Innovation is the key to success and disruptors can change the face of entire industries. Investors can therefore capitalise on incremental changes. Philipp Lienhardt, Julius Baer’s Head of Equities, tells us how to identify innovative and disruptive companies.
First of all, why is innovation so important for a company?
Philipp Lienhardt: “We believe that innovation is the path to success. In a competitive marketplace, companies with the best products and services, at the lowest possible prices, have the highest chances of success. Innovation plays a crucial role in this equation.”
Does this only apply to certain industries or is innovation a general prerequisite for success?
”The phenomenon of innovation can be observed across more and more industries.
Companies in all industries need to continuously reinvent themselves in order to stay abreast of changing consumer demands, regulatory requirements or technological advancements.”
What are the key factors that make a company innovative?
“We have identified five general characteristics of innovative companies.
- They are usually gaining market share,
- they achieve above average profit margins and
- act as price makers rather than profit takers.
- In addition, they often grow their market by identifying unmet needs and
- have the most efficient production process amongst their peers.
However, not every innovative company exhibits all these characteristics as the relative importance of each can depend on the type of industry.”
How does innovation lead to disruption?
“Highly innovative companies can change the face of entire industries – they become disruptors that can achieve incredible growth rates which far outpace the respective industry and the broader economy. Competitors then need to fundamentally revamp their business model and product or service portfolio. Otherwise they will become obsolete and eventually disappear from the market place. Investors should always keep in mind that what starts off as an innovation can over time become highly disruptive and create new investment opportunities.”
Talking about opportunities, how can investors participate? Can you give us some concrete examples?
“Investing in highly innovative and disruptive companies is not always straightforward as they are often privately held or in a niche that is simply too small for investors. My colleagues and I have therefore identified six topics for our clients which are not only interesting but also investable. We see attractive opportunities within renewable energy, digital media, liquid biopsies, travel booking platforms, robotics and automation as well as electronic payment systems.”
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