Disruptive and revolutionary are words companies often adopt to describe themselves and the influence they hope to have on the world. Properly used, they reflect the effect of innovation that feeds and propels the productivity and forward progress of any company. But which is more impactful for investors and likely to translate to long-term commercial success?
Revolutionary innovation refers to unexpected ideas that do not affect existing markets. Revolutionary innovators pose questions outside the boundaries of existing solutions by asking unexpected questions. When automobiles arrived in the late 1800s, the idea of an internal combustion engine to replace a horse-drawn buggy was unexpected. But for the first few decades, they had little effect on the buggy market. Automobiles were expensive, infrastructure was poor, and very few models sold.
The challenge for revolutionary ideas is the business models in which they arise. Revolutionary ideas orient towards new customers rather than the existing customers of the business. Many business models do not have the resources or desire to drive towards developing revolutionary ideas. IBM’s dominance of the mainframe market in the 1970s slowed their speed to capitalize on the revolutionary idea of a personal computer market. This led to being outmaneuvered by smaller rivals and contracting with a small company named Microsoft to provide the operating software for their earliest models.
Disruption happens when revolutionary ideas find a home. It tends to appear in organizations led by outsiders and entrepreneurs. When Henry Ford finally introduced the mass-produced automobile in 1908, he created an entirely new transportation market, affordable to the masses. The days of the horse-drawn vehicle market became numbered.
Yet disruptive innovation does not always equal commercial success. Bell Labs invented the first transistors, but Sony developed the transistor radio a decade later. Kodak invented the digital camera but remained invested in film, allowing Canon and others to bring their idea to the market. Napster, Gnutella, and Kazaa arose to allow for the digital distribution (albeit illegal) of music and predated online retailers like iTunes and Amazon.
Which is best for investors?
Neither. We love the idea of revolutionary concepts; they are fun, electrifying, and potentially paradigm-changing. Disruptors too are exciting during their time in the spotlight. But the type of innovation that pays the greatest dividends is their less exciting cousin, evolutionary innovation.
Evolutionary innovation improves a product in an existing market. It is adaptive, incremental, and often linear, progressing in ways that customers expect. Some of the best-known products emerged through evolution. The iPod was not the first MP3 player, the iPhone was not the first smartphone, and the iPad was not the first tablet. Tesla did not create the electric vehicle market, but they did make it better, turbo-charging a now growing market through their evolutionary innovations. Amazon and Netflix are where they are now, not only because they took a revolutionary idea and disrupted the world, but because they are constantly evolving.
Disruptive and revolutionary ideas are needed to foster creativity and out of the box thinking. But when putting money to work, it is the companies that best practice evolutionary innovation that we favor most.