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Disruption and innovation are emerging as defining topics of our time. With technology, changing consumer tastes, and new business models upsetting the competitive balance in a growing number of global industries, who stands to benefit, and who is most at risk?

Jennifer O’Hara Martin, portfolio specialist in the U.S. equity division at T. Rowe Price, refers to today as the golden era of innovation for investors and consumers alike. Our ability to adopt new and transformative technology has accelerated dramatically over the last 10 years.

For example, she notes that Microsoft Windows took nearly 26 years to reach a billion users. But today, platform companies like Google and Amazon — with 10 different applications between them — have skyrocketed to the same number of users in a quarter of the
timeTogether, they own a tremendous amount of data, and content is added to the platforms at an exponential rate, O’Hara Martin says. “It feels almost instantaneous with the development of Internet, mobility, social, and the sharing economy,” she says. Mature companies like Apple, with its dominance in smartphones, as well as new companies based on emerging 3D sensing technology like Lumentum, have become a significant part of the investment universe.

Picking the next winners 

So, how do investors assess which companies are disruptors? By using a framework that addresses several important elements of innovative companies.

Tesla is an example of a company inventing something transformative by disrupting traditional internal combustion engine technology in a large addressable end market — auto sales with upwards of $2 trillion in annual sales. Tesla’s vertically integrated business model is pushing forward with autonomous driving, and it has option value in the battery and solar technologies. This speaks to the future value and investment opportunity, she says.

Amazon is also a textbook example of disruptive growth, with a growing market cap and revenue that represent the transformation of a business that started with selling books on the Internet and evolved into an entirely new business — Internet infrastructure.

Traditional IT companies like Dell or Hewlett Packard were not able to keep up with Amazon’s hyper-growth, so Amazon built its own data centres to service its growing retail business. The company has since turned its data centre into what is now known as Amazon Web Services (AWS). It offers on-demand computing and services with the same relentless customer focus as its retail business.

“On average, Amazon has been adding new services to its AWS network at the equivalent of an S&P 500 data centre — daily,” O’Hara Martin says.

Plan sponsors should be looking at companies like this for accelerated growth, particularly through active management, which can help investors to be on the right side of change.