When I evaluate companies for investment there’s always one character trait I look for, disruptive innovation. These troublemaker companies aren’t content with the status quo and dare to be different. They seem to spring up in well-established business models like the lone tree in the desert all the while wondering why they’re the only ones crazy enough to try it a new way.
It’s disruptive innovation that causes advancements and improvements in an industry. As a result these companies often draw the attention of the press, talented employees, and rockstar CEOs hell bent on making their mark. I look for companies that embrace improvements and strive for new and innovative ways to deliver and service their clients and customers. I like cultures that encourage growth investments inside companies, well before profits and revenues may be seen. I want to have capital invested alongside leaders who are neither risk adverse, nor complacent and are keenly aware of competitive threats to their business.
But all too often investors are distracted by established companies who fall into the trap of “doing business as usual.”
Consider those companies who “sat” on their advantage, actively choosing not to innovate.
1. Kodak once dominated the film and photography industry by making the camera widely available to the populous. Disruptive innovation at its finest. But then they invented the digital camera, and called it a “cute” invention. Since it did not use film (their primary product) a culture of “don’t tell anyone” bred. Fostering a culture that protected their film business and ignored the digital imagery business forced this company to bankruptcy. Not exactly a “Kodak moment”.
2. Similarly the largest phone company in the world AT&T, with all their engineers and technology invented the cell phone. They feared cell phones would threaten their tethered land line business, while appealing to only a small niche audience. Oops. That small niche is now responsible for 7.3 billion units.
3. Then there’s Henry Ford who literally revolutionized America with the assembly line and Model T. The idea of paying his employees a high wage was unheard of at the time, but it allowed those people to purchase automobiles of their own which helped the success of the company. But few people know that he, along with another entrepreneur of the time Thomas Edison, invented electric cars. The problem? In 1910 gasoline was seven cents per gallon and equivalent electricity was twice that.
Even though electric cars cost less to operate and were safer than internal combustion engines, the traditional auto manufacturers were not interested in nor had the incentives to adopt new electric technology. Those very companies today are hand-cuffed by large investments in engine plants, restrictive union contracts and legacy dealership networks. Then along comes an innovator, Elon Musk with an idea, forged in Silicon Valley (no Detroit), who has attracted the most talented engineers from around the world.
So what do these companies have in common? Disruptive innovations that cause advancements and improvements are not something to be fearful of, nor to intentionally ignore in order to protect your business.
It is essential to embrace innovation and change: it is the source of progress.
If you would like to have a conversation about innovation and how we look at it related to your portfolio or our strategy, please let us know. We would enjoy the conversation.
Thank you for being a client of Prosperion Financial Advisors.
Steve started his investment career in 1978 with the NYSE investment firm EF Hutton, working in the environment of a large investment company. Desiring to provide clients with objective investment advice, he founded Prosperion Financial Advisors. Learn more about Steve here.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Investing involves risk including potential loss of principal.
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