What is disruptive technology?
Disruptive technology is an innovation that dramatically changes the way consumers, industries or businesses operate. Disruptive technology scans the systems or habits it replaces because it has attributes that are clearly superior.
Recent examples of disruptive technologies include e-commerce, online news sites, route sharing applications and GPS systems.
In their time, the automobile, electricity service and television were disruptive technologies.
Understanding the disturbance
Explanation of disruptive technology
Clayton Christensen popularized the idea of disruptive technologies in The dilemma of the innovator, published in 1997. It has since become a buzzword in start-ups looking to create a highly attractive product.
Even a startup with limited resources can aim for a technological breakthrough by inventing a whole new way of doing something. Established businesses tend to focus on what they do best and look for incremental improvement rather than revolutionary change. They are aimed at their most important and demanding customers.
Key points to remember
- Disruptive technology replaces an older process, product or habit.
- It usually has superior attributes that are immediately obvious, at least for first time users.
- Newcomers rather than established businesses are the usual source of disruptive technology.
This allows disruptive businesses to target neglected customer segments and gain a presence in the industry. Established businesses often lack the flexibility to adapt quickly to new threats. This allows disruptors to move upstream over time and cannibalize more customer segments.
Disruptive technologies are difficult to prepare because they can appear suddenly.
The potential of disruptive technology
Risk taking companies can recognize the potential of disruptive technology in their own operations and target new markets that can integrate it into their business processes. They are the “innovators” of the life cycle of technology adoption. Other companies can take a risk averse position and adopt an innovation only after seeing how it works for others.
Companies that ignore the effects of disruptive technologies may find themselves losing market share to competitors who have discovered ways to integrate the technology.
Blockchain as an example of disruptive technology
Blockchain, the technology behind Bitcoin, is a decentralized distributed ledger that records transactions between two parties. It moves transactions from a centralized server system to a transparent cryptographic network. The technology uses peer-to-peer consensus to record and verify transactions, eliminating the need for manual verification.
The automobile, electrical service and television were all disruptive technologies in their time.
Blockchain technology has huge implications for financial institutions such as banks and brokerage firms. For example, a brokerage could run peer-to-peer confirmations on the blockchain, eliminating the need for depositories and clearing houses, which will cut costs for financial intermediaries and significantly speed up transaction times.
Investing in disruptive technology
Investing in companies that create or adopt disruptive technologies carries significant risk. Many products that are considered disruptive take years to get adopted by consumers or businesses, or are not adopted at all. The Segway electric vehicle was once touted as disruptive technology until it was not.
Investors can gain exposure to disruptive technologies by investing in exchange-traded funds (ETFs) such as the ALPS Disruptive Technologies ETF (DTEC). This fund invests in a variety of innovative areas such as the Internet of Things, cloud computing, financial technologies, robotics and artificial intelligence.