What is Path Dependency

Path dependency is an idea that tries to explain the continued use of a product or practice based on historical preference or use. This holds true even if newer, more efficient products or practices are available due to the previous commitment made. Path dependency occurs because it is often easier or more cost effective to simply continue along an already set path than to create an entirely new one.

BREAKING DOWN Path Dependency

An example of path dependency would be a town that is built around a factory. It makes more sense for a factory to be located a distance away from residential areas for various reasons. However, it is often the case that the factory was built first, and the workers needed homes and amenities built close by for them. It would be far too costly to move the factory once it has already been established, even though it would better serve the community from the outskirts of town.

Effects of Path Dependency on Businesses

Industries can become committed to path dependency as an initial concept, method, or innovation is adopted as a standard that subsequent elements are derived from. For example, the use of fossil fuels as primary energy sources persists, in part, because of the development of a multitude of tertiary industries that are intrinsically tied to that usage.

The automotive industry continues to primarily develop vehicles with gasoline-fueled, internal combustion engines even though there is ultimately a finite supply of the resource. Alternative fuels and power sources have been explored; however, they lack the research time and infrastructure commitment that has already been established for gasoline-fueled transportation and machine. Despite rising costs and increased scarcity associated with fossil fuels, a long-term or renewable successor resource that can meet the worldwide demand has yet to be developed at scale.

Path dependency can influence strategies within companies, sometimes to the detriment of the business. For example, a company may be developing a core product or system that establishes its market presence. Over time, rival products and methods might appear in the market that represent more competitive or lucrative opportunities. Path dependency can contribute to the reluctance or inability to invest in forward-thinking innovations. The introduction of digital photography, for example, presented such a challenge to the makers of film for cameras.

Palm, the defunct maker of early personal digital assistants, found itself in comparable circumstances as the growth of the smartphone market eclipsed its devices. Though Palm’s technology saw widespread use as a novel to access mobile computing, the company did not adopt new strategies that would help it remain relevant as smartphones became the dominant mobile devices.