Master Thesis
Designing Value Propositions for Disruptive Innovations; Exploring Value
Proposition Design in the Case of Electric Vehicles
Author: J.G.A. (Jilles) Visser
Student number: 10475699
Supervisor: dr. R. Bohnsack
Date of submission: July 2, 2015
Study programme: MSc Executive Programme in Management Studies
Track: Strategy
Statement of Originality
This document is written by Jilles Visser who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
From disruptive innovation theory as well as from business model theory it has been argued that a good business model can compensate for the technological shortcomings that hinder further market penetration of a disruptive innovation. However little empirical research about this phenomenon exists. Because the value proposition is considered to be the central part of the business model, this thesis explores how value propositions are designed to increase the attractiveness of a disruptive innovation for the mainstream market. The electric vehicle, which is an example of a disruptive innovation, serves as the context for this study. By studying the value proposition, this thesis tries to respond to the quest to add more empirical insights from diverse disciplines about what factors contribute to success of the electric vehicle. Using a multiple case study approach, the value proposition of thirteen electric vehicles that are sold in the Netherlands and/or United States is analyzed. Firm brochures and websites are primary sources of evidence. Additional information, mostly in the form of press releases, is used to get more insight in the individual cases. Firms appear to include several tactics in the value proposition that aim to compensate for the most inferior and important performance attributes. These tactics endeavour to reduce and shift risks of ownership, extend the value beyond the core product and integrate the electric vehicle in the ecosystem. Tactics that reduce risks and extend the value of the electric vehicle are often derived from the conventional value proposition and seem to have a limited contribution to success. Nevertheless, the large majority of firms provides these tactics. Only a minority of cases actively works towards integrating the electric vehicle in the ecosystem and provides risk shifting tactics. Findings cautiously indicate that a value proposition that helps to integrate the electric vehicle in the ecosystem has a positive effect on success in the market.
Acknowledgement
I sincerely would like to thank my supervisor René Bohnsack for his support, knowledge and trust during the entire process of writing the thesis. I really enjoyed working together and thanks to his positivism and enthusiasm, I became in a relatively short time considerably familiar with the electric vehicle industry. Visiting the electro mobility conference in Paris was absolutely one of the highlights of this period. Discussing theory together and keeping each other up to date about developments in the electric vehicle industry were an important source of inspiration and helped me to push my limits.
Table of
Content
1. Introduction ... 1
2. Electric Vehicle Background ... 4
2.1 Low-emission vehicles ... 4
2.2 Electric vehicles: from the 19th century towards the 21st century ... 5
2.3 Meta-analysis on EV consumer studies ... 6
2.3.1 Importance and relative advantage of EV attributes ... 8
3. Literature Review ... 14
3.1 Disruptive innovation ... 14
3.1.1 Criticism and extensions of disruptive innovation theory ... 17
3.2 Business models ... 22
3.2.1 Overview of business model theory ... 22
3.2.2 Conclusion of business model review ... 28
3.3 Value proposition ... 29
3.3.1 Defining the value proposition ... 29
3.3.2 Conclusion of review of value proposition theory ... 32
3.3.3 Values ... 33
3.3.4 Design of the value proposition ... 34
4. Theoretical Framework ... 39
4.1 Research question ... 39
4.2 Working propositions ... 41
5. Method ... 45
5.1 Multiple case selection ... 45
5.2 Data collection ... 47
5.3 Process of coding and analyzing the data ... 48
5.3.1 Data reduction ... 48
5.3.2 Data display ... 50
5.3.3 Conclusion drawing and verification ... 50
6. Findings ... 52
6.1 Classification of EV attributes ... 52
6.2 Reconfiguration per attribute ... 54
6.2.1 Tactics for driving range ... 54
6.2.2 Tactics for price ... 57
6.2.4 Tactics for other attributes ... 63
6.2.5 Reconfiguration of attributes; summary of findings... 66
6.3 Generic strategies to value proposition design ... 75
6.3.1 Risk reduction and risk shifting ... 76
6.3.2 Value extension; products and services ... 77
6.3.3 Integrating in the ecosystem ... 79
6.4 Differences in value proposition reconfiguration strategies between EV manufacturers ... 80
6.5 Answer on the working propositions ... 88
7. Discussion ... 90
7.1 Discussion of findings ... 90
7.2 Contributions, limitations and future research ... 95
8. Conclusion ... 98
References ... 99
Appendices ... 110
Appendix A: Details of the meta-analysis on EV consumer studies ... 110
Appendix B: Within-case analysis ... 117
Volkswagen e-Golf ... 117
Volkswagen e-Up ... 119
Smart Fortwo Electric Drive ... 121
Mitsubishi i-MiEV ... 122
Nissan Leaf ... 123
Renault Zoe ... 127
Ford Focus Electric ... 128
Mercedes B Class Electric ... 129
Citroën C-Zero ... 130 Fiat 500e ... 131 Kia Soul EV ... 132 Chevrolet Spark EV ... 134 Chevrolet Volt ... 135 Opel Ampera ... 137 BMW i3 ... 138 Tesla Model S ... 142 Endnotes ... 146
Index of tables and figures
Table 1: Advantages and disadvantages of an EV. ... 5
Table 2: Importance and relative advantage of EV attributes ... 11
Table 3: Overview of critics and additional thoughts on disruptive innovation theory. ... 17
Table 4: Market segments from where the disruptive innovations emerge. ... 20
Table 5: Overview of different concepts of business models. ... 23
Table 6: Definitions of the value proposition. ... 32
Table 7: Overview of elements of the value proposition. ... 36
Table 8: Overview of selected EV’s in the U.S. market, sales figures and version of brochure. ... 46
Table 9: Overview of selected EV’s in The Netherlands, sales figures and version of brochure.. ... 47
Table 10: Summary of meta-analysis on consumer perceptions of EV attributes. ... 53
Table 11: Reconfiguration tactics for driving range. ... 57
Table 12: Reconfiguration tactics for price. ... 59
Table 13: Reconfiguration of charging time and charging infrastructure. ... 60
Table 14: General overview of tactics provided by all selected firms. ... 68
Table 15: Generic strategies used to reconfigure the value proposition. ... 76
Table 16: Answer on the working propositions. ... 88
Figure 1: Disruptive innovation model.. ... 16
Figure 2: Value Proposition Canvas. ... 38
Figure 3: Perception of EV attributes. ... 54
1. Introduction
The internal combustion engine [ICE] is the dominant technology in the automotive industry for already many decades, despite several attempts to develop alternative power train technologies (Gärling & Thøgersen, 2001; Orsato & Wells, 2007). In the last years, environmental pollution, dependence on fossil fuels and climate change have become important points on the agenda of the government, business and academia. Ambitious climate goals and subsequent governmental policies have forced companies to reduce their environmental impact. Governmental regulation also affects the automotive industry as this industry has a large environmental impact. The U.S. transportation sector is responsible for 27% of the greenhouse gas emissions and within this sector 62% of the greenhouse gas emissions come from passenger cars (United States Environmental Protection Agency, 2015). In Europe cars are responsible for approximately 12% of the GHG emissions (European Commission, 2015). In order to comply with governmental regulation, car manufacturers should reduce their fleet emissions with about 30% before 2020 (McKinsey&Company, 2014). Incrementally optimizing the ICE’s efficiency and reducing its emissions will not be enough, and therefore firms have to come up with zero-emission vehicles such as the electric vehicle [EV]. Those regulative forces and subsequent new technologies that allow for having zero-emissions challenge the current dominant technology and accumulated resources and capabilities in the automotive industry. These new technologies require a different infrastructure and are used differently by consumers compared to the existing alternative, which is the vehicle with an internal combustion engine [ICE] in this case (Hardman, Steinberger- Wilckens, & van der Horst, 2013; Pilkington & Dyerson, 2004). Therefore these technologies are called disruptive innovations (Christensen, 1997).
Compared to previous attempts to introduce the EV, this generation of EV’s seems to be quite successful. However, the current market share is still below 1% (International Energy Agency [IEA], 2013). The automotive industry is highly capital intensive and in order to make the EV profitable the firms have to scale up to the mainstream market. However, despite its environmental advantages the EV still faces important technological shortcomings which impact its performance on critical dimensions, such as price and driving range, and hinder further market penetration (Kley, Lerch, & Dallinger, 2011). This is characteristic for a disruptive innovation; during its introduction the innovation performs not good enough on important performance attributes in order to compete on the mass market with the existing product it tries to replace (Christensen, 1997).
Many disciplines in practice and academia investigate how the EV can be further developed to be successful. From the technological side it is acknowledged that a lot of uncertainties exist with regard to the possible speed of improvement of technology
(Goloparakrishnan, van Essen, Kempman, & Grünig, 2011; Van Wee, Maat, & de Bont, 2015), which is also characteristic for disruptive innovations (Danneels, 2004). Studies on consumer preferences show that several important performance attributes are perceived as inferior (e.g. Axen & Kurani, 2013; Egbue & Long, 2012; Hidrue, Parson, Kempton, & Gardner, 2011; Kudoh & Motose, 2011). From the business perspective it is acknowledged that a feasible business model for the EV is not yet present despite many experiments with several business models (Bohnsack, Pinkse, & Kolk, 2014; Kley et al., 2011; McKinsey&Company, 2014). More specifically, elements of the business model such as the value proposition and alignment with the value network also seem to be unclear yet (Weiller, Shang, Neely, & Shi, 2015). According to Van Wee et al. (2015) more knowledge from diverse disciplines is needed to understand the rationale behind the success (or failure) of the EV.
Against this background, this thesis tries to respond to this quest by taking a theoretical perspective based on theory of disruptive innovation, business models and value propositions. From the side of disruptive innovation theory as well as from business model theory it has been argued that an inferior technology can succeed in the market place if it is accompanied by an innovative business model (Yu & Hang, 2010; Christensen, 2006; Chesbrough, 2003; Abdelkafi, Makhotin, & Posselt, 2013; Sandtström, 2010). However, up to now little research exists about this phenomenon. The business model of a firm is built around the value proposition (Chesbrough & Rosenbloom, 2002; Johnson, Christensen, & Kagermann, 2008; Osterwalder & Pigneur, 2010), and the value proposition itself is not yet extensively studied in academia (Payne & Frow, 2014). By taking the value proposition as unit of analysis, this thesis tries to add empirical research to the field where disruptive innovations and value propositions intersect. The primary goal of this thesis is to explore how value propositions are designed in order to make the disruptive innovation more attractive for the mainstream market. Furthermore, by taking the EV industry as a contextual background this thesis aims to contribute to the rapidly evolving EV industry by giving insights in the efforts of firms to make the EV succeed despite its current technological shortcomings on important performance attributes.
By taking a multiple case study approach this study investigates the current EV value proposition of car manufacturers that directly sell EV’s to consumers in the United States and in the Netherlands. Details of the core technology, in this case the battery and electric drive train, are not part of this study; the focus is on firms’ efforts to make the value proposition of the EV more attractive.
The structure of this thesis is as follows. Chapter 2 briefly describes the EV industry and a meta – analysis of recent EV consumer studies provides a proper understanding of how the EV is perceived by consumers. Chapter 3 contains the literature review about disruptive innovation,
business models and value proposition theory. Subsequently, chapter 4 contains the central research question and the working propositions. Chapter 5 describes the methodological choices that have been made, in order to present the findings in chapter 6. Findings are discussed on the basis of theory in chapter 7 and the conclusion of this thesis is found in chapter 8.
2. Electric Vehicle Background
This chapter aims to give an overview of the background of EV’s. The characteristics of an EV compared to other low-emission vehicles are described, followed by a short description of the history of the EV and a future outlook. Subsequently, the consumer perspective on EV’s is presented to clarify how consumers perceive several EV attributes that can hinder or stimulate further adoption. This section gives an overview of recent consumer research on perceptions, preferences and attitudes about the current generation of EV’s.
2.1 Low-emission vehicles
Several low-emission vehiclesi [LEV’s] with alternatives technologies exist. However, EV’s, hybrid electric vehicles [HEV’s] and fuel cell vehicles [FCV’s] are considered to be most likely to eventually replace the ICE (Frenken, Hekkert, & Godfroij, 2004). A HEV has an internal combustion engine as well as an electro motor and is powered by a battery that is recharged through regenerative breaking and the internal combustion engine (U.S. Department of Energy, n.d.). HEV’s with a plug-in can be recharged by an external power source. Those plug-in versions have a longer (electric) range than regular HEV’s. HEV’s and plug-in HEV’s are not as disruptive in nature as EV’s or FCV’s since their electric motor can be quite easily integrated in the existing ICE (Zapata & Nieuwenhuis, 2010). According to Frenken et al. (2004) the HEV is a transition technology between the current ICE’s and FCV’s/ EV’s. EV’s and FCV’s have an entirely different power train that completely replaces the ICE and demand a different infrastructure than the ICE. The FCV also has an electric engine but is powered by fuel cells. It emits no CO2 but only water and has less constraints in driving range and charging time compared to an EV. Up to now FCV’s are not available for the mass market and with hardly any charging infrastructure at the moment it is no viable alternative to an ICE yet. The EV has a battery powered electric engine. This battery can be recharged by an external power source. EV’s have several advantages and disadvantages compared to an ICE, which are shown in Table 1. Note that these are objective advantages and disadvantages compared to an ICE. Section 2.3 discusses the perceived advantages and disadvantages of the EV in more detail.
i In several studies the term EV also refers to HEV’s, to avoid misunderstanding the term LEV is used
to refer to electrified vehicles and the term EV explicitly refers to an electric vehicle powered by a battery.
Table 1: Advantages and disadvantages of an EV.
Advantages Disadvantages
High initial purchase price, mostly due to high battery cost. Current price premium of approximately 40% (Bočkarjova,
Rietveld, & Knockaert, 2013; IEA, 2013)
Limited driving range (Miao, Xu, Zhang, & Jhang, 2014)
No tailpipe pollutants (Maio et al., 2014) Long battery charging times (Miao et al., 2014) Cost of energy in the form of electricity is cheaper than in
gasoline form (Miao et al., 2014)
Limited charging infrastructure (Lebeau, van Mierlo, Lebeau, Mairesse, & Macharis, 2012) Lower operating/maintenance costs due to less moving parts
in the car (Eggers & Eggers, 2011)
Performance of EV dependent on outside temperature (Eggers & Eggers, 2011)
Can be charged by regular power outlets (Eggers & Eggers, 2011)
Uncertain battery lifetime (4-10 years) and battery lifetime is influenced by charging speed (Nijland, Hoen, Snellen, &
Zondag, 2012)
Noise reduction (Bočkarjova et al., 2013) Uncertainty of Total Cost of Ownership [TCO], indication that EV TCO is only advantageous to an ICE when more
than 20,000 km/year are driven (Nijland et al., 2012; Kampman, Braat, van Essen, & Golopalakrishnan, 2011) Swift acceleration (Lebeau et al., 2012) Limited top speed (Budde Christensen, Wells, & Cipcigan,
2012) Energy efficient: EV’s convert about 59% - 62% of the
electric energy from the grid to power on the wheels whereas an ICE converts about 17% - 21% of the energy stored in gasoline to power at the wheels (U.S. Department
of Energy, 2011)
2.2 Electric vehicles: from the 19
thcentury towards the 21
stcentury
EV’s have been on the market for a long time. The first EV was built in 1842 in Scotland and EV’s were quite successfully introduced in the beginning of 1900 in the United States reaching a stock peak of 30.000 vehicles in 1912 (Gärling & Thøgersen, 2001; IEA, 2013). However, battery development stalled and the ICE became the key technology to dominate the market (Orsato & Wells, 2007). Governmental policies and regulations that aimed to improve air quality, such as the Californian Zero Emission Mandate in the 1990’s, forced car makers to develop a new generation of LEV’s or even zero (tailpipe) emission vehicles such as the EV and FCV (Pilkington & Dyerson, 2004). Not all car manufacturers successfully developed those cars, partly because they were reluctant to change since LEV’s, and especially the EV, require a different refuelling infrastructure and different partners and suppliers. Furthermore large capital and resource investments in ICE’s are already made, inhibiting firms to switch to making EV’s (Zapata & Nieuwenhuis, 2010). The EV technology not only disturbs the car manufacturers’ network,
resources and capabilities, also consumers are forced to change their behaviour since the entire charging process of an EV is completely different from that of an ICE (Hardman et al., 2013). These factors made the successful introduction of the second generation of EV’s problematic. However, the EV is still regarded as a potentially disruptive innovation as it can change the bases on which current competition takes place (Christensen, 1997; Hardman et al., 2013; Pilkington & Dyerson, 2004). Typical for the EV compared to other disruptive innovations is that EV’s are brought to the market mainly due to regulation and not explicitly by competition per se which is mostly the case (Pilkington & Dyerson, 2004). Another factor that makes this (expected) disruptive innovation different is that currently most incumbents are developing EV technology, whereas normally new entrants primarily come up with the disruptive innovation. Taken to its extreme; the ICE and EV strategy and business model heavily conflict and (partly) due to regulation that forces further development of the EV, the incumbents are more or less causing disruption to their existing (ICE) business. This is referred to as Disruptive Strategic Innovation (Charitou & Markides, 2003). This all illustrates that car makers operate in a highly complex system.
However, in the last ten years the further development of EV’s has again gained attention due to climate change, ambitious climate goals, more stringent regulation for ICE’s, financial and non-financial incentives and volatile oil prices. This leads to the third generation of EV’s and the sales figures look more promising than ever before. The stock of EV, plug-in HEV’s and FCV’s reached a new peak of 50,000 in 2011 and 180,000 in 2012 (IEA, 2013). Despite these developments, the market share of those vehicles in 2013 was still 0.02% of the current car stock. Furthermore, it is to be expected that the strong governmental incentives start to phase out at a certain moment and that can harm the attractiveness of an EV (IEA, 2013; Nijland et al., 2012). Thus it seems that more work needs to be done to make the next step and make EV’s part of the mass market.
2.3 Meta-analysis on EV consumer studies
Since the focus of this study is to investigate how EV manufacturers are designing their value propositions to increase the likelihood of market acceptance, it is important to get profound insights in the perspectives of (potential) consumers. In this section the importance of the most studied new and old performance attributes is analyzed, next to consumer perceptions about the relative advantages or disadvantages of the EV attributes.
As Sierzchula, Bakker, Maat, and Van Wee (2014) mention in their article, the current generation of EV’s was introduced to the broader consumer market quite recently (i.e. the Mitsubishi i-MiEV came to the European market in 2010, Nissan Leaf is on sale in the United
States since 2010) and therefore hardly any empirical data is yet available. Therefore, most studies investigating consumer preferences are stated preference studies. Those are helpful to get insight in the level of importance and relevance that consumers attach to the (old and new) performance attributes of the disruptive innovation, in this case the EV. However, it should be noted that one of the critiques on these studies is that there is often a gap between how people respond to questions and what they actually do; this is also referred to as the attitude-behaviour gap (Lane & Potter, 2007). That makes it difficult to make reliable predictions about preferences and purchase intentions.
Consumer research has been performed since the introduction of EV’s in the 1990’s (i.e. Bunch, Bradley, Golob, Kitamura, & Occhiuzzo, 1993; Golob & Gould, 1998; Segal, 1995), but since then a lot of EV attributes have been improved, such as driving range and charging time. Therefore this section only reviews research performed after 2009. Another relevant criterion used for selecting consumer research studies is the type of car studied. To prevent misleading conclusions, studies investigating consumer preferences only for (plug-in) hybrid electric vehicles, such as Ozaki and Sevastyanova (2007), are not used since these type of vehicles have less constraints with driving range and are not that dependent on charging stations as the EV is. On the other hand, studies that include PHEV’s, HEV’s as well as EV’s, such as Caulfield, Farrel, and McMahon (2010), are included in this overview.
Thirteen studies have been analyzed in order to get profound insight in consumer preferencesii. The sample size and sample characteristics widely differ between studies, so making comparisons between the studies should be done with some prudence. Furthermore the studies were performed in several countries that all have different introduction policies, so this fact should also be taken in consideration when comparing results. The study by Sierzchula et al. (2014) is a welcome addition to those individual studies since it studies the main factors that influence adoption across 30 countries. Another point of concern when interpreting the results is that despite the fact that all studies investigate consumer preferences, not all studies investigate exactly the same attributes or study those in the same constellation. Considering the fact that the current generation of EV’s was introduced around 2009/2010, this diversity is inevitable. Table 2 presents the level of importance and the degree of relative advantage of twelve EV attributes, based on the findings in the thirteen studies. Some attributes were studied in almost every study (i.e. purchase price and pollution reduction), whereas others (i.e. driving comfort or internal space) were less frequently studied. Taking all those factors into consideration implies that
ii
A complete overview of the characteristics and results of those reviewed studies can be found in Appendix A.
conclusions in Table 2 should be cautiously interpreted, although they are considered to be useful for this thesis as they mostly represent current academic consumer research on EV preferences.
2.3.1 Importance and relative advantage of EV attributes
The initial purchase price of an EV is seen as a highly important attribute that is perceived as strongly disadvantageous compared to an ICE. Larson, Viáfara, Parsons, and Elias (2014) found that in the case of conventional cars purchase price is the fifth important factor, whereas for EV’s the purchase price is reported as a main barrier to adoption (Lebeau et al., 2012). The fact that EV market share would raise to almost 18% in 2018 if EV’s have a premium of 20% over ICE’s is hopeful, but an average price premium of over 40% is the reality today (Eggers & Eggers, 2011). Several authors state that high market shares for EV’s are not likely until initial prices significantly decrease (Egbue & Long, 2012; Peters & Dütscke, 2014). Driving range is also a highly important attribute that prevents adoption (Axen & Kurani, 2013; Egbue & Long, 2012; Eggers & Eggers, 2011; Hidrue et al., 2011; Kudoh & Motose, 2011; Larson et al., 2014; Lee, Wang, & Lee, 2014; Miao et al., 2014). In the studies of Hidrue et al. (2011) and Egbue and Long (2012) it was concluded that driving range is the most important concern for consumers. It is considered to be the most disadvantageous attribute (Eggers & Eggers, 2011) and the limited range would lead to serious range anxiety (the fear of becoming stranded) (Kudoh & Motose, 2011). Important to note is that a gap exists between the actual driving range needed and the desired driving range (Center for Sustainable Energy, 2014; Egbue & Long, 2012; Eggers & Eggers, 2011; Miao et al., 2014). For example, the study by Eggers and Eggers (2011) found that for 81.8% of the respondents the current driving range would capture their daily needs. Range anxiety is not only related to limited driving range but also to charging infrastructure and length of charging times (Daziano & Chew, 2012). The charging infrastructure is regarded as highly important to consumers and has a strong impact on the EV market share in a country (Sierzchula et al., 2014). Reliability is a highly important car characteristic, and charging infrastructure is one of the attributes (i.e. next to range, charging time) that influences the perceived reliability of an EV (Caulfield et al., 2010; Daziano & Chiew, 2012). The charging infrastructure of an EV is regarded as relative disadvantageous compared to an ICE and is also a main barrier to further adoption (Axen & Kurani, 2013; Bočkarjova et al., 2013; Hidrue et al., 2011; Peters & Dütscke, 2014; Sierzchula et al., 2014). The charging infrastructure not only brings negatively utility due to the weak density of the network but also due to the length of charging time (Egbue & Long, 2012; Eggers & Eggers, 2011). Interesting finding in the study of Bočkarjova et al. (2013) was that home charging was not perceived as inconvenient. However it should be noted that this was the only study that especially investigated this.
The attribute performance is not as important for the purchase decision as the previously discussed attributes. However, it is seen as a moderately important attribute because increased performance compared to an ICE noticeably increases the value of an EV, but this is not as influential as driving range or charging time (Hidrue et al., 2011). Performance was also in other studies not ranked as highly important (Caulfield et al., 2010; Lee et al., 2014), but other studies (2014) concluded that the level of performance has an effect on the perception of other (symbolic and hedonic) attributes (Miao et al., 2014; Schuitema, Anable, Skippon, & Kinnear, 2013). It should be mentioned that performance was not consistently measured, i.e. some studies used horsepower as indicator whereas others used top speed or acceleration. In no study performance is mentioned as an advantageous or disadvantageous attribute in comparison to an ICE, and thus leading to neutral valuation.
The internal space of the EV seems to be of moderate importance. Caulfield et al. (2010) found that internal space was ranked as fifth important attribute (of twelve) for the car purchase decision in general, and according to Lee et al. (2014) it was considered to be the least important attribute. A relevant conclusion of Kudoh & Motose (2011) is that consumers are sceptical about the loss of capacity compared to an ICE, especially for (sub) compact cars. The internal space is perceived as disadvantageous compared to an ICE (Peters & Dütscke, 2014). The (driving) comfort of an EV also seems to be of moderate importance, it was ranked as fourth important attribute that determines customer perceived value (Miao et al., 2014). Comfort was, after design, ranked as least appealing EV attribute in the study by Egbue and Long (2012). This is in line with the conclusion by Peters and Dütscke (2014) that the comfort is regarded as being disadvantageous compared to an ICE. At this moment it seems that design is not a decisively important EV attribute. In general, it is ranked as fourth (of twelve) important attribute for a car purchase decision (Caulfield et al., 2010). However, specifically for an EV design was ranked as sixth (of nine) most important attribute (Lee et al., 2014) and the style availability of an EV was ranked as tenth (of twelve) important barrier to EV purchase (Larson et al., 2014). The current design of an EV seems not to lead to relative advantage as it was considered to be the least appealing EV attribute (Egbue & Long, 2012). According to Larson et al. (2014) the safety of a car is considered to be the sixth important attribute, and that was also found to be the case for an EV (Caulfield et al., 2010). There is no clear indication that safety is seen as relatively advantageous or disadvantageous. In Egbue and Long (2012) only 1% of respondents indicated that EV safety was a main concern, whereas Peters and Dütscke (2014) conclude that safety is perceived as disadvantageous.
The fuel cost, caused by higher efficiency, is considered to be highly to moderately important. Results in the studies are somewhat mixed. Hidrue et al. (2011) concluded that fuel
cost savings is one of the most important attributes whereas in the study of Eggers and Eggers (2011) it was ranked as fifth important attribute. As Larson et al. (2014) point out, the reason for this could be that consumers are currently mainly focused on factors as purchase price and driving range and therefore consider fuel cost at this moment as less important. An EV has a relative advantage over an ICE for operation cost, which also encloses maintenance cost (Peters & Dütschke, 2014). This relative advantage was also signalled in other studies (Egbue & Long, 2012; Eggers & Eggers, 2011). Maintenance cost is of moderate importance for consumers, it is clearly seen as important but not as distinct as purchase price of driving range (Eggers & Eggers, 2011; Miao et al., 2014). According to Lane and Potter (2007) consumers tend to underestimate the (benefits of) maintenance cost. The ability of an EV to considerably reduce car pollution (CO2-emissions) is seen as being advantageous compared to an ICE. Caulfield et al. (2010) found that 80% of the respondents agreed (or strongly agreed) that EV’s are better for the environment. Reduction of use of petroleum and reduction of CO2-emissions is regarded as highly appealing (Egbue & Long, 2012). However, consumers tend to hesitate whether an EV is more sustainable over the entire life cycle than an ICE (Bočkarjova et al., 2013; Egbue & Long, 2012). Environmental performance is considered to be important, but it is consistently ranked after attributes as driving range, purchase price or charging infrastructure (Bočkarjova et al., 2013; Egbue & Long, 2012; Hidrue et al., 2011).
This review indicates that purchase price, driving range, charging infrastructure and charging time are seen as main barriers to adoption as these attributes are rated as highly important and disadvantageous compared to an ICE. Those attributes relate to the primary function of a car to provide reliable mobility. The perceived inferiority of those functional attributes and the main economical attribute (purchase price) also affects the perception of other attributes that have a more emotional or symbolic meaning, such as design, performance (i.e. acceleration) and sustainability (Schuitema et al., 2013). As long as the basic attributes are not perceived as being competitive with an ICE, the other eventual advantageous attributes, such as fuel cost and maintenance cost, will not be distinctive enough to foster adoption. Furthermore, the green benefits of an EV start to play a differentiated role when consumers find out that they do not have to compromise on basic features. Lee and Lovellette (2011) argue that in order to be competitive with an ICE the basic attributes should be perceived as comparable. Thus to equal an ICE it is of primary importance to change the perceived inferiority of most relevant attributes of the EV and the more moderate ones should at least be on the same level.
Table 2: Importance and relative advantage of EV attributes
Attribute Importance Relative advantage Importance
(High, Medium, Low) Relative advantage (+, 0, -)
Driving range Driving range is seen as a highly important attribute that is a strong barrier to adoption. Hidrue et al. (2011) found that consumers have the highest willingness to pay for increased range. Egbue & Long (2012) concluded that driving range limitation is the main concern for consumers to adopt an EV. According to Lee et al. (2014) driving range is the second most important attribute that determines purchase preferences, whereas Larson et al. (2014) found that it is the third most important barrier to adoption.
The current driving range is strongly disadvantageous compared to an ICE. Eggers & Eggers (2011) conclude that driving range is, after charging time, seen as most disadvantageous attribute of the EV (Eggers & Eggers, 2011).
Effect of current driving range of an EV is that it would lead to serious range anxiety (Kudoh & Motose, 2011).
High
-
Price The purchase price is seen as a highly important attribute for the purchase decision of a car. Purchase price is the third (of twelve) important attribute that affects the car purchase decision (Caulfield et al., 2011), whereas in the study of Miao et al. (2014) it is the second most important attribute that determines the perceived value of an EV. The adoption of electric vehicles is most sensitive to the purchase price (Lebeau et al., 2012). High market shares of EV’s are not likely until the initial price significantly decreases (Egbue & Long, 2012; Peters & Dütscke, 2014).
The purchase price of an EV is seen as inferior compared to an ICE. The high purchase price is reported as main barrier to EV purchase, whereas for conventional cars it was the fifth important factor of the total of eleven (Larson et al., 2014). After driving range consumers are most concerned about the cost of an EV (Egbue & Long, 2012).
High
-
Charging time
The current charging time of an EV is an important attribute for consumers. Consumers have, after increased driving range, the highest willingness to pay for increased charging time (Hidrue et al., 2011). Lee et al. (2014) found that
battery charging time has the highest relative importance for consumers. Consumers that have no experience with driving an EV regard charging time as a major drawback (Peters & Dütscke, 2014).
The charging time of an EV is seen as inconvenient compared to an ICE. In the study of Eggers & Eggers (2011) it was seen as most disadvantageous attribute of the. Consumer perceive home charging not as inconvenient, but time spent on public (fast) charging predominantly brings extremely high disutility (Bočkarjova et al. (2013). Only 32% of consumers see charging time as convenient compared to an ICE (Egbue & Long, 2012).
High
-
Charging infrastructure
Charging infrastructure is an important factor for the attractiveness of an EV. Egbue & Long (2012) found that charging infrastructure of EV’s is seen as third most important concern. Charging network density has a stronger impact on EV market share than financial incentives that reduce the purchase price (Sierzchula et al., 2014).
The charging infrastructure is one of the factors (i.e. also driving range, charging time) that influences the perceived reliability of the EV (Daziano & Chiew, 2012). Reliability was found to be the most important attribute EV (and car) attribute (Caulfield et al., 2010).
Charging infrastructure was regarded as relatively disadvantageous compared to an ICE (Peters & Dütscke, 2014). Lack of charging facilities out of home was, after driving range, considered to be the main barrier to EV adoption (Axen & Kurani, 2013).
High
Performance (acceleration/ horsepower/s peed)
Performance is seen as a moderately important attribute of an EV. Performance was ranked seventh of twelve attributes that affect purchase decisions, and individuals that favour an EV over an ICE are less concerned with performance (Caulfield et al., 2010).
Performance (horse power) was ranked as third important factor for purchasing preferences (Lee et al., 2014).
To date, there is no indication that performance (in terms of acceleration, horsepower and speed) is seen as disadvantageous or advantageous compared to an ICE. Faster acceleration noticeably increases the value of an EV, however this was ranked behind driving range and charging time (Hidrue et al., 2011).
Medium
0
Internal space Comparison of several studies reveals that internal space seems to be of moderate importance. Trunk space was considered to be the least important attribute of an EV (Lee et al., 2014). However, Kudoh & Motose (2011) found that consumers are sceptical towards the eventual loss of passenger capacity of (sub) compact cars. Internal space was considered as fifth (of twelve) important attribute for the car purchase decision (Caulfield et al., 2010).
Basic characteristics of EV’s (safety, comfort, loading capacity) are perceived as disadvantageous compared to an ICE (Peters & Dütscke, 2014).
Medium
-
Safety Studies show somewhat mixed results for the importance of safety, it is considered of medium importance. Safety was ranked as sixth important attribute for the purchase decision of a car (Larson et al., 2014), and specifically for an EV safety ranked as sixth important attribute (Lee et al., 2014). However, Caulfield et al. (2010) found safety to be the second most important attribute affecting the car purchase decision.
The mixed results of studies indicate that safety is perceived as neither advantageous nor disadvantageous. In the article of Egbue & Long (2012), 1% of respondents indicated that safety of the EV was their most important concern and 57% of respondents agreed that EV’s are safe whereas 26% was unsure.
Basic characteristics of EV’s (safety, comfort, loading capacity) are perceived as disadvantageous compared to an ICE (Peters & Dütscke, 2014).
Medium
0
(Driving) comfort
Comfort was ranked as fourth important attribute determining customer perceived value of an EV (Miao et al., 2014).
(Driving) comfort is not seen as a particular advantageous EV attribute. Comfort was, after design, ranked as the least appealing attribute of an EV (Egbue & Long, 2012), and Peters & Dütscke (2014) found that basic characteristics of EV’s (safety, comfort, loading capacity) are perceived as disadvantageous compared to an ICE.
Medium
-Design/style Design of the EV is not an important attribute to make the EV more attractive. Style/design is ranked as fourth (of twelve) important attribute affecting car purchase decisions (Caulfield et al., 2014). (Interior) design was ranked as sixth (of nine) most important attribute of an EV (Lee et al., 2014). The style availability of an EV was ranked as tenth (of twelve) important barrier to EV purchase (Larson et al., 2014).
It seems that design/style is currently not perceived as an advantageous attribute of the EV. Design/style was ranked as least appealing attribute of an EV (Egbue & Long, 2012).
Medium/Low
-
Fuel cost/efficienc y
Fuel cost/efficiency is seen as a highly to moderately important attribute. Fuel cost/operating costs were ranked as third/fourth most important attributes that determine the purchase decision of a car (Larson et al., 2014). Caulfield et al. (2010) found that fuel consumption was ranked as sixth important attribute (of twelve) affecting the purchase decision. For an EV, fuel cost savings is one of the most important attributes for consumers (Hidrue et al., 2011).
Fuel efficiency was perceived as fifth (of six) important attribute of an EV (Eggers & Eggers, 2011), and Miao et al. (2014) found that cost of use (representing power
Fuel costs of an EV are seen as advantageous compared to an ICE. Peters and Dütscke (2014) found that an EV has relative advantage compared to an ICE for operation cost (maintenance and operation cost). 40% of consumers were not sure whether EV’s are cheaper to drive than ICE’s, whereas 35% agreed or strongly agreed (Caulfield et al., 2010).
High/Mediu
consumption and maintenance cost) is seen as sixth (of ten) important EV attribute. This is a mixed result, a reason could be that consumers tend to ignore fuel savings and are mainly focused on the high purchase price (Larson et al., 2014).
Maintenance cost
Maintenance cost is seen as moderately important for consumers. Lower drive train operating cost and less maintenance cost were ranked as first and third (of six) important EV attributes (Eggers & Eggers, 2011), but in the study of Miao et al. (2014) cost of use (representing power consumption and maintenance cost) was ranked as sixth (of ten) important EV attribute.
Relative advantage compared to an ICE was found for operation cost (maintenance and operation cost) (Peters & Dütscke, 2014). The fact that EV’s have lower drive train operating costs was perceived as most advantageous attribute of an EV, whereas less maintenance cost was perceived as third important attribute (Eggers & Eggers, 2011).
Reduction of maintenance cost was seen as second most (of five) appealing attribute of an EV (Egbue & Long, 2012).
Medium
+
Pollution reduction / sustainability
Pollution reduction is seen as a moderately important EV attribute. In general, CO2 reduction was ranked as tenth of twelve attributes that affect car purchase decisions (Caulfield et al., 2010), and Larson et al. (2014) found that CO2- emissions was ranked as seventh important attribute (of eleven) for the purchase decision of a car. Specifically for an EV, Hidrue et al. (2011) concluded that consumers are more driven by increased driving range, shortening charging time and better performance than by the desire to help to environment by reducing CO2 emissions.
It seems that reduced emissions have considerable influence on EV adoption, however it was ranked in importance behind cost and performance (Egbue & Long, 2012). Bočkarjova et al. (2013) concluded that CO2 reductions do, for the early majority consumers, not increase the utility of an EV.
The EV is seen as being advantageous over an ICE with regard to pollution reduction/sustainability. Caulfield et al. (2010) found that 80% of consumers agrees or strongly agrees that EV’s are better for the environment than ICE’s. Reduction of use of petroleum and reduction of greenhouse gas emissions was seen as first and third appealing EV attribute, but 43% was not sure whether an EV is more sustainable than an ICE (Egbue & Long, 2012).
Medium
3. Literature Review
In order to answer the research question and formulate working propositions that help to answer the research question, this chapter provides a literature review about theory of disruptive innovations, business models, and value propositions.
3.1 Disruptive innovation
This section provides a description of the fundamentals of the theory of disruptive innovation and gives a review of the main critics as well as an overview of the relevant extensions that are helpful for answering the research question of this thesis.
The now widely used term disruptive innovation was initially called disruptive technology (Bower & Christensen, 1995; Christensen, 1997). The term disruptive technology was in 2003 replaced by the term disruptive innovation since the application of the theory encompasses not only technological products but also services and business models (Christensen & Raynor, 2003; Yu & Hang, 2010). The theory of disruptive innovation is extensively explained in the book entitled The Innovators Dilemma written by Christensen (1997). However, the basic principles of the theory of disruptive innovation stem from the Harvard Business Review article of Bower and Christensen (1995), in which they describe why leading firms often lose their market position when new and innovative technologies are commercialized in the market. A fundamental reason is that leading firms often pay too much attention to their current, profitable, customers instead of looking towards future demand. These firms advance their current technology incrementally on existing performance attributes that are already valued by customers, those technologies are named sustaining technologies. These established firms try to better serve their current customers and their current needs thereby aiming to increase profit margins. Therefore these firms allocate their scarce resources to these profitable markets and internal incentives are often focused towards serving current customers. A result of these efforts to optimally serve current customers is that these established firms tend to ignore technologies which do not directly meet the current needs of their customers and become blindfolded for spotting emerging technologies and markets. In fact, these firms “stay [too] close to their customers” (Bower & Christensen, p. 43), which makes it difficult for them to anticipate the disruptive technologies.
Disruptive technologies introduce different performance attributes (dimensions)iii from the one(s) which are valued by mainstream customers (Christensen, 1997). Next, the performance of these technologies along the traditional performance dimensions of established products is mostly inferior during the introduction of the technology. Therefore this new technology lacks
iii
attractiveness for the consumers on the mainstream market. However, a few fringe market customers, at the low end of the market, are committed to the new performance attributes. A characteristic of the products that stem from the disruptive technology is that “they are typically cheaper, smaller, simpler, and frequently more convenient to use” (Christensen, 1997, p. 264). As a result, these technologies open new markets, but because of the initial small market size and low profit margins established firms are not committed to these new markets and these firms keep their attention towards their current customers which are more profitable at first glance. The performance of the disruptive technology on traditional as well as on new performance dimensions improves over time. At a certain point in time the performance on traditional dimensions is good enough to satisfy mainstream customers, and these consumers also start to value the new performance dimensions. At this moment the disruption occurs; the performance demanded by mainstream markets is provided by the disruptive technology (Danneels, 2004). Figure 1 illustrates this disruption; the dotted line (the performance demanded by the market) and the lower line (performance provided by the disruptive innovation) intersect. Finally after the moment of market disruption, the disruptive technology changes the bases of competition since new performance dimensions start to play a role and determine consumers purchase criteria. As a consequence the disruptive technology then also brings a new value proposition to the market (Christensen, 1997).
A typical example of a disruptive technology is the case of the steel industry (Christensen, 1997). Originally, large integrated mill companies dominated the steel market and those firms wanted to maximize profits and served the large segment with steel of high quality. Those established firms did not pay attention to the bottom of the market as this unattractive segment had low profit margins. New firms entered the industry and used mini mills to produce steel from scrap to serve the least demanding consumers in the market. These customers were looking for bars of steel to bury in cement to reinforce it. Furthermore, these customers did not need the high quality, which was served by the integrated steel mills. Over time, the steel quality of the mini mills improved from being inferior to “good enough” and these firms started to also serve the mainstream market. The mainstream customers approved the quality of the mini mills and also appreciated the low costs of the product. The integrated mills were driven out of the mainstream market and had to put their attention towards the most demanding customers in the smaller upper market segment. But since this segment was small in size, competition became fierce and finally led several integrated mills to bankruptcy.
An important aspect of the theory of disruptive innovation is that despite the technological improvements, the new technology remains still inferior compared to the established mainstream technology as this technology incrementally advances as well (Yu & Hang, 2010). Figure 1
illustrates that the trajectories of the disruptive innovation (new technology) and the sustaining innovation (mainstream technology) do not intersect (Christensen, 2006). The incremental innovations make the sustaining innovation better and make it actually surpass the needs of the mainstream consumers. This is referred to as “performance overshoot” (Yu & Hang, 2010, p. 437). This performance overshoot is illustrated in Figure 1; there is a gap between the upper line (performance of the sustaining innovation) and the dotted line (the performance demanded by the mainstream market). This phenomenon is one of the preconditions for market disruption and is illustrated by the example of the U.S. landline network (Christensen, 1997; Innosight, n.d.). The performance of landlines was extremely good and reliable. The landline would even function perfectly in extreme emergency conditions, its performance surpassed consumer needs. Meanwhile, the mobile phone came to the market but delivered not the outstanding quality of the landline. However, consumers considered the mobile phone quality as good enough, especially because it also offered flexibility and convenience. Therefore an increasing number of consumers switched from using landlines to mobile phones and gradually the mobile phone took over the market.
Next to performance overshoot, the presence of diverging incentives between the existing product and the potential disruptive product is the second precondition for market disruption (Yu & Hang, 2010). An incumbent has often a strong incentive to invest its resources in the existing technology, which is already valued by the mainstream market. This is because the established market already has a large customer base, usually has higher profit margins and economies of scale can be exploited. At first glance this seems to be more attractive than investing in new disruptive technology that serves an initially smaller market and where more uncertainties exist. New entrants are not faced with the concern of whether to invest scarce resources in the existing product and market or into the potentially disruptive product and unchartered market.
3.1.1 Criticism and extensions of disruptive innovation theory
The theory of disruptive innovation has been cited extensively but is also often debated and criticized (see Table 3). The criticism concerns the lack of predictive value of the theory (Danneels, 2004; Govindarajan & Kopalle, 2006; Hardman et al., 2013), being too broad (Markides, 2006; Yu & Hang, 2010), holding a too straightforward view towards performance dimensions (Danneels, 2004), ambiguity regarding general characteristics and industry-specific characteristics of disruptive technologies (Danneels, 2004) and furthermore the presumed diffusion from the low end of the market is questioned (Govindarajan & Kopalle, 2006; Hardman et al., 2013; Schmidt & Druehl, 2008; Utterback & Acee, 2005). Due to this criticism, also additional thoughts have been developed that have strengthened the theory. Table 1 provides an overview of the main critics and additional thoughts.
Table 3: Overview of critics and additional thoughts on disruptive innovation theory.
Author(s) Criticism
Christensen & Raynor (2003)
Disruptive innovations can also diffuse from the “new-market” segment. In that case previous non-consumers are served.
Danneels (2004) The number of performance dimensions that affect customers’ choice is often numerous and these dimensions are interrelated.
Lack of clarity which characteristics of disruptive innovation are essential and which are industry-specific. This limits the external validity of the theory.
The theory of disruptive innovation is mainly based on retrospective analysis. As a consequence the theory lacks predictive value.
It is not clear at which point in time a technology becomes disruptive. Is that necessarily at the moment the technology displaces the incumbent’s technology?
Govindarajan & Kopalle (2006)
To qualify as a disruptive innovation in advance, several criteria have to be met.
Disruptive innovations can also diffuse from the high end of the market. Hardman et al.
(2013)
The original theory of disruptive innovation lacks clarity to define potential disruptive innovations.
A potential disruptive innovation meets three essential criteria, and at least two. The more criteria are met, the higher the level of disruption.
Incumbents can also come up with disruptive innovations.
Markides (2006) Business model innovations do not necessarily overtake the complete market as supposed by Christensen (1997).
Different kinds of innovations exist, i.e. technological innovation, business model innovation, product innovation. These innovations have different origins, effects, and managerial implications. Treating these innovations all as being disruptive innovations would be confusing.
Schmidt & Druehl (2008)
A disruptive innovation has impact on the old product but does not necessarily displace the total market.
Disruptive innovations can also encroach from the high-end of the market.
Disruptive innovations are not necessarily low-priced; they can even start out as expensive.
A sustaining innovation is mostly associated with an incumbent and a disruptive innovation with a new entrant, but they are not explicitly linked. A disruptive innovation can also be introduced by an incumbent.
Utterback & Acee (2005)
Disruptive innovations do not necessarily diffuse from the low-end of the market or from a new market. Disruptive innovations can also diffuse from the high-end of the market, even with a higher performance on traditional performance attributes.
Yu & Hang (2010) A disruptive innovation does not necessarily lead to complete market take over.
One of the points of critique towards the theory of disruptive innovation as developed by Christensen (1997) is that it is mainly based on retrospective analysis (Danneels, 2004). The managerial usefulness is challenged because it seems difficult to use the theory to predict beforehand whether or not an innovation will be disruptive. According to Danneels it is difficult to foresee which performance dimensions will be valued by the market and what technological performance levels will be finally achievable. In response, Govindarajan and Kopalle (2006) attempted to develop measures to predict disruptive innovations and came with a new conceptualization of disruptiveness of innovations in 2006. According to these authors several criteria signal that an innovation is potentially disruptive. First, it offers a different set of features, performance - and price attributes compared to the established product. Second, this combination of attributes is not valued by mainstream consumers since they consider several important traditional attributes as underperforming and/or perceive that the innovation is too high priced. Third, a small customer segment values the new performance attributes of the innovation. Fourth, the inferior attributes improve over time to a level that satisfies the mainstream market. What Govindarajan and Koppalle clearly add to the theory is that disruptive innovations not necessarily have to emerge from the low-end of the market by offering a cheaper price and more convenience but can also diffuse from the high-end of the market with a higher price. More recently, Hardman et al. (2013) contributed to better understanding how to recognize candidate disruptive innovations. Three criteria were identified that help to identify potential disruptive innovations. The first criterion is that the disruptive innovation disrupts market leaders. The companies that produce the disruptive innovation are other than current manufacturers of the sustaining innovation. However, the authors mention that exceptions exist and that disruptive innovations can also be brought to the market by incumbents self. Also other authors, such as Schmidt & Druehl (2008) and Charitou and Markides (2003), acknowledge that the disruptive innovation does not necessarily come from new entrants. The first criterion also implies that crucial component suppliers are different from component suppliers of the sustaining innovation. The second criterion is that a disruptive innovation is disruptive to consumers. The innovation has to
be used entirely different than the sustaining innovation and it has to add extra features and thus offers a compelling reason to buy when traditional performance attributes are seen as “good enough”. The third criterion is that the existing infrastructure is disrupted. This means that a new infrastructure is needed or the existing infrastructure is negatively affected. Hardman et al. (2013) acknowledge that not for each disruptive innovation all three criteria are met. However, they argue that when all three criteria are met, the level of disruption is the highest.
According to Danneels (2004), the diagram (see Figure 1) that displays that performance of the disruptive innovation and that of the sustaining innovation as well as the performance demanded by the market is one of the best analytical tools provided by Christensen (1997). However, Danneels (2004) states that Christensen (1997) used mostly cases in his theory where one or two performance dimensions played a role in consumers’ preferences. According to Danneels (2004) the number of performance dimensions associated with the product and the purchase decision is usually much higher. Next to this, those dimensions are often interrelated. This complicates the use of the diagram as an analytical tool. Danneels takes the automotive industry as an example. Cars have several relevant performance dimensions such as range, speed, acceleration, design, fuel efficiency, reliability, convenience of fuelling, initial price, noise, pollution and maintenance cost. For example, the level of performance on range influences the level of reliability and a high top speed and faster acceleration result in less fuel efficiency and shorter driving range.
Another initial aspect of the theory of disruptive innovation that has been questioned is whether a successful disruptive innovation always takes over the complete mainstream market and forces incumbents to move into niches. Danneels (2004) questions at what specific point in time an innovation is seen as disruptive. Is that at the moment the technology displaces incumbents and their technology? Or is this at the moment a certain percentage of the mainstream market switches to the disruptive technology? These questions seem to be relevant since several authors (Markides, 2006; Schmidt & Druehl, 2008; Yu & Hang, 2010) also admit that complete market take over does not always take place in the case of a disruptive innovation. Therefore Charitou and Markides (2003) argue that it is not explicitly necessary for an incumbent to respond to the disruptive (business model) innovation. The authors come up with several options to response, i.e. ignore the innovation if it too heavily conflicts with the current business, adopt the disruptive innovation while keeping the current business running or completely embrace the disruptive innovation and try to scale it up. However, Markides (2006) argues that for most firms it is extremely difficult to make disruptive and sustaining innovations coexist in the same firm and that directly makes clear why a disruptive innovation has a disturbing effect on incumbents.
Initially Christensen (1997) argued that disruptive innovations diffuse from the low end of the market upwards to the mainstream market. In 2003, Christensen and Raynor complemented the theory with a new category: new-market disruptive innovation. This segment consists of consumers who were previous non-consumers. This segment is often overlooked by incumbents as this segment is initially regarded as not profitable and too small. As said, Govindarajan and Kopalle (2006) complemented the theory by adding high-end disruptive innovations, which serve consumers with a high willingness to pay. This addition is in line with the findings of Utterback and Acee (2005). These authors also illustrate that disruptive innovations can enter from the high end of the market meanwhile having higher or lower performance on traditional and ancillary dimensions. Fundamental for high-end disruptive innovations is that they are often radical in nature and serve a small niche segment with a high willingness to pay. Those consumers are committed to the new performance attributes and are willing to make sacrifices on traditional attributes. This is also reflected in examples of (disruptive) innovations where the new attributes mainly offer environmental benefits. Those benefits are mostly applicable to the environment and not to the consumer itself (Ottman, Stafford, & Hartman, 2006). However, the niche consumers embrace the product since the environmental benefits give them social credibility or strengthen their self image. When firms want to move from the high-end niche towards the mainstream market, they have to make sure that the product is by mainstream consumers seen as at least competitive on the most important performance attributes and thus offers non-green benefits (such as efficiency, convenience or better performances) instead of causing perceived sacrifices. Once that is achieved, the new performance attributes are also valued and start to play a role in consumer purchase decisions. It is therefore that Danneels (2004) states that the core of a disruptive technology is that “it changes the bases of competition by changing the performance metrics along which firms compete” (p. 249).
In summary, disruptive innovations can diffuse from different segments in the market: from the high-end of the market, the low-end segment and from a new-market segment (see Table 4).
Table 4: Market segments from where the disruptive innovations emerge.
Segment Description
Low-end This segment perceives performance overshoot at the traditional product. The lower prices, increased convenience and ease of use of the product are valued.
New-market This needs of this segment were not served by the incumbent, the consumers were previous non-consumers.
High-end This segment values the new performance dimensions and generally has a higher willingness to pay for the new product.
