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Christensen’s theory of disruptive technology is key to successful investing in the 2020s

The innovator’s dilemma is a theory about how market-leading companies, who appear to be unbeatable, can fall from grace and even go bust in some cases. It’s also a theory about how upstart companies can go from nowhere to corporate superstars in hardly any time.

Investors who understand the theory are at an advantage. In fact, I go further and say understanding the theory is vital. Companies like Unilever are a good example of how to learn from the innovator’s dilemma.

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Innovator’s Dilemma, first published in 1997, was written by late Harvard professor Clayton Christensen, who sadly died recently at just 67 years old.

Christensen’s theory runs counter to traditional business ideas — which is why many found the idea difficult to accept. However, the theory does explain how disruptive technology can transform a market and is illustrated by examples such Kodak, Blockbusters, Nokia, and Blackberry (formerly Research in Motion.)

In his study, Professor Christensen focused on the disc drive industry and what happened to the key players in the industry as the main format switched from 12-inch drives used in mainframe computers, to 8-inch drives for mini computers, 5.25 inch for desktop computers, and 3.5 disc drives for laptops.

His finding was that with every shift in the main standard, the market leaders immediately lost market share, often going bust, and new companies came to dominance. Then, when the standard changed again, these newer companies themselves lost market share only to be replaced by an even newer generation.

More significantly, in just about every case, the companies in question did all the things that conventional business and marketing advice suggested — they extensively researched the market, they canvassed the views of customers, and stuck closely to their business plans.

Unfortunately, for these companies, the research often seemed to suggest that the new technology was little more than a toy, and that they would be better off ignoring it.

The lesson of Innovator’s Dilemma 

One of the lessons of Innovator’s Dilemma is that it can be a mistake to listen too carefully to customers. Other lessons include trying to think ahead concerning different ways your business model might be disrupted, experimenting with different ideas, and being willing to adapt quickly.

Many of the current business buzz words such as agile, lean, and digital transformation relate to the lessons of Innovator’s Dilemma.

New technologies are developing so fast that traditional businesses models are in danger of going obsolete — whether the models relate to car companies, banks, energy firms, retailers, or even techs themselves, the risk of disruption is always present.

Some companies, such as Unilever, impress me with the way they have adopted technology to try to keep on top of the disruptive threats, applying agile techniques or backing start-ups, for example. Also, although Boohoo is itself a disruptor, I am impressed with the way it is applying data, lean, and agile techniques. In this way they are a better able to deal with future disruptive threats.

I believe that companies that do not learn the lessons from Clayton Christensen’s theory will not survive the next decade or two. Before investing in a company, find out about its strategy for dealing with future disruption. Learn what the CEO has to say on the matter, and the way it is using technology to make it more able to cope with “unknown future threats.”  

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Michael Baxter has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.