Disrupt or Be Disrupted: Protect your market position with the substitution curve

In a world where innovations can sweep across markets like a tsunami, many companies face a harsh reality: mature or saturated markets carry the risk that established products, technologies, or services will be displaced by new solutions. Declines in sales and revenue are not only unpleasant—they can threaten a company's very existence. This is where the substitution curve comes in: a powerful tool that helps companies anticipate this process and respond strategically in a timely manner. In this blog post, we take a closer look at how this curve works, where it comes from, why it is indispensable for market leaders, and how it is applied in practice.

The problem: market saturation and the risk of substitution

Imagine your company dominates a market segment. Profits are pouring in, and your competitive position seems unshakeable. But suddenly, an innovative alternative appears—and everything changes. “Today's successes are sacrificed on tomorrow's altar,” as the saying goes. Even the strongest market leaders are not immune to substitution. New solutions can capture parts of your market or even the entire market, pushing your solution out. This is exactly where the substitution time curve comes in. It allows you to roughly predict the course of displacement of your established product or even technology by innovative problem solutions – under certain conditions. By observing the market cycle, from the spread of a new idea to its marketing and the substitution of existing solutions, you can use data to forecast future developments. The result? A curve that shows how the substitution process could unfold and when the saturation point will be reached. On this basis, decisive strategic steps can be derived, such as investments in innovation or diversification.

What does the substitution curve draw on?

The substitution curve is more than just a graph - it combines mathematical models with economic insights. At its core, it draws on two central concepts:

1. The S-curve

This describes the typical course of market penetration for an innovation. Initially, adoption grows slowly, then explodes until it finally flattens out at saturation. The substitution time curve uses this dynamic to model the displacement of old solutions by new ones.

2. The Lotka-Volterra model

This is where it gets exciting. Imagine rabbits and foxes on an isolated island – a classic predator-prey model. The interactions between these populations were described in the 1920s by Austrian chemist and mathematician Alfred J. Lotka and Italian mathematician and physicist Vito Volterra [1].

Volterra derived a growth model based on two assumptions:

• The growth rate in a niche is limited by competition. There is no unlimited growth – resources are finite.

• Populations strive toward a saturation value that corresponds to the capacity of the niche.

These findings gave rise to a differential equation model known as the Lotka-Volterra model. It has been modified over time and is used in economics to simulate market dynamics. In the substitution time curve, this model is adapted to represent the interaction between “old” and “new” solutions – similar to how foxes control the rabbit population.

By combining these theories, companies with sufficient data (e.g., from past market cycles) can calculate the displacement process. The model not only shows the potential time course, but also helps to identify risks at an early stage.

Examples of market leaders being displaced from their traditional markets

To make the relevance of the substitution time curve more tangible, let's look at three specific examples from practice:

1. The music industry: From CDs to streaming services

In the 1990s and early 2000s, CDs dominated the music market. However, with the advent of MP3 players and later streaming services such as Spotify, substitution began. Companies such as Sony and Universal Music could have used the substitution curve to predict the decline in CD sales. By analyzing historical data (e.g., CD sales figures and early MP3 downloads), the curve would have shown that streaming services would dominate the market from around 2010 onwards. Strategic decisions, such as investing in proprietary streaming platforms or partnerships with Spotify, could have minimized losses.

2. The automotive industry: combustion engines vs. electric vehicles

The automotive industry is currently undergoing a massive transformation toward electric vehicles. Manufacturers such as Volkswagen and General Motors, which have long relied on combustion engines, have been confronted with the rapid market penetration of electric vehicles by companies such as Tesla. A substitution curve based on data such as electric vehicle sales figures and government subsidy programs would have shown early on that the market share of combustion engines would decline significantly from around 2020 onwards. Timely insight could have accelerated the transition to electric mobility – for example, through faster investment in battery technology or charging infrastructure. The chart below shows the interplay between diffusion and substitution, and thus the displacement of an old solution by a new one, using the example of new car registrations in Norway: The green curve represents the diffusion process, i.e., the spread of electric cars, while the red curve shows the substitution process, i.e., the displacement of combustion engines by electric cars. The first cars with electric motors were registered in 1995. Towards the end of 2020, the number of newly registered electric cars exceeded the number of newly registered combustion engines (gasoline, diesel, and hybrid) for the first time, with the two curves intersecting shortly before. In 2022, the proportion of newly registered electric cars grew to just under 80% with 138,292 new registrations, compared to a proportion of approximately 20% for combustion engines, which accounted for 36,037 new registrations, including plug-in hybrids [2].

3. Photography: Analog to digital

In the 1990s, analog cameras (e.g., from Kodak) were market leaders. However, the advent of digital cameras triggered a substitution process that ultimately drove Kodak into bankruptcy. A substitution timeline based on the spread of digital cameras and declining film sales could have warned Kodak that the market would shift at the turn of the millennium. Strategically, Kodak could have invested in digital technologies early on or developed new business models (e.g., digital image processing).

All these examples show that the substitution curve is not a theoretical construct, but a tool that helps companies translate data into action.

Why is the substitution curve particularly relevant for market leaders?

Companies with a strong market position—those that feel secure in their competitive position - benefit most from this tool. Why? Because they are often blind to impending disruptions. The curve serves as a wake-up call: it reveals how quickly a new solution could conquer the market. You can use it to simulate scenarios and answer questions such as:

• When will our market reach saturation point?

• How much time do we have to react?

Based on this, effective strategies can be developed in good time, such as entering into partnerships, investing in research and development, or tapping into new markets.

Conclusion: Early insights as the key to success

In an era of rapid innovation, ignorance is not an option. The substitution curve provides a valuable framework for observing market saturation and anticipating substitutions. By linking S-curves with the Lotka-Volterra model, it not only provides forecasts but also a solid basis for strategic decisions.

If your company deals with mature markets, it is worth using this tool. Collect data, model scenarios – and stay one step ahead of the competition. Because as Volterra and Lotka teach us: growth has limits, but foresight does not.

Detailed explanation and purchase of the practical tool for implementation

In my book Strategiewerkzeuge aus der Praxis - Volume 2: Optionenfindung, Strategieentwicklung, Umsetzung, you will find a detailed explanation of the substitution curve, including an application example. You can purchase the tool used there at a reasonable price here.

Sources

[1] Guerraggio, A., Paoloni, G. (2010): Vito Volterra. Springer: Berlin, Heidelberg

[2] Kaufmann, T. (2024): Practical Strategy Tools - Volume 2: Option Finding, Strategy Development, and Implementation. Springer Verlag.