Disruptive vs Sustaining Innovations
As investors, we often use “disruption” willy-nilly as shorthand for a technology or product that could grow faster than incumbents or generate better returns than an incumbent. And those descriptions are often incorrect.
Examples like electric vehicles disrupting the legacy auto industry, direct-to-consumer brands disrupting CPG brands, or solar energy disrupting utilities aren’t actual disruptions.
They’re evolutions or innovations within a business or market, but not disruption. If they were disruptions, the incumbents would fade into obscurity the way newspapers and mainframe computers have.
If we use Clayton Christensen’s “The Innovator’s Dilemma” framework, disruption has a very distinct definition. He described disruptive and sustaining innovations like this.
Disruptive innovations:
Create new markets or alter existing markets
Start with simpler, cheaper, or more convenient products/services
Address new or underserved segments of the market
Sustaining innovations:
Improve existing products
Address existing customers’ problems
It isn’t that disruptive innovations are unknown or unknowable. The problem is, that incumbents are (1) structurally incapable of switching to the new technology, (2) don’t take it seriously until it’s too late, or (3) misunderstand the size of the new market.
$Netflix(NFLX)$ disrupted cable TV in plain sight and legacy media companies not only didn’t follow they powered Netflix’s growth by selling the streamer content for years. Digital cameras were inferior to film photography, so Kodak ignored it until it was too late. PCs were inferior to mainframes in the 70s and 80s but enabled home computing which was orders of magnitude larger than mainframes.
These are just a few historical examples of disruptive innovation at work. They were seen but misunderstood by incumbents for logical reasons.
Disruption Is Harder Than Ever
It seems there are fewer true business disruptions than ever and there may be a good reason for that.
When the Innovator’s Dilemma was first published in 1997, it was a revelation in the tech industry. Innovation didn’t have to compete head-on with existing technology, it could start as inferior and ultimately win through more rapid innovations that incumbents would overlook.
Silicon Valley startups followed the Innovator’s Dilemma formula to fame and fortune.
Today’s incumbents came of age knowing the concepts of disruptive innovations from Day 1.
It’s impossible to know the impact of this book on managers today, but they are aware of the innovator’s dilemma concept. And it seems they’re reacting to it, which is why $Alphabet(GOOG)$ $Alphabet(GOOGL)$ $Apple(AAPL)$ $Meta Platforms, Inc.(META)$ seem so far ahead of the game in AI than their counterparts may have been 30 years ago.
As investors, we need to understand the difference between truly disruptive and incremental, sustaining innovations. It could determine whether a company has a 10x opportunity ahead or runs into an incumbent-sized wall.
https://asymmetric-investing.beehiiv.com/p/disruptive-vs-sustaining-innovation
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
