Disruptive technology refers to an innovation that significantly alters the way consumers, industries, or businesses operate. It replaces existing systems or habits with improved alternatives, often leading to wide-scale changes.
Recent examples of disruptive technologies include e-commerce, online news platforms, ride-sharing apps, and advanced GPS systems.
In the past, the automobile, electricity service, and television were revolutionary forms of disruptive technology.
How Disruptive Technology is Transforming the World
The concept of disruptive technologies was introduced by Clayton Christensen in a 1995 Harvard Business Review article, and further expanded in his book The Innovator’s Dilemma published in 1997. The term has since become a popular buzzword among startups aiming to create products with mass appeal.
Key Takeaways
- A disruptive technology supersedes older processes, products, or habits.
- It generally possesses superior attributes that early adopters recognize immediately.
- Upstart companies are typically the source of disruptive technologies rather than established firms.
Established companies often focus on refining their core capabilities, pursuing incremental improvements instead of aiming for revolutionary changes. They usually cater to their largest and most demanding customers. This focus often creates opportunities for disruptive businesses to target overlooked customer segments and rapidly gain a foothold in the industry. Moreover, established companies often lack the agility to respond promptly to new threats, allowing disruptors to eventually capture larger market segments.
The Potential of Disruptive Technology
Risk-taking companies might recognize the potential of disruptive technology within their operations and target new markets by incorporating such innovations. These companies are often the “innovators” in the technology adoption lifecycle. Contrarily, more conservative businesses might adopt new technologies only after observing their effectiveness elsewhere.
Companies that neglect the impacts of disruptive technology risk losing market share to competitors who have better integrated these technologies.
Blockchain: A Modern Example of Disruptive Technology
Blockchain, the underlying technology for Bitcoin, is a decentralized and distributed ledger that records transactions between parties transparently. It transitions transaction processes from centralized servers to cryptographic peer-to-peer networks. The use of consensus mechanisms to verify transactions eliminates the need for manual verification.
This technology has widespread implications for financial sectors, including banking and stock brokerages. For instance, brokerage firms could utilize blockchain for peer-to-peer trade confirmations, thereby reducing the need for custodians and clearinghouses. This shift will lower intermediary costs and speed up transaction times significantly.
Investing in Disruptive Technology
Investing in companies that create or adopt disruptive technologies involves substantial risk. Many disruptive products take years to gain acceptance and may never be fully adopted. For example, the Segway electric vehicle, once considered groundbreaking, did not achieve broad market use.
Investors looking to gain exposure to disruptive technologies can consider exchange-traded funds (ETFs) like the ALPS Disruptive Technologies ETF. This fund invests in a range of innovative areas such as the Internet of Things, cloud computing, fintech, robotics, and artificial intelligence.
Related Terms: innovation, blockchain, startups, technology disruption.
References
- Harvard Business Review. “Disruptive Technologies: Catching the Wave”.
- Clayton M. Christensen. “The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail”. Harvard Business School Press, 1997.
- ALPS. “ALPS Disruptive Technologies ETF”.
