We live in an age of disruption. It is all around us in the form of robotics, artificial intelligence, nanotechnology, 3D printing and the Internet of Things. Ride-sharing has disrupted the taxi industry, e-commerce has disrupted the retail market, streaming video-on-demand has disrupted film and television viewing.
Change represents opportunity for every serious investor who dreams of identifying the next big thing before it goes mainstream.
One of the best tools to help you identify such disruptions is the Innovation S-Curve, which plots the typical life cycle of a technology, product or process through four major phases: development, growth, maturation and decline.
Innovations grow gradually before exploding suddenly and rapidly. They then slow down and decline as they are overtaken by the next disruptive technology. The whole process then begins again.
Finding the tipping point
Several categories of consumer play defined and critical roles during this process of creative destruction. In the beginning are the innovators (2.5 per cent of the overall market), the people who actually create and develop the product during its long evolutionary phase.
Next come the early adopters (13.5 per cent) who pick up on a particular new product just as it has overcome barriers to viability and is beginning to take off. Early adopters are driven by a desire to get access to scarce products that confer status.
Then comes the critical point of the S-Curve, one which has been the subject of intense interest from many influential management writers. It has been called the ‘tipping point’ by Malcolm Gladwell1 and ‘crossing the chasm’ by Geoffrey Moore2.
At this stage the product or process will either jump into the mass market mainstream of the pragmatic early majority (34 per cent) and conservative late majority (34 per cent) – becoming a ‘next big thing’ – or it will fail to cross over and remain a mere fad.
The final 16 per cent, the laggards, are traditionalists, suspicious of change, who reluctantly adopt products late in the cycle, often at the point at which they are about to become superseded.
Every major innovation - from cars and phones to computers - has followed this trajectory. Each one began with an initial period of learning and development, followed by rapid growth, and then a plateauing and ultimately a decline in demand. Understanding this lifecycle can help you make better investment decisions and spot trends.
The first big S-Curve in computers came in the form of centralised mainframes which reached their take-off phase during the early 1960s. As that S-Curve matured it was disrupted, from around 1970, by the advent of networked, decentralised personal computers. As that curve reached maturity at the turn of the century it was disrupted, in turn, by a third wave of innovation in the form of internet and cloud computing.3
After Alexander Graham Bell invented the telephone in 1876, the telephone took decades to reach the early majority stage of 50 per cent of households. The traditional landline is now in decline but the process of disruption and adoption is accelerating. It took less than five years for mobile phones to achieve the same degree of penetration in the 1990s.4
Mobiles were themselves disrupted by smartphones around 2008. The smartphone market itself is now reaching saturation. Sales are beginning to decline as innovation levels off and improvements are incremental rather than exponential.5 With more than 2.5 billion mobile phones in the world, the mobile and smartphone have become commodities. The next S-Curve, for both computers and phones, may well be around artificial intelligence, augmented reality and machine learning.
The global car market is currently reaching the saturation and decline period of the traditional internal combustion engine. It is poised to be disrupted by the twin innovations of electric vehicles (EVs) and autonomous self-driving cars. With EVs, the development of effective Lithium ion batteries has overcome a major barrier to commercialisation and engaged the early adopters. EV manufacturers are seeing their valuations leapfrog those of traditional major car manufacturers as a result.6
The future is now
The S-Curve is especially relevant today as we stand on the cusp of the Fourth Industrial Revolution. Klaus Schwab, founder of the World Economic Forum, describes this as the fusion of the physical, digital and biological spheres.7
Artificial intelligence, machine learning and augmented reality may soon enter the early adopter phase of the S-Curve, taking over from mobile and smartphones. Smart investors will be carefully tracking the point at which they, in turn, transition from crazy laboratory idea to marketing frenzy.
For more information about investing in the future, speak to your Relationship Manager or Investment Counsellor.
1The Tipping Point; How Little Things Can Make a Big Difference by Malcolm Gladwell, 2000
2Crossing the Chasm: Marketing and selling technology products to mainstream customers by Geoffrey A. Moore, 1991, revised 2014
3Smart-future.org as referenced in The 2.5%: Understanding Innovation, Medium.com, April 2017
4The Pace of Technology Adoption is Speeding Up, Harvard Business Review, November 2013
5Global Smartphone Market Drops 9% in Biggest Ever Fall, Guardian, 2 February, 2018
6Mobile is Eating the World, Andreessen Horowitz, 2016
7The Fourth Industrial Revolution by Klaus Schwab, 2016