Investing in disruption: Part One

Disruption is a term that is used widely. But what does it really mean when it comes to investing?

This is the first in a series of articles that explores what disruption really means, exploring examples of leading disruptive companies, and implications for investors.

It’s easy to assume disruption is just another business buzzword. But the notion of disruption really speaks to ongoing economic evolution. It's at the heart of human nature and has been around for centuries.

Importantly, disruption benefits the economy because it leads to efficiencies by reducing costs, introducing new goods and services, as well as fast-tracking and improving business outcomes. Historically it has also been a net creator of jobs rather than a job killer.

Additionally, disruption is usually a positive force in society. Lower costs lead to higher living standards and supports economic development. It's also not new. The long transition from manual to machine-led agriculture is a good example.

In 1837 John Deere invented the steel plow, which transformed farming as we know it. There have subsequently been scores of disruptive technologies in agriculture including combine harvesters and tractors. Today, the use of drones and data continues to transform agriculture, leading to massive improvements in productivity and efficiency. This process will only continue over time.

However, innovations stemming from disruption can take time to take hold. The automobile is an example. Invented in 1885, for many decades it remained an unaffordable luxury. Now, cars are ubiquitous. Cost is a major reason innovations such as the car take time to become widespread. Initially, a car cost many times the average person’s annual income. Now, the cost of a car is a fraction of this amount and affordable for many.

Now, the pace of disruption is increasing thanks to technology. The music industry is a good example. Vinyl records were the dominant music delivery mechanism for many years. Then, cassettes were invented, and the two co-existed for some time. Along came CDs and rendered cassettes and records largely obsolete. Mini discs improved on CDs, until the invention of the iPod transformed music once more. We now stream music from our smartphones, demonstrating how technology can accelerate the pace of disruption and transform an industry and competitive landscape.

So, music is a great example of how the pace of disruption has accelerated, particularly when it involves technology. Technology makes acceleration possible because it has increased the speed and reduced the cost of innovation in many industries through the ever-reducing cost of processing power that has facilitated and enabled more digital disruption. This explains why the nature of a company’s competitive advantage and the pace of disruption has changed over time. In the digital revolution, core assets are more often than not intangible in nature such as Intellectual Property and network effects as opposed to the physical assets such as plant and machinery that dominated the non-digital era.

Ultimately this has important ramifications for long-term investing, which we will explore in future articles, including the nature and durability of competitive advantage, identification of sustainable long-term growth trends, and corporate capital allocation.

Source: AMP Capital 18 Septemebr 2018

Author: Simon Steele, Head of Global Equities London, United Kingdom

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