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DEFINITION of 'Disruptive Technology'

Disruptive technologies are those that significantly alter the way businesses or entire industries operate. Often times, these technologies force companies to alter the way they approach their business, or risk losing market share or becoming irrelevant. Recent examples of disruptive technologies include smartphones and e-commerce.

BREAKING DOWN 'Disruptive Technology'

Clayton Christensen popularized the idea of disruptive technologies in the book “The Innovator's Dilemma” published in 1997.

Disruption is the process whereby a small company with few resources successfully challenges a larger established incumbent business or invents entirely new markets. Often times, larger incumbent businesses are focused on their largest and most demanding customers, which opens the door for disruptive companies to target overlooked customer segments and gain a foothold. These incumbents often fail to respond very quickly to the new threats, and disruptive companies eventually move upstream and cannibalize more customer segments over time.

While incumbent companies often plan to make incremental improvements to the way they do business in order to improve efficiency, they are unlikely to be able to fully plan for disruptive technologies because they can appear suddenly or may not be economical to target at the onset.

More risk-taking companies may realize the potential of a disruptive technology targeting new markets 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 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 economics to some extent. For example, the new technology could be significantly cheaper and still provide the desired features. The advent of e-commerce retailing has led consumers to buy products online rather than going to a physical location, 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.

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