Roel Willems

I always enjoy Ben en James talking business strategy in their Exponent podcast (Ben Thompson from Stratechery with co-host James Allworth). Their last podcast about Zillow (#149 - Zillow and Sustaining Aggregation) has a specific part really standing out. At 14:14 minutes in, James explains the difference between sustaining and disrupting innovation. And does so in very clear language.

An excerpt from the podcast (emphasis is mine):

James: It think what would be interesting here, just to drive home the point for people. Is to think about a technology right now and how it could be applied as a sustaining innovation and a disruptive innovation. It’s been a less popular topic in the more recent Exponents but obviously, if you go back far enough, something we would talk a whole lot about is self-driving cars and the impact that’s going to have on society.

Now the technology is going to be the same if you are an existing manufacturer or something like Google, and maybe Google drops it into an existing manufacturer. This is a technology in and of itself business model agnostic, but you think about the incentives of different players and how they want to apply that technology. You give this to someone like BMW, an existing car manufacturer. And their instinct is to think; how can I take this technology and sell the vehicle that I have for more money as a result. And you get cool features like self-driving on Tesla or adaptive cruise control on BMW. ……… But it’s fundamentally a sustaining innovation. This is exactly why self-driving vehicle; people love to talk about Tesla’s disruptive, and maybe there is something in terms of the way they are thinking about building out a network and so on, this is true. But in terms of the actual vehicles, this is why Tesla vehicles are fundamentally not a disruptive product. They are using a technology to sell a better product to the existing people for more money. It is fundamentally the same business model. But take that to a very different context which is; something like Uber or Lift, doing ride sharing. And their primary cost of business is paying for the drivers in the vehicles. And that is disruptive to the existing car manufacturers. Uber and lift want to take the self-driving technology and they are not going to take that and trying to sell the vehicles for more money as a result of it. They are going to take the technology and use it to drive down the cost basis of offering ride sharing. The same technology applied in fundamentally different ways, one is sustaining, one is disruptive.

Highly recommend listing if you care about online/tech business strategy. James (and Ben) make a very compelling case that most (new) tech companies still running sustaining business models and most of them are in fact are no disrupters at all. Even if popular media will consistently describe them as “disruptive”.

Tesla is also a great explanatory case for disruption vs sustaining business models. The technology deployed by Tesla is very new (and Eldon’s vision maybe futuristic) but in its basic form, Tesla tries to build (better) cars and sell them for profit.

My personal take out is: technology in and on itself isn’t disruptive, the way technology is applied and to be more precise; the business model around it, make it disruptive for the status quo. Based on the business model behind technology/innovation can make it sustaining or disruptive.

I also like the Tesla example. It shows the difficulty faced when entering a market with new technology/innovation deployed in a sustainable manner. Tesla isn’t a tech company or disrupting the market. They are a car manufacturer in competition with other car manufacturers.

And as much as I like Tesla for what they did for electric driving¹, I do see many challenges in keeping ahead of the competition while solving the scalability issues they are facing.

Entering a market with a sustainable innovation is a rat race. And this is no different for Tesla. So how much time does it take Tesla to get their production efficiency on par with the traditional car manufactures? And how long will it take those manufactures to get to the same technology level?

Keeping in mind that traditional manufacturers very likely will be able to buy their way into newer and better technology at an increasing pace. Taking into account that there are a growing number of potential suppliers for self-driving tech (who haven’t shown interest in mass producing cars).

With every minute passing it will be easier for those traditional manufacturers to add more advanced technology into the already established line up of cars (which already are built at a massive scale).

So the biggest problem faced by Tesla isn’t how to build cars at scale. Given enough time I’m sure they will figure this out, other companies already have done so.

But the challenge for Tesla is keeping their edge over the competition. Keep outpacing other car manufacturers on a technology front long enough. Making the most innovative cars and reaching the hearts&minds (and share of wallets) from their potential customer. Which in turn will buy them (much needed) time to sort out car production at scale.

And if Tesla succeeds I still wonder what will differentiate Tesla when the rest of the market obtains the same level of technology.

You are basically betting on your ability to innovate at a faster pace then the incumbents can play catch up when competing on technology in a sustaining business model.

Which is all well and good, but clearly very different from disruption. Self-driving technology will make ride-sharing services cheap, practical and maybe even irresistible to consumers that they (potentially) will just stop buying cars altogether. Which would be very disruptive to the current market.

If this will happen at all, no one can tell. But I know that although innovative we shouldn’t be calling Tesla disruptive anymore.