Disruptive Innovation Part 2

Old Dogs, New Tricks: A Deeper Look at Disruptive Innovation.

A few months back, we wrote a piece about today’s age of “disruptive innovation,” which is in the process of reshaping many parts of the global economy. We called it a Fourth Industrial Revolution and outlined how emerging technologies may create new models for success and a whole new crop of winners and losers across various industries.

Here, we take a deeper dive into the topic and outline why some of the leaders of the old economy (old dogs) are leveraging innovation (new tricks) to secure their leadership positions even as their markets see rapid, large-scale change.

  • TECH REINVENTION: Some of today’s most prominent tech giants are proving that they can be winners at disruptive innovation. Take Hewlett Packard as an example, which has endured several steep selloffs over the years (e.g., 2012) as it struggled to re-define itself and move away from stagnant legacy businesses like ink-jet printing. However, the company’s stock has been a solid outperformer recently, with advancements in 3D printing solutions, open-source artificial intelligence (AI) and machine learning, and virtual reality. One of the granddaddies of the tech world, Microsoft, is another example. The company is rapidly building its cloud computing business, especially its cloud-based gaming platform. It’s also making acquisitions in AI and ambient intelligence tools (e.g., for use in healthcare settings). It acquired a leader in industrial technology innovation and rapid prototyping. And its augmented-reality capabilities recently won Microsoft a bidding war for a $21.9B, 10-year contract with U.S. Army.
  • INDUSTRIAL REMODEL: Is there any company that more screams “old-school” industrial than a company like John Deere?  Well, this company is truly advanced in applying AI, robotics, and connectivity to improve its manufacturing processes (e.g., a neural network technology that can diagnose and fix weld defects in real-time). It’s also using satellite-link technology to improve harvesting and deploying drone technology to provide autonomous crop-dusting.
  • RETAIL REFASHION: Not to be left behind, retail and service businesses are leading their charge into disruptive innovation. Sports apparel leader Nike uses a range of innovations — like advanced RFID technology, web-based loyalty apps, and predictive analytics — to help optimize inventory, speed up product cycles, and better match consumer demand. Supposedly, stodgy Walmart has been investing for years in supply chain management and automation technology, which powers upgrades to services like rapid in-store pick-up, personal shopping, and even drone delivery. The company is even expanding into consumer finance and money management, as well as autonomous vehicles.
  • SERVICE OVERHAUL: JP Morgan is in an all-out battle to fend off competition from fintech and Big Tech competitors: for example, it’s partnering with OpenInvest to facilitate ESG-based (environmental-social-governance) and values-based investing; and it’s rapidly automating the consumer investing market with the use of robo-advisors. Once just the investment bank of the uber-wealthy, Elite institution Goldman Sachs is building out digital apps, new trading capabilities, new credit building solutions, cryptocurrency management, and a range of related personal financial management tools.

It can be easy to get seduced by the tech angle within the theme of “disruptive innovation,” but technology is merely a means to an end. As these examples show, it’s not just upstarts and start-ups that are changing the game. Today’s old-line industry leaders can also be game-changers, sometimes by strategic partnership or acquisition, but also through old-school R&D investment.

As investors, given just how fast the world is changing, we believe that it’s important to avoid being overly weighted to past successes. Thankfully, there are a lot of big, ostensibly “conventional” benchmark companies that agree.

So, when looking at growth themes for the future, it’s critical that investors not automatically count them out.

Author

Mitch York, CFA®

CIO

Concord Asset Management

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