Let's be clear about something: The term "disruptive" does get thrown around a bit gratuitously these days. When used inappropriately, it becomes little more than a buzzword that serves as a futile attempt to justify a new product, service, or business that adds little to the marketplace.
Consider this social media ad that I saw recently for a "revolutionary" product that's about to "disrupt" the...bathroom market.
But when used correctly, it has massive industry- and world-changing implications for incumbents, new entrants, and consumers alike. With that in mind, is Tesla Motors (NASDAQ:TSLA) actually disruptive or not?
Clayton Christensen doesn't think so
The very man who pioneered disruption theory, Clayton Christensen, does not think that Tesla qualifies as disruptive. In Christensen's view, Tesla's technology is considered a "sustaining innovation," where an existing product is simply improved and made better.
This is due to the fact that Tesla entered the market at the high end, offering high performance in terms of acceleration and range at very high price points. Christensen notes that the market segment that Tesla plays in, high-end luxury vehicles, is extremely appealing to automakers since it's a lucrative niche. Tesla's success will attract intense competition. In contrast, he believes that disruption often comes from markets that incumbents are uninterested in and typically ignore.
Furthermore, he had one of his research associates, Tom Bartman, dig deeper into the question last year. Bartman and his team considered five critical questions:
- Does the product either target overserved customers or create a new market?
Does the product create "asymmetric motivation" where incumbents have less motivation to innovate than new entrants?
- Can the product improve performance fast enough to satisfy consumer expectations at reasonable costs?
Does the product create new value networks?
Does the product disrupt incumbent companies, or can incumbents capture the opportunity?
Bartman arrived at the same conclusion as Christensen, believing that Tesla is not a disrupter in the classical sense, and offers mere sustaining improvements. Interestingly, he believes that another category of electric vehicles does possess disruptive characteristics: neighborhood electric vehicles, or NEVs.
NEVs are essentially the high-performance golf cart EVs that people use for traveling short distances. Think of mall or university security guards. NEVs fit the classical case, starting at extremely low performance levels and price points, improving until they're ready to invade upmarket. Polaris Industries (NYSE:PII) entered the NEV market in 2011 via its acquisition of Global Electric Motorcars, or GEM, from Fiat Chrysler. Most NEVs only go about 35 miles per hour, but also cost a lot less than full-fledged cars.
So what Bartman and Christensen are essentially saying is that it's not necessarily about EV technology itself, but rather the strategic path to market and performance trajectory that determines whether or not the product is disruptive or sustaining. NEVs are coming in from below while Tesla is coming in from the top.
How do you define disruption?
Here's the thing, though: The classical theory mostly precludes the idea of top-down disruption altogether. Just a couple of months ago, Christensen and a couple of colleagues published a refresher on disruption theory in the Harvard Business Review, adding some additional insights gleaned in the 20 years since the theory's inception.
The authors reiterate that a key tenet of a disruptive innovation is that it starts in either a low-end market or a new market. According to the theory, any company that starts at the top is disqualified from being considered disruptive, instead being relegated to a sustaining innovation. The current framework narrowly defines "disruption" in this way.
None of this is to undermine disruption theory itself. Disruption theory has completely and utterly transformed the way that company executives and investors view competition, and Christensen has acknowledged the notion of top-down disruption before. He just doesn't think Tesla qualifies.
Spoiler alert: it doesn't actually matter
At a certain point this all becomes a semantic debate. I won't argue with the father of disruption theory about whether or not Tesla technically fits his definition of disruption. But at the same time, in Christensen's own words: "When mainstream customers start adopting the entrants' offerings in volume, disruption has occurred."
If the end goal of any new technology is to achieve mainstream adoption, it doesn't matter how a company gets there. What really matters to investors is whether or not Tesla will succeed as a company and an investment. Can Tesla live up to its growth expectations, and can it truly change the world with catalyzing EV adoption? Remember that Tesla's goal has always been to "accelerate" the world's transition to sustainable transport. Disrupting the auto market with the traditional bottom-up approach would take forever.
For instance, Polaris' GEM business is included in its "Global Adjacent Markets" operating segment, which saw revenue fall a modest 2% last year to $312 million. That's less than 7% of Polaris' total sales. GEM's NEVs are also nowhere near the performance levels required for primary transportation.
Developing and manufacturing mainstream and affordable EVs that have sufficient range and performance is incredibly expensive, and arguably no company has successfully done it yet. Current affordable EVs are somewhat lacking in performance, and Tesla vehicles offer plenty of performance but are not affordable for most people.
Meanwhile, some incumbents like Fiat Chrysler are exhibiting classic incumbent complacency. CEO Sergio Marchionne recently told Bloomberg, "I can't make money building a car like Tesla. So for the time being I am abstaining." Chrysler's aforementioned sale of GEM to Polaris shows that the company is still uninterested in developing EVs. But eventually abstinence becomes a competitive disadvantage, when consumers begin demanding EVs en masse.
Other incumbent OEMs like General Motors (NYSE:GM) are finally taking EV development seriously, acknowledging and accepting that new technologies are inherently unprofitable initially. GM is poised to launch the first affordable EV with sufficient range and acceleration to appeal to mainstream consumers. Without a doubt, GM and Tesla will reach the mainstream market with an affordable EV that offers sufficient performance well before Polaris or other NEV companies.
In this sense, Tesla's top-down strategy has succeeded in accelerating EV adoption (there are some other benefits to Tesla's approach, too). To the extent that Tesla can maintain its brand strength and meet its ambitious volume targets in the years to come, it will be a compelling investment and a thriving company.
At the very least, Tesla should probably also get in on this red-hot bathroom market I keep hearing so much about.