What is disruptive technology? - a definition from Whatis.com - see also: sustaining technology

What is disruptive technology? - a definition from Whatis.com - see also: sustaining technology: "

disruptive technology

Disruptive technology is a term coined by Harvard Business School professor Clayton M. Christensen to describe a new technology that unexpectedly displaces an established technology. In his 1997 best-selling book, "The Innovator's Dilemma," Christensen separates new technology into two categories: sustaining and disruptive. Sustaining technology relies on incremental improvements to an already established technology. Disruptive technology lacks refinement, often has performance problems because it is new, appeals to a limited audience, and may not yet have a proven practical application. (Such was the case with Alexander Graham Bell's "electrical speech machine," which we now call the telephone.) In his book, Christensen points out that large corporations are designed to work with sustaining technologies. They excel at knowing their market, staying close to their customers, and having a mechanism in place to develop existing technology. Conversely, they have trouble capitalizing on the potential efficiencies, cost-savings, or new marketing opportunities created by low-margin disruptive technologies. Using real-world examples to illustrate his point, Christensen demonstrates how it is not unusual for a big corporation to dismiss the value of a disruptive technology because it does not reinforce current company goals, only to be blindsided as the technology matures, gains a larger audience and marketshare, and threatens the status quo."

Disruptive technology - Wikipedia, the free encyclopedia

Disruptive technology - Wikipedia, the free encyclopedia: "

Disruptive technology

From Wikipedia, the free encyclopedia

Jump to: navigation, search

A disruptive technology or disruptive innovation is a technological innovation, product, or service that eventually overturns the dominance of existing technology or status quo products in the market. Disruptive innovations can be broadly classified into lower-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption, whereas a lower-end disruptive innovation is aimed at mainstream customers who were ignored by established companies. Sometimes, a disruptive technology comes to dominate an existing market by either filling a role in a new market that the older technology could not fill (as more expensive, lower capacity but smaller-sized hard disks did for newly developed notebook computers in the 1980s) or by successively moving up-market through performance improvements until finally displacing the market incumbents (as digital photography has begun to replace film photography).

The concept shares many similarities with biological evolution.

By contrast, "sustaining technology or innovation" improves product performance of established products. Sustaining technologies are often incremental; however, they can also be radical or discontinuous.



[edit] History and usage of the term

The term disruptive technology was coined by Clayton M. Christensen and introduced in his 1995 article Disruptive Technologies: Catching the Wave, which he coauthored with Joseph Bower. He describes the term further in his 1997 book The Innovator's Dilemma. In his sequel, The Innovator's Solution, Christensen replaced disruptive technology with the term disruptive innovation because he recognized that few technologies are intrinsically disruptive or sustaining in character. It is the strategy or business model that the technology enables that creates the disruptive impact. The concept of disruptive technology continues a long tradition of the identification of radical technical change in the study of innovation by economists, and the development of tools for its management at a firm or policy level.

[edit] The theory

Christensen distinguishes between "low-end disruption" which targets customers who do not need the full performance valued by customers at the high-end of the market and "new-market disruption" which targets customers who could previously not be served profitably by the incumbent.

"Low-end disruption" occurs when the rate at which products improve exceeds the rate at which customers can adopt the new performance. Therefore, at some point the performance of the product overshoots the needs of certain customer segments. At this point, a disruptive technology may enter the market and provide a product which has lower performance than the incumbent but which exceeds the requirements of certain segments, thereby gaining a foothold in the market.

How low-end disruption occurs over time.
How low-end disruption occurs over time.

In low-end disruption, the disruptor is focused initially on serving the least profitable customer, who is happy with a good enough product. This type of customer is not willing to pay premium for enhancements in product functionality. Once the disruptor has gained foot hold in this customer segment, it seeks to improve its profit margin. To get higher profit margins, the disruptor needs to enter the segment where the customer is willing to pay a little more for higher quality. To ensure this quality in its product, the disruptor needs to innovate. The incumbent will not do much to retain its share in a not so profitable segment, and will move up-market and focus on its more attractive customers. After a number of such encounters, the incumbent is squeezed into smaller markets than it was previously serving. And then finally the disruptive technology meets the demands of the most profitable segment and drives the established company out of the market.

"New market disruption" occurs when a product that is inferior by most measures of performance fits a new or emerging market segment. The Linux operating system (OS) when introduced was inferior in performance to other server operating systems like Unix and Windows NT. But the Linux OS distributed through Red Hat is supposed to be inexpensive compared to other server operating systems. After years of improvements in this easily available operating system, the functionality has improved so much that it threatens to displace the leading commercial UNIX distributions.

Not all disruptive technologies are of lower performance. There are several examples where the disruptive technology outperforms the existing technology but is not adopted by existing majors in the market. This situation occurs in industries with a high investment into the older technology. To move to the new technology, an existing player not only must invest in it but also must replace (and perhaps dispose of at high cost) the older infrastructure. It may simply be the most cost effective for the existing player to "milk" the current investment during its decline - mostly by insufficient maintenance and lack of progressive improvement to maintain the long term utility of the existing facilities. A new player is not faced with such a balancing act.

Some examples of high-performance disruption:

  • The rise of containerization and the success of the Port of Oakland, California, while the port of San Francisco neglected modernization - perhaps wisely due to its inconvenient location at the end of a peninsula not oriented with the prevailing freight traffic. Rather than attempt to compete in the oceanic freight terminal business, the city's resources were directed elsewhere, primarily toward becoming the leading financial center on the west coast through the encouragement of the construction of high rise buildings for office space.
  • VoIP phone technology is a disruptive innovation. At its best, the quality of voice that is available over this phone system is at least as good as that has been offered by traditional players.

[edit] Examples of disruptive innovations

Disruptive Innovation Displaced or Marginalized technology Notes
steam engines and internal-combustion engines horses and humans (for powering machines) The new engines took centuries to establish themselves, but eventually rendered animal/people power obsolete on their ability to scale up to much higher power outputs and offer greater reliability.
Automobiles Horses (for transport) Early roads were designed for horses, not cars. Nevertheless, the potential for greater convenience, reliability and speed offered by the motor car meant that the road system was eventually redesigned in its favor, after overcoming many obstacles, both technical and political (such as the Red Flag Act).
Hydraulic excavators Cable-operated excavators Hydraulic excavators were clearly innovative at the time of introduction but they gain widespread use only decades after. However, cable-operated excavators are still used in some cases, mainly for large excavations.
Mini steel mills vertically integrated Steel mills By using mostly locally available scrap and power sources these mills can be cost effective even though not large
Container ships and containerization "Break cargo" ships and stevedores In addition to efficiency these also provide a great reduction in opportunities for pilferage and integrate well with both rail and truck transport.
Desktop publishing Traditional publishing Early desktop-publishing systems could not match high-end professional systems in either features or quality. Nevertheless, they lowered the cost of entry to the publishing business, and economies of scale eventually enabled them to match, and then surpass, the functionality of the older dedicated publishing systems.
Digital photography originally, instant photography, now increasingly all chemical photography Early digital cameras suffered from low picture quality and resolution and long shutter lag. Quality and resolution are no longer major issues and shutter lag is much less than what it used to be. The convenience of small memory cards and portable hard drives that hold hundreds or thousands of pictures, as well as the lack of the need to develop these pictures, also helped. Digital cameras have a high power consumption (but several lightweight battery packs can provide enough power for thousands of pictures). Cameras for classic photography are stand-alone devices.
Semiconductors vacuum tubes Electronic systems built up with semiconductors require less energy, are smaller and more reliable than such with tubes. However for high power device semiconductor solutions are not always available (or from more complicated design)
"Bug logic'" Discrete components Medium Scale Integration (MSI) - electronic circuits (such as a flip-flop) built upon a single substrate require less energy, are smaller and more reliable than such built upon circuit boards.
Large Scale Integration (LSI) "Bug logic" Complete electronic systems upon a single substrate require less energy, are smaller and more reliable than such built by mounting simpler Integrated circuits ("bug logic") upon complex circuit boards, extending to the current implementations of entire central processing units, memory, and supporting logic on a single chip.
Minicomputers Mainframes Though mainframes survive in a niche market which persists to this day, minicomputers have themselves been disrupted into extinction.
Personal computers Minicomputers, Workstations Workstations still exist, but are increasingly assembled from high-end personal computer parts, to the point that the distinction is fading
High speed CMOS video sensors Photographic film When first introduced, high speed CMOS sensors were less sensitive, had lower resolution, and cameras based on them had less duration (record time). The advantage of rapid setup time, editing in the camera, and nearly-instantaneous review quickly eliminated 16 mm high speed film systems. CMOS-based cameras also require less power (single phase 110 V AC and a few amperes of current vs. 208 V single, double and even triple phase cameras requiring 20-50 A for film cameras. Continuing advances have overtaken 35 mm film and are challenging 70 mm film applications.
Cassette Tape Eight Track Cassette tapes gave longer play times, a smaller size of player and media, and more functionality.
Compact Disc Phonograph record, and later Cassette Tape Compact Discs give higher quality, smaller size, eventual portability, and cheaper production costs.
Digital audio player Compact Disc From 15-20 songs per CD to 100's and 1000's of songs in a smaller form factor, with content that can be transferred effortlessly through the internet.
Muskets Crossbows, longbows and the Knight military unit
Steamships Sailing ships The first steamships were deployed on inland waters where sailing ships were less effective, instead of on the higher profit margin seagoing routes. Hence steamships originally only competed in traditional shipping lines' "worst" markets.
Telephones Telegraphy When Western Union infamously declined to purchase Alexander Graham Bell's telephone patents for $100,000, their highest-profit market was long-distance telegraphy. Telephones were only useful for very local calls. Short-distance telegraphy barely existed as a market segment, if at all. So Western Union's decision was quite understandable at the time.

Not all technologies promoted as disruptive innovations have actually prospered as well as their proponents had hoped. However, some of these technologies have only been around for a few years, and their ultimate fate has not yet been determined.

Unresolved examples of technologies promoted as 'disruptive innovations'

[edit] Business implications

Disruptive technologies are not always disruptive to customers, and often take a long time before they are significantly disruptive to established companies. They are often difficult to recognize. Indeed, as Christensen points out and studies have shown, it is often entirely rational for incumbent companies to ignore disruptive innovations, since they compare so badly with existing technologies or products, and the deceptively small market available for a disruptive innovation is often very small compared to the market for the established technology.

Even if a disruptive innovation is recognized, existing businesses are often reluctant to take advantage of it, since it would involve competing with their existing (and more profitable) technological approach. Christensen recommends that existing firms watch for these innovations, invest in small firms that might adopt these innovations, and continue to push technological demands in their core market so that performance stays above what disruptive technologies can achieve.

Disruptive technologies, too, can be subtly disruptive, rather than prominently so. Examples include digital photography (the sharp decline in consumer demand for common 35mm print film has had a deleterious effect on free-riders such as slide and infrared film stocks, which are now more expensive to produce) and IP/Internet telephony, where the replacement technology does not, and sometimes cannot practically replace all of the non-obvious attributes of the older system (sustained operation through municipal power outages, national security priority access, the higher degree of obviousness that the service may be life-safety critical or deserving of higher restoration priority in catastrophes, etc).

[edit] See also

This article has been illustrated as part of WikiProject WikiWorld.

(Click image for full size version.)

[edit] References

  • Bower, Joseph L. & Christensen, Clayton M. (1995). "Disruptive Technologies: Catching the Wave" Harvard Business Review, January-February 1995.
  • How to Identify and Build Disruptive New Businesses, MIT Sloan Management Review Spring 2002
  • Christensen, Clayton M. (1997). The Innovator's Dilemma. Harvard Business School Press. ISBN 0-87584-585-1.
  • Christensen, Clayton M.;Raynor, Michael E. (2003). The Innovator's Solution. Harvard Business School Press. ISBN 1-57851-852-0.
  • Christensen, Clayton M., Anthony, Scott D., & Roth, Erik A. (2004). Seeing What's Next. Harvard Business School Press. ISBN 1-59139-185-7.
  • Christensen, Clayton M. & Overdorf, Michael. (2000). "Meeting the Challenge of Disruptive Change" Harvard Business Review, March-April 2000.
  • Christensen, Clayton M., Bohmer, Richard, & Kenagy, John. (2000). "Will Disruptive Innovations Cure Health Care?" Harvard Business Review, September 2000.
  • Christensen, Clayton M., Baumann, Heiner, Ruggles, Rudy, & Sadtler, Thomas M. (2006). "Disruptive Innovation for Social Change" Harvard Business Review, December 2006.
  • Mountain, Darryl R., Could New Technologies Cause Great Law Firms to Fail?
  • Mountain, Darryl R. (2006). Disrupting conventional law firm business models using document assembly, International Journal of Law and Information Technology 2006; doi: 10.1093/ijlit/eal019
  • Tushman, M.L. & Anderson, P. (1986). Technological Discontinuities and Organizational Environments. Administrative Science Quarterly 31: 439-465.

[edit] Additional Readings

[edit] External links


Disruptive technology - Wikipedia, the free encyclopedia

Disruptive technology - Wikipedia, the free encyclopedia: "Disruptive technology From Wikipedia, the free encyclopedia • Ten things you didn't know about Wikipedia • Jump to: navigation, search A disruptive technology or disruptive innovation is a technological innovation, product, or service that eventually overturns the dominance of existing technology or status quo products in the market. Disruptive innovations can be broadly classified into lower-end and new-market disruptive innovations. A new-market disruptive innovation is often aimed at non-consumption, whereas a lower-end disruptive innovation is aimed at mainstream customers who were ignored by established companies. Sometimes, a disruptive technology comes to dominate an existing market by either filling a role in a new market that the older technology could not fill (as more expensive, lower capacity but smaller-sized hard disks did for newly developed notebook computers in the 1980s) or by successively moving up-market through performance improvements until finally displacing the market incumbents (as digital photography has begun to replace film photography). The concept shares many similarities with biological evolution. By contrast, 'sustaining technology or innovation' improves product performance of established products. Sustaining technologies are often incremental; however, they can also be radical or discontinuous."


Neurodegenerative disease | Trashing the brain | Economist.com

Neurodegenerative disease | Trashing the brain | Economist.com: "Biologists are learning how prions kill brain cells

SEEMINGLY different diseases can sometimes share a common cause. Tumours of all sorts, for example, are clusters of cells run out of control, dividing incessantly. Over the past decade, another unifying medical principle has emerged. It holds that many diseases of the central nervous system—including Alzheimer's, Huntington's and Parkinson's diseases—also share a mechanism. Instead of non-stop proliferation, the theme in this case is rubbish-disposal gone wrong.

The garbage in question is abnormally folded proteins. These are usually collected by dustmen (molecules called “ubiquitins” that pick up proteinaceous litter) before being taken to the cell's waste-processing centre (a structure known to biologists as the “proteasome”). Healthy cells create plenty of junk that keeps the system busy. The hundreds of steps of folding that create a complex protein can take a cell many minutes to complete. And with so many steps, mistakes often occur, or toxins push a perfectly configured protein out of place. Such wrongly wrought proteins need to be binned before they cause substantial damage.

In the current issue of the New England Journal of Medicine, Alfred Goldberg of Harvard Medical School, who helped discover the proteasome 20 years ago, discusses what happens to this waste-disposal system when the brain is infected by a particularly nasty protein called a prion. Prions cause Creutzfeldt-Jakob disease (or “mad cow disease” in cattle) by rearranging the structure of normal proteins in their own image. Recently scientists have started to think that prions might also disrupt the rubbish-disposal system, and that such interference might explain how they destroy nerve cells in the brain. Dr Goldberg proposes that globules of prions plug the waste-processing proteasome. That would cause all cellular garbage disposal to cease. Trash would thus remain in the brain until the accumulating filth killed the nerve cells.

Deadly origami

Sarah Tabrizi of University College London, and her colleagues, have also examined the question of how prions kill nerve cells, transforming the brain into a spongy organ riddled with holes. They used a Petri dish of mouse nerve cells and a fluorescent lamp. The cells they studied had been modified to produce a waste protein that glows green under fluorescent light.

First Dr Tabrizi infected the nerve cells with disease-causing prions. Doing so made them grow more luminous as their waste proteins accumulated. Then she added an antibody that cleared the cells of prions but left the ubiquitins, the proteasome and the waste proteins in place. As expected, this made the nerve cells dim because they had regained the ability to dispose of their fluorescent rubbish.

A similar experiment using living mice gave corresponding results. When the mice were infected with prions, ubiquitins collected in their brains. Those ubiquitins were pinned to proteins destined for destruction but, after prions had entered the brains, the junk somehow survived.

Although these tests show that prions can force the waste disposal system to malfunction, they did not identify which part of the process went wrong. So, to work out whether the dustmen were on strike or whether the rubbish-crunching centre had been closed down, Dr Tabrizi purified some proteasomes and took a closer look. By carefully measuring the rate at which proteasomes laboured, she found a clear correlation: as the clumps of prions in the sample got bigger, the proteasomes slowed down. Thus it is the rubbish dump that ceases to work rather than the dustmen neglecting their duties.

That infectious prions cause rubbish to accumulate in brain cells may not be the only way in which they cause damage. Alex Greenwood of the Technical University of Munich, in Germany, and his colleagues, have another idea. They believe that infectious prions might wake viruses that lie dormant in the DNA of an uninfected cell.

Dr Greenwood also works with cells taken from mice. These cells contain disabled viruses because murine ancestors, just like human ones, accumulated them in their genomes whenever infections entered their sex cells. Those historical viruses have been largely disabled by evolution over many millions of years, but they remain, they are numerous, and their genomes constitute about 10% of the DNA of most mammals.

Like Dr Tabrizi, Dr Greenwood infected several types of mouse nerve cells with prions. Next, he examined those cells to see whether they started making the previously disabled viruses. He found some in which this was happening. When he added an anti-prion drug to the mix, though, the virus production halted. The research is reported in Biochemical and Biophysical Research Communications.

Dr Greenwood's data support the theory that prions stimulate brain cells to make viruses that natural selection long put to bed. He thinks that these viruses might even transport prions between nerve cells, spreading the infection to other parts of the brain. If that idea proves correct, prions would be more than flying pickets that closed municipal dumps. They would be muck-spreaders too.


Cashing in on innovation

Cashing in on innovation: "

Thursday, September 20, 2007

The University of Texas at Austin is getting better at commercializing the inventions that its scientists and engineers develop, according to a state study to be released today.

UT-Austin took in a record $8.4 million in technology licensing income in fiscal 2006, up 26 percent from 2005. Statewide, all publicly funded colleges and research organizations generated $40.5 million in licensing income, up 1.5 percent.

All state schools in Texas are under pressure to commercialize more faculty research to help Texas create homegrown companies in fields such as nanotechnology, the cutting-edge industries that are expected to become big job generators.

Texas has a long way to go to catch up to research powerhouses such as the University of California campuses, which collect tens of millions a year in patent royalties and have spawned high-profile companies.

But the report shows steady progress.

It may be used as a partial measure of the potential impact of the state's $200 million Emerging Technology Fund, which the Texas Legislature created in 2005 to accelerate the growth of research-based companies in Texas.

Much of that money will go to university researchers and to small companies based on that research.

According to the study released by the Texas Higher Education Coordinating Board, the leaders in generating licensing income in Texas were: the UT Southwestern Medical Center, $12.3 million; UT-Austin, $8.4 million; the UT M.D. Anderson Cancer Research Center, $6.3 million; the Texas A&M University System, $6.5 million; the UT Health Science Center in Houston, $3 million; and the UT Health Science Center in San Antonio, $2 million.

However, the revenue was offset by the costs of commercialization offices and legal expenses, especially patent law- suits. Overall, the universities spent $16.6 million on those costs, including $1.5 million at UT-Austin.

UT-Austin also helped create seven startup companies that licensed its research in the year, bringing its total to 19. That compared with 18 for M.D. Anderson, 11 for the Texas A&M System; nine for the Health Science Center in San Antonio and six for the Southwestern Medical Center.

"UT-Austin has been creating six or seven new companies a year, outpacing all public universities in the state," said Juan Sanchez, vice president for research at UT-Austin. "That is not only encouraging, but also clear evidence of the emergence of a strong entrepreneurial culture among our faculty and students."

UT's commercialization growth has been rapid and recent. In the past, the school was regarded as a national underperformer in commercialization for a major research school, according to Neil Iscoe, director of the school's Office of Technology Commercialization since 2003.

The school has cultivated closer ties with investment companies and worked as a kind of marriage broker between researchers and investors. It has sponsored commercialization conferences in Austin and created a searchable online database of its patent holdings.

"We are becoming a place that people are coming to to find technology, and we are actively promoting that," Iscoe said. "We are building a diverse portfolio of promising companies, and we have been willing to collaborate with investors to do deals that make sense."

And recently, UT changed its policies to streamline its process and address complaints by some faculty members and entrepreneurs about bureaucratic hurdles.

At least a few investors say UT's proactive approach is working.

Austin-based Emergent Technologies Inc., which invests in biotech startups, says one reason it created a fund devoted to technology licensed from UT System schools was the collaborative attitude it found at UT-Austin and UT-Arlington.

Bruce Thornton, a UT alumnus and an investor in a new UT-related startup, Advanced Laser Materials LLC, said the collaborative attitude of Iscoe's office was a key to getting the deal done.

Advanced Laser develops materials that can be turned into rapid prototypes and precision tools through a process known as laser sintering.

UT was willing to take its licensing fee in company stock rather than cash, Thornton said. That saved the startup money early on and could earn the school a handsome profit now that the Belton company is approaching profitability and pursuing larger deals.

"UT brought a flexibility and creativity to the licensing process," said Thornton, a veteran entrepreneur who believes that outsiders underestimate how much work it takes to turn good research into a successful business. "Building a new company is much harder than most people realize. It is a grind. It is not a snap of the fingers. Not enough people realize that yet."

Some UT companies have landed grants from the Emerging Technology Fund.

One recipient is Austin-based Molecular Imprints Inc., which has 80 workers and expects this year to have $20 million in sales of its equipment that helps make advanced computer chips and other products.

CEO Mark Melliar-Smith says the company is close to becoming profitable and is paying back UT with royalty payments and about $200,000 a year in research grants.

"The large universities of the United States, including UT, are becoming critical assets to the country," Melliar-Smith said. "They have become the wellspring of multidisciplinary research and innovation as some of the large corporate labs have begun to be shrunk back."

Some UT researchers are saying they like what they see in the commercialization process.

Chemical engineering pro- fessor Nicholas Peppas said he liked the way UT worked with Emergent Technologies to create a startup called Mimetic Solutions LLC based in part on his research in intelligent drug delivery.

"The process is working magnificently at UT," Peppas said.

The system works far more smoothly, he said, than it did at Purdue University, which he left four years ago.

kladendorf@statesman.com; 445-3622

From labs to market, UT delivers

A sampling of tech startups with research ties to the University of Texas at Austin.

Molecular Imprints Inc.

Founded: 2000

Employs: 80

Headquarters: Austin

Investors: Several, including Draper Fisher Jurvetson and Alloy Ventures.

Does: Makes advanced lithography equipment used in producing advanced computer chips and other products.

Based on research done at UT by: Chemical engineering professor Grant Willson and mechanical engineering professor S.V. Sreenivasan.

Milestones: Received $3 million Emerging Technology Fund grant in 2006. Anticipates $20 million in revenue in 2007.

Advanced Laser Materials LLC

Founded: 2003

Employs: Four

Headquarters: Belton

Investors: A small group of angel investors has raised about $500,000.

Does: Develops materials for rapid prototyping and manufacturing using lasers.

License based on research by: UT mechanical engineering professors Joseph Beaman and David Bourell.

Milestones: Agreed to venture with major aerospace company in 2006. Achieved its first break-even quarter in 2007.

Cambrios Technologies Corp.

Founded: 2002

Headquarters: Mountain View, Calif.

Does: Develops advanced materials for touch-screen computers.

Investors: Several, including Arch Venture Partners, Alloy Ventures and Oxford Bioscience Partners.

Based on research by: Former UT biology professor Angela Belcher, now working at the Massachusetts Institute of Technology.

Milestone: Expects first design wins in 2007.

Mimetic Solutions LLC

Founded: 2006

Employs: Five

Headquarters: Austin, with laboratory operations in Lexington, Ky.

Does: Intelligent drug delivery, such as pills containing drugs that are bound with special chemicals. The drugs are released only when a specific change in body chemistry occurs.

Investors: Emergent Technologies Inc.

Based on work by: UT chemical engineering professors Nicholas Peppas and Mark Byrne and Zach Hilt, a chemical engineering professor at the University of Kentucky.

Milestones: None yet. Mimetic is a new company in the formulation stage.


Biotech Terms - Science Terms - Biotechnology Industry Terms - Sent Using Google Toolbar

Biotech Terms - Science Terms - Biotechnology Industry Terms

6. Why Are New Drugs So Expensive?

The entire process of bringing a new drug to market involves years of laboratory research and development, animal trials, toxicity testing and, finally, clinical trials. Typically, this process plus the patent filing, takes over 10 years, so it is a long time before the pharmaceutical company can start earning any payback for its investment which can amount to hundreds of millions of dollars. Obviously the company needs to earn back some of that investment, so the costs are passed on to consumers.

Economic Indicators: Wholesale Trade Report

Economic Indicators: Wholesale Trade Report: "Economic Indicators: Wholesale Trade Report

By Ryan Barnes
Release Date: On or around the 9th of the month
Release Time: 10am Eastern Standard Time
Coverage: Two months prior (report released six weeks after period end)
Released By: U.S. Census Bureau
Latest Release: http://www.census.gov/mwts/www/currentwhl.html

The Monthly Wholesale Trade Report is based on a monthly survey of about 4,500 wholesale merchants operating in the United States. The sample group is updated quarterly to reflect new businesses in the marketplace, and includes importers and exporters. While some wholesale companies do sell directly to end consumers (such as Costco), most companies surveyed here sell to retail businesses as their primary source of revenue.

The report presents three statistics to investors; monthly sales, monthly inventories and the inventory to sales ratio. The data is broken down into durables and non-durables, and from there about 8-10 industries within both. Coverage is nationwide

Data is released about six weeks after the end of the month and the report will show any revisions for the previous two reports as well. Percentage changes are shown from the prior month and year-over-year to smooth out volatility. Figures are based on current dollar values for products when estimating sales and inventory levels, which is a change from other indicators that may value product based on volume.

What It Means for Investors
The inventories-to-sales (I/S) ratio is probably the most-watched variable after the Durable Goods Report has come out for the month to shed some light on the durable sales figures. Investors in non-durable industries like beverages and apparel will be happy to see some good representation in the Monthly Wholesale Trade Report.

The I/S ratio does a good job of indicating any supply/demand imbalances that exist in the economy. For example, if retail demand is higher than current production levels support, the I/S ratio will show this by falling (in this scenario, an I/S ratio of 1 means that current inventory levels can meet one month of current demand). A rising I/S ratio should be met with higher retail demand or corporate profits could be contracting, as extra costs to maintain inventory or slow production add up. Because of this, the I/S ratio is labeled as a lagging indicator by the Conference Board and most economists. According to the Conference Board, "because inventories tend to increase when the economy slows and sales fail to meet projections, the ratio typically reaches its cyclical peak in the middle of a recession."

Year after year, key players in the Forex market make a killing by picking the right currencies – now it’s your turn. Access industry gurus Boris and Kathy’s exclusive FREE report, The Five Things That Move the Currency Market – And How to Profit From Them, right now!

It all depends on where the economy, or even a particular industry, stands in relation to earnings expectations and potential. As long as the I/S ratio does not change dramatically from month to month, the report will not elicit a strong response in the stock and bond markets; its biggest benefit is the ability to predict future GDP levels or its utility in researching specific industry trends.

Because inventory values are measured in current dollars, price changes month to month will change inventory values even if the amount of supply stays constant. This is especially important to note for industries such as chemicals and petroleum when viewing this report.

  • There is an Annual Benchmark Report for Wholesale Trade released every spring that includes more detailed information such as annual sales estimates and gross margins for the industries that are sampled in the monthly report
  • Provides a good snapshot of the "middle" of the supply chain for many industries - up the channel from manufacturing, but not yet retail.
  • A good indicator of supply/demand imbalances
  • Long time series (since 1946) available
  • Data provided "raw" and with seasonal adjustment
  • Longer time lag than most
  • Industry breakdowns not too specific
  • The previously-released Durable Goods report will have already shed some light on wholesale results
The Closing Line
Monthly Wholesale Trade Report is not potent enough to move the markets, but it is very useful when taken in context with other industry-specific indicators to gauge sales and demand; it is also helpful in predicting quarterly gross domestic product (GDP) figures.

Economic Indicators:Trade Balance Report

Economic Indicators:Trade Balance Report: "Economic Indicators:Trade Balance Report

By Ryan Barnes
Release Date: International Trade - around the 19th of the month
Release Time: International Trade - 8:30am Eastern Standard Time
Coverage: International Trade - two months prior
Released By: Bureau of Economic Analysis (BEA)
Latest Release: http://www.bea.gov/international/index.htm

Investors and policymakers are increasingly using trade balances and information as a way to determine the health of the U.S. economy and its relationship with the rest of the world. The indicator within the Trade Balance Report that is most well known is the
nominal trade deficit, which represents the current dollar value of U.S. exports minus the current dollar value of U.S. imports. The report also covers trade balances for services, such as financial and informational management, of which the U.S. is currently a large exporter, creating a surplus in this category. In the physical goods category, the largest components of the monthly nominal value are for consumer goods and energy (petroleum).

There are several different aggregate measures of trade balance that are recorded and presented in the media, but the one that is most cited will be the current account,a measure of the net of physical goods trade, services trade, investment income and unilateral transfers. A more detailed breakdown of the financial receipts between the U.S. and abroad is available quarterly, summarizing the monthly data and reporting adjustments as needed; it is also released by the Bureau of Economic Analysis (BEA). (To learn more, read Understanding The Current Account In The Balance Of Payments and Current Account Deficits.)

What it Means for Investors
The U.S. has been running a trade deficit for more than 20 years (and a current account deficit for some time as well), set against the backdrop of a long-term U.S. economic expansion. As a nation, the U.S. imports more than it exports, which, in itself, is not a bad thing. Because the U.S. economy has been expanding for so long, most other nations have not been able to keep up, meaning that U.S. demand for things as a nation is higher than other nations' demand for U.S. goods. What causes worry among some is the long-term trend of more money flowing out than coming back in.

The consensus is that the trade deficit must be balanced out by an equal dollar amount of foreign investment in U.S. assets. For example, if the U.S. spends $1 billion dollars to purchase computers from Japan, by definition, Japan is holding $1 billion U.S. dollars or other dollar-denominated assets. In practice, most of the balance in trade is made up by foreign countries holding U.S. Treasury securities. But when interest rates are low, our debt is not as attractive on a risk-adjusted basis, creating concern that our investments will no longer attract foreign ownership, causing the value of the dollar to drop and leading to decreased world purchasing power.

The current account as a percentage of total gross domestic product (GDP) is an important metric because it shows how large the current account number is in relation to overall output in the economy.

The Trade Balances Report can move the markets upon release if the data shows a marked change from the prior period. Compared to other indicators, this report is relatively hard to estimate outside of petroleum, so some surprise factors can occur from time to time. Most investors want to see the trade balance maintain current levels or fall, as it is a sign that exports are rising, and the companies who export are increasing sales in those areas of the world.

  • Monthly releases are concise and give results in nominal (dollar) terms.
  • Highlights which countries make up the largest percentages of the balance, as well as rates of change
  • Results shown against the backdrop of the past six months
  • Trade represents approximately 25% of total economic activity and is a large component of GDP.
  • Monthly report doesn't show a complete transaction reconciliation (quarterly release does).
  • Inconclusive as to the long-term effects of the stock market and economy of a trade deficit or surplus.
  • Volatile due to oil prices and seasonality
The Closing Line
The Trade Balance Report can give valuable clues to future swings in GDP not explained by internal consumption and production, so the report helps to "close the loop" on GDP estimation variables. The more investors know about trade balances and how policy makers interpret the data, the more helpful it becomes in making investment choices.

Economic Indicators: Retail Sales Report

Economic Indicators: Retail Sales Report: "Economic Indicators: Retail Sales Report

By Ryan Barnes

Release Date: On or around the 13th of the month
Release Time: 8:30am Eastern Standard Time
Coverage: Previous month's data
Released By: Census Bureau and the U.S. Department of Commerce
Latest Release: http://www.census.gov/svsd/www/advtable.html

Retail Sales is very closely watched by both economists and investors. This indicator tracks the dollar value of merchandise sold within the retail trade by taking a sampling of companies engaged in the business of selling end products to consumers. Both fixed point-of-sale businesses and non-store retailers (such as mail catalogs and vending machines) are used in the data sample. Companies of all sizes are used in the survey, from Wal-Mart to independent, small-town businesses. (For related reading, see Using Consumer Spending As A Market Indicator.)

The data released will cover the prior month's sales, making it a timely indicator of not only the performance of this important industry (consumer expenditures generally make up about two-thirds of total gross domestic product), but of price level activity as a whole. Retail Sales is considered a coincident indicator, in that activity reflects the current state of the economy. It is also considered a vital pre-inflationary indicator, which creates the biggest interest from Wall Street watchers and the Conference Review Board,which tracks data for the Federal Reserve Board's directors.

The release will contain two components: a total sales figure (and related % change from the previous month), and one "ex-autos", as the large ticket price and historical seasonality of auto sales can throw off the total figure disproportionately.

What it Means for Investors
The release of the Retail Sales Report can cause above-average volatility in the stock market. Its clarity as a predictor of inflationary pressure can cause investors to rethink the likelihood of Fed rate cuts or hikes, depending on the direction of the underlying trend. For example, a sharp rise in retail sales in the middle of the business cycle may be followed by a short-term hike in interest rates by the Fed in the hope of curbing possible inflation. This would cause investors to sell bonds (causing yields to rise), and could pose problems for stocks as well, as inflation causes decreased future cash flows for companies.

If retail sales growth is stalled or slowing, this means consumers are not spending at previous levels, and could signal a recession due to the significant role personal consumption plays in the health of the economy.

One of the most important factors investors should note when viewing the indicator is how far off the reported figure is from the so-called consensus number, or "street number". In general, the stock market does not like surprises, so a figure that is higher than expected, even when the economy is humming along well, could trigger selling of stocks and bonds, as inflationary fears would be deemed higher than expected.

Year after year, key players in the Forex market make a killing by picking the right currencies – now it’s your turn. Access industry gurus Boris and Kathy’s exclusive FREE report, The Five Things That Move the Currency Market – And How to Profit From Them, right now!

Retail companies themselves can be especially volatile with the release of this widely read industry report. The release data will show the sales performance of all the component sectors within retail (such as electronics retailers and restaurants), allowing investors to peek in on relative "pockets of strength" within the overall figures. An investor holding stocks in retail can see how his or her holdings are performing relative to the sector as a whole - a valuable analysis regardless of overall market conditions.

  • The retail sales data is extremely timely, and is released only two weeks after the month it covers.
  • The data release is robust; investors can download a full breakout of component sectors, as well as spreadsheet historical data to examine trends.
  • Retail sales reports get a lot of press. It's an indicator that is easy to understand and relates closely to the average consumer.
  • A revised report comes out later (two to three months on average), amending any errors.
  • Analysts and economists will take out volatile components to show the more underlying demand patterns. The most volatile components are autos, gas prices and food prices.
  • Data is adjusted seasonally, monthly and for holiday differences month to month.
  • Revisions to the report (released about two months after the advance report) can be quite large, and the sample size is relatively small compared to the number of retailers opening their doors to consumers.
  • Retail sales data is often volatile from month to month, which makes trend-spotting difficult.
  • The indicator is based on dollars spent and does not account for inflation. This makes it difficult for individual investors to make decisions based on the raw data.
  • Does not account for retail services, only physical merchandise. The U.S. is an increasingly service-based economy, so not all retail "activity" is captured.

The Closing Line
Retail Sales is one of the big ones - a report that can shed a lot of light on the economy. It provides detailed industry information and can really move the market. Investors will best be served by waiting for the analysts to sort through the report, removing any overly volatile components, and drawing conclusions from there. For owners of individual retail stocks, look at the sector growth rates to determine the relative performance of individual stocks held in a particular sector.

Economic Indicators: Purchasing Managers Index (PMI)

Economic Indicators: Purchasing Managers Index (PMI): "Economic Indicators: Purchasing Managers Index (PMI)

By Ryan Barnes

Release Date: The first business day of the month
Release Time: 10am Eastern Standard Time
Coverage: Previous month's data
Released By: Institute for Supply Management (ISM)
Latest Release: http://www.ism.ws/ISMReport/

The Institute for Supply Management (ISM) has is responsible for maintaining the Purchasing Managers Index (PMI), which is the headline indicator in the monthly ISM Report on Business.The ISM is a non-profit group boasting more than 40,000 members engaged in the supply management and purchasing professions.

The PMI is a composite index of five "sub-indicators", which are extracted through surveys to more than 400 purchasing managers from around the country, chosen for their geographic and industry diversification benefits. The five sub-indexes are given a weighting, as follows:

  • Production level (.25)
  • New orders (from customers) (.30)
  • Supplier deliveries - (are they coming faster or slower?) (.15)
  • Inventories (.10)
  • Employment level (.20)
A diffusion process is done to the survey answers, which come in only three options; managers can either respond with "better", "same", or "worse" to the questions about the industry as they see it. The resulting PMI figure (which can be from 0 to 100) is calculated by taking the percentage of respondents that reported better conditions than the previous month and adding to that total half of the percentage of respondents that reported no change in conditions. For example, a PMI reading of 50 would indicate an equal number of respondents reporting "better conditions" and "worse conditions".

What it Means for Investors
PMI is a very important sentiment reading, not only for manufacturing, but also the economy as a whole. Although U.S. manufacturing is not the huge component of total gross domestic product (GDP) that it once was, this industry is still where recessions tend to begin and end. For this reason, the PMI is very closely watched, setting the tone for the upcoming month and other indicator releases.

The magic number for the PMI is 50. A reading of 50 or higher generally indicates that the industry is expanding. If manufacturing is expanding, the general economy should be doing likewise. As such, it is considered a good indicator of future GDP levels. Many economists will adjust their GDP estimates after reading the PMI report. Another useful figure to remember is 42. An index level higher than 42%, over time, is considered the benchmark for economic (GDP) expansion. The different levels between 42 and 50 speak to the strength of that expansion. If the number falls below 42%, recession could be just around the corner. (To learn more, read Recession: What Does It Mean To Investors?)

As with many other indicators, the rate of change from month to month is vital. A reading of 51 (expanding manufacturing industry) coming after a month with a reading of 56 would not be seen favorably by the markets, especially if the economy had been showing solid growth previously.

The PMI can be considered a hybrid indicator in that is has actual data elements but also a confidence element, like the Consumer Confidence Index. Answers are subjective, and may not always relate to events as much as perceptions. Both can have value to investors looking to get a sense of actual experiences as well as see the PMI index level itself.

Bond markets may look more intently at the growth in supplier deliveries and prices paid areas of the report, as these have been historical pivot points for inflationary concerns. Bond markets will usually move in advance of an anticipated interest rate move, sending yields lower if rate cuts are expected and vice versa. (For more insight, see Get Acquainted With Bond Price/Yield Duo.)

PMI is considered a leading indicator in the eyes of the Fed, as evidenced by its mention in the FOMC minutes that are publicly released after its closed-door meetings. The supplier deliveries component itself is an official variable in calculating the Conference Board's U.S. Leading Index.

There are regional purchasing manager reports, some of which come out earlier than the PMI for a given month, but the PMI is the only national indicator.

  • Very timely, coming out on the first day of the month following the survey month
  • A good predictor of future releases, such as GDP and the Bureau of Labor Statistics (BLS) manufacturing reports
  • Anecdotal remarks within the release can provide a more complete perspective from actual professionals (like in the Beige Book).
  • Report displays point changes from the previous report, along with the length in months of any long-term trends shown for the "sub-indicators", such as inventories or prices.
  • Commodities, such as silver, steel and copper are reported individually regarding the supply tightness and price levels noted in the previous month.
  • Only covers manufacturing sector - the PMI Non-Manufacturing Business Report covers many other industries in the same manner
  • Survey is very subjective in its data retrieval compared to other indicators.
  • Regional reports released earlier (Philly Fed, Chicago NAPM) may have high correlations and can take some of the steam out of this release.
The Closing Line
The PMI is a uniquely constructed, timely indicator with a lot of value on Wall Street.

It is most useful when taken in context with more data-driven indicators, such as the Producer Price Index and GDP, or in conjunction with the ISM Report Non-Manufacturing Report on Business."

Ecdonomic Indicators: Productivity Report

Ecdonomic Indicators: Productivity Report: "Ecdonomic Indicators: Productivity Report

By Ryan Barnes
Release Date: Approximately five weeks after previous quarter's end
Release Time: 8:30am Eastern Standard Time
Coverage: Quarterly; revisions about eight weeks after quarter's end
Released By: Bureau of Labor Statistics (BLS)
Latest Release: http://www.bls.gov/news.release/prod2.toc.htm

The Productivity and Costs Report is a quarterly release from the Bureau of Labor Statistics (BLS) that measures the level of output that is achieved by businesses per unit of labor. In this context, output is measured by using previously-released gross domestic product (GDP) figures; input is measured in hours worked and the associated costs of that labor. The unit labor costs that are provided take into account more detail than is provided in the earlier labor reports, including the effects of employee benefit plans, stock options expensing and taxes.

Percentage changes, presented in annualized rates, are the key figures released with this report. Separate productivity rates are released for the business sector, non-farm business sector and manufacturing. Manufacturing is kept separate because unlike the rest of the data, total volume output is used instead of GDP figures, and it also shows the highest volatility of any of the industry groups.

Productivity figures are provided across the economy as a whole, as well as for major industry groups and sub-sectors - it is a very thorough and detailed release, which is the main reason for the long time lag between period end and data release. The BLS will begin with total GDP figures, then remove government production and non-profit contributions to arrive at a GDP component that represents just "corporate America".

What It Means to Investors
Increased productivity is the ability of a company to achieve more output with the same workforce level. Strong productivity gains have been one of the most important reasons that the U.S. economy has expanded for the past 25 years. Productivity gains have historically led to gains in real income, lower inflation and increased corporate profitability. A company that is increasing output with the same number of hours worked will likely be more profitable, which means that it can raise wages without passing that cost on to customers, which keeps inflation pressures down, while adding to GDP growth.

The productivity report does not give investors any new data sets; its value is in the calculations and derivations the BLS computes on previously-released data.

Productivity is not labeled as a leading, lagging, or coincident indicator, as the figures are derived from the components of previous indicators, including GDP, the Consumer Price Index (CPI) and the employment cost reports.

The release will rarely be a big mover of the markets; GDP and labor reports will have already been released, and gains in GDP tend to be a fairly accurate indicator of productivity gains. The revised Productivity & Cost Report (released about one month after the initial release) will often show a marked change from the initial release, as any revisions to the GDP or labor reports will change the function used to calculate productivity.

Year after year, key players in the Forex market make a killing by picking the right currencies – now it’s your turn. Access industry gurus Boris and Kathy’s exclusive FREE report, The Five Things That Move the Currency Market – And How to Profit From Them, right now!

Productivity rates are volatile, not only quarter to quarter, but also within the various stages of the business cycle. A big challenge for economists and investors is separating out short-term changes in productivity due to cyclical factors from the independent long-term rate of productivity.

  • Presents the results of many complex calculations that are difficult for investors to compute on their own
  • Productivity gives good insight into inflationary pressures, and how much GDP can grow without causing concurrent gains in inflation.
  • Jumps in productivity tend to make their way to corporate bottom lines quickly via margin expansion.
  • Release shows results with and without the effects of inflation
  • Detailed productivity measures at the industry and sector level allow investors to analyze the relative productivity performance of many of their holdings.
  • One of very few indicators that shows results compared to other advanced economies; shows how the U.S. stacks up against the world in terms of productivity gains.
  • Productivity results represent the lion's share of total GDP (about 75%); only government results and nonprofit groups are removed from calculations.

  • Not a timely indicator; first report comes five weeks after the quarter, and the revised report nearly two months
  • No new series of data is released, only derivations of previous data sets
  • Can be very volatile quarter to quarter; long-term measurements are the most effective use of this indicator when analyzing sustainable, long-term rates of productivity growth