Right-Side-of-Disruption Test
Back beneficiaries of disruption and avoid business models it can undermine
- Difficulty
- Moderate
- Time to result
- ~weeks to results
- Steps
- 6
- Confidence
- 88%
The Right-Side-of-Disruption Test evaluates a company by tracing how new technology or a new entrant changes the way an industry serves customers and captures value. The investor maps the incumbent model, identifies credible disruptive forces, and determines which participants gain or lose if adoption continues. A target passes when its products, capabilities, or economics benefit from the transition and when management can reinforce that position. It fails when a new model can undermine the core source of revenue or profit faster than the company can adapt. The test prevents investors from confusing a superficially stable historical business with a durable future business.
Origin
Extracted from Masters in Business during Scott Sperling’s discussion of disruption as a crucial investment concept.
Core principles
- 01Treat disruption as both opportunity and risk
- 02Examine the business model, not only the technology
- 03Look for beneficiaries of changing industry structures
- 04Study new entrants with fundamentally different models
- 05Reject businesses whose economics can be structurally undermined
How to run it
- 1
Map the incumbent model
Describe how customers are served, how money is made, and which assets or relationships protect existing firms. Identify the assumptions supporting current margins.
Pro tip Map the customer journey as well as the financial model.
Watch out Industry labels can conceal major differences between business models.
- 2
Identify disruptive forces
Find technologies and entrants capable of serving customers through a materially different model. Focus on changes that alter cost, convenience, distribution, or control.
Pro tip Study emerging competitors before they become large enough to appear in conventional benchmarks.
Watch out Not every new technology produces meaningful commercial disruption.
- 3
Trace winners and losers
Determine which companies gain customers, data, bargaining power, or margin as the new model spreads. Identify which participants lose those advantages.
Pro tip Follow value migration rather than headline market growth.
Watch out An expanding market can still destroy the economics of incumbent providers.
- 4
Classify the target
Decide whether the target enables, benefits from, adapts to, or is undermined by the disruptive force. Require evidence for claims that an incumbent can adapt.
Pro tip Look for adoption and customer-retention data rather than strategy presentations alone.
Watch out Management awareness does not equal execution capability.
- 5
Model the transition
Estimate how disruption affects the target’s revenue, margins, capital needs, and competitive position. Include scenarios where adoption happens faster than expected.
Pro tip Use leading indicators such as customer switching and unit-cost trends.
Watch out Straight-line historical forecasts are unreliable during structural change.
- 6
Make the exposure decision
Favor companies positioned to gain from the transition and avoid those whose core model can be undermined. Price residual uncertainty into the investment.
Pro tip Revisit the assessment as technology adoption and competitive behavior evolve.
Watch out Being on the right side of disruption does not justify an unlimited valuation.
In the wild
A financial-technology provider helps mortgage companies execute essential processes more effectively. Rather than depending on a legacy balance-sheet model, it supplies technology that established financial institutions need as their operations modernize.
→ The company participates in technology-driven improvement instead of being displaced by it.
An investor examines a traditional intermediary whose margins depend on restricted access and manual distribution. A digital entrant can provide the same service directly at lower cost, and the incumbent lacks a credible transition plan.
→ The target fails the test because its core economics can be structurally undermined.
Common mistakes
Using disruption as a slogan
Calling a company disruptive does not explain how value moves or whether the company can capture it.
Watching technology but not entrants
A new business model can disrupt an industry even when its underlying technology is not novel.
Assuming incumbents will adapt
Legacy assets, incentives, and customer relationships may prevent an established company from changing quickly enough.
Is it for you?
Best for
It is best for investment and strategy decisions in industries facing technological or business-model change.
Not ideal for
It is not ideal as a standalone valuation method because it does not quantify the price worth paying.
From the transcript
“what we're trying to do is look for companies that are on the right side of disruption”
“always be aware of the business models that could be disrupted by new technologies or new entrants that bring in a very different model to…”
“our entire business model can be undermined by new entrance who disrupt the traditional way that business is done in that industry.”
From the episode
Scott Sperling on Innovative Investment Strategies (Podcast)
Scott Sperling