The recent reporting season offered an insight into how companies are adapting to rapid technological disruption. As the second decade of the 21st century rolls on, innovation in products, services and pricing models is crucial to engineering company growth. 
The winners will be those companies where adaptation is embedded in their DNA. This is evidenced by expenditure on research, development, brands/marketing, and cultural attitudes towards investing in the long-term success of the company.
The IT sector is reshaping the world by leading the data revolution. Once start-ups, like Apple, have now matured into market-defining behemoths. But these beasts have also kept on their toes by reaping some of the rewards for years of investment in the next phase of technologies.
Big beasts lead tech’s second wave
Microsoft’s business is now driven by its Azure cloud platform, which allows companies and developers to host their applications in a constantly accessible environment. Intel has focused its research and development efforts on data centre-focused processors, and invested capital in the capacity to produce them, again to facilitate cloud-based applications.
Both of these firms have used the resources generated from their dominance in the first wave of the information era to develop the next. The increasing adoption of cloud technologies is already emerging in positive corporate results, an acceleration that appears relatively disconnected from the macroeconomics driving other industries.
Media stocks must transform in the digital age
Media is an industry fundamentally affected by the advent of personal computing and the internet. It is no longer sufficient to simply create content and pump it out to consumers. In the world of business-to-business media, companies like Wolters Kluwer and Relx have transformed their offerings into a hybrid of content and technology, which provides data and analytics to support decision making.
This has led to steady growth in recurring revenues for these two businesses, as the services become embedded into customers’ workflows, a trend continued in 2017. Even service companies like the recruiters are in on the technological game. Adecco is increasingly using tools such as chatbots and online matching services like its Adia platform to enhance its offering to clients and candidates, and to increase its own efficiency.
Innovation keeps pharma stocks in good health
Healthcare companies necessarily have to evolve their product offerings, as the intellectual property protections afforded to them through patents last only so long. This is an acute problem in pharmaceuticals, where generic versions of drugs lead to rapid declines in pricing; it is a fundamental requirement that innovative new therapies are developed.
Of course, this is also of interest to patients who benefit greatly from this process. Healthcare systems get more effective ways of reducing illness and keeping people out of hospital, which is an expensive way of dealing with maladies. Like economic development, the innovation cycle does not happen smoothly and many pharmaceutical firms have seen drugs come off patent and not immediately replaced with novel treatments, a process that has come to be known as the ‘patent cliff’.
However, providing a company invests well in good science and does not stretch itself financially, positive outcomes can occur over the long run. For example, Roche is seeing good take-up of its multiple sclerosis drug Ocrevus, and its new cancer therapies where it is a leader in the field of immuno-oncology.
It also has potential for future innovations in personalised medicine, helped by the build-up of data sets from its market-leading diagnostics business. Many of the big pharma companies are seeing modest growth as a result of product innovation coming to fruition.
Consumer ‘dinosaurs’ not yet extinct
Even the world of shampoo and shaving has been put on alert of being disrupted. The narrative goes that the incumbent consumer staple dinosaurs will have their lunch eaten by young upstarts on the one side and Amazon on the other. However, looking at the results we see large consumer firms grinding out low-to-mid single digit sales growth, and improving their profit margins. It’s not the go-go years, but it’s not too bad all the same.
Partly the expansion is through digital channels; although it is still a minority sport, online is the fastest-growing method of people doing their day to day shopping. On the web, perhaps counterintuitively, people search around less for different options, and those players with the number one or two brands, like PepsiCo, have higher market shares online than in-store. And those upstarts? Indeed some do nibble at the heels of the big boys.
Dollar Shave Club forced P&G to examine its Gillette razor business after the former’s novel subscription-based offering started to take market share in the US. Dollar Shave Club is now owned by Unilever, having been bought in 2017. So in addition to innovating themselves, a well-resourced consumer goods company can buy ready-made innovation.
Ben Peters is portfolio manager of the Evenlode Global Income fund. The views expressed above are his own and should not be taken as investment advice.