Tesla Motors: Producing Disruptive or Sustaining Innovation?

Tesla Motors: Producing Disruptive or Sustaining Innovation?

Disclaimer: Last month I was one of two hundred thousand Americans to hand Tesla Motors $1000.00 in the first 24 hours of the Tesla 3 product announcement, merely for the opportunity to purchase one, when it becomes available. Safe to say, I’m excited about the brand. That said, this isn’t a story about how cool the car, the company, or even Elon Musk is. Instead, I’d like to explore whether Tesla Motors is producing a disruptive, or a sustaining innovation in the automobile market.

Shortly after reserving my chance to purchase the new Tesla 3, I read a recent Forbes interview with Clay Christensen, in which he shares fresh insights on Disruptive Innovation. In it, Christensen describes the differences between disruptive and sustaining innovations. I’d like to share my perception of each, with some examples.

Disruptive Innovation

Among the three types of innovation I’d like to explore, none strike fear into the heart of C-Suite executives quite like disruptive innovation. A disruptive innovation is one that creates a new market and value network which eventually ‘disrupts’ an existing market and value network, displacing established market leaders. However, according to Christensen, it does this specifically by offering lower performance than existing customers expect but also new features, allowing it to create new markets. Then, as the innovated product improves along established performance metrics, it is eventually able to ‘disrupt’ former market leaders.

Image of people dancing on the beach

One simple, real-world example of  disruptive innovation was the introduction of the transistor radio. Initially, the sound quality of a transistor radio was far lower than its analog predecessor. However, a teenager could afford one and it was light enough to carry to the beach. Prior to this innovation, the consumer version of a radio was a big, heavy, expensive piece of furniture that was purchased by the head of a household and kept in the living room. Today, tube radios are essentially extinct.

Interestingly, while many people think of the iPod as a disruptive innovation, by Christensen’s definition it can be argued it was not, because it did not create new markets in the business of personal music devices. On a side note, the iPod wasn’t even the first mp3 player to hit the market.

Sustaining Innovation

A sustaining innovation does not create new markets or value networks. Instead, it adds value to products and/or services in existing markets over time. These incremental improvements are one of the key ways existing players compete with one another over time.

Classic examples of sustaining innovations are the annual releases of new devices in the smartphone market, or the incremental horsepower, legroom, and mileage gains in the automobile industry. In these cases, innovations improve existing products to stay competitive, but they do not create new markets.

So where does this leave Tesla?

Now that we’ve gotten some definition out of the way, we can get back to the question at hand. Is Tesla Motors producing Disruptive or Sustaining Innovation? The strategist in me couldn’t help but create a diagramed approach to the question so I created this handy little tool:

Disruptive Innovation Flow Chart

First, it’s important to point out the fact that, with regard to Tesla’s role in the automobile industry, the jury is still out. However, we can make some assumptions and predictions. Also, let’s put aside the glaring question of: What is something if it creates a new market but does not disrupt existing market leaders? That’s a subject for another day, and another post on innovation!

Thus, with regard to Tesla, as manufacturer of the first fully electric vehicles to be produced and sold to the automobile market (since the technology was originally abandoned in favor of gasoline cars in the early 20th Century¹) the questions are:

  • Are their products creating a new market? No
  • Does it add incremental value to an existing product? Yes
  • Sustaining innovation!

However, not being satisfied with my own evaluation, I also put this question out to the Twitterverse and invited some other strategists I know to weigh in using Twitter’s polling feature. Here are the results:

Welcome to the future

Although I promised this was about innovation and not about how cool Tesla Motors is, I truly believe they are going to change the world. But don’t take my word for it, this piece about Tesla on Wait but Why has said everything worthwhile on the subject. By the way, presales for the Tesla Model 3 have now reached 400,000 units in the US and they expect to get a half million this year. To put this in perspective, there were only 140,000 BMW 3 series cars sold in the US in 2014².

Something I find interesting whenever a couple of strategists start talking about innovation is how easily the conversation forks. For instance, while I disagree the portable mp3 player was a disruptive innovation in the portable music player market, the role iPod and the iTunes ecosystem played in disrupting the music industry is considerable, to say the least.

What role Tesla Motors will play in disrupting the automobile industry, the battery industry, and the power generation and transmission industries has yet to be seen, but my money’s on a considerable impact. It’s already prompted competitors to start developing competing products and it’s on the verge of upending the vehicle distribution and sales value chain by forcing regulatory change around the traditional auto dealer business model.

In the meantime, if you’re interested in getting your own Tesla 3, here’s the link. See you on the road!

¹ Bet you didn’t know EV’s once made up 28% of all personal automobiles on the road!

² Wikipedia BMW 3 Series 2014 Production and Sales.

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