DEFINITION of 'Disruptive Technology'
A technology that significantly alters the way that businesses operate. A disruptive technology may force companies to alter the way that they approach their business, risk losing market share or risk becoming irrelevant. Recent examples of disruptive technologies include smart phones and the e-commerce retailing. Clayton Christensen popularized the idea of disruptive technologies in the book “The Innovator's Dilemma” in 1997.
BREAKING DOWN 'Disruptive Technology'
While companies often plan to make incremental improvements to the way that they do business in order to improve efficiency, they are unlikely to be able to fully plan for disruptive technologies because these technologies can appear suddenly.
More risk-taking companies may realize the potential of a disruptive technology and try to find ways to incorporate it into their business processes – the “innovators” of the technology adoption lifecycle – but most companies are more risk-averse and will adopt an innovation only after seeing how it performs with a wider audience. Companies that fail to account for the effects of a new, disruptive technology may find themselves losing market share to companies that have found ways to integrate the technology into the way that they manage labor and capital.
A disruptive technology does not have to be better than those currently offered by the market, and may damage the overall market to some extent by existing. It could, for example, be significantly cheaper and still provide the desired features. The advent of e-commerce retailing has led consumers to buy products online rather than their store, with online options often carrying lower prices. This has benefited consumers but made it much more difficult for producers and brick-and-mortar stores to maintain profitability.
Investing in a firm that has produced a disruptive technology is likely to carry significant risk. Many products considered disruptive don’t make an immediate impact on the market, and may take years before being adopted by a critical mass of users.