What is Disruptive Innovation? Definition and examples

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One example of disruptive innovation is Tesla’s mass production of electric vehicles, which has reversed the auto industry’s grip on sales of cars and trucks with internal combustion engines for more than a century.

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ContentsWhat is disruptive innovation?

Disruptive innovation refers to the transformation or massive change that occurs due to the introduction or development of a new technology or process.

The term traces its origins to a 1995 issue of the Harvard Business Review in an article in which Harvard Business School authors described it as “any situation in which an industry is shaken up and successful incumbents stumble.”

Cathie Wood, who rose to prominence with founding ARK Invest, makes disruptive innovation the core of the fund management firm’s thematic investment strategy, which is the foundation of its investment focus. ARK defines disruptive innovation as “the introduction of a technology-enabled product or service that potentially changes the way the world works.”

What are some examples of disruptive innovation?

Perhaps the greatest opportunity for equity investors is to invest early in companies poised to take advantage of emerging themes. There have been many examples of disruptive innovation over the past few decades.

In the late 1990s, Amazon shook up the book market, taking on big brands like Barnes & Noble and selling titles by mail via the Internet. Its online platform expanded into the sale of other goods, and eventually the company created a marketplace that turned the retail market upside down.

Tesla took on the auto industry by developing and manufacturing EVs on a large scale, beating out traditional automakers like Ford Motor and GM as they continued to focus on internal combustion engines.

Today, new entrants are taking advantage of advances in technology, including artificial intelligence on information data and cloud computing on storage data, which many investors believe will present opportunities as advancements continue to occur.

How to invest in disruptive innovation

Many major money management firms have mutual funds and exchange-traded funds dedicated to disruptive innovation. Cathie Wood’s ARK Invest funds are dedicated to disruptive innovation, with a range of ETFs focused on certain sectors.

How does disruptive innovation differ from creative destruction?

Creative destruction refers to the destruction of old markets to create new ones. Creative destruction was first coined by economist Joseph Schumpeter in his 1942 book Capitalism, Socialism, and Democracy to describe new, ever-changing markets. That theory is applied to innovations that continually replace established norms, making them obsolete and eventually creating new ones. An example could be turbines, powered first by steam, then by fossil fuels, and then by renewable energies such as solar and wind power.

The nuance between creative destruction and disruptive innovation is that creative destruction can result from the demise of an innovation and lead to a new one, whereas, in disruptive innovation, the innovation can result from an existing norm. For example, the creation of the automobile made the horse and buggy obsolete, but disruptive innovation took place when the mass production of electric vehicles began to replace unit production with the internal combustion engine.

What is sustainable innovation and how does it differ from disruptive innovation?

Sustaining innovation is the opposite of disruptive innovation in that sustaining innovation seeks to maintain or improve existing technologies, systems or products. Apple’s iPhone is a good example of how to support innovation. The iPhone rocked the smartphone market after its release in 2007 and made traditional cell phones obsolete. As new competitors emerged and gained market share, Apple made improvements to the iPhone every year, helping it maintain market share over the years.

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