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August 12, 2013

The Market's Darling of Disruption

Posted by Ravi Kumar S. (View Profile | View All Posts) at 8:16 AM

Jeff Bezos Advice to Entrepreneurs - Founder of Amazon.com [Source:CorporateValley http://www.youtube.com/watch?v=KVZAIss-A-Y ]

You're only as good as your last market disruption.

Don't think so? Well, let's consider how the stock market values innovation. Upon first glance there's no discernible pattern. But if you take a closer look at companies that have track records of relentlessly disrupting their markets and creating new ones, they're usually rewarded well beyond what traditional valuation methods would ever grant them.

Make no mistake: The stock market shrewdly takes notice of those companies that innovate once or twice and then rest on their laurels. In this unforgiving economy, a company must build a solid track record of disruption. Companies that we think of as one- or two-time innovators continue to be pummeled by the market ... even if strong earnings miss the even loftier expectations of investors and analysts.

Take Amazon for instance. Clayton Christensen, the father of the concept of market disruption, says that Amazon has three particularly potent ways of beating back competitors: online retailing, the disruption of publishing, and the cloud services that give everyone access to sophisticated IT technology. "But," says Christensen, "you have to hope that this approach is institutionalized at Amazon, and not dependent on the instincts of one person."

The stock market is always wary of a company that's embodied by just one person. What might happen to Virgin Group, the sprawling, diversified entertainment and transportation conglomerate founded by Richard Branson, when he retires? There's a danger of placing an entire company's prospects in one individual, even if that person is a world-class talent like Branson. Nobody is forever.

Christensen is expressing the same type of concern, but in this case it's about another world-class talent: Jeff Bezos, the driving force behind Amazon's culture of innovation for more than 15 years. What would happen to Amazon if, for the sake of argument, Bezos decided to leave the company tomorrow and spend the rest of his life working on his golf game? Would Amazon retain the same swagger that currently makes it an enduring favorite among investors?

The magic touch of a sterling innovator like Bezos is that he never looks at the market in an overly complicated way. For example, what's the one major advantage that a big box retailer like Wal-Mart, Best Buy, or Target has over Amazon? If the customer is willing to drive a few miles to the store, he can buy what he wants immediately. There's no waiting a couple days for the item to arrive in the mail. If Amazon can ensure same-day delivery, what's the point of leaving the house to go shopping - especially given the price of gasoline these days? Therein lies part of the explanation for Amazon's sky-high valuation: Given the track record of Bezos, we can reasonably bet that he'll succeed in going toe to toe with big box retailers. Many customers and analysts alike already consider Amazon to be a kind of big box. In fact, it's become a dominant player in every retail segment, no matter how you try to classify the company.

What remains a bit of a mystery - and nobody ever said stock market valuations were completely rational - is that other continuous innovators aren't able to attain the same status as stock market darling that Amazon does. Corning, for example, is 150-year-old glassworks that has transformed itself into a modern manufacturer of fiber optics and touch-screen pads. Lockheed Martin is another company that continues to deliver one innovation after another (its famous "Skunk Works" is celebrating its 70th Anniversary). Both these companies have p/e ratios more in line with conventional market expectations.

These other innovators also have teams of executives driving their innovation programs. It's much more difficult to pinpoint one, single personality who's become a corporate celebrity. Maybe that's part of a longer-term advantage. In either case, to succeed in today's markets, an enterprise needs to be thinking about your next major innovation before it's through with its current one.

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