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Tesla Motors: A case study in disruptive innovation

Senior Director, Cost Benchmarking Services, IHS Markit

Associate Director, AutoIntelligence, S&P Global Mobility

Tesla Motors broke the mold. Then reinvented it. Not only did Tesla Chief Executive and Chief Product Architect Elon Musk demonstrate that convention could be defied, he did it in an industry with 100-year-old traditions, norms, and processes. Of course, the auto industry has innovated in the past, but Tesla, which was founded in 2003, has pushed the envelope beyond what most automakers thought possible. The company's Silicon Valley-style "techpreneurship" enabled it to move faster, work more efficiently, and create groundbreaking new ideas around sustainable mobility and automotive technology.

After all, this is Musk's modus operandi. In 1998, he disrupted e-commerce by creating a widely deployable and secure payment platform called PayPal. And in 2002, he launched SpaceX, a company that designs, manufactures, and launches rockets and spacecraft. The company's goal is to enable people to live on other planets. Musk, himself, wants to "die on Mars" and wholeheartedly believes it will be possible.

He is also a lightning rod in the debate around mass transit with an idea some critics refer to as vaporware. Dubbed Hyperloop, Musk's idea is to create a high-speed transportation system that is immune to weather, impossible to crash, uses little energy and recaptures most of what it uses, and travels twice the speed of today's commercial aircraft. He believes the concept could move people from Los Angeles to San Francisco in just 35 minutes. Oddly, he has no interest in making the Hyperloop a reality but, rather, is putting his ideas out there for others to take and improve the human experience.

With Tesla, Musk is focused on disrupting mobility. As of mid-June 2014, the company has released all of its patent holdings, claiming that open-source innovation is more powerful than anything one company could do individually. While IP lawyers cringed, Wall Street applauded, sending Tesla's stock price up 14% to $231 a share. This radical approach to innovation runs deep, as evidenced in the technology and design approach of the company's flagship Model S, its $69,900 luxury car.

In August 2014, the IHS Technology Teardown Team purchased a used 2013 Model S and took it apart to see what made it tick. The team dismantled 12 systems and cataloged every part within each system. The teardown included both the electronics systems inside the car's interior and the drivetrain (see sidebar "What's inside the Model S?").

Technical differences

The teardown confirmed that the Tesla Model S is unlike anything else on the road. A massive plot of real estate in the center stack is dedicated to a 17-inch touch screen infotainment system, which became—since its production launch in 2011—an instant industry benchmark for automotive display integration. There is room left for only two physical buttons on the console—one for the hazard lights and one for the glove compartment release (see sidebar below).

The technical specifications are impressive. The 17-inch screen is a Chi Mei Optoelectronics display with 1920 x 1200 WVGA resolution that includes a projected capacitive touch screen—the same technology employed in many smartphones and tablets. The system runs on a Linux-based operating system, offers Garmin navigation with Google Earth overlays, and computes at speeds still besting most other systems available today with its NVIDIA Tegra 3 processor combined with 2 GB of DDR3 SDRAM.

The system includes an embedded 3G modem from Sierra Wireless that runs broadband data off AT&T's network. It can receive software updates over the air and controls all of the functions of infotainment, audio, navigation, Bluetooth phone, HVAC, and even vehicle settings like windows, door locks, sunroof, trunk release, traction control, headlights, steering, and suspension settings.

In addition, a 12.3-inch fully digital instrument cluster sits directly in front of the driver with its own NVIDIA Tegra 2 processor, which it uses to handle the diverse array of graphics, content, and redundant outputs for the driver. About the only "familiar" driver components are the steering wheel, pedals, and transmission shifter—the latter actually borrowed from the Mercedes-Benz parts bin.

Manufacturing differences

The system is clearly in a class of its own. However, with all of these high-end specifications, how can Tesla sell this as a standard feature in every Model S? More disruption.

The company chose to change up the supply chain and borrow from the electronic manufacturing services (EMS) model of production that is standard practice in the consumer electronics industry. In this respect, Tesla is closer to being a technology company than a traditional automobile maker. Much like how Apple designs the iPhone and then employs Foxconn to build it, Tesla contracted with a leading EMS provider to build its center infotainment system, instrument cluster, and several other systems in the Model S. This model required Tesla to internalize much of the hardware and software development, as well as the systems integration work. Given that Tesla has hired its engineers from all over Silicon Valley and beyond, this was not a problem.

The Silicon Valley culture and the EMS approach to manufacturing were a clear advantage for Tesla at one time but no longer make it unique. The EMS model is expanding in the automotive industry, and the likes of Compal, Flextronics, Foxconn, and Jabil are working with brands including Chrysler, Daimler, Ford, General Motors (GM), Jaguar, and Volkswagen.

However, the transition to the EMS model can be problematic. Ford outsourced the entire infotainment architecture for the development and deployment of MyFord Touch in 2011 to an EMS provider. The initial system had technical software problems that required Ford to issue several software upgrades. This cost tens of millions of dollars, contributed to a poor customer experience, and caused perception problems for Ford, from which the company has only recently recovered.

Development differences

In the last decade, virtually every automaker has relocated portions of vehicle and vehicle technology development to new R&D facilities in the San Francisco-to-San Jose tech corridor. In fact, some early innovators predate Tesla: BMW, Daimler, and Volkswagen set up shop in the Valley in the mid-1990s, and Honda opened its first office in 2003, the same year Tesla was founded.

The reasons for doing so now go beyond manufacturing. Automotive OEMs are co-locating with the likes of Apple, Cisco, Facebook, Google, HP, Intel, NVIDIA, and Oracle to help speed the pace of innovation. This involves accelerating the pace of hardware, software, services, and applications development but also rethinking the process of design.

The development speed of a typical mobile device is often six months or less. Compare that with the design-to-production timing for a new vehicle of approximately four years and it's no wonder car-buying consumers have been underwhelmed by standard in-vehicle electronics. Even today, consumers can find navigation and infotainment systems designed in 2008 for sale in model-year (MY) 2014 vehicles. To give an idea of how ancient that is in "tech-years," BlackBerry held more than 50% market share among smartphone users in 2008. Remember BlackBerry?

Tesla has had a competitive advantage over auto industry rivals in design innovation since day one. Located in arguably the center of the world for technological innovation, Tesla was able not only to construct its vision of mobility in Silicon Valley, but also recruit its employees from many of the leading technology companies to design and build the car there as well. All other OEMs grasping for automotive technology leadership had to learn the culture of Silicon Valley, figure out how to adapt to it, and dissolve the century-old "way of doing things." Tesla was born into it.

Service differences

With Tesla's technology come some very important services. Perhaps at the top of the list is the convenience of over-the-air (OTA) software updates for vehicle recalls, which Tesla has made free and standard for Model S owners. This functionality has, in turn, created plenty of positive press for the company.

It all starts with the connection. The 3G connection in the Tesla infotainment system is already providing this solution via relatively old wireless technology. Since the modular and flexible hardware architecture of its infotainment system allows for mid-cycle technology enhancements, IHS expects Tesla will soon debut true 4G LTE connectivity in its vehicles. The added bandwidth will further enhance the OTA update service, as well as the rest of the services the Model S offers.

IHS forecasts a 60% global penetration rate on embedded cellular connections in cars by 2022, with 4G LTE bandwidth comprising roughly 60% of that market. GM and Audi have actually beaten Tesla to market on this specification as both OEMs already have 4G LTE cars on the road now.

One central purpose of this mass-market vehicle broadband adoption is to accommodate FOTA (firmware over the air) and SOTA (software over the air). Tesla has already deployed this function in part because it allows the company to provide vehicle service without needing to charge (or possibly pay) for service bay labor.

Consider Tesla's recall of the Model S for overheating charger plugs in January 2014. The day the recall notice came out, Tesla had all 29,222 Model S vehicles updated wirelessly and running the new safer version of the software. Ironically, around the same time, GM had a similar fire-related safety recall issued that also required a software update. Despite all of its vehicles having standard OnStar telematics, owners were required to take their cars into a dealership for the software update, costing GM a warranty labor expense on all 370,000 recall service appointments.

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Volume aside, Tesla paid much less on a per-vehicle basis than GM, simply by providing a software update procedure that has been on personal computers for more than two decades and mobile phones since before the BlackBerry.

IHS sees the OTA software trend continuing strongly. With vehicles like the new Mercedes-Benz S-Class claimed to have over 65 million lines of code—10 times that of the Boeing 767 Dreamliner—the automotive industry stands at a crossroads. Software recalls are about to become a major problem, one that will be expensive if this type of technology is not broadly deployed.

As of February 2014, over 530 software-related recalls had been reported since 1994 (see figure below). Among these, 75, or 14%, were issued for MY 2007 alone, with over 2.4 million vehicles affected. Numerous questions arise from the variation in volume by model year—not the least of which is, why have recalls for MY 2007 been so numerous? There are likely several reasons for this spike:

MY 2007 had the last large-sales volume before the economic recession plunged US car purchases from approximately 16 million to 10 million in 2010.

Many new electronics systems were added in MY 2007 for infotainment, advanced driver assistance systems, and core auto control systems, which increased the amount of software in the typical car.

MY 2007 involved recalls of 75 vehicles, the most of any model year. Many automotive OEMs had multiple model recalls with software updates. Toyota had especially high recall rates that included software updates.

It is in this context that IHS expects FOTA and SOTA to be enabled in over 22 million vehicles sold worldwide in 2020 alone, growing from approximately 200,000 vehicles in 2015. Major deployment will begin in 2017. In the meantime, Tesla will continue to leverage its first-to-market status with FOTA and SOTA to help lower overall costs to the end user and improve unit margins on each additional Model S sold.

Powertrain differences

The heart of Tesla's Model S is its electric propulsion system, which includes a battery, motor, drive inverter, and gearbox. The battery is a microprocessor-controlled lithium-ion unit available in two sizes; spending more buys more range and more power. The induction motor is a three-phase, four-pole AC unit with copper rotor. The drive inverter has variable-frequency drive and regenerative braking system, while the gearbox is a single-speed fixed gear with a 9.73:1 reduction ratio. The battery of each Model S is charged with a high-current power inlet, and each vehicle comes with a single 10kW charger and mobile connector with adapters for 110-volt and 240-volt outlets as well as a public charging station adapter.

This powertrain package allows Tesla to deliver a longer driving range than any other EV maker—about 200 miles versus just under 100—plus acceleration and driving performance similar to or better than a traditional gasoline-powered vehicle. While several automakers offer EV powertrains—Nissan's Leaf and Chevrolet's Volt, for example—none matches Tesla's commitment to EV development. And as a clean slate company, Tesla has had the advantage of developing an entirely new powertrain and supply chain without the hindrance of existing dealerships, physical plants, or inventory.

Other EV products use lithium-ion batteries, but in lower kWh and using fewer, but larger, battery cells. For example, the Nissan Leaf uses a 24kWh battery, with 192 cells and EPA-estimated range of 84 miles. The Model S' 85kWh battery has more than 7,100 cells, allowing it to move greater weight faster and with longer range.

To address range anxiety, Tesla has made a significant investment developing charging stations in the US (112 to date, according to the Tesla website), Europe (63), and Asia (17). These supercharger stations can swap out the battery in less time than it takes to fill a tank of gas. Owners must come back and swap again for their original battery. Nonetheless, this helps alleviate drivers' worries about becoming stranded on long trips.

Tesla is working to drive battery costs down in anticipation of the launch of its mass-market, $35,000 Model 3 EV sedan, which is slated to debut in 2017. To that end, the company recently announced a new $5 billion "gigafactory" battery plant in Nevada in partnership with Panasonic. It will reportedly handle all elements of battery cell production, from raw material to battery pack, rather than only battery pack assembly. And Tesla intends to sell its OEM batteries for non-automotive applications, which will enable it to increase production volume and reduce unit cost.

What does the future hold?

• Created a fun-to-drive electric roadster. Check.
• Leveraged the lessons to scale-up to a full-luxury sedan. Check.
• Disrupted the luxury car market and, according to IHS Automotive data, attracted "conquest" buyers from the likes of BMW, Mercedes, and Lexus, not to mention Toyota and other volume brands. Check.
• Diverged from entrenched supply chains to develop technology in-house and lowered per-unit development costs for an industry-leading infotainment platform. Check.
• Addressed a software-related vehicle safety recall in one day for almost 30,000 cars. Check
• Created a company destined to influence the industry as a whole and did so while pleasing Wall Street. Check.

Tesla has established benchmarks for infotainment system hardware, software flexibility, and manufacturing supply chain. The company innovated powertrain design, which has proven both robust and viable for everyday use. And it has received plenty of accolades for aesthetic design from the automotive media. The result is that "made in Silicon Valley" is no longer roundly dismissed as an option for an automotive OEM.

So what's next for Tesla? How does it maintain its leadership in technology development? Has it created a sustainable competitive advantage? Can it deliver on promises of a new luxury crossover with the Model X and a new high-volume EV competitor with the Model 3? Will Tesla be able to steal market share from not only luxury marques, but also from higher-volume brands?

Going forward, Tesla faces five distinct challenges:

Consumer demand. Perhaps the most significant is consumer acceptance of electric vehicles. In the first eight months of 2014, EVs accounted for only 0.7% of the 11.2 million light-vehicle sales in the US. Even Renault-Nissan CEO Carlos Ghosn, a staunch supporter of EVs, last year acknowledged Renault-Nissan would miss its original 2016 target of selling 1.5 million EVs by four to five years.

Dealerships and service. Today, Tesla's direct-sales model is illegal in most US states. As Tesla attempts to go mainstream, it will need the legal restrictions lifted or be forced to adjust its model. Further, as vehicles age and the numbers sold increase, there will be maintenance issues that cannot be handled by OTA software updates. Tesla will need to build out an after-sales service network that is robust enough to handle the demand.

Marketing. To date, demand for the Model S exceeds supply. But as the company targets the mass market with the Model 3 and aims for 500,000 units sold in 2020, it will need to beef up its marketing. Tesla's Apple Genius-bar-inspired dealership model has worked for the affluent early adopters, but can it be scaled up to meet its sales targets?

According to IHS registration data, 51.8% of all Tesla buyers have annual household incomes over $150,000. By comparison, the percentage of Chevrolet Malibu buyers with a household income higher than $150,000 is only 6.5%. Tesla will need to create a marketing strategy that targets economy-car consumers, who are notably different than those who buy the $80,000 to $100,000 Model S.

Production Boosting output will likely mean growing pains for Tesla as it transitions to a high-volume production model. How the company manages the transition will determine Tesla's near-term future. Of course, many automakers have had difficulties ramping up new plants or launches and yet overcome the challenges in the longer term. While growing pains are to be expected, there is no reason to believe Tesla does not have the capacity to become a volume manufacturer.

Innovation. Tesla has already made a name for itself around technology adoption and innovation. But it will be challenged, as all first movers are, to maintain that lead and continue to push the boundaries with future products. Assuming the gigafactory and its supply chain allow Tesla to make a mass-market offering and keep its infotainment stack as an industry benchmark, the company's next move will be automated driving. Musk has already stated that Tesla will "hit the market" by 2017 with a partially self-driving vehicle. With many other OEMs targeting this time frame as well, Tesla might not be as disruptive in automated driving as it has been in infotainment design and sustainable mobility

But then again, it might surprise the market and break loose another game-changing product or technology before the rest of the automotive industry is ready—because that's how Silicon Valley works.

Tesla's user-experience focus sets it apart

We live in an era of smartphone ubiquity. So we are routinely disappointed when we get into our cars and are forced to make do with resistive touch screens (if we are lucky) or LEDs and vacuum fluorescent displays controlled by dials and buttons (if we are not). Tesla understands the importance of smartphone ubiquity to modern life, so it's no accident the transition is seamless when one climbs into a Model S

That is not the case with the majority of comparably priced vehicles from other auto manufacturers. Indeed, many of the recent automotive infotainment systems that the IHS Teardown Team has analyzed feature relatively small displays (typically 7-inch diagonal size or less) and low resolution (typically 800 x 480 WVGA or less).

Then there's the touch technology. Many of the touch screens IHS tears down in automotive head units are using resistive technology. Combine these legacy technologies with often underpowered processing chips and proprietary software and you often end up with a user experience that is unfamiliar, not intuitive, and has a lot of "latency" issues (meaning it's slow).

At the center of the dashboard in the 2013 Model S is the Tesla Premium Media Control Unit, which blows away all of the head units we have seen in specs, not to mention sheer size. The 17-inch diagonal display with touch screen makes for a very large assembly when removed from the dash. Inside the unit are many subassemblies, which are all modular, giving Tesla numerous design options for future models.

Several of the printed circuit board (PCB) assemblies, including the main assembly, feature Tesla Motors logos and copyrights, meaning that they are all designed and controlled by Tesla. In and of itself, this is unusual, as we find that most automotive OEMs entrust and outsource the bulk of their head unit designs to third parties such as Harman

Automotive, Panasonic, Alpine, Denso, Pioneer, and others. Tesla is thus designing and controlling the bill of materials down to the component level. This is closer to Apple's design-and-build model than it is to other automakers.

Such an approach affords Tesla leverage in the supply chain, more direct control over the finished product, and ultimately more control over the user experience. It also gives Tesla a potential performance and technology edge that others might find difficult to quickly emulate, as so much of the design is done in-house at Tesla rather than by the head unit suppliers.

Many other PCB assemblies are modular and come from third parties, such as the processing PCB, which is a turnkey solution from NVIDIA, and the air interface module, which is from Sierra Wireless.

All told, there are 10 PCB assemblies in Tesla's media control unit. The modularity of this design is not unusual for automotive electronic systems and allows Tesla many options. If Tesla wants to upgrade the processing power or change the air interface module, it may be possible to achieve this more easily and with less redesign than if all of the functions were integrated into fewer PCB assemblies. In this sense, modularity of design, rather than aggressive integration, has always been an automotive electronic standard. Not only does modularity give automotive designers many upgrade options, it improves reparability.

The center console of the Tesla Model S is dominated by a 17-inch touch screen infotainment system, which is an industry benchmark for automotive display integration.

What's inside the Model S?

In August 2014, IHS bought a second-hand 2013 Tesla Model S. The Los Angeles-based IHS Technology Teardown Team set to work pulling it apart to examine all primary systems inside the car. The team has cataloged every component and developed a detailed bill of materials for each system that includes the technical specifications, cost, and manufacturers of the components. In addition, the team estimated the labor and manufacturing cost of each system.

The 12 systems analyzed by the IHS Teardown Team comprised the following:

• Premium Media Control Unit
• Instrument Cluster
• EV Inlet Assembly
• High-Voltage Junction Box
• Battery Charger
• Thermal Controller
• Liftgate Left Hand Taillight
• Power Liftgate Module
• Body Control Unit
• Sunroof Control Unit
• Passive Safety Restraints Control Module

Mark Boyadjis, Senior Analyst, Infotainment and Human-machine Interface, IHS Automotive Andrew Rassweiler, Senior Director, Teardown Services, IHS Technology Stephanie Brinley, Senior Analyst, Americas, IHS Automotive Posted 7 October 2014

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Disruptive Innovation Theory: What It Is & 4 Key Concepts

• 15 Nov 2016

Disruptive innovation has been a buzzword since Clayton Christensen coined it back in the mid 1990s to describe the way in which new entrants in a market can disrupt established businesses. It’s gained even more prominence in the past two decades as companies like Uber, Lyft, Etsy, and countless other startups have emerged with a goal of changing their respective industries .

For a term thrown around so frequently, it’s surprising how often it’s misunderstood. What does “disruptive innovation” actually mean, and how can today’s businesses—both the disruptors and the disrupted—form an understanding that will allow them to spot potential opportunities and threats?

This post explores disruptive innovation and offers four key concepts that can help you apply the theory to your business.

What Is Disruptive Innovation?

According to Christensen, disruptive innovation is the process in which a smaller company, usually with fewer resources, is able to challenge an established business (often called an “incumbent”) by entering at the bottom of the market and continuing to move up-market. This process usually happens over a number of steps:

• Incumbent businesses innovate and develop their products or services in order to appeal to their most demanding and/or profitable customers, ignoring the needs of those downmarket.
• Entrants target this ignored market segment and gain traction by meeting their needs at a reduced cost compared to what is offered by the incumbent.
• Incumbents don’t respond to the new entrant, continuing to focus on their more profitable segments.
• Entrants eventually move upmarket by offering solutions that appeal to the incumbent’s “mainstream” customers.
• Once the new entrant has begun to attract the incumbent business’s mainstream customers en masse, disruption has occurred.

4 Tips for Understanding the Theory of Disruptive Innovation

1. not all innovation is disruption.

According to Merriam Webster , disruption is "to cause (something) to be unable to continue in the normal way: to interrupt the normal progress or activity of (something)." If this definition is applied to business, then really anything that enters a market and is successful can be seen as "disruptive." At least that’s how the term is often used today.

But this isn’t how Christensen defined it when writing in the 1990s.

An article by Ilan Mochari discusses the misuse of the word disruption when referring to business. As he clarifies, disruption is "what happens when the incumbents are so focused on pleasing their most profitable customers that they neglect or misjudge the needs of their other segments."

2. Disruption Can Be Low-End or New-Market

Disruption can come in different varieties: Low-end disruption and new-market disruption.

• Low-end disruption refers to businesses that come in at the bottom of the market and serve customers in a way that is "good enough." These are generally the lower profit markets for the incumbent and thus, when these new businesses enter, the incumbents move further "upstream." In other words, they put their focus on where the greater profit margins are.
• New-market disruption refers to businesses that compete against non-consumption in lower margin sectors of an industry. Similar to low-end disruption, the products offered are generally seen as "good enough," and the emerging business is profitable at these lower prices.

The main difference between the two types lies in the fact that low-end disruption focuses on overserved customers, and new-market disruption focuses on underserved customers.

3. Disruptive Innovation Is a Process, Rather Than a Product or Service

When innovative new products or services, such as Apple’s iPhone or Tesla’s electric car, launch and grab the attention of the press and consumers, do they qualify as disruptors in their industries?

In the Harvard Business Review , Christensen cautions that it takes time to determine whether an innovator’s business model will succeed. He cites Netflix as an example that didn’t threaten Blockbuster at first; its DVDs-by-mail service didn’t satisfy customers who wanted to get their hands on the latest new release instantaneously. But in shifting to an on-demand streaming model, Netflix siphoned away Blockbuster’s core users before the company could stage an adequate response.

Will the next new launch be a flash in the pan, or a formidable competitor? Keeping a close eye on the process, and being able to determine whether that product or service is evolving its business model to better serve customers’ needs, will help you evaluate the extent of the threat.

4. Choose Your Battles Wisely

If you’re currently an incumbent, you want to be on the lookout for potentially disruptive emerging businesses . It’s important to note, however, that not all new entrants will prove to be disruptive.

Every fire doesn’t need to be extinguished, nor will it threaten your house. If you treat every fire as dangerous because someone else calls it “disruptive,” you’ll soon discover it’s not possible to put every fire out and, in the interim, will waste your resources. The fires you have to worry about are the ones that truly threaten you. Understanding the correct meaning and application of the word “disruption” will help you identify and target true threats.

On the other hand, new entrants can also benefit from achieving a better understanding of disruption, as it will help you identify opportunities to start or scale your business. An understanding of disruption, coupled with Christensen’s other theory of "Jobs to be Done," can help you create products and services that will be desired by customers and, ideally, left alone by incumbents.

Understanding the Impact of Disruptive Innovation

Whether you're an incumbent intent on defending your market share and profits or you are a new entrant seeking to grab a piece of the pie, understanding disruptive innovation as a process can offer valuable insights you can incorporate into your business plan .

Do you want to learn more about disruption and explore other theories from Professor Christensen? Our six-week online Disruptive Strategy course will equip you with the tools, frameworks, and intuition to develop executive-level strategy and organize for innovation.

This post was updated on August 30, 2019. It was originally published on November 15, 2016.

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Enabling disruptive innovations: a comparative case study of Uber in New York City, Chicago and San Francisco

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Nicholas Occhiuto, Enabling disruptive innovations: a comparative case study of Uber in New York City, Chicago and San Francisco, Socio-Economic Review , Volume 20, Issue 4, October 2022, Pages 1881–1903, https://doi.org/10.1093/ser/mwab056

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Much research on disruptive innovations has focused on firms that disrupt existing industries. Yet, regulators and lawmakers are instrumental in containing or enabling market disruption, in ways that are less understood. This article examines taxi industries in New York City, Chicago and San Francisco between 2010 and 2014 to better understand the role of regulators and lawmakers in enabling Uber to disrupt these industries. Relying on 142 interviews, ethnographic observations and primary source documents, I show that regulators and lawmakers used two strategies in responding to Uber: blocking and incorporating. Blocking refers to measures that stop a firm from entering the industry. Incorporating refers to adding, subtracting or modifying regulations to align with an innovative firm’s practices. I identify three incorporating strategies: horizontal venue shifting, vertical venue shifting and reinterpreting existing regulations. Analyzing these strategies more clearly illuminates regulatory change mechanisms and lawmakers’ and regulators’ role in enabling disruptive innovations.

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Netflix & Blockbuster – Case Study Of Disruptive Innovation

Written By:

Post Date – Update:

It’s rare for a week without me tuning into Netflix to watch something or at least browse its offerings to find my next binge-worthy series. I know I’m not alone in this habit; countless others probably engage in the same routine.

That’s why examining the Netflix and Blockbuster case study is so enlightening. It offers a riveting look at how disruptive innovation can permanently alter the digital landscape. One company survived and flourished, while the other faded into business irrelevance. As we delve into key learnings from this case study, we also discuss what contemporary companies can do to avoid meeting the same fate as Blockbuster.

Table of Contents

Understanding disruptive innovation, netflix’s early challenges, low-end footholds, new market footholds, blockbuster’s missed opportunities, the importance of transformation in business, 1. adapt or perish, 2. recognize low-end footholds, 3. embrace technology early, 4. customer-centric approach, 5. stay ahead through innovation, 6. use data intelligently, 7. anticipate future trends, 8. understand market signals, 9. transformation is continuous, listen to our podcast about streaming wars chronicles: the netflix & blockbuster case study of disruptive innovation below or by clicking here., 5 questions to ask when considering a solid wood furniture manufacturer, what is solid wood vs. engineered wood, hardwood solids furniture, what does the term mean, netflix & blockbuster: a case study in disruptive innovation.

One of the most compelling case studies in disruptive innovation is the saga of Netflix and Blockbuster. This story provides valuable insights into how Netflix managed to upend the industry, positioning itself as a dominant force in today’s digital landscape.

Continue reading as we delve deeper into the disruptive journey of Netflix and Blockbuster.

Digital disruption has been a game-changer in entrepreneurial strategies since the late 20th Century. Contrary to popular belief, disruptive innovation is not the same as mere creativity.

While creating a fuel-efficient engine might draw a new consumer base, the minor variations from standard engines do not categorize it as disruptive. True disruption focuses on targeting sectors that established companies overlook or revolutionizing an existing system.

This case study delves into how Netflix applied disruptive innovation to dethrone Blockbuster in the home entertainment industry.

Brief History Of Netflix

Understanding its history is crucial to grasp the scale of Netflix’s disruption fully. Netflix was founded in 1998 by Reed Hastings and Marc Randolph in Scott’s Valley, California, with an initial investment of $2.5 million from Hastings.

Opting to distribute DVDs rather than bulky and fragile VHS tapes, Netflix started with 30 employees and 925 available titles. Over time, the company introduced a monthly subscription model, eliminating the single rental system. It positioned itself as a consumer-friendly alternative to Blockbuster’s model, often including late fees and hidden charges.

Netflix wasn’t always the giant we know today. In 2000, the company even offered to sell itself to Blockbuster for $50 million—an offer that Blockbuster refused.

Following the dot-com bubble burst and the 9/11 attacks, Netflix was forced to lay off two-thirds of its staff. However, the proliferation of affordable DVD players and an IPO in 2002 helped the company regain its footing.

Disruptive Strategies Used By Netflix

Netflix employed various disruptive approaches to outmaneuver Blockbuster in the market. Continue reading to uncover two of these critical, innovative strategies.

Netflix initially targeted lower-end markets that Blockbuster ignored. It presented itself as a hassle-free alternative to Blockbuster by eliminating late fees. This allowed Netflix to grow its customer base steadily.

The company focused on improving service speed and video quality, gradually becoming a preferred choice over Blockbuster for many consumers.

Netflix further disrupted the industry by introducing DVDs and streaming services. Their easy-to-use online interface and innovative recommendation algorithm provided an experience Blockbuster couldn’t match.

They also invested in creating original content, widening their market appeal, and keeping audiences engaged.

Blockbuster’s business model worked well for a time, but their complacency in innovation left them vulnerable to disruption. They continued to rely on an aging model that included late fees and did not adapt quickly enough to new technologies.

When they finally attempted to catch up, it was too late, and they were already in decline.

While disruptive innovation is crucial for capturing market share, continual transformation is essential. Netflix’s willingness to adapt allowed it to evolve from a DVD rental service to a streaming giant.

Conversely, Blockbuster’s resistance to change led to its downfall. The case of Netflix vs. Blockbuster is a compelling example of how disruptive innovation can reshape industries and why companies must adapt to survive.

Lessons From The Netflix & Blockbuster Case Study On Disruptive Innovation

The evolution of Netflix and the decline of Blockbuster serve as an epic tale of disruptive innovation in the business landscape. This case study provides insights into strategic decision-making and offers lessons on how to deal with market transformation.

Here are ten key lessons companies can learn from this saga.

The inability of Blockbuster to adapt to emerging technologies and new consumer preferences, especially around the convenience of movie rentals, was a critical downfall. Companies must be agile and willing to adapt their business models to remain relevant.

Netflix capitalized on the aspects of the market that Blockbuster ignored, primarily around consumer annoyance with late fees. Companies should be cautious not to ignore market segments that might seem less profitable or secondary, as they may become entry points for disruptive competitors.

Netflix took a risk by betting on DVDs and online streaming. Companies should look towards emerging technologies as opportunities for future growth and be willing to invest early, even if the technology hasn’t yet reached mass adoption.

Netflix’s recommendation algorithm, easy-to-use interface, and concern for customer experience made them a consumer favorite. Companies should place the customer at the center of their business model and continually strive to improve the user experience.

Netflix invested in original content to differentiate itself further from Blockbuster and new competitors. Companies must continuously innovate and expand their offerings to keep customers engaged and deter potential entrants.

Netflix has been a pioneer in utilizing big data to understand customer behavior and preferences. Companies should leverage data analytics to make more informed decisions and to tailor their services/products to individual customer needs.

While Blockbuster remained committed to physical stores, Netflix anticipated the shift toward digital consumption. Forecasting and acting upon trends can differentiate between leading the market or becoming obsolete.

Blockbuster missed the signals when Netflix offered to sell itself for $50 million, and consumers began to show dissatisfaction with late fees. Recognizing and acting upon market signals, even subtle ones, can impact a company’s trajectory.

Even after establishing itself as a leader in streaming, Netflix continues to evolve and adapt. Understanding that transformation is an ongoing process rather than a one-time event is crucial for long-term success.

10. Learn From Failures

Both Netflix and Blockbuster had their share of mistakes. However, Netflix has shown an ability to learn from its failures, pivot, and recover. Companies should not only celebrate successes but also see failures as learning opportunities.

The tale of Netflix and Blockbuster is a masterclass in understanding disruptive innovation and market transformation mechanics. By recognizing early signs of disruption, staying adaptable, and being committed to continuous improvement and innovation, companies can remain competitive and relevant in their respective markets.

Find out more about how Mondoro can help you create, develop, and manufacture excellent home decor and home furniture products – don’t hesitate to contact me ,  Anita .  Check out my email by clicking here , or become a part of our community and  join our newsletter  by  clicking here .

Mondoro gives out a  FREE Lookbook to anyone interested . You can receive a copy of our latest Lookbook by  clicking here.

Listen to our Podcast called Global Trade Gal .  You can find it on all major podcast platforms. Try out to listen to one of our podcasts by  clicking here.  

Subscribe to our Mondoro Company Limited   YouTube Channel  with great videos and information by  clicking here.

Related Questions

One of the things we look at when we go into a new solid wood furniture manufacturer is in-house kiln wood drying. We also want to know if they understand how to join the wood properly and have the equipment. Also, if the manufacturer is in a hot and tropical climate if they have a dry room to help control the wood moisture levels. We like to work with factories that cut and shape all the wood and have in-house finishing facilities.

You can discover more by reading our blog  5 Questions To Ask When Considering A Solid Wood Furniture Manufacturer ; read more by  clicking here.

Solid  wood is cut down from the tree , cut into wood boards, and then used for manufacturing. On the other hand, engineered wood is considered manmade as it is usually manufactured with wood chips, wood shavings, and an adhesive. Today the manufacturing of engineered wood is extremely technical.

You can discover more by reading our blog  All About Teak Wood And Outdod?  by  clicking here.

Hardwood solids can include non-solid woods such as engineered woods. Hardwood solids are used in furniture and other industries to classify what wood is used in a product. The terms usually do not classify what type of wood is used.

You can discover more by reading our blog  Hardwood Solids Furniture, What Does The Term Mean?  by  clicking here .

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A Case Study in Disruptive Innovation

Grady, Janet DrPH, MSN, RN, ANEF, FAAN

Janet Grady is vice president of academic affairs and chair of the Nursing and Health Sciences Division at the University of Pittsburgh in Johnstown, PA. Contact author: [email protected] . The author and planners have disclosed no potential conflicts of interest, financial or otherwise.

Overview 

Technologic advances in health care have often outpaced our ability to integrate the technology efficiently, establish best practices for its use, and develop policies to regulate and evaluate its effectiveness. However, these may be insufficient reasons to put the brakes on innovation—particularly those “disruptive innovations” that challenge the status quo and have the potential to produce better outcomes in a number of important areas. This article discusses the concept of disruptive innovation and highlights data supporting its necessity within health care in general and nursing in particular. Focusing on telehealth as a case study in disruptive innovation, the author provides examples of its application and reviews literature that examines its effectiveness in both nursing practice and education.

This article discusses many applications of telehealth—a means of delivering care that is likely to be a part of every nurse's skill set in the not-too-distant future.

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