DEFINITION of 'Capital Decay'

Capital decay is an economic term referring to the amount of revenue that is lost by a company due to obsolete technology or outdated business practices. Revenue is lost because a firm loses its competitive standing due to old practices and clients to elsewhere. Capital decay is a growing problem for firms, as the rate of technological development continues to increase. This financial malady can cause firms without current technology to struggle to keep up with competitors.

BREAKING DOWN 'Capital Decay'

Capital decay is often a problem in industries where technology tends to move very quickly, or where barriers to entry for the industry or line of business are low. This allows firms to quickly enter the industry and innovate, changing the shape of the industry. Firms that utilize older business models and that are locked into them due to management inflexibility or high fixed/sunk costs are most at risk to suffering from capital decay. 

Example of Capital Decay

Capital decay was the boon of many firms in the early twentieth century, when modern production methods first came into use. When Henry Ford began to employ the assembly line for car production, firms that used the same employee to build an entire car suffered from capital decay and either went out of business or sold out to Ford or another competitor.

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