Tesla is a very exciting car company, and lots of people like to use the word "disruptive" when talking about it, so it's natural that headlines proclaiming Tesla to be disrupting something or other are rampant on the internet.
But describing Tesla in this way stretches the concept of "disruption" beyond the point of usefulness and misunderstands the nature of the company's success. The real message of Tesla is that not everything needs to be disruptive to be innovative and successful. Sometimes making something great really is good enough.
Lots of people want to call Tesla disruptive
Here are a few reactions to the release of Tesla's Model 3:
- "We are now witnessing Elon Musk’s slow-motion disruption of the global auto industry"
- "Why Tesla Motor Inc's disruption runs deep"
- "Tesla Hoopla embodies the disruption of Detroit"
And, of course, it's true that Tesla's cars are well-reviewed and popular, and if the company can really deliver the Model 3 on the scale that it's promising, that will be a significant challenge over the medium term for other car companies.
But "disruption" theory, introduced by Harvard Business School's Clay Christensen, actually refers to something more specific than the generic idea of new competition. His coinage is a useful one and worth preserving — while also recognizing that it simply doesn't apply to every successful new business.
Disruption: Sometimes cheaper and simpler beats better
The core idea of disruptive innovation is that successful companies tend to become obsessed with getting better and better at serving their existing high-margin customers.
Those customers provide the profits, so they get studied closely and provided with more and more services and features to ensure their continued loyalty. Eventually a new competing product comes into the marketplace that is generally cheaper, simpler, and, in an abstract sense, inferior. This is the disruptor. What makes it disruptive is that even though the incumbent company could, technically, copy the disruptive new product, it can't bring itself to actually do so, because that would involve undercutting its existing profit margins.
Instead, the tendency is for the incumbent to reassure itself, accurately, that the new product simply does not meet the needs of the most valuable customers and to continue focusing on them.
The problem for incumbents is that over time the new disruptive product tends to get better and better, eating away at a bigger and bigger share of the incumbent's market share. At the same time, because the disruptive new product was designed from the beginning to be cheaper, simpler, and lower-margin it manages to enlarge the market far beyond its previous size.
In this sense, smartphone cameras have disrupted the traditional camera industry. Even a very good smartphone camera takes photos that are lower quality than what you could get with a dedicated camera. But these days, the marginal price of owning a phone that's also a camera as opposed to just a phone is essentially $0. That has devastated the market for dedicated cameras, even as it's created a world in which people buy more cameras (called "phones") and take more photos than ever before.
Tesla isn't like this at all
Tesla's products do not have any of these hallmarks.
Even the new Model 3 — the "affordable" Tesla — is very expensive. It's affordable in the sense that unlike the Model S or the Model X, a middle-class family could decide to buy one if they wanted to stretch their budget. But it's unquestionably an indulgence, and not an affordable alternative to anything.
More importantly, in terms of sequencing Tesla followed the exact opposite strategy.
It first introduced the Roadster, a high-end electric sports car that was both expensive and impractical for most generic automotive applications. It was a car aimed at an extremely narrow target audience of rich weirdos. But it served the purpose of demonstrating that Tesla could, in fact, make an all-electric car that was safe and fun to drive.
Next Tesla made the Model S, a very expensive luxury sedan aimed at the wider audience of rich people who enjoy fancy cars. This and its successor, the larger and more expensive quasi-SUV Model X, served to establish the idea that Tesla was a luxury brand and a maker of cool, high-quality cars.
Now the company is moving further down market with the more accessible Model 3. It's a car that benefits from the technical innovations that went into the earlier cars, but that also benefits from the brand halo effect. As Stratechery's Ben Thompson writes, "It's a Tesla," which everyone now knows is a good thing to be.
A disruptive electric car would look very different
A disruptive approach to the electric vehicle market would have involved a vehicle that looked more like a Smart car: cheap, small, and with a limited range that limited its appeal to conventional car buyers but that was extremely reliable due to the extreme simplicity of an all-electric drivetrain.
Such a car could, along the lines of classical disruption, appeal primarily to buyers who aren't well-served by the existing auto manufacturers. Smart cars might have sold primarily as fleet vehicles for new on-demand, app-based ride-hailing services that rarely need to take passengers on long trips. Disruption would have emerged as the batteries and range improved and, more importantly, as automation eventually made on-demand fleets into a larger and larger share of the overall transportation marketplace.
A Tesla, by contrast, essentially competes head to head with a BMW or an Audi as a product.
It's true that the underlying technology is different, but the basic value proposition is the same — it's intended to be an awesome car by the standards of the people who buy expensive cars today, and to appeal to them for similar reasons.
Some markets never get good enough
Thompson's view is that Tesla's success — and the larger-scale success of Apple's high-end gadgets — is that disruption theory doesn't apply to consumer markets. That's an overstatement. Companies like Ikea, Walmart, Aldi, and Warby Parker have all applied disruption-style ideas to consumer markets.
But Thompson is right to say that at least some segments of some consumer markets persistently resist disruption.
That's because for many classes of consumer goods, products never become truly "good enough." Nobody needs a Lexus to get to work and run errands. For that matter, nobody needs a brand new Toyota when a used one would be cheaper. And nobody needs features like power steering, anti-lock breaks, Bluetooth connectivity for smartphones, or dozens of other features that were once high-end options and have now become standard.
It just happens to be the case that most people spend a lot of time in their car, and consequently, to the extent that they can afford to do so they always prefer a nicer car to a less-nice one.
Value still counts in this kind of consumer market, but it's not the all-consuming priority in the way it is for some other markets. And it means that entering on the high end to build your capabilities and your brand makes at least as much sense as starting at the bottom.