Elon, Clay & Disruption
Over the past few weeks, I’ve stumbled upon several articles and conversations on the topic of “high-end” disruption, a phenomenon that some have proposed as a refinement to Dr. Clayton Christensen’s classic disruptive innovation theory.
First, I read a December 6th article by Shaye Roseman, Research Associate at The Forum for Growth & Innovation at the Harvard Business School entitled “The Persistent Myth of High-End Disruption.” Then, on December 20th, the following thread caught my eye on Twitter:
Did I really just see this? Elon Musk, the real-life Tony Stark, he of 23.7 million Twitter followers and aspirations to colonize Mars just dissed Clay Christensen, the father of disruptive innovation theory. And he did it with a really awesome scene from Wall Street.
This is the kind of thing that catches my eye and gets me scrolling through a rabbit hole of reply threads. I love the classically Clay response — an invitation to talk. There’s a lot of people who would pay good money to be a fly on the wall for that epic conversation. Full disclosure — I am a huge fan of both of these brilliant men. As a student and practitioner of disruptive innovation theory, and an admirer of Tesla, I’m drawn to reconcile these positions in some way.
What sparked this seismic tweet? On December 18th, TechCrunch published an article by Chandrasekar Iyer, a visiting research fellow at the Clayton Christensen Institute from Tata Consultancy Services called “Tesla’s China factory and the missed growth opportunity.” Mr. Iyer has authored a more extensive report entitled “Driving Disruption: Catching the Next Wave of Growth in Electric Vehicles.” In the article, he points out that Tesla’s entry into China through a new factory to build Model 3 and Model Y cars represents a sustaining innovation. As such, Tesla “will enter an established market to compete along existing measures of performance, like acceleration, style and luxury.”
Mr. Iyer then explains the development of the low-speed electric vehicle (LSEV) market in China — small, inexpensive cars that attract nonconsumers, people who previously could not afford cars who used alternatives such as bicycles, motorcycles or farm vehicles. Since LSEVs represent a low-end disruptive innovation, they create new market growth rather than compete with incumbents for high-margin vehicle consumers. With this logical application of disruptive innovation theory, he suggests that Tesla may be missing a market opportunity and is entering a world of fierce competition from incumbents.
Over the years, others have written about the phenomenon of “high-end” disruption, citing Uber and Tesla of examples that may explain how transformative technologies and business models start at the high-end of the market and work their way down. This is clearly what Elon Musk notes in his tweet, using cell phones as an example. In my research, I found an interesting blog post in 2015 by Sina Motamedi with a case for high-end disruption, adjusting Dr. Christensen’s low-end disruption framework “simply by changing the measure of innovation from performance to affordability.” Jeff Dyer and David Bryce wrote “Tesla’s High End Disruption Gamble” in Forbes the same year, also citing companies such as Apple, Garmin and Dyson as examples of high-end disruption.
In her article, Ms. Roseman offers three reasons why high-end disruption is unlikely to occur:
1. The high end is a fortified hill.
2. The high end is a hard place to hide.
3. You can’t shrink your way to growth. (in other words, it’s difficult to move down-market once you start at the top)
All three of these reasons are sound. Based on his tweet, the third reason is the one I assume Elon would challenge most strongly. A technology can be tested and perfected at the high-end, then scaled with production efficiencies. It’s just not easy, as Tesla has experienced. In 2006, Elon published his first Master Plan, which transparently explained how Tesla would start with the elite small-production Roadster, move to the luxury Model S and finally mass-produce the Model 3. He didn’t quite hit the timeline desired for the Model 3 and we’ve yet to see it at the originally announced $35,000, but Tesla is getting close. If Tesla can truly produce a $35,000 Model 3 — and get the government to extend the $7,500 EV tax credit (side note: I think is a no-brainer policy move) — then things will really get interesting. Tesla is only using about 30 percent of its Gigafactory capacity (below) and there’s no reason to think they can’t go back to the playbook of repurposing shuttered GM plants as they did in Fremont.
Elon’s Master Plan may not be the path of disruptive innovation that can create tremendous new market growth such as LSEVs, but it’s impressive to see the extent to which this plan is actually unfolding.
I find many debates these days to be framed a bit too black and white. Dr. Christensen’s theory has certainly sparked decades of debate since its introduction more than twenty years ago. The digital era has introduced new, complex dynamics and there have been refinements to theory and other theories developed such as Ben Thompson’s Aggregation Theory. Nonetheless, many people, including myself, find it to be an extremely valuable lens for corporate strategy. It doesn’t explain every situation in every industry, but it remains a great way for large incumbent businesses to watch their flank, and for startups to unlock market-creating growth.
In their 2015 Harvard Business Review article “What is Disruptive Innovation”, Dr. Christensen, Michael Raynor and Rory McDonald address some of the theory’s criticisms and offer useful refinements and clarifications. They remain firm about Tesla being classified as a sustaining innovation rather than a high-end disruption, noting:
“Tesla’s entry, not surprisingly, has elicited significant attention and investment from established competitors. If disruption theory is correct holds either acquisition by a much larger incumbent or a years-long and hard-fought battle for market significance.”
It’s hard for me to see this perspective as wrong. While I’m inclined to think that Tesla is unlikely to be acquired by an incumbent (unless it takes a sharp turn for the worse), the reality is that it has already been in a long, hard-fought battle for market significance. Tesla’s financials are starting to turn the corner now, but Elon’s been forthright about how they’ve lived on the edge. It remains to be seen how effective traditional automakers will be in pivoting away from internal combustion engines, but at least some of them will fight back hard. Volkswagen, for instance, has recently proclaimed the ability to produce 50 million electric cars cheaper than Tesla. (Electrek, November 12) Furthermore, Elon’s overarching goal for Tesla is to ensure a sustainable energy solution for Earth by moving away from the hydrocarbon economy. He wants other automakers to fight back hard.
However, just because Tesla’s path has been and will continue to be challenging, it doesn’t mean success is impossible. Ms. Roseman’s post, in fact, states that “high-end disruption is unlikely to occur.” It doesn’t say that it doesn’t exist, and she indicates this phenomenon is the subject of frequent discussion at HBS. Theories have anomalies. The 2015 Christensen/Raynor/McDonald HBR article acknowledges the existence of anomalies to the theory and notes refinements that have been made over the years. I’ve found this article to be a very useful update, but it left me wondering if there might be more to it than being a mistake in application of the theory, or miscategorization, as indicated by the authors:
Is it possible that under specific circumstances, a sustaining innovation could have characteristics that have a transformative impact on incumbents?
As I wrote this last sentence, I almost said “disruptive impact”, but as I think and read more on this debate, I do think that it’s best to leave the term “disruption” to the low-end and new market situations and preserve the integrity of that definition and the management learnings that it offers.
Tom Bartman, currently at McKinsey & Company, previously a senior researcher at the Forum for Growth & Innovation at HBS, wrote a Medium post in 2016 that I find helpful in finding the language to describe how Tesla might succeed as a sustaining innovation. He cites a 1990 work by Rebecca Henderson of MIT and Kim Clark of Harvard that describes four types of technological change: Incremental, Modular, Architectural and Radical Innovation. Mr. Bartman makes a good point in his post about the conflation of architectural and radical innovation with “high-end disruption.” He describes electric vehicles as an example of radical innovation as “it involves changing both the technology of the subcomponents and the ways they link together”, replacing “internal combustion engines with electric motors, drive shafts with wires and fuel tanks with batteries.” He concludes the post by explaining that it may be very difficult for incumbents to compete against a radical innovation, but that they have a strong incentive to fight back hard, whereas against a disruptive innovation they tend to wait until it’s too late.
I believe Tesla has two key characteristics that enable it to have a transformative effect on the automotive industry while being a sustaining innovation as defined by the theory: (1) the uniqueness of its business model, and (2) the uniqueness of its CEO.
Tesla’s Unique Business Model
Tesla’s highly integrated approach — similar to Apple in many ways — is designed to produce delightful consumer experience, giving it a significant near-term advantage over incumbents trying to pivot their business models. Tesla’s technology is an important component of its business model but is not solely driving its success. In fact, Elon recently pointed about that Tesla’s patents are open-sourced. While Elon draws criticism for missed timelines and other well-documented behaviors, he deserves a great deal of credit for continuing to evolve a comprehensive business model that fundamentally changes the experience of purchasing and owning a vehicle. Major components of this unique business model include:
· Tesla vehicles are fundamentally designed and built differently than internal combustion engine (ICE) vehicles. They have far fewer moving parts and are more computer than car. The ability of Tesla to add significant features and capabilities to existing cars via wireless updates is unprecedented.
· Tesla fully integrates its distribution and service network, enabling it to control the full consumer journey. For instance, contrast the value proposition of its service offerings to the traditional experience: https://www.tesla.com/service
· As of this writing, Tesla operates 1,386 Supercharger stations with 11,583 Superchargers to accommodate longer trips and ease consumer anxiety about battery range. They continue to expand this network rapidly.
· Tesla also has a fully integrated/interdependent model with respect to autonomous technology that has a head-start on the competition. Monica Desai, an HBS grad now at Kleiner Perkins, wrote a series on Medium in 2017, referenced below, that offers a great deep dive on interdependence vs. modularity for key autonomous vehicle approaches of Tesla, Waymo and Uber.
Traditional car companies will certainly invest tremendous resources to combat this unique business model. I believe that these companies actually need to view Tesla as a disruptive innovation — even though it is sustaining — because its business model is so unusual. As such, incumbents should employ the dual transformation approach espoused by Innosight, a consulting firm founded by Dr. Christensen. They will need to set up separate divisions to compete with Tesla, while establishing the appropriate linkages to their traditional businesses. Without this approach, incumbents will likely find it very difficult to keep pace with Tesla, even if they invest far more resources than Tesla can muster.
A key difference between Tesla and low-end disruptors is, of course, the absence of asymmetric motivation. Incumbents are highly motivated to protect market share of their best customers. As the chart below shows, the emergence of the Model 3 has propelled Tesla quickly to a luxury car leader in the U.S.
The question is how quickly incumbents can fight back, particularly with the Model Y, a crossover SUV, coming to market in early 2019. What everyone should be able to agree on is that this will be a fascinating market to watch over the next few years.
Tesla’s Unique CEO
This one’s pretty obvious. I’m not a business historian, but I doubt there are many strong comparators to Elon Musk. This article is focused on the automotive industry. Elon is also transforming the solar energy and space travel industries, with the Boring Company (solving the problem of soul-destroying traffic) and Neuralink (implantable brain-computer interfaces) as relative side hustles.
Can you imagine Tesla ever needing a TV commercial? A year-end clearance event? Elon launched a Tesla Roadster into outer space. That’s a pretty good marketing plan. All Elon needs to do is tweet to sell a lot of cars. Traditional car companies buy commercial time during the Super Bowl at the clip of about $5 million for 30 seconds.
My greatest worry about the long-term future of Tesla and SpaceX is Elon himself — I just want him to stay healthy and get some sleep. Listen to Arianna Huffington.
Where disruptive innovation theory can help Tesla is to serve as a constant reminder for the challenge they have undertaken, and how they need to relentlessly out-hustle and out-business model the incumbents. I doubt that Elon really needs this reminder, but the theory offers it nonetheless. In his 2016 Master Plan, Part Deux, he admits:
“The list of successful car company startups is short. As of 2016, the number of American car companies that haven’t gone bankrupt is a grand total of two: Ford and Tesla. Starting a car company is idiotic and an electric car company is idiocy squared.”
Yet Elon is doing a pretty darn good job of making it happen. I’m rooting for him too. And have my eye on a Model 3 when I buy a new car in a couple of years. (Keep building supercharger stations — that’s my biggest anxiety)
I think it would be a great thing for our planet if Clay and Elon did have the meetup Clay offered. Recently, on our Innovation Engine team’s podcast, A Sherpa’s Guide to Innovation, a close friend and colleague of Clay’s, Bob Moesta, noted:
“Being an academic, he’s always trying to see things from the biggest picture, to help the most people. Very few people are blessed to be in that position to influence the world on that level.”
True to this statement, Clay has a new book coming out in January with Karen Dillon and Efosa Ojomo, “The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty.” Given Elon’s passion for ridding our world of carbon-based fuels and ultimately making us a multi-planetary species, I think these two incredible minds could make some magic together.
A Note of Thanks:
I truly appreciate the great work of the Christensen Institute and The Forum for Growth & Innovation at Harvard Business School. They are incredible resources for leaders — business or otherwise. These are really smart and thoughtful people — the more I come into contact with, the more I’m enriched. I’m still a learner of the theories — if I’ve made any missteps in their application, please comment. Also, I feel like I’m just scratching the surface with regard to how a sustaining innovation can still transform an industry. I think a more rigorous framework or theory could be devised to predict the likelihood or necessary conditions for success of a new entrant choosing the tough road of sustaining innovation. Or perhaps it’s already out there and I am overlooking it.
Jeff Dyer and David Bryce:
Jeff Dyer and Hal Gregersen: (co-authors of The Innovator’s DNAwith Dr. Christensen)
Clayton M. Christensen, Michael Raynor, and Rory McDonald:
Elon Musk’s Master Plan (2006 and 2016 versions)