Disruptive Technology

Disruptive technology significantly alters the way businesses or entire industries operate. It often forces companies to change the way they approach their business for fear of losing market share or becoming irrelevant. Recent examples of disruptive technologies include e-commerce and ride-sharing.

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 limited resources, such as a startup, successfully challenges a larger established incumbent business or invents entirely new markets. Often, larger incumbent companies only focus on their largest and most demanding customers, which allows disruptive businesses to target overlooked customer segments and gain industry presence. These incumbents often don’t have the flexibility to adapt 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 conduct business to improve efficiency, they're unlikely to be able to thoroughly prepare for disruptive technologies because they can appear suddenly or may not be initially economical to target.

Risk-taking companies may recognize the potential of disruptive technology and target new markets to try and find ways to incorporate it into their business processes – the "innovators" of the technology adoption lifecycle. Larger companies typically take a more risk-averse position and adopt an innovation only after seeing how it performs with a broader audience. Companies that fail to account for the effects of new, disruptive technology may find themselves losing market share to competitors that have discovered ways to integrate the technology into managing labor and capital as well as other resources.

Blockchain, the technology behind Bitcoin, is a decentralized distributed ledger that records transactions between two parties. It moves transactions from a centralized server-based system to a transparent cryptographic network. The technology uses peer-to-peer consensus to record and verify transactions, removing the need for manual verification. Blockchain technology has enormous implications for financial institutions, such as banks and stock brokerages. For example, a brokerage firm could execute peer-to-peer trade confirmations on the blockchain, removing the need for custodians and clearing houses, which will reduce financial intermediary costs and dramatically expedite transaction times.

Investing in firms that use and deliver disruptive technology carries significant risk. Many products considered disruptive don't make an immediate impact on the market and may take years before they become adopted by consumers or businesses. Investors can gain exposure to disruptive technology by investing in the ALPS Disruptive Technologies ETF (DTEC), an exchange-traded fund that covers a variety different innovative themes, such as internet of things (IoT), cloud computing, fintech, robotics and artificial intelligence (AI). The ETF is up 5.79% over the past year, outperforming the broad-based S&P 500 Index by roughly 5% over the same period as of March 2019.

• Disruptive technology significantly alters the way companies operate and compete.
• Disruptive technology allows small companies to find overlooked target markets and gain market share.
• Blockchain is a disruptive technology that removes the need for manual verification of transactions.
• Investors can invest in disruptive technology using exchange-traded funds.

Online conglomerate Amazon.com, Inc. (AMZN) has used e-commerce to disrupt the retailing industry completely. Consumers can now order products with the simple click of a button and have them delivered the next day, or in some locations, on the same day, they are purchased. Online retailers like Amazon use economies of scale to offer significantly lower prices than their traditional competitors. Consumers have benefited considerably from e-commerce disruption, but it has made it more difficult for producers and brick-and-mortar stores to maintain profitability.

The taxi industry is another example where disruptive technology has had a significant impact. Uber Technologies, Inc., a San Francisco-based transport networking company, uses peer-to-peer technology to provide a ride-sharing service that exploits the shift to a more decentralized "sharing" economy. Other well-known ride-share companies that have used disruptive technology to shake up the taxi industry include Lyft, Inc. and Via, Inc.