustration of the two colliding tennis balls “sticking” together (an example of an inelastic collision), provides another model for thinking about industry consolidation. When two organizations merge, the resultant mass of the new organization increases. Based on the law of the conservation of momentum, the velocity of the merged organization (which we previously defined as the time rate of change in revenue) must decrease by an amount inversely proportional to the sum of the masses as follows:
m1vi + m2vi = (m1 + m2 ) vf
vf = (m1+m2)-1 · (m1vi + m2vi)
Overall changes in market share provide us with another “intuitive” sense that a conservation principle is is at work. We readily accept that notion that once an industry matures, in order for one company to gain market share, another company must lose market share. One would reasonably expect the conservation of momentum to apply. However, like René Descartes, we want to go beyond our intuitive sense. We need to validate the model mathematically to prove our hypothesis.
In our next post we’re going to dive much deeper into this exploration, analyzing the momentum of the mobile phone industry between 2002 and 2007 (prior to the introduction of the iPhone). Our goal is to determine if the principle of the conservation of momentum can be applied from a mathematical perspective.