"I know no way of judging of the future but by the past."
-- Edward Gibbon
It earned the name "category killer," a term used for large companies that put less efficient merchants out of business. When this retailer went public in 1978, it soon became No. 1 in the market. Independent shops closed their doors, unable to compete with the growing colossus.
The future looked bright for the new industry leader in the 1980s and 1990s. The absence of competition and increased demand led to revenues of more than $10 billion per year by the late '90s. Alas, it never saw the competitor in the rearview mirror. In March 2005, the company bowed to the inevitable and accepted a $6.6 billion buyout offer from a consortium of investment firms. The deal was completed later that summer.
Why did Toys "R" Us fail to see the gathering threat posed by Wal-Mart? Perhaps it was unable to adequately predict future trends in its market. An ability to anticipate the future is perhaps the most important skill a manager or an investor can possess (which is kinda like saying "an ability to know the final score" is the most important skill required of a gambler). So where do you go to learn about the future?
When being disruptive is a good thing ...
Christensen has identified the concept of innovation -- either sustaining innovation or disruptive innovation -- as crucial to determining the direction of a particular company or industry.
Google's
Early Life Cycle |
Mid-Life Cycle |
Late Life Cycle |
---|---|---|
Disruptive company enters the market via the low end. |
Company meets with success and gains market share. |
Company moves upmarket in search of higher margins. |
Schwab was a discount broker that used the Internet in a disruptive way relative to industry leaders such as Merrill Lynch. As Schwab gained market share, it was faced with a dilemma: Go upmarket in search of higher margins, or remain downmarket, slugging it out against low-cost competitors in a commodity market. At the moment, the jury is still out on which way Schwab will go. Ironically, Merrill Lynch started out as a disruptive innovator itself. According to Christensen, Charles Merrill began his business with the aim of bringing Wall Street to Main Street, and his approach made it easier for average folks to own stocks. Now, Merrill Lynch is ensconced in the upmarket niche, selling its financial products to consumers with a "high net worth."
The hunt for innovators
As someone who once thought the whole personal computer thing was a fad, I should be listening to Professor Christensen, especially because he thinks disruptive technology will be playing an even larger role in the next 10 years. By my reckoning, quite a few of our current Rule Breakers stock picks are disruptive innovators. One of our more disruptive selections, Intuitive Surgical, a maker of surgical robots, is up more than 113% since we recommended it more than a year ago.
Want to join us in our search for disruptive companies? David Gardner is offering a free 30-day trial to the service -- full privileges included. Your trial gives you access to the two growth stocks we like best right now and all back issues, buy reports, and interviews. If you don't like the service, just cancel. No questions asked. To have a peek at the future, just click here.
This article was originally published on Feb. 23, 2005. It has been updated.
John Reeves owns shares in Netflix. Netflix, Yahoo!, and Schwab are Stock Advisor recommendations. Wal-Mart is an Inside Value recommendation. The Motley Fool has a disclosure policy.