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How Disruptive Is Tesla, Really?

Applying the theory of disruptive innovation to Tesla is not as simple as it seems.

Tesla’s entry into the automotive industry has fascinated industry analysts, scholars, and customers, who love to debate its viability and long-term prospects. Will yet another fairy-tale story of entrant success and incumbent displacement unfold in the coming years, or will dominant players with their massive resources crush this little upstart?

History is scattered with examples not only of entrant success, but also of established firms that eventually regained the upper hand. Fortunately, there is much scholarly work to help us determine whether Tesla is here to stay or not. By applying relevant theory on the subject of technological transitions, we can have a more informed discussion regarding the future of Tesla and electric vehicles more generally.

A recent article in the Harvard Business Review by Tom Bartman and colleagues applied Clayton Christensen’s theory of disruption to the ongoing entrant-incumbent battle, concluding that Tesla’s offering does not fulfill Christensen’s criteria for being a truly disruptive innovation. Christensen’s argument, as laid out in his best-selling book The Innovator’s Dilemma, essentially draws upon an asymmetry of incentives between entrants and incumbents. If a technology does not initially cater to the demands of an incumbent’s established, profitable market, it will not succeed.

The reason is not a lack of competencies or assets but, rather, that established firms face a high opportunity cost and will as a consequence not be able to allocate sufficient resources to disruptive projects. As entrants can get excited about a small niche market, they invest at an early point and gain momentum; incumbents enter the new technology when it’s too late.

Applying this theory, the authors conclude that Tesla is not truly disruptive, because the company has launched a high-end, high-margin product in direct competition with established players such as Mercedes and BMW. Incumbents will therefore be highly motivated to beat Tesla by allocating substantial resources to the development of an electric vehicle, and thus the theory predicts that established firms will win this competitive battle.

This argument rests on the assumption that consumers are the main stakeholders influencing how entrants and incumbents allocate resources. They are, after all, giving the firms the cash flow they need to survive and please their investors. The automotive industry, however, contains another important actor, which might be less enthusiastic about Tesla’s offering: auto dealers.

The fact that Tesla effectively circumvents dealers and sells directly to consumers has caused extensive turbulence. Car dealers across the United States have lobbied against this business model and successfully banned Tesla in several states. For sure, the influence of financially strong, vested interest groups presents a daunting challenge for a small entrant like Tesla.

Revisiting Christensen’s original theory, this observation would cast even greater shade over the prospects of incumbent firms. While Tesla has 52 showrooms in the U.S. and Canada, Ford and Chevrolet together have 3,000 dealers in the U.S. alone. These dealers have provided incumbents with a competitive edge for many decades, but they also make it virtually impossible for established firms to sell directly to consumers. If it’s politically challenging for Tesla to make dealers obsolete, it would be virtually suicidal for incumbents to even consider circumventing their dealers. Thus, they are captivated by established stakeholders, which in turn implies that they actually face most of the challenges Christensen postulated.

While Christensen’s theory has considerable explanatory value, it is not the only theory that can help us explain how new technology shapes the competitive dynamics of an industry. After all, Apple’s iPhone emerged as a high-margin, high-end product, but that didn’t stop Nokia from going bust in the transition to smartphones. Another important factor is related to how a new technology affects the capabilities and organizational structures of established firms.

Technological development is inherently path dependent. In a paper published in 1985, Kim Clark at Harvard noted how the decisions of engineers in the early automotive industry shaped the development work of other engineers many decades later. One can only marvel at the extent to which the know-how of incumbent firm engineers has been shaped by almost a century of combustion-engine development.

One such factor that is particularly noteworthy in the case of Tesla is its unique product architecture. A Tesla has a trunk in the front (a “frunk”), whereas the battery is instead put underneath the seats. This stands in sharp contrast to various hybrid cars launched by incumbents over the past decades, which are usually strikingly similar to combustion-engine vehicles. Rebecca Henderson and Kim Clark published a paper in 1990 where they introduced the notion of architectural innovation. In this article, they observed that organizational structures are usually a reflection of the product architecture and that consequently, an incumbent firm will struggle when developing a new architecture.

This pattern seems highly applicable to the car industry of today. Incumbents have to a large extent projected their organizational structure into their attempts at electric vehicles, even though this is probably not technologically optimal. Entrant firms like Tesla are not bound by any such constraints and can thus look for and find a better way to design an electric vehicle.

So what’s the conclusion? Will we see a big-bang disruption of the automotive industry as we know it, or will today’s dominant players be the winners of tomorrow? Tesla’s offering is so different to the established logic that the company has been able to gain a foothold in the fiercely competitive car industry. Tesla has introduced not only a new technology, but also a new product architecture and a new business model. To do something remotely similar, incumbents are up for a challenge of great magnitude.

Christian Sandström is associate professor at Chalmers University of Technology and the Ratio Institute in Sweden. He writes and speaks about technological change and industrial transformation. You can read more on his website

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