Investment Strategies

Investing in disruption

By Simon Steele
Chartered FCISI, CISI Head of AMP Capital Global Equities London, United Kingdom

It’s easy to assume disruption is just another business buzzword. We explore what disruption really means and implications for investors.

The notion of disruption really speaks to ongoing economic evolution. It's at the heart of human nature and has been around for centuries.

Importantly, disruption benefits the economy because it leads to efficiencies by reducing costs, introducing new goods and services, as well as fast-tracking and improving business outcomes. Historically it has also been a net creator of jobs rather than a job killer.

Additionally, disruption is usually a positive force in society. Lower costs lead to higher living standards and supports economic development. It's also not new.

Lessons from history

The long transition from manual to machine-led agriculture is a good example.

In 1837 John Deere invented the steel plow, which transformed farming as we know it. There have subsequently been scores of disruptive technologies in agriculture including combine harvesters and tractors.

Today, the use of drones and data continues to transform agriculture, leading to massive improvements in productivity and efficiency. This process will only continue over time.

However, innovations stemming from disruption can take time to take hold. The automobile is an example. Invented in 1885, for many decades it remained an unaffordable luxury. Now, cars are ubiquitous.

Cost is a major reason innovations such as the car take time to become widespread. Initially, a car cost many times the average person’s annual income. Now, the cost of a car is a fraction of this amount and affordable for many.

Technology accelerates pace

The pace of disruption is increasing thanks to technology. The music industry is a good example. Vinyl records were the dominant music delivery mechanism for many years. Then, cassettes were invented, and the two co-existed for some time. Along came CDs and rendered cassettes and records largely obsolete. Mini discs improved on CDs, until the invention of the iPod transformed music once more.

We now stream music from our smartphones, demonstrating how technology can accelerate the pace of disruption and transform an industry and competitive landscape.

Music is a great example of how the pace of disruption has accelerated, particularly when it involves technology. Technology makes acceleration possible because it has increased the speed and reduced the cost of innovation in many industries through the ever-reducing cost of processing power that has facilitated and enabled more digital disruption.

This explains why the nature of a company’s competitive advantage and the pace of disruption has changed over time. In the digital revolution, core assets are more often than not intangible in nature such as intellectual property and network effects as opposed to the physical assets such as plant and machinery that dominated the non-digital era.

Ultimately this has important ramifications for long-term investing, including the nature and durability of competitive advantage, identification of sustainable long-term growth trends, and corporate capital allocation.


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Important notes

While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) (AMP Capital) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.
This document is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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