5 Principles to Find Disruptive Companies, No. 5: Technology Supply Versus Market Demand

By Markets Fool.com

Innovative, disruptive companies shift the whole sector they operate under.

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In this clip fromIndustry Focus: Tech, Motley Fool analystsDylan Lewis and Simon Erickson explain the difference between innovations that no one actually wants or needs, and ones that change an industry's status quo forever. And, they give an example of one disruptive company that's helping companies across the world target their audiences more effectively today.

Check out Simon's five principles that are 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 Sept. 2, 2016.

Dylan Lewis: No. 5: Technology supplyversus market demand. Youwant to dive into that one?

Simon Erickson:Yeah. Alot of times, companies get really excitedabout their technology,and try to push it to the limit. They say, "We havethe greatest-in-the-industry widget that'sgoing to do something 10 times betterthan you even need it to do in the first place," whichsounds great, but it's actuallycompletely inefficient. You want atechnology to meet the market'sdemand, and do exactly what the market isasking you to do. Otherwise,you're probably spendingway too much money of your [research and development]efforts ondeveloping something that isn't even needed in the first place.

The trick is to see what is it that your market wants your industry to do? What is thevalue that you're bringing to your customers? What are they asking you for,and how can you hit that right in the sweet spot so you're not overspending or underinvesting butgoing right after what they're asking you to do?

Lewis:I'm curious what you think aboutapplying that type of approach to Tesla. Theystarted with a very elite, luxury product. The difference is, they went small market first and created anexcellent product, reached the high-value markets, then slowly havedecided to make it more accessible,build out their scale. Would you saythat might be an example of a companybeing limited in the scope of technology,and maybe not spending as much in R&D as they would have, had they been more ambitious, but doing it in a smart way?

Erickson:Interesting example. Actually,electric vehicles were talked about in Christensen's original book in '97.

Lewis:That's early on.

Erickson:Exactly, right? I think Tesla, early on, wasmore about the brand than the car and its performance. They really went after the highest end so they could start at the top of the market, and geteverybody to want a Tesla,that all the movie stars like Leo DiCaprio had. And if you had a Teslaat the mid-market, or the lower end, one that was affordable, you were buying into a luxury vehicle. I mean, it's a Tesla, this thing is awesome. Even thoughit might have cost, I think the next one is supposed to be $35,000, the Model 3.

The one I like, Dylan, isactually a company calledSplunk(NASDAQ: SPLK),that can just look at a ton of data out there and distill it down into a very simple dashboard for their customers to understand. Examples ofwho they're working with -- theSan Francisco 49ers --

Lewis:Oh! I was not expecting a sports example!

Erickson:Yeah! What Cokes and what hot dogs people are buying indifferent sections, maybe they can market to them.Domino's Pizzauses Splunk to know what, regionally, is selling better. If thejalapeno pineapple pizzais only selling in Cleveland, Ohio,then maybe you go after more marketing there.

Lewis:I have a feeling it's not Cleveland, Ohio, for jalapeno pizza. I know Sean O'Reilly,host of theEnergy Industry Focusshow, has one of the blandest palates I've come across at the Fool,and he's from Ohio.

Erickson:Youmight have to ask him if he would eat it,pineapple jalapeno pizza.

Lewis:I'll follow up with him after the show.

Erickson:OK. Probablynot the best example on my part, then.

Lewis:But,the idea being, they'reteasing out insights from data andhelping businesses make smarter decisions.

Erickson:Yeah. And if you're in a board room, maybe you're a CEO, you're a decision-making manager,you don't want a whole lot of data that doesn't mean anything to you. Youwant to say, "OK,what is this going to matter to me?" And Splunk does a great job ofdistilling all of that down, and saying, "What are you trying to accomplish? Let'slook at what the data is telling us,and let's move forward from that." Again, hitting the sweet spot. What is the market demanding? What do they want your product to do? Companies going out with thetechnology to achieve that.

Lewis:Yeah,I think sometimesyou can overdeliveron the tech side or the capability side,and it's just extra. Or,your customers aren't seeing the value, and you've spent all this time and ramp up getting it there andit might not even be a very useful feature or add-on. So,definitely something to keep in mind.


Dylan Lewis owns shares of Tesla Motors. Simon Erickson owns shares of Splunk and Tesla Motors. The Motley Fool owns shares of and recommends Splunk and Tesla Motors. The Motley Fool is short Domino's Pizza. 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.