Many have referred to Tesla Motors' (NASDAQ: TSLA) electric vehicles as "disruptive." After all, the company has exploded onto the scene against all odds. The Model S is heralded as "one of the best cars in the world" at Edmunds.com, the highest-rated car ever tested at Consumer Reports, and the safest car ever tested by the National Highway Traffic Safety Administration. But students of Clayton Christensen's well-known book, The Innovator's Dilemma, usually refrain from referring to the young company's electric cars as a disruptive innovation. After all, Christensen himself said Tesla vehicles are, instead, a "sustaining innovation." But what if Christensen is wrong?
Christensen: Tesla is not disruptive
"[T]he electric car is not in any way disruptive. I don't think Tesla itself thinks this way, but there are a lot of investors who do. It's what I call a 'sustaining innovation,'" Christensen wrote in a Bloomberg article last year. "[I]t makes a good product better. It's up against the very high-end cars made by BMW and other sports cars."
In a May issue of Harvard Business Review the Harvard professor made his case again, this time via his research associate Tom Bartman. Bartman concluded: "Tesla is not a disrupter. It's a classic 'sustaining innovation' -- a product that, according to Christensen's definition, offers incrementally better performance at a higher price."
By Christensen's definition, therefore, Bartman said Tesla has "chosen a very difficult strategic path" if its goal is to surpass existing larger automakers.
Electric golf carts, however, have a chance at disrupting the auto industry, Christensen and Bartman say. As Christensen explained in his book, products "that seriously underperform today, relative to customer expectations in mainstream markets," are more likely to be disruptive than technologies that closely match market needs today. It's the technologies that sneak up from the bottom that can be the most disruptive, Christensen believes.
UBS calls out Christensen
But UBS analyst Steve Milunovich (via Barron's) suggested Christensen is wrong, citing his failure to predict the iPhone's disruptive nature.
Based on the answers to five criteria, his [Christensen's] research associate concludes that Tesla is more a sustaining than disruptive innovation. One reason is that Tesla is attacking from above at high price points rather than undercutting existing automakers in a way they will ignore. Similarly, Christensen predicted limited success for the iPhone, which came in at a high price point and was viewed as sustaining relative to Nokia. He later said the iPhone succeeded because it actually disrupted personal computers rather than handsets, which seems misguided.
While Milunovich doesn't cite a specific reason Christensen is wrong, he believes the theory might be missing something.
The iPhone and Tesla car might not be classically disruptive according to Christensen's theory, but something is going on. From a marketing standpoint, consumers view these as new categories. Creating a category then setting up your product as the leader is powerful brand building. The iPhone was the first smartphone that gained significant mindshare thanks to its design differentiation, which continues today.
In other words, Milunovich seems to believe Tesla might be positioning its brand in a way that could attract the masses if electric cars do eventually become mainstream.
Tesla CEO Elon Musk seems to fall in the camp that believes the company's vehicles are disruptive. Musk has predicted that Tesla revenue will soar 50% annually for 10 years -- growth rates suggesting a significant level of disruption.
On the other hand, Musk's decision to allow competitors to use Tesla patents and to share its Supercharger infrastructure with any vehicles made by competing manufacturers that make an electric car that can handle Tesla's high-powered charge, and that agree to fork out their share of operating costs for the network, demonstrates his belief that other companies will ultimately produce their own formidable electric vehicles. He also applauds planned efforts -- both rumored and formal -- by competitors to produce fully electric vehicles.
Assuming electric vehicles catch on with the masses, will Tesla's boldness in quickly expanding manufacturing of its products, paired with its planned 2017 launch of its lower-cost Model 3, secure the company a sustainable position as the leader in its chosen industry? Or is Tesla poised to remain a small player as the incumbent automakers easily adopt this "sustaining technology" when the time is right?