5 Principles to Find Disruptive Companies, No. 2: Small Markets Dont Solve Growth Needs

By Markets Fool.com

A disruptive company changes the status quo of its industry, and success often follows.

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In this clip fromIndustry Focus: Tech, Motley Fool analystsDylan Lewis and Simon Ericksontalk about how a disruptive company will often be ignored by the big fish like Berkshire Hathaway, and why retail investors need to pay some attention to these overlooked players.

Check out all five of Simon's principles, based on Clayton Christensen'sThe Innovator's Dilemma:

No. 1: Resource Dependence

No. 2:Small Markets Don't Solve Growth Needs

No. 3: Markets That Don't Exist Can't Be Analyzed

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No. 4: Capabilities Define Disabilities

No. 5: Technology Supply Versus Market Demand

A full transcript follows the video.

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This podcast was recorded on Sep. 2, 2016.

Dylan Lewis: No. 2: Small markets don't solve growth needs. Youwant to elaborate on that a little bit?

Simon Erickson:Say thatyou'reBerkshire Hathaway, you'reWarren Buffett.Buffett has famously said thathe can't go after small fish anymore. He can't go after small-cap companiesas investments, because they're just not going to move the needle forBerkshire Hathaway. He has multiple hundreds of billions of dollarsin invested capital, so he has to go after theCoca-Cola'sand the IBM'sas investments. It'sthe same thing with businesses. If you're wildly successful, doing $100 billion a year,you have to find a market that's existing today that's a $10 billion market for you to grow 10%. A $100 million company just has to have $10 million to do the same thing.

Disruptive companies, a lot of times, willlook at markets that big companies are not looking at. The example for this one is aRule Breakers' recommendation,Ubiquiti Networks(NASDAQ: UBNT), that'ssetting up wireless access points toget onto the internet. When you think about the internet service providers we've typically had, they lay a lot of cable, they go and want to dominate a market. Maybeif you have an apartment complex in the D.C. area, you'relocked into one certainprovider.

Lewis:I know that game very well.

Erickson:Huge costs, huge sales forces like to go in and dominate areas. Ubiquiti has no direct sales force and very little marketing costs. They basically have customers come to them and say, "Hey,I would really like this kind of product spec. Can you build it for me andtell us how much we'll pay for it?" It's been really successful inuniversities and sports stadiums and emerging markets. A very, very profitable business.

Dylan Lewis has no position in any stocks mentioned. Simon Erickson owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends Coca-Cola and Ubiquiti Networks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.