DEFINITION of Disruptive Innovation

Disruptive Innovation refers to a technology whose application significantly affects the way a market or industry functions. An example of a modern disruptive innovation is the internet, which significantly altered the way companies did business and which negatively impacted companies that were unwilling to adopt it. A disruptive innovation is differentiated from a disruptive technology in that it focuses on the use of the technology rather than the technology itself.

BREAKING DOWN Disruptive Innovation

Clayton Christensen popularized the idea of disruptive innovation in the book “The Innovator’s Solution”, which was a follow up to his “The Innovators Dilemma” published in 1997. Christensen posited that there were two types of technologies that businesses dealt with. Sustainable technologies were those that allowed a business to incrementally improve its operations on a predictable timeframe. These technologies and the way they were incorporated into the business were primarily designed to allow companies to remain competitive, or at least maintain a status quo. Disruptive technologies and the way they are integrated - the disruptive innovations - were less easy to plan for and potentially more devastating to companies that did not pay enough attention to them.

What Constitutes a Disruptive Innovation?

What makes a technology or innovation “disruptive” is a point of contention. The term may be used to describe technologies that are not truly disruptive. As mentioned, the internet was disruptive because it was not an iteration of a previous technology. It was something new that created unique models for making money that never existed before. Of course, that created losses for other business models. A classic example of the disruptive innovation of the internet being unleashed was the restructuring of the book selling industry. The big book selling chains lost out to Amazon because it could display its inventory without having to own a physical store in every town and then ship the book to the buyer's home. In contrast, Model T car is not considered disruptive because it was an improvement on an existing technology and it wasn't widely adopted upon its release. The auto industry didn't take off until mass production brought prices down, moving the entire transportation system from hooves to wheels.

In that sense, the system of mass production does meet the criteria for a disruptive innovation. 

Implications of Disruptive Innovation for Investors

Investing in a disruptive innovation can be complicated. It requires an investor to focus on how companies will adopt to a disruptive technology, instead of focusing on the development of the technology itself. Companies such as Amazon, Google, and Facebook are examples of companies that have heavily focused on the internet as a disruptive technology. The internet has become so ingrained in the modern world that the companies that failed to integrate the disruptive innovation into their business models have been pushed aside. Artificial intelligence (AI) and their potential to learn from employees and perform their jobs may be a disruptive innovation for the job market as a whole in the near future.