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Disruptive vs Sustaining Innovations
We often confuse disruption with something that's more sustaining to existing businesses.
Travis Hoium
June 27, 2024
As investors, we often use “disruption” willy-nilly as shorthand for a technology or product that could grow faster than incumbents or generate better returns than an incumbent. And those descriptions are often incorrect.
Examples like electric vehicles disrupting the legacy auto industry, direct-to-consumer brands disrupting CPG brands, or solar energy disrupting utilities aren’t actual disruptions.
They’re evolutions or innovations within a business or market, but not disruption. If they were disruptions, the incumbents would fade into obscurity the way newspapers and mainframe computers have.
If we use Clayton Christensen’s “The Innovator’s Dilemma” framework, disruption has a very distinct definition. He described disruptive and sustaining innovations like this.
Disruptive innovations:
Create new markets or alter existing markets
Start with simpler, cheaper, or more convenient products/services
Address new or underserved segments of the market
Sustaining innovations:
Improve existing products
Address existing customers’ problems
It isn’t that disruptive innovations are unknown or unknowable. The problem is, that incumbents are (1) structurally incapable of switching to the new technology, (2) don’t take it seriously until it’s too late, or (3) misunderstand the size of the new market.
Netflix disrupted cable TV in plain sight and legacy media companies not only didn’t follow they powered Netflix’s growth by selling the streamer content for years. Digital cameras were inferior to film photography, so Kodak ignored it until it was too late. PCs were inferior to mainframes in the 70s and 80s but enabled home computing which was orders of magnitude larger than mainframes.
These are just a few historical examples of disruptive innovation at work. They were seen but misunderstood by incumbents for logical reasons.
What I think is worth exploring is two exciting technologies that investors think will be disruptive: Artificial Intelligence and Autonomous Driving.
Are they disruptive or sustaining innovations that will ultimately favor the incumbents?
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🤖 Artificial Intelligence: Disruptive or Sustaining Innovation?
It’s easy to say AI is disruptive given all of the industries it could change. But is it disruptive?
AI is more expensive than alternative computing
AI (as it exists today) does not address a new or underserved market
It is worse than incumbent products and is improving quickly (a vote for disruption)
AI is arguably the opposite of a disruptive innovation for most of big tech. It serves the most value for advanced technology users like programmers and executives and is more expensive than incumbent options.
There’s potential that AI will enable disruptive innovations eventually. For example:
AI could enable lower-cost (and initially lower-quality) legal services that are unaffordable to most people
AI could enable lower-cost health services
AI could enable teaching or language services
Depending on your view, AI is sustaining or disruptive. If I’m Alphabet or Meta, I see it as a sustaining innovation, but if I’m a lawyer I’m worried I will go the way of the newspaper columnist in 1995.
Ironically, the AI pins released earlier this year had a chance to be disruptive innovations. But they weren’t a compelling form factor, didn’t work well, had weak business models, and weren’t cheaper than existing tech in our pockets today.
Verdict: Artificial intelligence is a sustaining innovation (so far) with the potential to be disruptive eventually.
🚘️ Autonomous Vehicles: Disruptive or Sustaining Innovation?
Autonomous driving features are proliferating in nearly every vehicle and full autonomy with no drivers is being rolled out by companies like Waymo (Alphabet) and Cruise (General Motors).
The view of disruption depends on how the market plays out. If we look at transportation as a service:
On a per-mile basis, autonomous vehicles could be significantly lower cost than Uber/Lyft, despite initially being accessible in fewer locations to begin with.
Autonomy could make NOT owning a vehicle possible, increasing the total addressable market for rides and reducing the addressable market for auto sales.
Transportation as a service from an autonomous fleet could reduce the number of vehicles sold each year as utilization per vehicle rises.
This could be a classic case of disruption if we begin to view transportation as a service rather than owning vehicles. In that case, how does Ford compete with NOT buying a car/truck? Would VW, Hyundai, and dozens of other companies fade into oblivion?
Probably!
If autonomous features proliferate on vehicles people own, it’s much more likely autonomy is a sustaining innovation with the traditional automakers simply incorporating new features in their vehicles.
Verdict: If autonomy enables transportation as a service, it will be disruptive to automakers. If autonomy becomes a feature in vehicles, it’s a sustaining innovation.
The irony here is GM owns one of the potential disruptors (Cruise), which could allow GM to disrupt itself.
Disruption Is Harder Than Ever
It seems there are fewer true business disruptions than ever and there may be a good reason for that.
When the Innovator’s Dilemma was first published in 1997, it was a revelation in the tech industry. Innovation didn’t have to compete head-on with existing technology, it could start as inferior and ultimately win through more rapid innovations that incumbents would overlook.
Silicon Valley startups followed the Innovator’s Dilemma formula to fame and fortune.
Today’s incumbents came of age knowing the concepts of disruptive innovations from Day 1.
It’s impossible to know the impact of this book on managers today, but they are aware of the innovator’s dilemma concept. And it seems they’re reacting to it, which is why Alphabet, Apple, and Meta seem so far ahead of the game in AI than their counterparts may have been 30 years ago.
As investors, we need to understand the difference between truly disruptive and incremental, sustaining innovations. It could determine whether a company has a 10x opportunity ahead or runs into an incumbent-sized wall.
Disclaimer: Asymmetric Investing provides analysis and research but DOES NOT provide individual financial advice. Travis Hoium may have a position in some of the stocks mentioned. All content is for informational purposes only. Asymmetric Investing is not a registered investment, legal, or tax advisor or a broker/dealer. Trading any asset involves risk and could result in significant capital losses. Please, do your own research before acquiring stocks.
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