INNO-Grips – Global Review of Innovation Policy Studies
http://www.proinno-europe.eu/innogrips2
INNO-Grips Policy Brief No. 4
Disruptive Innovation: Implications forCompetitiveness and Innovation Policy
Study team:
Hannes Selhofer, empirica GmbH
René Arnold, Institut der deutschen Wirtschaft Köln Consult GmbH
Markus Lassnig, Salzburg Research GmbH
Pietro Evangelista, Italian National Research Council
Version 2.1
April 2012
About this document and INNO-
This policy brief was prepared
deutschen Wirtschaft Köln Consult GmbH,
Industry Research (IRAT) at the
Grips (http://www.proinno-europe.eu/innogrips2
on behalf of the European Commission, DG Enterprise and Industry. INNO
makers in adopting appropriate responses to emerging innovation needs, trends and phenomena. It
is part of the European Commission's PRO INNO Eur
focal point for innovation policy analysis and cooperation. The INNO
monitoring (Lot 2) is carried out by empirica GmbH and ICEG European Cent
Institut der deutschen Wirtschaft Köln Consult GmbH
and Industry.
Acknowledgements
The INNO-Grips study team would like to thank the experts
policy brief by sharing their sectoral and/or innovation expertise with the study team, by reviewing
the draft document and by providing comments and suggestions at the INNO
same issue in Brussels on 24th January 2012.
Disclaimer
Neither the European Commission nor any person acting on behalf of the Commission is responsible
for the use which might be made of the following information. The views expressed in this report are
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this report implies or expresses a warranty of any kind.
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For further information about this policy brief or INNO
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INNO-Grips Policy Brief No. 4, prepared by empirica GmbH for DG Enterprise and Industry, as part of
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Bonn/Brussels, April 2012
Policy Brief:
2
-Grips
This policy brief was prepared by empirica GmbH, Bonn, with the support of
en Wirtschaft Köln Consult GmbH, Salzburg Research GmbH and the
the Italian National Research Council (CNR), in the framework of INNO
europe.eu/innogrips2), the “Global Review of Innovation
on behalf of the European Commission, DG Enterprise and Industry. INNO-Grips supports policy
makers in adopting appropriate responses to emerging innovation needs, trends and phenomena. It
is part of the European Commission's PRO INNO Europe portal (http://www.proinno
focal point for innovation policy analysis and cooperation. The INNO-Grips policy analysis and
monitoring (Lot 2) is carried out by empirica GmbH and ICEG European Center with support from
n Wirtschaft Köln Consult GmbH, based on a service contract with DG Enterprise
would like to thank the experts who supported the rese
policy brief by sharing their sectoral and/or innovation expertise with the study team, by reviewing
the draft document and by providing comments and suggestions at the INNO-Grips workshop on the
January 2012.
her the European Commission nor any person acting on behalf of the Commission is responsible
for the use which might be made of the following information. The views expressed in this report are
those of the authors and do not necessarily reflect those of the European Commission. Nothing in
this report implies or expresses a warranty of any kind.
For further information about this policy brief or INNO-Grips, please contact:
empirica Gesellschaft für Kommunikations-und Technologieforschung mbH
European Commission
Directorate-General Enterprise and Industry
D.1 - Policy development for industrialinnovation
http://ec.europa.eu/enterprise/dg/
rief can be freely used or reprinted but not for commercial purposes, and,
if quoted, the exact source must be clearly acknowledged. Recommended quota
Disruptive Innovation: Implications for Competitiveness and Innovation Policy.
Grips Policy Brief No. 4, prepared by empirica GmbH for DG Enterprise and Industry, as part of
Policy Brief: Disruptive innovation
support of the Institut der
Institute for Service
in the framework of INNO-
), the “Global Review of Innovation Policy Studies”,
Grips supports policy-
makers in adopting appropriate responses to emerging innovation needs, trends and phenomena. It
http://www.proinno-europe.eu), a
Grips policy analysis and
er with support from the
, based on a service contract with DG Enterprise
who supported the research work for this
policy brief by sharing their sectoral and/or innovation expertise with the study team, by reviewing
Grips workshop on the
her the European Commission nor any person acting on behalf of the Commission is responsible
for the use which might be made of the following information. The views expressed in this report are
he European Commission. Nothing in
General Enterprise and Industry
Policy development for industrial
http://ec.europa.eu/enterprise/dg/
rief can be freely used or reprinted but not for commercial purposes, and,
if quoted, the exact source must be clearly acknowledged. Recommended quotation: "European
Disruptive Innovation: Implications for Competitiveness and Innovation Policy.
Grips Policy Brief No. 4, prepared by empirica GmbH for DG Enterprise and Industry, as part of
Policy Brief: Disruptive innovation
3
Table of contents
1 Executive summary .......................................................................................................................... 5
2 Context, objectives and approach.................................................................................................. 13
2.1 Context and objectives............................................................................................................ 13
2.2 Methodological approach....................................................................................................... 16
3 The concept of “disruptive innovation”.......................................................................................... 17
3.1 Disruptive innovation in the OECD innovation framework ..................................................... 18
3.2 Analysing disruptive innovation in a Porter framework ......................................................... 20
3.3 Christensen’s disruptive technology framework..................................................................... 22
3.4 Critique and debate of Christensen’s work ............................................................................. 26
4 Sector case studies ......................................................................................................................... 32
4.1 Disruptive innovation in the chemical industry....................................................................... 32
4.2 Disruptive innovation in the automotive industry .................................................................. 45
4.3 Disruptive innovation in tourism............................................................................................. 52
4.4 Disruptive innovation in transport and logistics ..................................................................... 65
5 Strategic responses for innovation policy ...................................................................................... 72
5.1 General conclusion.................................................................................................................. 72
5.2 Specific issues and recommendations..................................................................................... 73
Annex I: Sector definitions and additional information......................................................................... 77
Annex II: References .............................................................................................................................. 81
Annex II: Study team.............................................................................................................................. 86
Policy Brief: Disruptive innovation
4
Policy Brief: Disruptive innovation
5
1 Executive summary
1.1 Context and objectives
This policy brief was prepared as part of the
INNO-Grips project which supports policy
makers in adopting appropriate policy respon-
ses to emerging innovation needs, trends and
phenomena.
The brief discusses the concept of disruptive
innovation in the sense introduced by
Christensen’s seminal work ‘The Innovator’s
Dilemma’ (1997). Christensen’s framework has
been widely discussed in management litera-
ture, but not yet in terms of its implications for
innovation policy design. This brief addresses
this gap. It explores whether and how inno-
vation policy should pay specific attention to
disruptive innovation trends and, if so, how
this could be achieved. The brief applies the
framework to analyse potentially disruptive
trends in four industries, including manu-
facturing and service sectors:
- the chemical industry (Section 4.1)
- the automotive industry (Section 4.2)
- tourism (Section 4.3)
- transport & logistics (Section 4.4)
The brief is based on a review of the literature
regarding disruptive innovation, interviews
with industry experts and the results of a vali-
dation workshop (on 24th January 2012 in Brus-
sels) where interim results were presented and
discussed with a group of innovation experts.
1.2 The theory of disruptive innovation
Disruptive innovation in the OECD innovation
framework
The OECD’s Oslo Manual (2005), a widely used
framework for measuring innovation activities,
defines disruptive innovation as “an innovation
that has a significant impact on a market and
on the economic activity of firms in that
market. This concept focuses on the impact of
innovations as opposed to their novelty.”
As such, any type of innovation (product,
process, marketing or organisational inno-
vations) can be disruptive – in practice, the
concept refers mainly to product and process
innovations. The manual warns that it may not
be apparent from the start whether an inno-
vation has a disruptive impact until long after it
has been introduced – a major challenge for
analysing disruptive innovation if not con-
ducted with hindsight (see Section 3.1).
Christensen’s disruptive technology frame-
work
The term disruptive innovation is widely used
today in the sense introduced originally as
disruptive technology in Christensen’s seminal
work ‘The Innovator’s Dilemma’ (1997).
Christensen links his observations with the
widely used S-curve of a technology life-cycle
and the concept of value networks. He argues
that a truly disruptive technology cannot be
plotted in a conventional framework, because
the new technology (at least initially) competes
on criteria incommensurable with those that
were typically used to measure performance.
Thus, the disruptive technology operates in the
early phase of its life-cycle in a different value-
network. For example, it is often used in
different applications (see right part of Figure).
Often, the innovative technology is initially less
complex and offered at a lower price, appeal-
ing to low-end, price-sensitive customer seg-
ments. After some time, however, when the
technology has matured, it may surpass the
incumbent technology even in terms of the
traditional performance criteria that used to
Pro
du
ctp
erf
orm
ance
Time or engineering effort
technology 1technology 2
technology 2
Performance asdefined in
Application “A”
Performance asdefined in
Application “B”
Policy Brief: Disruptive innovation
6
rule the market and will gradually proceed to
replace it (see left part of Figure). The point at
which disruptive innovations start to challenge
existing products is when the marginal utility
of further improvements in the traditional
performance criteria decreases.
The incumbents, including large companies,
may fail to understand the early signals that
indicate a technological shift as they are too
focused on the current demand pattern of
their leading customers. They place all their
innovation efforts in continuously improving
the performance in terms of the traditional
criteria, to the extent that they ‘overachieve’.
In the shadow of this race to be top dog, the
disruptive technology starts to gain a foothold
in other markets or areas of implementation
(‘value networks’), often delivered by new
entrants (see Section 3.3).
Discussion of Christensen’s work
Christensen’s work on the impacts of
disruptive technology and how companies
should deal with it has triggered an intense
discussion and critique of the concept in
academic and business literature. The main
aspects that have been controversially
addressed in papers include the following (see
Section 3.4):
Lack of a precise definition: a cornerstone of
the debate is the lack of a measurable
definition how exactly disruptive innovation
differs from other (non-disruptive) innovations,
and how to select adequate performance
metrics to plot the performance provided by
the disruptive technology.
High-end vs. low-end disruptive innovations:
several authors suggest to make a distinction
between high-end and low-end disruptive
innovations. Low-end disruptions start their
life-cycle in lower-cost segments of the market,
appealing to price-sensitive consumers. High-
end disruptions are typically more radical in
their novelty and compete with existing
products or services not on cost, but by
offering distinctive features.
The predictability of disruptive innovations: a
key question is whether the disruptive
technology framework is suitable for making ex
ante predictions.
Business-model vs. product innovations:
Markides (2006) suggests that a distinction
should be made between disruptive business-
model innovations and product innovations, as
they are completely different in their impact
on established firms. He also argues that the
disruptive and the traditional model can co-
exist in some markets.
Implications for business strategy: there is a
controversial discussion about the right
business strategy to address disruptive
innovation, for instance whether first-movers
are always those to benefit most, and how
incumbents should deal with potentially
disruptive technologies.
1.3 Disruptive innovation in thechemical industry
As a provider of innovative materials and
technological solutions, the chemical industry
plays an important role in industrial innovation
and competitiveness as a whole. It is a highly
mature industry with stable product cate-
gories, players and value systems. Nonetheless,
R&D and innovation are very important; new
processes and materials requiring chemical
problem-solving expertise play a key role in
addressing global challenges such as climate
change (see Section 4.1).
The impact of chemical innovations in other
industries
The chemical industry is a catalyst for enabling
smart and sustainable growth. There are
numerous examples of innovations –including
disruptive ones– in other industries which are
mainly or at least partly enabled by innovations
in the chemical industry. For example, new
polycarbonates are an important base for
optical storage media and liquid crystals for
displays. Today, innovations originating in the
chemical industry are needed more than ever
so that everybody can have clean air, safe
water, healthy food, reliable medicine, and
environmentally friendly products and so that
Policy Brief: Disruptive innovation
7
materials and energy production can become
more sustainable.
Key innovation areas with a significant dis-
ruptive potential
The following areas of innovation were found
to be particularly relevant in terms of their
disruptive impact on the chemical industry and
other sectors: process intensification,
innovation in feed stock use, in advanced
materials, and the field of nanotechnology.
Process intensification: the chemical industry,
as well as other process industries, are about
to undergo a fundamental change in their
production processes. Process intensification
(PI) has been discussed for many years, but has
now gained momentum as new break-through
technologies emerge. Novel process approa-
ches constitute a disruptive shift in process
design which can lead to massive size
reductions of equipment or plants. This has
important implications for the raw material
efficiency of processes and for achieving
reductions in greenhouse gas emissions. The
SPIRE proposal (“Sustainable Process Industry
through Resource and Energy Efficiency”), an
industry proposal for a public-private partner-
ship for research and innovation, gathering
partners from different industries, is a good
example for mechanisms to support innovation
in this field.
Alternative feedstocks: the high prices of
petroleum and natural gas, the uncertainty
about remaining reserves, and the pressure to
achieve a lighter carbon-footprint have led to
considerable efforts in the chemicals industry
to widen its feedstock base, particularly
through broader use of bio-based renewable
raw materials as replacement and complement
for fossil feedstocks. In principle, a large
amount of chemical substances could be
produced from renewable raw materials, but
the technical and logistical difficulties must not
be underestimated.
Advanced materials: innovative chemical
materials are an indispensible requirement for
technological progress in many sectors and
equally important as innovation in processes
that address global environmental challenges.
New materials developed by the chemical
industry play a key role, for instance, in all
relevant fields of energy (e.g. catalysts trans-
forming biomass into bio fuel, use of fibre
reinforced polymeric materials to improve the
performance of wind turbines, chemical
materials in photo voltaic systems).
Policy implications
The central objective for policy responses to
disruptive innovation trends is uncontested:
Europe must take a pro-active approach to
maintain its role as an innovation leader, in
particular in cutting-edge domains which may
have disruptive impacts in different areas of
the economy. Innovation has already been
identified as a key success factor specifically for
the competitiveness of the chemical industry
by a High Level Group (HLG) on the Competi-
tiveness of the European Chemicals Industry.
The following issues arise from the discussed
technological shifts in the chemical industry
and their importance for addressing global
challenges such as climate change:
- A systemic approach: building platforms for
large scale, cross-sector cooperation and
innovation activities in Europe, which
reflect the that many disruptive
technologies require expertise from
different industries.
- Solving the business case: the costs for
switching to more energy-efficient tech-
nologies (capital write-offs) must be shared
in a fair way.
- Regulation and the cultural context:
Europe needs to find the right balance bet-
ween safety regulations and accepting risks
by fostering innovation in new technologies.
- Encourage research on substitutes for rare
earth elements and other scarce materials.
Policy Brief: Disruptive innovation
8
1.4 Disruptive innovation in theautomotive industry
The main innovation trends in the automotive
industry are determined and driven by global
megatrends, in particular the shortage of raw
materials (notably, but not only, oil) and
climate change. These create challenges for the
automotive industry on a technological but
also on a supply-chain level (see Section 4.2).
Rising oil prices and increasing environmental
awareness of consumers as drivers of change
In Europe and the USA, consumer awareness of
climate change and pollution is growing. Fuel
economy is probably the most pressing
challenge for car-makers, irrespective of the
type and size of the car. To tackle this
challenge, car-makers have several options,
ranging from reducing the weight of their cars
to switching them completely from internal
combustion engines (ICE) to electric engines.
Electric vehicles – uncertainty about their
disruptive impact
Replacing an ICE by an electric engine has
numerous technical implications, ranging from
the remainder of the drive-train to issues of
crash safety, as well as maintenance.
Moreover, the necessary charging infra-
structure requires significant changes in the
power grid which shall influence the economy
far beyond the automotive industry. As such,
from a technological perspective, the move to
electric cars has a disruptive impact.
However, from a consumer’s point of view, a
battery electric vehicle (BEV) is not disruptive
as long as the objective is to develop BEVs to
the same specifications in terms of range and
speed as current ICE-cars. So far, BEVs are
essentially unattractive to the majority of
consumers due to their shortcomings in
conventional performance criteria, including
price and range.
Developments in China could play a critical role
in this context. China heavily subsidises the
purchase of electric cars and plans to have
500,000 electric cars, buses and lorries on its
roads by 2015. As China owns above 90% of
the magnetic raw materials needed for the
most common type of electric engines, it is
well positioned to compete in this market.
Potential shifts in the mobility paradigm
The current mobility paradigm, in which the
central value revolves around car ownership, is
also not favourable for electric cars (as long as
they are expensive). Some analysts therefore
question the disruptive nature and success of
the concept as a whole.
On the other hand, there are also two major
societal trends that could benefit the faster
deployment of electric cars: (i) the trend
towards urbanisation, and (ii) changing values
and lifestyles, with regards to mobility, among
the young generation, as cars seem to partly
lose their function as a status symbol. If these
trends develop further, they could have a
disruptive impact on the way we are framing
mobility (from ownership to access, e.g.
through car-sharing).
Policy implications
It is still unclear to what extent electric cars will
finally be successful (and disruptive), or
whether they will remain a niche market. In a
scenario where mobility concepts change
(“mobility as a service”), BEVs offer clear-cut
advantages and would very likely create
opportunities for completely new business
models. In this framework, there are some
implications for innovation policy:
1. Electrical vehicles help to overcome the oil
dependency of cars; however, as various
materials needed to produce the engines are
generally rare and expensive, and mostly
located within China, it would basically mean
switching from one dependency to another.
Innovation policy should therefore strengthen
research on electrical engines into a direction
that leads to as little dependency as possible
(e.g. supporting R&D in magnet-free electrical
engines).
2. Considering current trends in major econo-
mies, especially in China, promoting the
development of electrical vehicles is to be
advised, in spite of the uncertainty. The risk of
Policy Brief: Disruptive innovation
9
backing the wrong horse has to be weighed
against the risk of losing competitiveness in the
emerging technology.
3. If innovation policy decides to support BEVs,
the best approach is therefore probably to
encourage the move to ‘mobility as a service’.
This could have positive side-effects such as
reducing emissions and freeing up parking
space in cities.
1.5 Disruptive innovation in tourism
The importance of innovation was long under-
estimated in service industries, including
tourism. The major turning point came with
the rise of the internet in the 1990s and its
significant (and even disruptive) impacts. In
fact, tourism is probably one of the sectors in
which the internet has had one of its most
significant impacts, as it leads to disinter-
mediation in some markets, re-intermediation
in others and increases dramatically the
market transparency.
In this policy brief, five major innovation
trends in the sector are discussed in terms of
their impact (see Section 4.3)
(1) Booking on the internet
Close to 40% of all bookings (e.g. for hotels and
flight tickets) in Western Europe and in the
USA are made on the internet. This develop-
ment has transformed parts of the value
network in tourism. It poses a threat to
established service providers, such as con-
ventional travel agencies, and has been an
opportunity for new entrants such as online
booking sites. Internet booking therefore has a
strong disruptive potential. Europe, in par-
ticular its accommodation sector, could benefit
from the trend towards online bookings.
(2) Dynamic packaging
Dynamic packaging (DP) combines offerings
from more than one data source on demand
and according to customer preferences. Using
pre-determined packaging rules, which are set
and controlled by the service provider, and
hiding price transparency on the individual
components, a combined price is determined
for the chosen package. DP can have dis-
intermediation as well as re-intermediation
effects, yet it is not expected to fully substitute
pre-packaged deals and should rather be
considered an incremental innovation.
(3) Yield management systems
Yield (or revenue) management systems are
integrated information systems which con-
tribute to the revenue optimisation of supply
capacities by (semi-)automatically and dynami-
cally regulating prices and quantities. Although
it is a significant marketing or even business-
model innovation, it will rather not have a
disruptive impact.
(4) Internet customer feed-back portals
Online reviews of other travellers have not
only become an important source for taking
decisions about which accommodation or
restaurant to choose, the reviews even
influence the decision on travel destinations.
They have a strong impact as they further
increase market transparency. However, there
is no evidence that this impact is going to
change products, services, business models or
value networks in the tourism industry.
(5) Low-cost airlines
In recent decades, the most important change
in the airline industry has been the trend
towards privatisation and enhanced
competition – most prominently resulting in
the emergence of the no-frills, low-cost
carriers (LCC). Their emergence has strongly
reduced average fares in European air travel
and posed a significant threat to the
incumbents and was clearly disruptive.
Policy implications
The strategic response of economic and
innovation policy should consist in creating
positive framework conditions for European
tourism companies to adopt these innovations
in the best possible way. The goal must be to
maximise the net benefits (accepting that the
disruptive trends will not benefit all), by
ensuring that the European tourism industry is
a leader in innovation, regarding to the dis-
Policy Brief: Disruptive innovation
10
cussed trends, compared to its competitors.
However, these policies are broadly in line with
existing schemes to support innovation. There
is no evidence that would call for a ‘reactive’
response in the form of a specific disruptive
innovation policy design for the tourism sector.
1.6 Disruptive innovation in thetransport industry
ICT as a key driver of (disruptive) innovation
Information and communication technology
(ICT) is a key enabler of innovation in the
transport and logistics service industry.
Investment in ICT by logistics providers is
usually triggered by specific requests from
customers, who are aware that increased
performance of their logistics providers will
benefit the logistics performance of the entire
supply chain.
While large multinational logistics groups have
massively invested in ICT to support their
operations for a long time and gained sub-
stantial benefits, SMEs have more difficulties in
setting up ICT applications and the potential of
technology is largely underestimated.
Main innovation trends
There are three main innovation trends which
are triggered and enabled by ICT (see Section
4.4)
New e-services: the integration of traditional
services with new, innovative information
services facilitated by the internet. These
enhanced services do not have a significant
disruptive potential, however.
New players: ICT has facilitated the market
entry of a new intermediary: different types of
transportation e-marketplaces. They may have
a disruptive impact on several aspects of the
industry; for instance, they tend to alter the
role of traditional transport intermediaries
(e.g. freight forwarders) and the relationships
between these firms and other actors in the
supply chain.
New alliances: Another innovation resulting
from the diffusion of ICT and web technologies
is the formation of new types of alliances
between third-party logistics providers (3PLs)
and companies operating in other service
sectors such as financial services, management
consulting and ICT vendors. Some of these
alliances have given rise to the creation of a
new category of service provider called fourth-
party logistics provider (4PL). This can be seen
as a disruptive trend in service provision and
business models, as the 4PL model enables
customers to outsource to a single organisation
the entire re-engineering of their supply chain
processes.
Policy implications
Policy actions to remove innovation barriers
should concentrate on supporting and acceler-
ating the use of ICT in transport and logistics.
Means to address this goal include:
- Stimulate higher ICT expenditure through
fiscal actions;
- Reassess education and training systems at
all levels in this sector;
- Better coordinate initiatives for dissemi-
nating technology solutions for transport
and logistics systems.
Policy Brief: Disruptive innovation
11
1.7 Strategic responses for policy
It is widely uncontested that Europe must take
a pro-active approach to maintain its role as
an innovation leader, in particular in cutting-
edge domains which may have disruptive
impacts in different areas of the economy. The
key question for this policy brief was whether
innovation trends which are expected to have
a disruptive impact in the economy also
require a special ‘disruptive innovation policy’.
Should policy ‘react’ to disruptive trends?
The authors of this policy brief do neither see
clear evidence for the need nor an opportunity
for a specific ‘disruptive innovation policy’
intervention. In particular, given the long term
nature of disruptive technology development
(which typically takes 10-20 years from their
invention to their widespread deployment in
products), this policy brief does not
recommend any short-term interventions
specifically in response to any of the described
developments.
Rather, the strategic response of economic and
innovation policy should consist in creating
positive framework conditions for innovation in
Europe (irrespectively of whether innovations
will be incremental or disruptive in their
impact), with the objective to strengthen the
general capabilities for innovation.
However, even if the brief does not see a
business case for a specific framework for
disruptive innovation policy, some policy-
relevant issues arise from the sector case
studies which should be considered when
discussing disruptive technologies. While they
are generally relevant for innovation policy (as
well as for economic policy), they are
particularly important the more ‘disruptive’ a
new technology is likely to be. These issues
are:
1. The cross-sectoral nature of disruptive
innovations
A common feature of many disruptive tech-
nologies is that their development requires
expertise and contributions from different
industries. Strengthening cross-boundary inno-
vation processes may require innovative
mechanisms, e.g. establishing technology plat-
forms involving stakeholders from different
industries.
2. Dealing with ‘business case conflicts’
A major challenge for innovation policy arises if
the desired and ex-pected externalities from
accelerating disruptive innovation deployment
do not coincide with the industry’s business
case (at least in the short and medium term):
how should the cost for shortening the S-curve
be shared?
3. Anticipating unwanted side-effects of inter-
ventions
Subsidies and grants are a policy instrument
frequently used to accelerate the adoption of
new technologies, for instance in the area of
renewable energies (e.g. subsidies for
photovoltaic power generation). However, this
is not without risk – policy is well advised to
conduct an impact assessment of possible side-
effects and of the longer-term impacts before
launching such measures.
4. Understanding disruptive innovation in
service sectors
The case studies on tourism and transport
show that ‘disruptive innovation’ can have a
totally different meaning in services than in
manufacturing. In services, disruptive
innovation is typically linked to new business
models that have been made possible by
innovative uses of technologies provided by
other sectors, notably ICT, rather than
conducting R&D. The implications for
innovation policy are therefore quite different.
Policy Brief: Disruptive innovation
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Policy Brief: Disruptive innovation
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2 Context, objectives and approach
2.1 Context and objectives
2.1.1 Objectives and main questions addressed
This policy brief discusses the concept of disruptive innovation with a view to its relevance for
innovation policy. Some strands of innovation theory make a distinction between ‘incremental’ and
‘disruptive’ (or ‘radical’) innovation. The term is widely used today in the sense introduced originally
as ‘disruptive technology’ in Christensen’s seminal work ‘The Innovator’s Dilemma’ (1997).
Christensen and Raynor (2003) later modified the term to disruptive innovation to include several
innovations in service and business models which were visible at the time, such as discount stores
and low-cost airlines. The concept also owes to Schumpeter's work on ‘creative destruction’ (1942),
where radical innovations create major disruptive changes in a market or in a whole industry. In a
nutshell, the notion of ‘disruptive’ innovation refers to the impact which an innovation has (on
markets, industries and the players acting in them) rather than on the mere novelty of the innovated
products, services, processes or management techniques.
While disruptive innovation theory has had a significant impact on management practices (Yu, 2010),
possible implications for the design of innovation policy have not yet been explored in a systematic
way. The main objective of this policy brief is to establish this link. It addresses the question of
whether innovation policy should pay specific attention to innovation trends that are expected to
have a disruptive impact in specific sectors of the economy (or to society as a whole), and,if so, how
this could be achieved.
Against this background, the specific objectives of this policy brief are:
to introduce the concept of disruptive innovation by reviewing the main theoretical
foundations and definitions, and by providing practical examples;
to analyse the main innovation trends in selected industries (automotive, chemical, tourism)
with reference to their disruptive potential, and to assess the implications of the anticipated
developments for the competitiveness of the European industry;
and to assess whether this has any policy implications for research and innovation policy
and, if so, to suggest strategic responses.
2.1.2 The policy rationale and interest
The interest of DG Enterprise and Industry in the topic of disruptive innovation, and the resulting
request to INNO-Grips to prepare a policy brief on this issue, has to be seen in the context of a
generally increased focus on innovation in advanced economies in recent years. Innovative capacity
is broadly recognised as a key source for creating and sustaining prosperity. The European
Commission has long placed great emphasis on the critical role of innovation for European
businesses in order to stay competitive in a global economy. Communications such as “More
Policy Brief: Disruptive innovation
14
Research and Innovation - Investing for Growth and Employment: A Common Approach” (2005)1 and,
more recently, the “Innovation Union” Communication (2010)2 stress the importance of promoting
innovation as much as possible, even if the strong competitive pressure provides powerful incentives
for companies to continuously engage in innovation and R&D anyway. The baseline is that the
innovative capacity, productivity and competitiveness are closely intertwined; companies operating
in high-labour-cost countries (as in Europe) need to be more innovative and productive than their
counterparts in economies with low labour costs in order to be competitive. Innovative capacity is
seen as the key to address this challenge, and thus as a precondition for sustaining prosperity.
The specific interest in disruptive innovation is linked with the risk and uncertainty which disruptive
innovations can bring about. As with all major innovations, there are two sides of the coin: they
present an opportunity and risk at the same time, definitely for individual enterprises but, in the case
of disruptive innovations, possibly also for larger segments of an economy. In the automotive
industry, for example, disruptive innovations in technology and consumer demand (see case study in
Section 4.1) could have a significant impact on the future potential for success of different
manufacturers. The basis of competition in this industry could be changed in a significant way – with
resulting shifts in the value networks of the automotive industry. Those that have bet on the right
trends at the right time could benefit significantly from first-mover advantages, while others could
face severe challenges.
For policy makers, the question is, then, whether disruptive innovation poses a threat to
‘conventional’ innovation policy. In the same way that conventional management practices are
possibly not the right way to address disruptive challenges (Christensen 1997, see Section 3.2), a case
could be made that innovation policy must also adapt its instruments in order to exploit
opportunities stemming from disruptive innovation rather than falling victim to the changed
conditions. However, this is not clear and is subject to debate. The high degree of uncertainty that is
inevitably linked with disruptive technology, and the typically long period of time it takes for
disruptive innovations to be commercialised, raises significant challenges for managers and
innovation policy makers alike (see following section). It is the objective of this policy brief to discuss
some of these issues and suggest a structure for debate among the innovation community. The
policy brief cannot provide answers to all these questions – rather, it raises awareness for the issues
to be considered, provides some topical examples from three industries and suggests ways in which
the debate could be taken forward. Insights from the case studies are used to draw, carefully, some
possible conclusions for strategic responses to disruptive innovation in policy.
2.1.3 Challenges to be confronted
Ex ante assessment: can we predict disruptive innovations?
Addressing these questions is not without challenges. The greatest challenge is obviously that the
effects of disruptive innovations are often only properly understood in hindsight, when their impact
on products, markets, specific companies and/or whole industries have become a reality and are
visible to everybody. If innovation policy is expected to take into account potentially disruptive
1Communication from the Commission, COM(2005) 488 final.
2“Europe 2020 Flagship Initiative Innovation Union.” Communication from the Commission, COM(2010) 546final.
Policy Brief: Disruptive innovation
15
developments in advance, however (as assumed in this policy brief), policy makers inevitably have to
make risky assumptions about future developments, such as technological innovation, changes in
demand structures or framework conditions, and possibly even about the timing of these
developments. Ex ante predictions of disruptive innovation are, almost by definition, speculative; it is
not clear which methods exist for such predictions (Danneels, 2004, p. 251).
“It is difficult to make predictions, especially about the future”.
(Quote ascribed to different people, including Mark Twain and Winston Churchill.)
This central issue has of course been recognised and is discussed in disruptive innovation theory as
well. How can managers and policy makers benefit from an ex post analysis of cases of disruptive
innovation? What is the practical value of such reviews for making strategic decisions about the
future? This is also a common critique on existing literature, including the seminal work by
Christensen. It has be argued that “retrospective analysis is subject to bias” (Danneels, 2004),
because it allows cherry-picking case studies of disruptive technologies that have succeeded (in
hindsight) to support the conceptual framework, while it ignores other potentially disruptive
technologies that have failed. On the other hand, it can be argued that a better understanding of
which types of organisational competencies are needed for developing disruptive innovations may
help incumbents introduce such innovations (Govindarajan, 2006); policy could then specifically
promote the development of such competencies.
As for the purpose of this policy brief, the challenge has to be accepted as an inherent problem to
the issues discussed. The way to deal with it is simply to accept it, and to derive any conclusions and
recommendations in full consideration of the uncertainty which is involved in making assumptions
about the disruptive impact of anticipated trends.
Challenges for considering disruptive innovation in policy making
Another challenge is to establish a concrete link between the anticipated innovation developments
and the design and implementation of innovation policy. This can be seen as an aggravation of the
challenge to predict the innovation: if the design of innovation policy measures shall deliberately
take into account the impacts of disruptive innovation, it is not only necessary to anticipate the
disruptive trends as such, but also their timing: when will their effects unfold? The policy measures
addressing the anticipated trends would have to implemented at the right time so that the desired
impact can be achieved (e.g. accelerating the time-to-market of the disruptive technology, if
desirable). These challenges will be discussed in more detail in Section 6.
Apart from the timing issue, the central issue for innovation policy in this context is whether it should
proactively focus on specific technologies (or trends, in a broader sense) which are supposed to have
a pronounced disruptive potential, or whether innovation policy should rather be ‘technology-
neutral’. In a concept that leans towards focusing on potentially disruptive technologies the focus is
on so-called ‘lead markets’ which are supposed to play a very important role in the future. While
their importance is not necessarily derived from disruptive developments, these tend to be markets
with a higher propensity towards innovation and, as a result, change. Tax reductions for R&D and
related innovation activities, if not restricted to specific sectors or technologies, would be an
example of an innovation policy instrument that does not discriminate between different types of
innovation.
Policy Brief: Disruptive innovation
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2.2 Methodological approach
The policy brief is based on a literature review on the issue of disruptive innovation and, for the
assessment of disruptive innovation in the sectors discussed, on interviews with experts from the
sectors in focus (including researchers and industry representatives) as well as on relevant literature
about the industry. The interviews were conducted by members of the INNO-Grips study team (see
Annex I).
Work on the case studies was conducted in parallel by three organisations: the case study on
disruptive innovation in the chemical industry was conducted by empirica (in cooperation with sector
experts), the case study on the automotive industry by Institut der deutschen Wirtschaft Köln
Consult, and the case study on tourism by Salzburg Research. The recommendations for strategic
policy responses (see Section 6) were derived from a synopsis of this research, also making use of the
results of a workshop with experts held on 24 January 2012 in Brussels.
Figure 2-1: Approach for this policy brief in overview
Synopsis &policy analysis
Expert interviewsLiterature review
Literaturereview
Theoreticalfoundations:
disruptive innovation
Sectorcase studies:disruptive innovation in ...
Policyconclusions
Micro level (the firm)
Macro level (theeconomy)
Policy level
the automotive industry
the chemical industry
tourism
Strategicresponses for
innovation policy
INNO-Gripsvalidationworkshop
transport & logistics
Policy Brief: Disruptive innovation
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3 The concept of “disruptive innovation”
Although there is a common sense understanding of what the term ‘disruptive innovation’ implies,
there is no precise and commonly accepted definition of how exactly it is distinct from non-disruptive
(‘incremental’) innovation. In fact, it may be legitimate to even question the concept as such, as it
could be argued that any innovation is disruptive by its very nature. This section of the policy brief
introduces the theoretical foundations of disruptive innovation, mainly based on economic literature.
The goal is not to develop a new definition in its own right, but rather to explore to what extent
making a distinction between innovations in terms of their disruptive impact has practical
importance – for business and for innovation policy making.
The concept of disruptive innovation, and its implications for entrepreneurship and competitiveness,
can be dated back to Schumpeter’s work (1942) on creative destruction. Yu and Hang (2010) describe
a timeline of evolution of disruptive innovation theory which lists major research in the field, starting
with Schumpeter (see Table 3-1). This section suggests definitions and frameworks for the analysis of
disruptive innovation, and provides a literature review of the debate on this issue. The review is
centred around the seminal work of Christensen (1997), as it is still a main point of reference in the
debate, and on the responses and critique it has generated.
Table 3-1: Disruptive innovation theory: timeline of evolution
Year Research
1942 Schumpeter: Creative Destruction in “Capitalism, Socialism and Democracy”. Harper&Brothers
1986 McKinsey & Richard Foster: Technology S-curve and “Discontinuities”. Innovation: The
attacker’s advantage. NY: Summit Books
1990 Henderson and Clark: Architectural Innovation
1991 Geoffrey Moore: Crossing the Chasm. Marketing and Selling Technology Products to Mainstream
Customers. NY: Harper Business.
1992 Clayton M. Christensen: The Innovator’s Challenge: Understanding the Influence of MarketEnvironment on Processes of Technology. Development in the Rigid Disk Drive Industry,Dissertation; “Exploring the limits of the technology S-curve”, in: Production and OperationManagement, 1(4), 334-357
1997 Clayton M. Christensen: The Innovator’s Dilemma; 7 papers on related issues
2001 Richard Foster and Sarah Kaplan: Creative Destruction: Why Companies That Are Bulit to LastUnderperform the Market–and How to Successfully Transform Them. NY: Doubleday
2003 Christensen: The Innovator’s Solution
Source: Yu and Hung (2010) (selection)
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3.1 Disruptive innovation in the OECD innovation framework
As a starting point for the definition of disruptive innovation, this section describes how the concept
is linked with the OECD’s innovation framework as described in the Oslo Manual (2005), which is
widely used for the purpose of measuring innovation. The central definition of innovation in the
manual (see box) covers innovation in products, processes, marketing methods and organisational
methods. Any of these innovations can be disruptive.
“An innovation is the implementation of a new or significantly improved product (good
or service), or process, a new marketing method, or a new organisational method in
business practices, workplace organisation or external relations.” (p. 46)
(...)
“A related concept is a radical or disruptive innovation. It can be defined as an
innovation that has a significant impact on a market and on the economic activity of
firms in that market. This concept focuses on the impact of innovations as opposed to
their novelty.” (p. 58)
OECD Oslo Manual (2005), bold print added
Classifying innovations by their degree of novelty
As indicated in the above quoted definition, the Oslo Manual introduces “diffusion and novelty” as
further criteria to analyse different types of innovation. With regard to the degree of novelty, the
Olso Manual suggests making a distinction between four levels of novelty – with “disruptive
innovation” as the most pronounced level (p.- 17, p. 57f.):
- new to the firm: the minimum requirement for an innovation, according to the Manual, is
that the product, process, marketing method or organisational method must be new (or
significantly improved) to the firm that introduces it
- new to the market means that a firm is the first to introduce the innovation in its market.
The market is hereby defined as the firm and its competitors; it can include a geographic
region or product line.
- new to the world: the firm is the first to introduce the innovation for all markets and
industries (domestic and international).
- disruptive innovation: an innovation that has a significant impact on a market and on the
economic activity of firms in that market. The impact can, for example, change the structure
of the market, create new markets or render existing products obsolete.
The manual specifies that an innovation is a change that involves “a significant degree of novelty” (p.
17), but, it need not necessarily be the firm itself that has developed it – the innovative product (or
process etc.) can also be acquired from other firms or institutions through the process of diffusion.
The minimum requirement is that it is new to the firm. This concept links to Rogers’ seminal work on
the diffusion of innovation (20035). Rogers takes the same view in his definition of innovation: “An
innovation is an idea, practice of object that is perceived as new by an individual or other unit of
adoption. It matters little (...) whether or not an idea is ‘objectively’ new as measured by the lapse of
Policy Brief: Disruptive innovation
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time since its first use or discovery. The perceived newness of the idea for the individual determines
his or her reaction to it.” (p. 12).
Disruptive innovation
In its definition of disruptive innovation, the Oslo Manual refers to the work of Christensen (see next
section). The manual also warns that “(...) it might not be apparent whether an innovation is
disruptive until long after it has been introduced”, a major challenge for analysing disruptive
innovation if not conducted in hindsight.
There are two important points to be taken from the OECD definitions for the purpose of this policy
brief. First, the concept of disruptive innovation focuses on the impact of the innovation (on markets
and the activity of players). When discussing disruptive innovations, there is normally a strong focus
on the impact of the innovation, as opposed to the mere novelty of the product, service, marketing
or organisational technique. Incremental innovations, by contrasts, tend to improve existing products
without causing major structural changes in the underlying markets.
Second, disruptive innovation is not restricted to any of the basic types of innovation as defined in
the Oslo Manual (or elsewhere), such as product or process innovation. It would therefore be
possible to classify different innovations in an innovation framework, depending on (i) the type of
innovation and (ii) the degree of novelty (see Table 3-2). The arrows in the matrix indicate that the
borderlines between the different categories and layers can be blurred. An innovation can lean more
towards one end or the other, but it may be difficult to place it exactly into one of the 16 cells.
Whether the introduction of a completely new product (level 3 - ‘new to the world’) has ‘disruptive’
character (level 4) or not, may be subject to debate and only be fully understood in hindsight.
Similarly, the launch of a new product may be linked with the introduction of new processes and
marketing techniques, which makes it difficult to precisely place the innovation in the matrix.
Table 3-2: Framework for classifying innovations (based on OECD Oslo Manual)
Degree of novelty
Type of innovation
New to
firm
New to
market
New to
worldDisruptive
Product innovation
Process innovation
Marketing innovation
Organisational innovation
Innovation in manufacturing vs. services – a common misunderstanding
A third dimension that could be added to the above matrix is the sector in which the innovation
occurs. It is often misunderstood that ‘product innovation’ equals innovation in manufacturing, while
‘process innovation’ is about innovation in services. This is not correct. In the OECD framework, both
(innovations in manufacturing and in service sectors) can be either ‘product’ or ‘process’ innovation.
This is reflected by the definition of innovation where the term ‘product’ includes services as a subset
(see above): “(...) a new or significantly improved product (good or service)”.
In fact, innovation often has aspects of both product and process innovation. This applies in
particular to service innovation; for example, an insurance company might introduce a new model
for calculating rates (product innovation) and combine this with innovative service delivery, for
instance through a combination of online and offline channels in selling it to customers (process
Policy Brief: Disruptive innovation
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innovation). The Oslo Manual is aware of this challenge: “With respect to goods, the distinction
between products and processes is clear. With respect to services, however, it may be less clear, as
the production, delivery and consumption of many services can occur at the same time.“ It solves the
problem by suggesting that an innovation in services can be either a product or a process innovation,
or be both at the same time. (p. 53).3
For this policy brief, it is not critical whether the product or process dimension of a service innovation
is in the foreground. However it should be kept in mind that disruptive innovation can take place not
only in manufacturing sectors, but certainly in services (the case study on tourism in this policy brief
demonstrates this) and other sectors as well.
Limitations to the conceptual framework
However, from a practical perspective, there are some limitations to this categorisation. First, while
any type of innovation could have disruptive impacts, the examples quoted in literature are mostly
either product or process innovations, at least these are the main sources of the disruptive impact.
The development of a new product can be accompanied by innovations in marketing this new
product, or the introduction of a new process can require organisational changes, but the disruptive
impact is typically derived from the new products or processes. Thus, without being able to deliver a
statistical proof of this, the majority of cases discussed (as in this policy brief) are probably either
product or process innovations. Markides (2006) argues that a major distinction regarding disruptive
innovations should be made between business-model innovations and radical (new-to-the-world)
product innovations, as these would “pose radically different challenges for established firms”. The
OECD framework does not have a specific category for business-model innovations; it is partly
covered by the marketing innovation category (but goes beyond this business function).
The second limitation of the concept has already been indicated above: the matrix seems to suggest
that each innovation can be ‘simply’ placed into one of the cells. In practice, this will often be difficult
or inadequate, because the boundaries between the different sections are blurred. The categories
are nonetheless useful, particularly as they can be matched up against the widely used OECD
framework and the data that have been collected on the basis of the manual.
3.2 Analysing disruptive innovation in a Porter framework
Another framework which lends itself to assessing the disruptiveness of an innovation is the ‘Five
Forces’ model by Michael E. Porter (1980). This framework can be applied in a complementary way
to the OECD framework introduced above. While the OECD framework is helpful in mapping out and
classifying disruptive innovations, the Porter framework can be used to assess to what extent and in
what ways a disruptive trend has unfolded or is likely to further manifest its disruptive impact. Thus,
it is a framework for ex post as well as ex ante assessment of (past or anticipated) disruptive
innovations.
3The distinction between what is a ‘product’ and a ‘process’ has become much more complex inmanufacturing as well. For example, in machinery and equipment, the quality in the provision ofmaintenance services is an extremely important aspect and, from a buyer’s perspective, seen as an integralpart of the ‘product quality’.
Policy Brief: Disruptive innovation
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The model of the five competitive forces, initially developed by Porter in his book "Competitive
Strategy: Techniques for Analysing Industries and Competitors" of 1980, is a widely used and
recognised tool for analysing industrial structure, competition and the strategic options of players.
The model is based on the insight that a corporate strategy should meet the opportunities and
threats of the organisation’s external environment. Porter identifies five competitive forces that
shape every industry and every market, focusing on the activity and influence of the main actors a
company deals with (its customers, suppliers, existing competitors and new entrants) and the
characteristics of the goods or services that are traded (the risk of substitution) – see Figure 3-1.
These forces determine the intensity of competition and, hence, the profitability and attractiveness
of an industry. The objective of corporate strategy should be to modify these competitive forces in a
way that improves the position of the organisation. Porter’s model helps to identify the main driving
forces in an industry. Based on the information derived from the five forces analysis, companies can
decide how to influence or to exploit particular characteristics of their industry.
Figure 3-1: Disruptive innovation exerting an impact on Porter’s competitive forces
Source: developed from Michael E. Porter (1980)
Extending from the OECD definition, an innovation could be classified as ‘disruptive’ (or at least as
having disruptive potential), if it has a major impact on at least one of the five competitive forces.
For example, much of the disruptive impact of the internet in consumer markets can be derived from
the fact that the internet has massively increased the transparency of prices – and thus increased the
bargaining power of buyers and, ultimately, the rivalry of firms in their respective markets. In media
markets, the internet has become a potential substitute for existing products or services, for instance
for classified advertising in newspapers. Table 3-3 provides some examples to illustrate how new
technologies or other innovations (including also changes in the regulatory framework, which can
also be framed as disruptive innovations) have had an impact on their respective competitive forces.
Rivalry amongexisting firms
Suppliers Buyers
Substitutes
Potentialentrants
Competitors
Bargainingpower
of buyers
Bargainingpower
of suppliers
Threat ofnew entrants
Threat of substituteproducts / services
Disruptivetechnologywill have an
impacton specific
factors
Policy Brief: Disruptive innovation
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Table 3-3: Disruptive innovations and their impact on competition (‘Five-Forces’ framework)
Competitive force Examples of disruptive innovations and their impact
Rivalry in the market Internet: sales of used cars are increasingly initiated on specialised
internet platforms
Threat of new entrants Digital photography has enabled electronics companies to enter
the camera market
Online intermediaries taking commission from existing service
providers (e.g. hotel reservation services, best price finders)
Online retailers competing with conventional retail stores
Bargaining power of customers Internet has increased price transparency in consumer goods
Changes in the regulatory framework / liberalisation of markets,
allowing customers to select providers (utilities, telecoms)
Bargaining power of suppliers Electronic components requiring rare earth elements (dependence
on raw material providers)
Substitution of products /
services
Internet: substation of classified advertising
Computers replace typewriting machines
An analysis of an innovation with a potentially disruptive impact would as such try to describe and
assess the impact in each category.
3.3 Christensen’s disruptive technology framework
The term disruptive innovation is widely used today in the sense introduced originally as disruptive
technology by Christensen’s seminal work ‘The Innovator’s Dilemma’ (1997). Clayton M.
Christensen, a professor of business administration at Harvard Business School, analysed in this
widely discussed bestseller why incumbents frequently miss out on new waves of innovation, with
the consequence that new entrants take over much or all of their business in the respective market.
Christensen’s analysis is made from a business and management perspective, with the goal to
provide advice to managers who are confronted with emerging disruptive technologies. A central
point in his conclusion is that managers need to abandon some widely accepted rules of good
management at a certain point when it can be anticipated that a disruptive technology is likely to
break its way into the market. From his analysis, he derives some rules for companies about when to
follow traditional management practices and when alternative principles are appropriate. He refers
to these rules as the “principles of disruptive innovation” (p. xv). The rules are related to the
following principles (which apply for ‘normal’ business):
1. Companies depend on customers and investors for resources.
2. Small markets don’t solve the growth needs of large companies.
3. Markets that don’t exist can’t be analysed.
4. An organisation’s capabilities define its disabilities.
5. Technology supply may not equal market demand.
Christensen argues that most of the large and successful companies have all the capabilities,
organisational structures and decision-making processes in place that they need to successfully keep
Policy Brief: Disruptive innovation
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(incremental) innovation as part of their routine business by strictly applying the above principles.
However, the same management and business techniques that work in ‘stable’ business conditions
may not be appropriate to address challenges posed by disruptive technologies. In other words,
conventional managerial wisdom constitutes an “entry and mobility barrier” (p. 261) to disruptive
technology, as the technologies “rarely make sense during the years when investing in them is most
important.”
‘Technology’ vs. ‘innovation’
While Christensen initially (1997) used the term ‘disruptive technology’, the underlying rationale and
analysis can be –mostly– extended to non-technological fields of innovation (including the types of
innovation defined by the OECD and discussed in Section 3.1). Although most of the examples
presented in the book in more detail are disruptive technologies in the narrow sense, it is implicitly
clear that the concept is understood in a broad sense. In fact, in their sequel “The Innovator’s
Solution” (2003), Christensen and Raynor replace disruptive technology with the term ‘disruptive
innovation’. Whether they widened the application of the theory with this change of terminology, as
Yu and Hung (2010) claim, or whether they had a broader understanding of the term ‘technology’
from the start, is not quite clear.
The terms ‘innovation’ and ‘technology’ are often used almost as synonyms in the discussion, as
Rogers points out (2003, 13); he defines a ‘technology’ as “a design for instrumental action that
reduces the uncertainty in the cause-effect relationships in achieving a desired outcome.” In this
sense, a ‘technology’ is not necessarily limited to hardware, but can also be “almost entirely
composed of information”, up to the point that political philosophy or a religious idea could be
considered as technology. Implicitly, this concept is prevalent in Christensen’s work as well.
Christensen presents examples from different industries to illustrate his arguments, starting with the
hard disk drive industry, because of the rapid sequence of disruptive developments in this industry.4
Other examples he presents in his book include the mechanical excavator industry, where most of
the established producers of mechanical shovel manufacturers were “wiped out by a disruptive
technology – hydraulics” when new entrants took over the business as hydraulic excavators began to
replace mechanic ones. The incumbents had initially underestimated the potential of the new
technology and were too late in starting their own R&D to build such machinery. This process of
disruptive innovation took 20 years.
The conventional and disruptive technology S-curves
Christensen links his observations to the widely used S-curve of a technology life-cycle and the
concept of value networks. He argues that the conventional framework of intersecting S-curves,
depicting the life-cycle of a technology which is then replaced by its successor (see Figure 3-2),
reflects “the conceptualization of sustaining technological changes within a single value network” (p.
45). In this framework, the vertical axis typically depicts a single performance measure; incremental
improvements in the underlying technology drive the performance, while improvements due to new
(but not yet disruptive) technologies lead to a more pronounced performance leap. In the case of the
disk drive industry, according to his analysis, entrants to the industry were not successful in securing
4Christensen argues that the hard drive industry, for studying innovation, can be compared to the role offruit flies in genetics: similarly as fruit flies produce new generations in a very short period of time (whichenables researchers to study the impacts of different factors), the hard drive industry with its shortinnovation cycle lends itself to study the impact of disruptive technology on incumbents.
Policy Brief: Disruptive innovation
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a significant market share or even a leading position when the conventional sequence of S-curves
was dominating the industry.
Figure 3-2: The conventional technology S-curve Figure 3-3: The disruptive technology S-curve
Source: adapted from Christensen (1997), p. 45f.
Christensen argues that a truly disruptive technology cannot be plotted in this framework, because
the new technology competes on criteria different to those that were typically used to measure
performance. Thus, in Christensen’s terms, the disruptive technology operates in the early phase of
its life-cycle in a different value-network than the incumbent technology. For example, it is used in
different applications (see right part of Figure 3-3). Often, the innovative technology is initially
simpler and offered at a lower price than existing products, appealing to low-end, price-sensitive
customer segments. After some time, however, when the technology has matured, it may surpass
the incumbent technology even regarding the traditional performance criteria that used to rule the
market, and it will then gradually replace it (see left part of Figure 3-3). The point at which disruptive
innovations start to challenge existing products is when the marginal utility from further
improvements in the traditional performance criteria decreases.
Govindarajan and Kopalle (2005, 2006) support this framework (at least for low-end innovations5)
and suggest considering the disruptiveness of innovations therefore as a continuous variable, since
the performance criteria and the respective performance of the disruptive technology change
relative to those of the existing products.
Christensen concludes that this represents the ‘innovator’s dilemma’ (lending the book its title): he
believes that traditional recommendations to stay ahead of the competition, such as increased
investment in R&D, forecasting and mapping, and longer investment and planning horizons, are
suitable means for the conventional s-curve pattern (as depicted in Figure 3-2), but not adequate to
cope with disruptive innovation.
5It can also be the other way round, however: an innovative technology can be high-end rather than low-endright from the start (cf. Govindarajan and Kopalle 2006) and provide added-value to customers in specificaspects (but not with regard to the performance criteria which govern the mass market), as the example ofsolid state drives (SSD) in this section demonstrates. Over time, the price and performance gap regardingthe conventional technology may narrow, so that the added-value regarding other criteria outweighs thedisadvantages. This is the point at which the disruptive technology will become the dominant one in themass market.
Pro
du
ctp
erf
orm
ance
Time or engineering effort
first technology
second technology
third technology
Pro
du
ctp
erf
orm
ance
Time or engineering effort
technology 1technology 2
technology 2
Performance asdefined in
Application “A”
Performance asdefined in
Application “B”
Policy Brief: Disruptive innovation
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A particular challenge he has observed is that large companies may fail to understand the early
signals that indicate a technological shift, as they are too focused on the current demand pattern of
their leading customers. In market research (and in conversations with sales representatives),
leading customers will normally stress the importance of outstanding performance with regard to the
existing criteria – e.g. they expect more storage capacity in disk drives at a given price. The company
will then place all its efforts in continuously improving its performance in this respect, to the point
that they ‘overachieve’. In the shadow of this race to be top dog in terms of the existing performance
criteria, the disruptive technology starts to emerge in other applications or markets (‘value
networks’), until it begins to compete with the incumbent technology even in the main market – and
will then be demanded by the lead customers as well. In essence, Christensen argues that the
customers of today are possibly not the best advisors to predict future demand.
Excursus: a recent example – the shift from HDD towards SSD
The diffusion of solid-state drives (SSD)6 could be used as a more recent example of innovation in the
same industry (disk drives) that Christensen analysed, and as a test-bed to support (or challenge) his
arguments. SSDs are beginning to replace hard-disk-drives (HDD) in notebooks and desktop
computers, although they are (as of yet) more expensive while offering less storage capacity than the
incumbent technology. The reason is that they started to compete in performance criteria different
to storage capacity: noise, energy consumption and computing speed. In contrast to hard-disk-drives,
SSDs have no moving parts and therefore make no sound – they operate with complete silence.
Moreover, they consume less energy (allowing for increased battery times in notebooks), and are
much faster and responsive than HDDs because data is accessed directly from the flash memory.
Thus, in Christensen’s terminology, they started to compete in a different ‘value network’, appealing
to users who place more emphasis on the above mentioned criteria than on capacity. HDD will stay
superior where the performance criterion is gigabyte per cost unit – but will probably lose ground
here over time as well. Therefore, it is likely that SSD will gradually replace HDD in most devices,
including in the former value-networks in which HDD are still dominant.
In short, SSDs can be considered another disruptive technology in the disk drive industry. Applying
Christensen’s theory, it could be expected that, once again, this will have major repercussions on the
structure of the industry – some of the established actors who were leading producers of HDDs (but
failed to anticipate in due time the shift towards SSD) could be driven out of the market, while
entrants or former niche market players, who bet on this technology, should be able to exploit their
first-mover advantages. It remains to be seen whether the theory holds true for this new generation
of computing storage devices as well. Interestingly, many SSD manufacturers, including some of the
leading companies, are not engaged in the manufacture of hard-disk drives, and not even in the
closer segment of flash memory devices.7 This indicates that, once again, new entrants are likely to
secure a significant piece of the market in the new generation of disk drives.
6a data storage device that uses solid-state (flash) memory to store data with the intention of providingaccess in the same manner of a traditional hard disk drives (HDDs) – cf. http://en.wikipedia.org/wiki/Solid-state_drive
7See: List of solid-state drive manufacturers published at Wikipedia:http://en.wikipedia.org/wiki/List_of_solid-state_drive_manufacturers (accessed in April 2012)
Policy Brief: Disruptive innovation
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Recommendations for managers
While much of Christensen’s seminal bestseller addresses, as the title already says, the innovator’s
dilemma, managers are also given advice how to deal with the issue (in greater detail in the sequel of
2003 – ‘The Innovator’s Solution’). He links his recommendations to the five principles of disruptive
innovation (see above). According to his analysis, successful managers harness these principles to
exploit disruptive technology in the following ways (p. 113 f.):
1. Resource dependence: they embed internal projects to develop and commercialise
disruptive technologies – the key is to align the disruptive innovation with the ‘right’
customers (rather than letting lead customers’ demand entirely determine innovation
efforts)
2. Small markets: the projects are placed in organisations small enough to get excited about
‘small’ opportunities and win
3. Analysis of non-existing markets: failing early and inexpensively is an option, i.e. part of the
plan.
4. Capabilities of the organisation: they utilise some of the resources of the mainstream
organisations, but chose not to rely on its processes and values – they create a project
organisation within the organisation.
5. Technology supply vs. market demand: for the commercialisation of disruptive technologies,
they find (or create) new markets rather than regarding the innovation as a break-through in
the existing market.
A central conclusion Christensen draws from his analysis is that “although the mortality rate for ideas
about disruptive technologies is high, the overall business of creating new markets for disruptive
technologies need not be inordinately risky” (p. 260). He recommends that companies should not
adapt a generic technology strategy as to whether they should always be leaders or followers, and in
particular that they should “take distinctly different postures whether they are addressing a
disruptive or a sustaining technology.” However, he does not extend his recommendation to the
point that companies should absolutely aim to be first-movers in developing/adopting disruptive
technology, even if disruptive innovations “entail significant first-mover advantages”. He concedes
that there is strong evidence that companies that do well in extending the performance of
conventional technologies “through consistent incremental improvements do about as well as
companies with a pro-active approach to exploit technological leaps.” This conclusion seems, in a
way, not fully consistent with the central idea of the book that disruptive developments can
undermine company strategies which work fine under stable conditions.
3.4 Critique and debate of Christensen’s work
Christensen’s work on the impacts of disruptive technology and how companies should deal with
them has triggered an intense discussion and critique of the concept in academic and business
literature. The main aspects that have been addressed in various papers are reviewed in this section.
“A disruptive innovation (i.e., one that dramatically disrupts the current market) is not
necessarily a disruptive innovation (as Clayton Christensen defines this term).”
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Schmidt and Druehl (2008)
Lack of a precise definition and issues to be further explored
A cornerstone of the debate is the concept of disruptive innovation as such, i.e. how exactly it is
different from other (non-disruptive) innovations.
In a frequently quoted paper, Danneels (2004) offers a general critique of the concept of disruptive
technology and suggests a research agenda of issues that need to be further addressed – both by
practitioners and scholars. He argues that the actual definition of a ‘disruptive technology’ is still
vague, even if the general rationale behind it is well understood. If such technologies pose a threat to
industry incumbents and an opportunity to entrants, as Christensen argues, “managers and scholars
need to be able to distinguish disruptive from sustaining technology” (p.247). A central question in
this context, in his view, is whether a technology is inherently disruptive or whether its disruptiveness
may differ between markets and industries, according to the use context. For instance, the internet
maintains discount brokers, but can be disruptive for department stores as they are challenged by
online sellers.
Another issue he raises is the choice of performance metrics to plot the performance provided by the
disruptive technology. Christensen’s trajectories of performance improvement typically consist of
one (or a few) performance metrics; in reality, however, the number of performance dimensions
(viewed from a customer’s demand perspective) can be much higher, which makes it more
complicated to benchmark the performance of the conventional vs. the disruptive technology.
There are several more questions which Danneels has grouped into five main themes – a proposal for
a research agenda for disruptive technology (see Table 3-4).
Table 3-4: Themes and questions for disruptive technology research
Themes Questions to be addressed (selection)
Definition Are there different types of technological change? Is disruptive technology a
distinct type of technological change and, if so, how is it different?
Is a technology inherently disruptive, or does disruptiveness depend on the
perspective of the firms confronted with the technological change?
At what point can disruption be said to have occurred?
Do different types of technological change have different sorts of impact on firms
and industries?
Predictive use of the
theory
Can a theory about the impact of technological change be used to make ex ante
predictions about the fates of particular firms and industries?
Do these predictions generalize across different industries?
Can these predictions form the basis for managerial prescriptions?
How can a potentially disruptive technology be spotted in its infancy?
Can predictions be made regarding the origin and likely success of entrants?
Explaining the success
of incumbents
What are the characteristics of incumbents that survive and prosper in the face of
disruptive technological change in comparison to those that falter?
How does the legacy (e.g., in assets, operating procedures, business networks) of
incumbent firms affect their ability to harness technological change?
Where do entrants come from? What is the basis of their success?
What is the impact of a marketing capability on the fate of incumbents when faced
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with a disruptive technology?
What is the role of the competence of individual middle- or top-level managers of
incumbent firms?
Merits of being
customer-oriented
under disruptive
technological change
Does the focus of customer orientation to current versus potential customers
impact the fate of incumbents?
How does the relationship with current customers drive investments in
technological alternatives? Which customer research tools inhibit versus facilitate
successful harnessing of technological disruption?
Merits of creating a
spin-off to pursue
disruptive technology
What are the advantages and disadvantages of creating a separate organisation to
pursue disruptive technology?
Are these advantages and disadvantages different for the technological and
commercial stages of this pursuit?
How should the relationship between the mainstream organization and the spin-off
be structured?
Source: Danneels (2004)
Danneels proposes his own definition of disruptive technology, which is broadly in line with
Christensen’s work and the OECD Oslo Manual definition, but has the advantage of being more
precise in regard to naming the parameters of determining the impact – namely by focusing on the
performance metrics: “A disruptive technology is a technology that changes the bases of competition
by changing the performance metrics along which firms compete.” (p. 249). The example of the solid-
state drives replacing hard-disk drives (see above) could be used to illustrate this perspective.
Sometimes there are different views as to whether a specific shift in technology has been disruptive
or not. With a view to Christensen’s example of the disk drive industry, for instance, critics state that
only the transition to 5.25-inch drives was clearly disruptive, with incumbents failing and new
entrants taking over. The following transition to 3.5-inch drives is not seen as disruptive in this
respect by some, as many of the established firms did not fail to successfully make this shift. In short,
the evidence of established companies having difficulties with migrating to the disruptive technology
(as Christensen claims) is, at best, mixed (Danneels 2004, p. 251) - there are also many examples of
incumbents successfully embracing a new technology to their advantage (see Table 3-5).
Table 3-5: Examples of incumbents successfully embracing a new technology (Danneels, 2004)
Industry Examples
Finance (brokerage) Charles Schwab (an established financial industry incumbent) embracing online
brokerage
Consumer electronics Most US manufacturers of television sets were previously dominant producers of
radios (Klepper/Simons 2000)
Hewlett-Packard, as an incumbent, successfully managed the shift to ink-jet printers
Automotive The major producers of hybrid and electric cars are still the established car makers
Tourism Most of the incumbents among tour operators (of standard package tours)
successfully embraced the internet for their marketing and sales activities
Source: Danneels (2004), p. 251 f., own examples
High-end and low-end disruption, radical vs. disruptive innovation
Govindarajan and Kopalle (2006) support Christensen’s framework, but suggest refining it by making
a distinction between high-end and low-end disruptiveness. Low-end disruptions start their life-cycle
Policy Brief: Disruptive innovation
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in lower-cost segments of the market, appealing to price-sensitive users. High-end disruptions are
typically more radical in their novelty and compete with existing products or services not on cost, but
by offering distinctive features. The case of solid state drives (see Section 3.2.1) is a good example of
a high-end disruption. The concept of high-end disruptiveness is closely reflected by classical
diffusion theory (Rogers 2003); the diffusion of such innovations follows the well-described path,
starting with early adopters before appealing to the mainstream market.
They emphasise, in this context, that the ‘disruptiveness’ of an innovation is not the same as its
‘radicalness’ (in contrast to the OECD definition, see Section 3.1). They regard disruptiveness as a
market-based dimension which refers to the extent an emerging customer segment sees added value
in the innovation at the time of its introduction. Radicalness, by contrast, is a technology-based
dimension and refers to the degree of novelty rather than to the impact in the market. An innovation
can be ‘radical’ in this sense without becoming disruptive. Govindarajan and Kopalle offer as
examples the replacement of VHS with DVD players, many pharmaceutical products and cordless
phones relative to wired phones.
Yu and Hang (2010) support the distinction between low-end and high-end innovations and suggest
classifying disruptive innovations in a four-field matrix, with the performance on traditional
attributes as one of the dimension (lower / higher) and cost as the other (lower / higher).
Schmidt and Druehl (2008) go a step further and offer an alternative terminology and
complementary framework which maps the direction of diffusion (starting from high-end or low-end
market segments) with the type of innovation in terms of its novelty (see Table 3-4).
Figure 3-4: Innovation framework: mapping type of diffusion by type of innovation
Type of
innovation
Type of diffusion to
which it maps
Description Example
Sustaining High-end
encroachment
The new product first encroaches on the high
end of the existing market and then diffuses
downward.
Pentium IV relative
to Pentium III
Disruptive Low-end
encroachment
The new product first encroaches on the low
end of the existing market and then diffuses
upward.
New-Market
Disruption
Fringe-market low-
end encroachment
Before encroachment begins, the new
product opens up a fringe market (where
customer needs are incrementally different
from those of current low-end customers).
5.25 inch disk drive
relative to 8 inch
drive
Detached-market
low-end
encroachment
Before encroachment begins, the new
product opens up a detached market (where
customer needs are dramatically different
from those of current low-end customers).
Cell phone relative
to land line
Low-End
Disruption
Immediate low-end
encroachment
Low-end encroachment begins immediately
upon introduction of the new product.
Discount relative to
department stores
Source: Schmidt and Druehl (2008)
They claim that they tested the validity of the terminology of their framework against the 75
innovations which Christensen and Raynor (2003) classified as being disruptive, and that the
framework could well be applied. The authors suggest that their framework could be applied by
companies to recognise and assess the risks and opportunities of a low-end encroachment (which
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includes the type of disruptive innovation described in detail by Christensen). To do so, companies
have to make the following steps:
- Step 1: Identify the market segments and primary attributes (i.e. product performance
criteria) of the market
- Step 2: Assess each market segment’s willingness to pay for each attribute
- Step 3: Assess which segments will buy a given new product over time
The predictability of disruptive technology
Another central point in the critique of Christensen’s work is the question of whether the disruptive
technology framework is suitable for making ex ante predictions (see also Section 2.1.3 –
challenges). The examples upon which Christensen based his theory could be subject to bias. In
business, to be useful managerially, the main issue is how well the concept works in anticipating and
predicting disruptive trends. This is not at all clear. Criticism in this respect goes so far as to say that
luck could be an alternative explanation for why some companies succeeded in exploiting disruptive
shifts, while others fell victim to the changes (Barney 1997, quoted in Danneels 2004). The challenge
for taking decisions on investment in R&D and developing commercial solutions is that the winners
among emerging technologies are rarely clear at the outset.
A specific challenge in this context is to define criteria for assessing the potential of disruptive
innovations. Christensen suggests charting the trajectories of performance improvement as
demanded in the market against the performance improvement supplied by the technology.
However, this requires a knowledge of the performance criteria right away, i.e. knowing what future
markets will demand, and having the respective data for the competing technologies. This is not
always the case when a potentially disruptive technology is still in its infancy.
Govindarajan and Kopalle (2006) investigated the issue of whether it can be helpful to measure the
disruptiveness of innovations ex post for the purpose of making ex ante predictions and conclude
that “the disruptive-technology framework does indeed help us to make ex ante predictions about the
type of firms likely to develop disruptive innovations and that this framework presents fruitful
opportunities for future research” (p. 12).
Impact is not generic for all types of disruptive innovation - business-model and product
innovations differ in their effects
As indicated before, Markides (2006) criticizes Christensen’s concept for not making a sufficient
distinction between different types of innovation. In particular, he argues that disruptive business-
model innovations are completely different in their impact on established firms than product
innovations: “(...) treating them all as one and the same has actually confused matters considerably.”
(p. 19).
By ‘business-model innovation’, Markides means the introduction of a new business model in an
existing company without the discovery of new products or services – the innovators “redefine what
an existing product or service is and how it is provided to the customer.” He quotes Amazon as an
example: it did not discover bookselling, but redefined what the service is all about and how it is
provided. In case of disruptive innovations, the new model is initially centred round different key
success factors and addresses different customer segments, but over time may improve in traditional
criteria as well and then extend its service to the former customer segments. While this thought is
fully in line with Christensen’s model, Markides disagrees that disruptive (business model)
innovations will necessarily dominate the market at one point and replace the former model. He
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argues that the disruptive and the traditional model can co-exist in some markets – it is perfectly
possible that the ‘disruptive’ grows only to a certain percent of the market, without fully substituting
the existing way.
He concludes that it may therefore be reasonable for established companies to ignore disruptive
innovations and to continue focusing on their established business model. Companies need to define
their response to disruptive innovation, but “response does not necessarily mean that they have to
adopt it.” He names three exceptions where established firms may find it advantageous to create
disruptive business model innovations:
1. when they enter a new market where established competitors have first-mover advantages;
2. when the company is facing a crisis and the current strategy is clearly inappropriate;
3. when they are attempting to scale up a new-to-the-world product to make it attractive to
the mass market.
Markides argues that the situation is different for radical product innovations. In his view, they
typically result from a supply-push and can significantly change prevailing consumer habits and
behaviours, thus undermining the competencies and complementary assets on which existing
competitors have built their success. However, in his analysis, early pioneers that create the new
products markets are “very rarely the ones that scale them up from little niches to big, mass
markets.” Those that do step in “at the right time” and make heavy investments to exploit scale
economies, develop brands and control the distribution channels. If latecomers manage to shift the
basis of competition away from purely technical performance to other product attributes (e.g. price),
they have a good chance of competing with the first movers.
“The irony is that in many cases, a late entrant captures the market even when their
product is not as good as the products of the early pioneers.”
Markides (2006), p. 23
Simplistic understanding of customer demand
Danneels (2004) remarks that “the firms portrayed by Christensen show a shallow understanding of
their customer’s needs.” He thinks that it is unlikely that a truly customer-oriented company would
only rely on basic market research data and not have an understanding of latent, unexpressed and
emerging needs. Thus, Christensen’s argument that companies fail in disruptive technology because
they only listen to their leading customers (and their present demand) maybe be too simplistic and
reflect “a very reactive, narrow notion of customer orientation”.
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4 Sector case studies
4.1 Disruptive innovation in the chemical industry
4.1.1 The chemical industry in Europe
“The chemical industry is one of the European Union’s most international, competitive
and successful industries, embracing a wide field of processing and manufacturing
activities. The output of the chemical industry, which includes all 27 EU member states,
covers a wide range of chemical products and supplies virtually all sectors of the
economy. The industry also provides a significant contribution to EU net exports.”
“By innovating constantly and consuming fewer resources, Europe’s chemical industry is
a driving force for sustainable development.”
(CEFIC 2011)
The chemical industry, as discussed in this case study, covers those business activities described by
NACE Rev. 28 Division 20 as: the manufacture of chemicals, chemical products and man-made fibres
(see Annex I for subsectors covered).
The chemical industry is a large manufacturing sector. About 29,000 enterprises provide jobs for
about 1.3 million people in the EU.9 The sector is dominated by large enterprises (with more than
250 employees) which account for roughly 70% of value added and two thirds of employment
(Eurostat). A striking feature of the industry is the “dichotomy between the highly fragmented nature
of the industry as a whole and the highly concentrated nature of some of the sectors within it”
(Festel, in: Droescher et al. 2003, p. 6).
It has close ties to many other industries. On the supply side, the fuel processing industry (as a major
supplier, NACE Division 19) is closely linked with the chemical industry; downstream, several sectors
such as the pharmaceutical (NACE 21) and the rubber and plastics industry (NACE 22) are key
customers, but nearly all other manufacturing industries depend on materials from the chemical
industry as well. As a provider of innovative materials and technological solutions, the chemical
industry plays an important role for industrial innovation and competitiveness as a whole. Products
and services provided by the chemical industries are part of everyday life: they can be found in food,
clothing, housing, transport, communications and consumer electronics. In many ways, the industry
plays a very important role in coping with key future challenges, such as climate change (renewable
energy, energy saving) and sustainable mobility.
8NACE Revision 2 is a four-digit classification of business activities. It is a revision of the “General IndustrialClassification of Economic Activities within the European Communities”, known by the acronym NACE andoriginally published by Eurostat in 1970. NACE Rev. 2 replaced the earlier used version Rev. 1.1 on 1 January2008.
9European Business: Facts and figures 2009, p. 153, Table 6-2 (sum of figures for “basic chemicals” and“misc. chemical products”). CEFIC, the European industry federation for the chemical industry, quotes afigure of 1.2 million people in its report “Facts and Figures 2011”.
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The chemical sector is a highly mature industry with stable product categories, players and value
systems.10 This does not mean, however, that R&D and innovation – including product and process
innovation – are not important. Optimising material and work flows is critical in a framework of
global competition (cf. Dröscher et al., 2003).
According to Eurostat (2009, p. 154), the production index for chemicals manufacturing across the
EU rose continuously and strongly (an average of 3.4 % per annum) during the period between 1997
and 2007, far outpacing the growth recorded across industry. Employment, however, has decreased
on average by 2.2% per year in Europe from 2000-2010, while labour costs increased by 3.6% p.a.
(CEFIC 2011).
Segments of the chemical industry and the role of innovation
The chemical industry has adopted a convention of defining itself into three main segments, which
do not directly corresponding to the NACE classification: basic chemicals, fine and speciality
chemicals, and formulated chemicals. There are focused players which service one or a few specific
markets within these segments (about 75% of the companies and 60% of sales) as well as of non-
focused hybrid companies, typically very large companies such as BASF in Germany, which cover
practically all segments with their product and service portfolio (about 25% of companies, accounting
for about 40% of sales). Analysts expect the some of the complex hybrids which used to contain
chemical and non-chemical companies under one roof will start to break up and spin off their non-
chemical businesses to focus their portfolio on individual product segments.11
Basic chemicals (mostly covered by NACE 20.1) form the foundation of the chemical industry. Its
manufacturers produce inputs for the remainder of the chemical industry from raw minerals, crude
oil, gas and energy, typically in large-scale plants. Much of the produced output remains in the
chemical industry itself, where it is refined to downstream products. Some examples for output are
petrochemicals, basic inorganics, basic organics, and industrial gases. The production is characterised
by large output volumes as well as by high capital and energy intensity. Raw materials (referred to as
"feedstock") are basic commodities and the main input besides capital. Production costs therefore
depend heavily on the prices for feedstock, which are typically commodity prices. Outputs are also
commodities, i.e., standardised products that are bought in huge quantities with price being the
major decision criterion for the buyer.
In this segment, R&D&I intensity is comparatively low, due to the limited potential for product
differentiation. Outputs are the initial materials for colorants, paints, adhesives, coatings, medicines
and other products. Typically, the output markets are highly transparent. Due to the high market
transparency and standardised product characteristics the switching costs for buyers are low and the
markets are very competitive, implying comparatively low profit margins. Thus, cost leadership
strategies dominate in this segment, favouring large players. In fact, the commodities industry is
becoming more and more concentrated, in Europe and worldwide.
Fine and speciality chemicals are the next element in the chemical industry’s value system. The
companies in this segment use basic chemicals as a major input to produce a large variety of special
substances, often in relatively small volumes. Some of the outputs are used by other segments of the
10The term "value system" is used in this study according to Porter (1985). While a "value chain" categorisesthe generic value-adding activities of an organisation, a "value system" refers to interconnected systemsbeyond individual organisations.
11figures and assessment published by Festel (2003, in Droescher et al., p. 8)
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chemical industries and manufacturers of plastics products (e.g. soaps as input for toiletries). Other
outputs are sold to outside the combined chemical industries. For example, food additives serve as
inputs for the food processing industry or man-made fibres (NACE 20.6) as input for the textile
industry.
Production differs considerably from the basic chemicals industry. Much of the output is custom-
manufactured for specific customers, imposing highly specific requirements onto production plants.
Often, product specifications are developed in co-operation with the customer from the start. This
implies a higher R&D&I intensity than in the basic chemicals segment (as companies compete mainly
in quality and specialisation), as well as higher switching-costs for customers. Overall, the
manufacture of fine and speciality chemicals is an industry with comparatively high profit margins,
where price is not the determining factor for establishing business relationships. Some products,
however, sometimes called “bulk specialities”, are easier to substitute. Pricing for these products has
become highly competitive, as market transparency has increased.
Manufacturers of formulated chemicals typically use basic chemicals as well as speciality chemicals
as inputs. This segment differs from the former two sub-sectors in that its goods are mostly produced
for end users and not as inputs for other products. Outputs of this sector include pesticides (NACE
20.2), paints and coatings (20.3), soap, detergents, cleaning and polishing products, as well as
perfumes and beauty products (20.4). The formulated chemicals sector is characterised by a higher
R&D intensity. The brand name and quality are very important in this segment; therefore, companies
that are well positioned can command premiums and earn relatively high margins. Still, competition
by non-branded products exists and forms the foundation for a low-price segment of the market.
R&D intensity
The chemical industry is one of the most innovation oriented sectors, accounting for about 6% of the
world’s total industrial R&D expenditures and investing about 2.5% to 3% (speciality chemistry
producers) of its turnover in R&D (Rammer, in Droescher et al. 2003). 3% is a typical value for large
companies such as BASF and producers of specialty chemicals, while commodity producers normally
spend less than 1% on R&D. In total, this is quite a lot for a highly capital intensive industry.
According to Cefic, the R&D intensity in the European chemical industry is, however, below US and
Japanese levels – European companies spend on average 1.5% of sales on R&D, compared to 2.1% in
the US and 4.1% in Japan (see Figure 4-1).
Figure 4-1: R&D intensity in the chemical industry (R&D spending in % of sales)
Source: CEFIC (2011)
2.1 1.9 1.81.5
2.8 3.02.7
2.1
5.3 5.15.5
4.1
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1997 2000 2003 2008
EU US Japan
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In the following section, the main trends and characteristics of innovation in the chemical industry
are described. A central aspect in this assessment is that innovation processes in the chemical
industry tend to be strongly connected with product and process innovations in other sectors.
4.1.2 The impact of chemical innovations in other industries
Process and product innovations originating in the chemical industry do not only have an impact on
the sector itself, but can trigger important innovations in other industries as well. For example, new
polycarbonates are an important base for optical storage media and liquid crystals for displays
(Rammer, in Droescher at al. 2003). Chemical problem-solving expertise is needed now more than
ever so that everybody can have clean air, safe water, healthy food, reliable medicine, and
environmentally friendly products and so that materials and energy production can become more
sustainable. In short, an innovative chemical industry is key to tackling the global challenges of today
(see Section 4.2.3 for practical examples).
The pathways of the ‘Innovation transfer’ to / from the chemical to other industries
Innovation in the chemical industry can enable innovation in other sectors in different ways. New
chemical substances can improve the quality of the products in which they are used or allow for
more efficient production processes downstream in value network. Process innovations in the
chemical industry can result in lower procurement costs for clients by reducing prices of inputs.
Finally, the chemical industry can trigger innovations in supply industries through its own
requirements, such as better machinery and apparatus (see Figure 4-2).
Figure 4-2: Impact of chemical innovations on innovation activities of other industries
Source: Rammer / ZEW, in Droescher et al. (2003), p. 123
Chemical innovations(new materials)
Improved ProductCharacteristics
• longer durability,• reduced weight,• smaller size,• more environment
friendly,• increased stability,• improved visual
characteristics, newfunctionality
Lower ProductionCosts
• eased manageability,• more diverse
applicability,• higher load capacity,• reduced resource
consumption• increased
performance,• improved recycling
Price-reductions inmaterials andcomponents
• lower product prices,• improved
competitiveness ofproducts withchemicalmaterials
accelerated diffusionof new products
Requirements to Suppliers of the Chemical Industry
• improved basicmaterials• new facilitites, machines and apparatus• new producer services
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Improving product characteristics
Perhaps the most important “innovation transfer” from the chemical industry into other sectors is
the improvement of product characteristics through new materials which are developed and
supplied by the industry. This can either make sustaining innovations of product features possible
(such as a longer durability or reduced weight), or be part of a disruptive innovation, for instance by
enabling totally new applications of an existing product or allowing for the production of a totally
new product. Examples include new fibre reinforced composite materials which are applied in the
aircraft or automotive industry to reduce weight.
Data from the annual German Innovation Survey by ZEW, a representative survey among companies
about their innovation activities, showed that the chemical industry is the most important sector in
initiating new products in manufacturing. Almost 18% of the turnover from product innovations in
manufacturing originates from innovations the chemical industry.12
Process innovations - enabling lower production costs
The chemical industry is also an important enabler and facilitator of process innovation in other
sectors. Often, new chemical materials are specifically designed with the goal of increasing the
productivity of production processes in the (end) user industry. For example, new and better
materials for detergents facilitate the work of professional cleaning companies. There can be a
significant time lag, however, before new materials are used in innovative ways by other industries;
polycarbonates initially developed in the 1950s are still a critical basis for fundamental innovations in
the electronics industry (Rammer, in Droescher et al. 2003).
With regards process innovations, the chemical industry ranks third after the mechanical engineering
(by far the most important sector) and software industry as a catalyst of innovation. About 8% of
cost-savings due to supplier-driven process innovations can be attributed to the chemical industry,
according to the ZEW innovation survey.
Facilitating innovation Price-reductions in materials and components
The chemical industry does not only enable process innovations in other industries, but is itself a
highly innovative sector. Process innovation within the chemical industry has important impacts on
other sectors nonetheless, for instance as it results in reduced prices of materials, i.e. reduced
procurement costs for the client industries. In particular, if the respective products produced by the
user industries compete with other types of products (risk of substitution), this can be an important
factor for the competitiveness of the respective industry and have an accelerating effect on
innovation activities in those sectors. This type of indirect innovation effects is indirect and difficult
to observe, however (Rammer, in Droescher et al. 2003). More importantly, process innovation in
the chemical industry, and in other process industries, are seen as essential to achieve sustainable
growth objectives (see following section on process intensification).
Innovation inputs requested from suppliers
The role of the chemical industry for innovation as a customer of other industries seems to be less
pronounced, according to innovation survey data. The automotive industry and, to some extent,
12All data from 1999 (to be updated, if possible for the final version of the policy brief). Figures are quotedfrom Rammer, in Droescher et al. (2003).
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mechanical engineering are those that ‘force’ their suppliers to innovate.13 However, the close links
and cooperation between the chemical industry and the machinery and equipment industry should
not be underestimated. For instance, there is rising pressure on the chemical industry to further
improve the energy efficiency of its production processes in response to rising energy costs,
increasing environmental concerns and the resulting demand to further reduce the ecological
footprint. This cannot be achieved without technological innovation in the production plants. It may
not emerge from statistical figures which are obtained from representative surveys, but the
innovativeness of the machinery and equipment industry is probably an essential success factor for
process innovation in the chemical industry – it has been and will be so in the future.
4.1.3 Specific innovation areas with a disruptive potential
In interviews with sector experts and Cefic, the European industry federation, three areas of
innovation were found to be particularly relevant in terms of their disruptive impact on the chemical
industry and other sectors:
- process intensification,
- substitute for non-renewable substances in the feed stock,
- innovation in advanced materials,
- innovations in the field of nanotechnology.
The state of play in these fields, and their impact is briefly described in this section. There is
overwhelming agreement that Europe must make every effort that its chemical companies are
amongst the innovation leaders and drivers in these areas. This is seen a major success factor for the
future competitiveness of the industry.
Process intensification
The chemical industry, as well as other process industries, are about to undergo a fundamental
change in their production processes. Process intensification (PI) has been discussed for many years,
but has now gained momentum as new break-through technologies are coming forward. Novel
process approaches constitute a disruptive shift in process design which can lead to massive size
reductions of equipment or plants; as such, novel processes have probably the highest disruptive
impact on the sector. This topic is closely linked with developments and the implementation of some
of the Key Emerging Technologies, such as biotechnology and nanotechnologies for energy. It has
important implications for the raw material efficiency of processes and for achieving reductions in
greenhouse gas emissions.
The process intensification can result from shrinking the size of individual pieces of equipment, from
cutting the number of unit operations or apparatuses involved, or refer to new technologies which
increase the energy efficiency of processes, or cut wastes of by-products formation. PI has clearly a
high disruptive potential in the sense of Christensen’s framework for disruptive technology, as the
innovation may “result in the extinction of some traditional types of equipment, if not whole unit
operations” (Stankiewicz 2000).
13ibid.
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Stankiewicz suggests to differentiate between two types of PI (p. 23 f.):
- process-intensifying equipment, such as novel reactors, intensive mixing, heat-transfer and
mass-transfer devices; and
- process-intensifying methods, such as new or hybrid separations, integration of reaction and
separation, heat exchange, or phase transition, techniques using alternative energy sources
(light, ultrasound), and new process-control methods (like intentional unsteady-state
operation).
The industry itself has prepared a proposal how innovation through PI could be advanced in order to
make faster use of its benefits, notably as a catalyst to address global environmental challenges. The
SPIRE proposal (“Sustainable Process Industry through Resource and Energy Efficiency” – see section
on process intensification), a proposed public-private partnership for research and innovation,
gathers partners from different industries and has the support of Cefic, the European federation for
the chemical industry. The proposal was developed and is driven by the Resource and Energy
Efficiency Partnership (REP) involving more than 10 major process industry sectors which together
represent 20% of the European economy.14 The consortium behind SPIRE claims that it is addressing,
“for the first time, in addition to research, the innovation opportunities for resource efficiency from a
full value chain perspective”, probably a key success factor for driving innovation in such domains.
SPIRE has the ambition that the EU process industry should be the most competitive at the global
level, with the specific goals of
1. a reduction in fossil energy intensity of up to 30% from current levels by 2030 through a
combination of, for example, cogeneration-heat-power, process intensification, introduction
of novel energy-saving processes, and progressive introduction of alternative (renewable)
energy sources, and
2. up to 20% reduction in non-renewable, primary raw material intensity versus current levels
by 2030, by increasing chemical and physical transformation yields and/or using secondary
(through optimised recycling processes) and renewable raw materials.
“The SPIRE PPP will involve large corporate, top-academia and high-tech SMEs to
develop innovative technologies and breakthrough materials of the future that will
modernise the European industrial landscape in becoming a competitive process
partnership, as a global solution provider towards a clear set of breakthrough ambitions
related to crucial resource efficiency targets.”
Besides technological challenges that need to be addressed to drive innovation in this domain, there
is a major business issue to be addressed: due to the disruptive impact of the new technologies,
chemical companies would have to fully write off existing production facilities well ahead of their
time. In short, the innovation may render existing working capital useless. Therefore, the economic
rationale for an individual company when to adopt the new technologies can be quite different from
the societal rationale (which would favour a faster adoption). This has policy implications; to
accelerate adoption, it could become necessary to agree on a fair way of sharing the costs (for
14For more information about the proposal, see SusChem Blog: http://suschem.blogspot.com/2011/11/spire-proposes-process-efficient-europe.html
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making a faster switch) among all stakeholders in industry and society (see policy recommendations
in next chapter). Conceptually, there may be a difference in this case to Christensen’s framework of
disruptive technology, where the market determines the time when the new technology becomes
dominant; in the case of PI, the business case from a market logic might differ from the ‘business
case’ from a global, societal perspective.
The search for alternative feedstocks
The high prices for petroleum and natural gas, the uncertainty about the remaining stock, and the
pressure to achieve a lighter carbon-footprint, have led to considerable efforts in the chemicals
industry to widen its feedstock base, particularly through broader use of bio-based renewable raw
materials as replacement and complement for fossil feedstocks (HLG 2010, VI). The chemicals
industry is largely based on oil and gas, but uses increasingly renewable materials such as starch,
vegetable oils or ethanol from different feedstock sources. R&D on the use of alternative feedstocks
has been conducted for decades and is still seen as a major area in terms of its innovation potential.
It is closely linked with the other area of innovation discussed above, process intensification, since
new feedstocks would have to be processed in different ways. Feedstocks under consideration
include coal from unconventional processing technologies, such as gasification and liquefaction,
novel resources such as biomass, stranded natural gas from unconventional reserves, and heavy oil
from tar sands or oil shale (McFarlane 2006).
In principle, a large amount of chemical substances could be produced from renewable raw
materials, but the technical and logistical difficulties must not be underestimated, as the HLG notes
in its report (2010). Ensuring a reliable flow of high quantities of feedstock of constant quality
“represents an important difference from the use of renewable raw materials to generate energy
and some fuels, where chemical composition and purity are less of a concern.” While this is a major
priority for RTD, it is still too early to make a robust assessment of the extent to which renewable
feedstock in the chemicals industry will be used as a replacement for fossil feedstocks in the future.
The potential in the longer term is seen as substantial, however.
The HLG has warned in this context against negative side-effects of incentives (through subsidies or
regulation) in agriculture or energy policy which can “seriously jeopardise attractive established uses
of bio-based raw materials in the chemicals industry by favouring other applications” (p. 43). For
instance, the availability as feedstock for the detergent industry is jeopardised due to higher
subsidies for bio-fuel use.
Advanced materials
Innovative chemical materials are an indispensible requirement for technological progress in many
sectors. A good example to illustrate this is energy. Chemistry plays a key role there in all relevant
fields of activities:
- Catalysts do the job transforming biomass like cellulose or rape seed into bio fuel.
- Wind mills have become larger and larger and more efficient using more advanced materials.
Carbon fibre reinforced polymeric materials withstand the high forces when rotor blade tips
reach velocities of 200 km/h and blade surfaces withstand a very demanding environment
offshore.
- Photo voltaic systems depend strongly on chemical materials, even more if they are based on
organic molecules rather than silicon.
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- Innovation triggered by the chemical industry is also essential to address scarcity in raw
materials. Rare earth metals in particular are becoming scarce in the world markets. New
chemical materials could substitute rare earth metals in many applications. This is not a step-by-
step change, however, but will need new systems.
- When we use more renewable energy sources, storing of energy becomes the main issue.
Better batteries depend e.g. on better electrode materials. Here, we are still far away of the
theoretically achievable capacity. Even in the Lithium-Ion technology there is much room for
improvement. Large storing units have to be developed. Just taking 4000 laptop batteries as in
the Tesla electric car will not do the job at large, up-scaling will ask for new ideas.
- The best way to solve the energy issue is to use less energy, even without compromising
comfort. Good heat insulation of houses can help to save 20-30% of all energy used. Similarly
light weight construction of transportation means as cars and trains would also contribute
strongly to the saving. Insulation and light weight construction are mostly based on organic
materials.
- Light bulbs are phased out in the EU because most of their energy goes into heat not light.
Energy saving illuminants still show need for improvement, when the next generation, the LEDs,
start to penetrate the market. Here, the organic based LEDs (OLED) will become more and more
efficient. OLEDs also are used in displays, e. g. in smart phones. New lighting structures and
systems will open new design paths for architects.
On a global base, one of the main issues is the availability of clean water. Billions of people do not
have easy access, as we do in Europe. Here, chemistry and chemical materials as membranes help to
tackle the problem. But also new processes and recycling systems will be needed.
Producing materials with less energy consumption is also a source of saving. New and better catalysts
will do this job. But also new synthesis strategies and production features, as micro reactors, will
decrease raw material and energy consumption. The factory of the future will look very different
from today’s plants.
New and better materials were also the base of recent electronic market entries, as flat screens,
smart phones and tablet computers. Even every day articles as frames for glasses and household
appliances are built from new materials with a better performance.
As our resources are limited, recycling of materials is also an important issue. Not cradle to grave but
cradle to cradle is the right way of thinking. Urban mining has become a relevant source for metals,
but also recycling of materials is important. If it is after short cycles, as for packaging, or after long
term use, as for building materials, new strategies should be developed. Again we have to think new
structures and develop new processes, even for our daily life.
Nanotechnology
The enhanced ability to control and characterise materials at the molecular level has fuelled the
rapidly growing science of nanotechnology. Advanced research in chemical engineering plays an
important role in this field. Research in nanotechnology can lead to the development of advanced
materials with unique structures, properties, and functions, which may have significant disruptive
impacts in the longer term. Nanotechnology is seen as a “cross-sectional technology that can play a
Policy Brief: Disruptive innovation
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role in a variety of different industries and application areas."15 There is a wide range of potential
uses, covering industrial production, energy supply and storage, information technology, intelligent
surfaces and medicine. Thus, materials and applications based on nanotechnology are in use in
almost all sectors. There is a societal debate about research in nanotechnology, however, since it is
not without risks. Critics argue that nanotechnology is a potential “time bomb” since the
consequences of its outputs are not fully understood. They warn against unforeseeable problems of
unknown dimensions. The advocates say that the advantages outweigh the potential risk.16 Industry
and legislators have thus a challenging task to take decisions about an adequate regulatory
framework for research and development in nanomaterials: finding the right balance between safety
regulations and accepting risks by fostering innovation in new technologies is a difficult trade-off,
which probably holds true for other disruptive technologies as well (see also policy implications).
4.1.4 Policy recommendations
General conclusion
The central objective for any policy responses to disruptive innovation trends is that Europe must
take a pro-active approach to maintain its role as an innovation leader, in particular in cutting-edge
domains which may have disruptive impacts in different areas of the economy. The new materials
and processes will be developed and introduced anyway – if not in Europe, it will be in other
economies which will then reap the benefits.
Innovation has already been identified as a key success factor specifically for the competitiveness of
the chemical industry by a High Level Group (HLG) on the Competitiveness of the European
Chemicals Industry.17
“More innovation and research are key to securing the future of the European chemicals
industry.”
Conclusion no. 1 of the High Level Group on the Competitiveness of the European
Chemicals Industry in its Final Report, 2010
The HLG recommended in 2008 that, in order to maintain the world-leading position of the European
chemical industry, four main objectives should be pursued and proposes concrete policy measures to
be taken to achieve these objectives (see Annex I, Table A1-5 for details):
- Strengthening innovation networks
- Increased spending in Research and Development (R&D)
- Better development of human resources
- Improvements in information and communications
15Joachim Wolff, member of Bayer Material Science's executive committee, quoted in: “ChemicalEngineering: The Rise of Nanotechnology”, in: chemicals-technology.com, 17 September 2010(http://www.chemicals-technology.com/features/feature96057)
16ibid.
17The HLG was set up by the European Commission in June 2007 to analyse the competitive scenario of thesector in Europe. Its last meeting took place in February 2009. The Commission prepared a report in 2010on the implementation of the HLG recommendation which was presented and discussed in a conference inBrussels on February 10, 2011. All reports are available on the web (accessed in December 2010):http://ec.europa.eu/enterprise/sectors/chemicals/competitiveness/high-level-group/index_en.htm
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These objectives are all still highly relevant and valid. The proposed measures, if implemented, will
strengthen innovation in Europe, including the key areas for disruptive innovation discussed in this
brief.
The empirical evidence about the disruptive impact of innovations stemming from the chemical
industry (which have effects not only in the chemical, but also in its client sectors) do not allow
straight forward recommendations for specific responses by innovation policy. On the one hand, it
can be argued that competitive pressure will drive the development of these innovations anyway and
that they should therefore be left to the market; it is doubtful if specific interventions by innovation
policy can really make a difference. On the other hand, the importance of the discussed trends for
Europe’s future competitiveness, as well as to tackle global challenges such as renewable energies
and climate change, cannot be ignored. Joint R&D&I efforts by the industry and the public sector may
contribute to accelerating the discussed innovation processes and, thus, shorten the time until their
impacts become visible. Ideally, apart from strengthening the competitiveness of the European
industry, suitable measures could thus have a positive impact on the global scale by bringing forward
the solutions needed to tackle the grand societal challenges such as climate change.
Strategic policy responses to address disruptive innovation
The proposed objectives and actions in this section are not in any way in contrast to the
recommendations of the HLG, but highlight further issues that could (or should) be considered by
innovation and economic policy in order to support and sustain the competitiveness of the European
chemical industry. In particular, they reflect the specific role of innovation in this industry as a
catalyst for innovation in other sectors, and its importance to address global challenges such as
climate change. This calls for a highly systemic approach to innovation with mechanisms that
encourage joint developments and cooperation across sectors.
Objectives Possible actions to address the objectives Addressee
Taking a systemicapproach: encouragelarge scale, cross-sectorinnovation activities
Consider options how to encourage cross-sectorR&D activities in key technology domains in thecontext of planning Horizon 2020
Foster open innovation concepts
Create and support European technologyplatforms to stimulate exchange and cooperationin disruptive technology domains
Continue the work of the High-Level Group (e.g.publish an update of the report every two years)
EC
Industry
(MemberStates)
Support industry inimplementing disruptivetechnology
Create incentives for companies to switch to new,more energy efficient production processes,factoring in the positive impacts on other sectorsand the environment
Address the challenge of working capital having tobe replaced before it is written off
EC
Member States
Lead the debate aboutrisk-taking in Europe
Take a proactive approach to this debate –establish information platforms and opportunitiesfor debate of related issues
Consider stakeholder consultations on risksassociated with bio- and nanotechnology
Involve citizens in decision-making processes
EC
Member States
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Consider opportunitiesfor coordination andspecialisation ofindustrial developmentin Europe
Initiate a discussion of a ‘European strategy’ forspecific industry segments
Raise awareness for weaknesses and risks of theEuropean chemical industry and providesuggestions how these could be addressed
Member States
EC
Ensuring access to rawmaterials and supportresearch on substitutes
Strengthen R&D efforts in developing newsystems to substitute scarce materials
Develop (jointly with the industry) scenarios andstrategies how to deal with shortages in supply
EC
Industry
Taking a systemic approach – promoting joint (cooperative) innovation activities across industry
boundaries by creating research platforms and networks
Innovations in the chemical industry, as shown in this case study, often have their major impact in
other sectors. Innovative concepts of innovation policy should seek to build on this distinctive feature
and seek to strengthen joint, cooperative developments. The traditional model of project-based R&D
funding (as provided in the FPs) may not always be the best framework here. As proposed by the
HLG, clusters and technology platforms which enable longer-term innovation cooperation may be
more adequate here, in particular for driving forward cross-cutting, disruptive innovations (see Final
Report, p. IV/V). Nonetheless, it should also be considered how future R&D programmes can support
progress in disruptive innovations triggered/enabled by the chemical industry. The framing of
themes and instruments for Horizon 2020, as currently discussed, should take this into consideration.
The SPIRE proposal (“Sustainable Process Industry through Resource and Energy Efficiency” – see
section on process intensification), is an excellent example of a mechanism that could be used to
address this objective – see also Section 5.2.
Regulation and the cultural context: finding the right balance between safety regulations and
accepting risks by fostering innovation in new technologies
Some of the areas prone to disruptive innovation involve risk. In particular, advanced research in
nanotechnology and biotechnology has triggered a controversial debate about the uncertainties of
these technologies. The nightmare scenario is that any of these new, disruptive technologies could
get out of control and have massive negative impacts on the ecosystem.
Europe will have to continue this debate, possibly even more so in the future, and take difficult
decisions on how to deal with risk in such domains. Obviously, there are different views as to what is
the right balance between risk-taking (and thus facilitating innovation and business in emerging
technologies) and ensuring the highest possible degree of safety by means of strict regulation. This is
not only a complex and challenging task, but also a politically loaded and, in particular, a cultural
issue. One could argue that the European tradition and culture is rather risk-averse, while the US and
certainly China and other emerging economies are prepared to take higher risks. Unfortunately, a
negative attitude to risk taking brings an economic ‘risk’ with it – the relocation of investments in
innovation and resulting business from Europe to other economies.
A recent example to illustrate this dilemma is BASF’s decision to fully stop selling and developing
genetically modified products in Europe, including its Amflora potato, because of overwhelming
opposition to this technology. Instead, activities in this domain will be relocated from Germany to
the USA (about 140 jobs from the company’s Pant Science unit, which employs 840 people in total,
are concerned). The decision by BASF is seen as an example of the difficulties for the biotechnology
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industries in Europe, including areas such as nanotechnology and animal cloning (NYT, 2012). The
European Commission had given green light for the cultivation of the genetically modified Amflora
potato in Europe in 2010; thus, it is not strictly an issue of regulation. However, almost expectedly,
there have been massive protests against any activities in this domain in Germany and other
countries since. Thus, BASF’s decision was made in response to the adverse socio-cultural context.
The European Commission and the Member States have an important role here, not only by
ultimately deciding on adequate regulation, but also by guiding, structuring and coordinating the
debate about risk-taking. All stakeholders from society should be involved in this difficult debate;
decisions should be taken after intensive information and consultation processes. Opportunities and
potential risks should be clearly communicated in a way which enables citizens to form an opinion,
even if it is highly complex matter.
Consider opportunities for a coordinated, targeted approach for industrial policy and industrial
development in Europe – specialisation and critical mass
In today’s global competitive framework, industries which are sufficiently specialised but still have
critical mass (in the respective domains) are well positioned to compete on a global scale. This can be
a challenge for the European industry, as most of its national economies are comparatively small
when compared, e.g., to the US or China. Therefore, if Member States could find a way of
coordinating (at least to some extent) their industrial strategies and efforts to develop the new,
possibly disruptive technologies, it might be beneficial for Europe as a whole. Clearly, this is a
controversial and politically loaded issue; notably in the context of the financial crisis which has
triggered a controversial debate whether the European Union needs more integration (in economic
and financial policy) or not. It would be beyond the mandate of this policy brief to make a clear-cut
recommendation; it might be useful, however, to bring up this issue to the agenda and discuss
whether an overarching ‘European strategy’ for specific industry segments could make sense, and
how this could be approached from a practical viewpoint. The strategic framework programmes
which the EU had adopted for the development of the information society (e.g. i2010), and the
Innovation Union flagship initiative within Europe 2020 could serve as models for such a strategy.
Access to raw materials and developing new systems to substitute scarce materials
Facing difficult access to raw materials is a major concern and threat for the European chemical
industry which could hamper its function as an innovation enabler in the future. According to the
German Chemical Industry Association VCI (2010), raw materials and energy represented 30% of the
gross value for German chemical companies in 2007. Due to population growth and increasing
demand for raw materials in emerging economies, notably in Asia, there are risks of shortages in the
raw material supply. It is to be expected that, in the long term, important raw materials will become
more expensive and be in shorter supply. The chemical industry must devise innovative strategies for
guaranteeing the raw material supply. Policy should aim to support the industry in this respect.
At the same time, in a longer-term perspective, the chemical industry can help to overcome these
shortages. Rare earth metals are becoming scarce in the world markets. New chemical materials
could substitute rare earth metals in many applications. This is, however, not a step-by-step change,
but will need completely new (disruptive) systems. R&D efforts in developing such systems should be
strengthened, for instance in the frameworks of future European RTD programmes.
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4.2 Disruptive innovation in the automotive industry18
4.2.1 The automotive industry in Europe
The automotive industry is an important direct and indirect employer in the European Union. For
every direct job (about 2.3 million), five jobs are created indirectly in other manufacturing or service
sectors. With 15.1 million produced passenger cars in 2010, the EU is still the largest manufacturer of
passenger cars, accounting for almost 26% of the global production (China is likely to surmount the
EU in the near future, however). With 1.8 million commercial vehicles produced in 2010, the EU
represents around 9.5% or the world-wide production and ranks third behind the US (26%) and China
(23%).
The ratio of five jobs created indirectly for every job created directly in car manufacturing illustrates
the on-going process of increased outsourcing and the bundling of more value chain activities in
supplier firms. The largest suppliers, all based in developed countries, have turned into ‘global
suppliers’, with multinational operations. A feature that the automotive industry shares with other
globalised industries such as electronics, apparel, and consumer goods. Another common feature is
that Foreign Direct Investment (FDI), global production and cross-border trade have accelerated
dramatically. Real and potential market growth and a huge surplus of low-cost but skilled labour in
countries like Brazil, China and India have attracted large FDI flows to supply local markets and to
export back to developed countries. This has been aided by free trade agreements encouraged by
the WTO (Sturgeon and Lester, 2004).
On the other hand, the automotive industry is distinct because of its relatively concentrated
structure. Only a dozen large lead companies control the largest part of the world-wide market. A
second distinctive feature specific to the automotive industry is that final vehicle assembly, and by
extension, parts production, has largely been kept close to end markets. A third distinctive feature is
its strong regional structure. Although the automotive industry has become more integrated globally,
it has also developed strong regional-scale patterns of integration. A fourth distinctive feature of the
automotive industry is that there are few fully generic parts or subsystems that can be used in a wide
variety of end products without extensive customisation. Parts and sub-systems tend to be specific to
particular vehicle models.The absence of open, industry-wide standards undermines value chain modularity and ties suppliersto lead firms, limiting economies of scale in production and economies of scope in design. Suppliersare often the sole source for specific parts or module variants. This creates the need for closecollaboration, raises the costs for suppliers that serve multiple customers and concentrates mostdesign work into a few geographic clusters, typically near the headquarters of lead firms. Becausevalue chain modularity is limited, linkages between lead firms and suppliers tend to be relational orcaptive in character. This also means that suppliers account for the major part of R&D value creation(see
18This sector case study was prepared by Institut der deutschen Wirtschaft Köln Consult GmbH (author: RenéArnold).
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Table 4-1).
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Table 4-1: R&D Value Creation in the Automotive Industry
Actor
R&D Value Creation
2005 2015*
Value creation % Value creation %
OEMs € 21 bn 31% € 25 bn 28%
Suppliers € 41 bn 61% € 55 bn 61%
Engineering service providers € 6 bn 8% € 10 bn 11%
*forecast; Oliver Wyman (2007)
Innovation objectives amongst suppliers, however, are more often than not driven by lead
companies i.e. OEMs. The aforementioned structure with strong ties between OEMs and suppliers
supports this direction of setting innovation objectives. OEMs due to their direct market contact have
more information about demand patterns and trends. Consumer behaviour (individual and
organisational) in the market reacts to micro- and macro-environmental influence. While micro-
environment’s influence on consumer behaviour concerns OEMs in specific marketing decisions,
macro-environment’s influence on consumer behaviour sets the frame for long-term and potentially
disruptive innovation objectives. For instance, a consumer’s personal sphere may shape his / her
preferences concerning design, comfort, power, etc. as well as individual willingness to pay; macro-
environmental influence such as oil shortage resulting in rising fuel costs or urbanisation are likely to
have an impact on the general formation of preferences for the majority of consumers. The following
section elaborates further on such macro-environmental trends and their influence on innovation
objectives in the automotive industry.
4.2.2 Key innovation trends in the automotive industry
Macro- and micro-environmental developments shaping the automotive industry
The main macro-environmental developments relevant for the automotive industry as identified by
the interviewed experts are (1) climate change; (2) shortage of oil and rising fuel costs; and (3)
urbanisation. Climate change, oil shortage and rising fuel costs are strongly interlinked via their cars
in consumers’ minds. The car is the product that has the most notable direct impact on climate
change. Also rising fuel are visible for consumers every time the fill their tanks. So, if consumers
choose to live more sustainably, the car is the most oblivious starting point for changing their
behaviour. So that fuel economy is becoming more and more important when purchasing a car.
Some may even think not purchasing a car at all.
Urbanisation, the third macro-environmental influence identified by the interviewed expert as
particularly relevant to the automotive industry, fundamentally alters mobility needs. Commuting
distances reduce considerably. Public transport services are generally good, while parking space is
scarce. Owning a car becomes less attractive. Mobility is becoming a service independent from the
means of transport. Indications for this trend can be recognised best in the younger generation. For
instance, the Department for Transport (DfT 2011) in the UK has registered that less and less young
people hold full driving licences in the UK. The same trend has been shown by Ruud and Norbakke
(2005) for Sweden and Norway are less likely to hold a driving licence. This trend is particularly strong
in urban areas. Further empirical cited in their paper supports that young people are more likely to
take up public transport in cities, as they want to use their time most efficiently and arrive on time.
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Oliver Wyman (207) have summarised the effect of top megatrends on innovation objectives in the
automotive industry (see Figure 4-3).
Figure 4-3: The impact of megatrends on automotive innovations
Are electric vehicles (EVs) the solution?
In many ways the integration of electric engines in the drivetrain or replacing the traditional fuel
drivetrain with an electric one suits the trends and innovation objectives mentioned above. Electric
vehicles come in many forms ranging from Hybrid Electric Vehicles (HEVs)19 over Plug-In Hybrid
Vehicles (PHEV) to Battery Electric Vehicles (BEVs). While HEVs and PHEVs can reduce fuel
consumption and emissions, BEVs emit almost no noise and no CO2 or other gases within cities. This
helps cities to achieve the emission regulations set by the European Commission and improves life
quality for inhabitants. A fundamental emission reduction, however, can only happen if BEVs are
powered by alternative forms of energy.
China’s critical role in the competitive frame-work for electric cars
China plays a key role within that frame. First and foremost, China subsidises the purchase of electric
cars with 60,000 yuan (€ 7,300) and further incentives. China plans to have 500,000 electric cars,
buses and lorries on the roads by 2015. Analysts expect the market share of electric cars and plug-in
hybrids to rise to about 7% until 2020, which would render China the largest future market for
19For definitions and speicifications see Edwards et al. (2011)
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electric cars. As China owns above 90% of the magnet raw materials needed for the most common
type of electric engines, it is well positioned to compete in this market. European car manufacturer
will have to compete in this market within the foreseeable future.
Summary
In Europe and the USA, consumer awareness of climate change and pollution are growing among
consumers. The ecological footprint of products and services becomes an important feature for
consumer choices – including consumers from mainstream lifestyles. Clearly, an obvious appliance to
reduce the ecological footprint is the car. Consumers are keen on affordable greener solutions. As a
result, fuel economy is the most pressing challenge for car manufacturers, independent of the
segment and size of the car. Furthermore, urbanisation alters the mobility needs of large parts of the
population. China as major player in the market (2nd in passenger car production and commercial
vehicle production) is using its competitive advantage for the production of EVs (in particular BEVs)
to push EVs.
European car manufacturers have different options to tackle the fuel economy challenge, ranging
from reducing the weight of their cars up to switching them completely from internal combustion
engines (ICE) to electric engines. Such a switch would also contribute to reducing high urban
emission levels and respond to the alterations in mobility demands. Also European car
manufacturers have to keep up with technological developments in light of the Chinese market and
their push towards EVs. The following section will elaborate further on the disruptive potential of
BEVs.
4.2.3 Assessment of the disruptive potential
Electric vehicles – a disruptive innovation?
Replacing an ICE by an electric engine is a technically complex task. It has numerous implications
ranging from the remainder of the drivetrain up to issues around crash safety as well as
maintenance. This requires new suppliers with specialised knowledge, for instance for batteries, and
resets large parts of the drivetrain back to a level playing field. Moreover, the necessary charging
infrastructure requires significant changes in the power grid, which will influence the economy far
beyond the automotive industry. As such, from a technological perspective, the move to electric cars
has a disruptive impact.
However, from a consumer’s point of view, a battery electric vehicle (BEV) is not disruptive as long as
the objective is to develop BEVs to the same specifications in terms of range and speed as current
ICE-cars. So far, BEVs are essentially unattractive to the majority of consumers due to their
shortcomings in conventional performance criteria, including price and range: BEVs are much more
expensive than comparable ICE cars (even when factoring in subsidies), and they are not yet suitable
for long distances, which is a major drawback in many use contexts. Finally, there is no second hand
market for BEVs yet; the market is therefore entirely the high-end consumer segment. In many ways,
therefore, owning an electric car is as much a status symbol as an ecological statement. Apart from
Anable et al. (2011), there is little research available that considers the motives and desires behind
purchasing an EV. Understanding consumers’ motives and perceived barriers, however, is paramount
to developing measures for increasing the uptake of EVs in the population.
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Will electric cars trigger a paradigm shift in mobility?
The current mobility paradigm in which the central value revolves around car ownership is also not
favourable for electric cars (as long as they are expensive). Some analysts therefore question the
disruptive and success of the concept as a whole. On the other hand, there are also two major
societal trends that could benefit the faster deployment of electric cars:
the trend towards urbanisation
changing values and lifestyles with regard to mobility among the young generation: cars are
losing their function as a status symbol in many socio-economic segments, even the
percentage of young people attaining a driving licence decreases; young people think of
mobility more in terms of a service solution to a problem rather than in terms of owning a
car.
If these trends reinforce, they could have a disruptive impact on the way we are framing mobility. It
took a long time, but eventually it seems that car sharing schemes (at least in large cities) are
becoming more successful (see Figure AI-1 in Annex I). According to bcs (2010), the number of car
sharing customers in Europe has risen to 385,000 sharing almost 12,000 cars as of mid-2009. Car-
makers are, of course, aware of these trends, but have to figure out how to respond to them. One
strategic response is to launch their own car sharing schemes. Many car manufacturers already use
this strategic potential to their advantage. For instance, BMW and Sixt have launched car-sharing
schemes; Daimler has launched car2go in Europe and the US, Peugeot has launched Mu by Peugeot;
even Porsche is seriously considering to provide their own car sharing services. BEVs are often part of
these schemes. Car2go, for instance, is going to bring 300 electric Smart fortwo on Amsterdam’s
street within this year. Indeed, BEVs are in many ways particularly suited to such a new concept of
mobility as a service.
4.2.4 Policy implications
From the above information, policy implications can be drawn. In summary, the car industry presents
itself as a well-established, relatively uniquely structured industry whose world-wide heart is (still)
situated in Europe. It represents about 12 million employees (direct and indirect), invests heavily in
R&D&I and is one of the major commercial taxpayers.
Due to its heavy investments into R&D&I and its avant-garde status, the European automotive
industry have been developing numerous innovations, some of which were disruptive such as the
electric starter invented by Bosch that essentially rendered the ICE successful at the beginning of the
20th century. Current innovation objectives are largely shaped by the challenges of our age, of which
the most pressing one clearly is the dependency on oil as a fuel. Therefore fuel efficiency is the major
objective of innovation within the automotive industry. Besides building more efficient ICEs or
supporting them by small electrical engines, BEVs would solve the problem.
Technologically, this solution to the oil shortage can be considered a disruptive innovation as it
changes the complete drivetrain of the car and brings new players such as battery producers into the
supply chain. It is challenging, however, to make recommendations to policy at this point because it
is still unclear to what extent the current paradigm of mobility will shift, and whether electric cars
will finally be successful (and disruptive) or remain a niche market. In a scenario where mobility
concepts change (“mobility as a service”), BEVs offer clear-cut advantages and would very likely
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create opportunities for completely new business models. In this framework, there are three
implications for innovation policy:
1. Electrical vehicles help to overcome oil dependency for cars; however, various materials
needed to produce the engines are generally rare and expensive. Most of them lie within
China. Thus, essentially, if this type of engine is to be successful, it means switching from one
dependency to another. Innovation policy should therefore strengthen research on electrical
engines into a direction that does lead to as little dependency as possible (e.g. supporting
R&D in magnet-free electrical engines).
2. Considering current trends in major economies, especially in China, promoting the
development of electrical vehicles is to be advised, in spite of the uncertainty. The risk of
backing the wrong horse has to be weighed against the risk of losing competitiveness in the
emerging technology.
3. Electrical vehicles (in particular BEVs) as such are not necessarily disruptive from a consumer
perspective, even though they are from a technological perspective (and therefore with their
supply-chain impacts). If innovation policy decides to support BEVs, the best approach is
therefore probably to encourage the move to mobility as a service. This could have positive
side-effects such as reducing emissions and freeing up parking space in cities.
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4.3 Disruptive innovation in tourism20
Definition issues and scope of the analysis
Tourism is most commonly understood as the provision of services for people travelling to and
staying outside their usual environment for less than one consecutive year for leisure or for business
purposes. The operational definition of tourism for structural industry statistics is ambiguous. If one
defines tourism from the consumer’s point of view, all products and services consumed by tourists
could be taken into account – this would be the widest possible definition.
The standard NACE Rev. 2 classification does not contain ‘tourism’ as a sector in its own right – the
sector has to be composed by combining selected business activities from different divisions and
groups (see Annex I, Table A1-3). Clearly, accommodation establishments (NACE 55), travel agents
and tour operators (NACE 79) are the core part of the tourism industry. Furthermore, passenger
transport, in particular air transport, is an important service which is also part of the tourism value
chain. This policy brief concentrates on innovation in these segments.
The European tourism industry – key figures
Tourism is still seen as a promising area of growth for the European economy, even if the financial
crisis of 2008/2009 had put an end –temporarily– to the long-established boom in world tourism, not
least in Europe. In 2009, European tourism suffered a 5% decline in arrivals and a 13% fall in receipts.
It has already recovered, however, in 2010 and 2011. International tourist arrivals grew by over 4% in
2011 to 980 million, an all-time high, according to the latest UNWTO World Tourism Barometer. If
growth continues in 2012 as expected (at a somewhat slower rate), international tourist arrivals are
on track to reach the milestone one billion mark later this year (UNWTO, 2012). Europe is still the
most tourism-intensive region worldwide. Tourism presents the third largest economic activity in the
EU after the trade and distribution and construction sectors, contributing 5% of GDP (directly) and,
factoring in its indirect effects, even 10%. Despite the economic uncertainties, according to UNWTO
(2012), tourist arrivals to Europe reached 503 million in 2011, accounting for 28 million of the 41
million additional international arrivals recorded worldwide. Some evidence of the importance of the
tourism industry for the European economy is presented in Table 4-1.
Table 4-2: European tourism – facts and figures
GDP Tourism produces directly 5%, and indirectly 10% of European GDP
International receipts€ 306 billion in 2010 (+ 4.0% compared to 2009),
Average spending of € 640 per arrival (2010)
International arrivals 477 million in 2010 (+ 3.2%, after 4.9% decline in 2009)
Market shareEurope’s share of international tourism arrivals: 51% in 2010 (in 1990: 62%)
Share of international tourism receipts: 44% in 2010 (in 1990: 55%)
Top ten tourism
destinations worldwide
Six of the world’s top ten tourism destinations by arrivals are in Europe:
France, Spain, Italy, UK, Turkey and Germany;
Seven of the world’s top ten destinations by receipts are in Europe:
Spain, France, Italy, Germany, UK, Turkey, Austria
20This sector case study was prepared by Salzburg Research GmbH (author: Dr. Markus Lassnig).
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Origin of guestsEurope (intra-regional travel) 86.9%, Americas 6.1%, Asia-Pacific 4.4%,
Africa 0.8% and Middle East 0.8% (2009; rest unspecified)
Enterprisesabout 1.8 million businesses, primarily SMEs. 99% of all tourism companies in
Europe are micro or small enterprises with fewer than 50 employees.
EmploymentAbout 9.7 million jobs directly (indirectly more than 20 million),
5.2% of total workforce directly and approximately 12% indirectly (2006)
Sources: Eurostat, UNWTO Tourism Highlights (September 2010 and June 2011),
European Commission Communication COM (2010) 352/3.
4.3.1 Main innovation trends and their disruptive potential
The importance of innovation was long underestimated in service activities, including tourism. The
major turning point came with the rise of the internet in the 1990s and its rapidly evolving impact on
the tourism industry. It soon became clear that the new information and communication
technologies would enable innovation in many ways, with significant (and even disruptive) impacts
on the sector’s value network. Tourism is probably one of the sectors where the internet has had the
most significant impacts: it leads to disintermediation in some markets and re-intermediation in
others, increases dramatically the market transparency, changes the way in which service providers
market their offer and enables entirely new business models.
Unsurprisingly, therefore, some of the main innovation trends in tourism discussed in the following
sections are internet-enabled developments (online booking, dynamic packaging, online rating
platforms, digital mobile services). However, there are other important innovations which are not
strictly internet-related, such as the rise of the no-frills airlines (although it could be argued that the
possibility of online booking has been a crucial success factor for this industry, and thus again being
internet-enabled). An important business model innovation in the sector which requires information
technology (but is not necessarily internet-driven) are yield management systems. In the following,
these trends –which the authors consider as the currently most important innovations in the sector–
are briefly introduced and assessed in terms of their disruptive impact.
Booking on the internet
Tourism is a primary user of ICT and e-commerce. In the last 15 years, the number of bookings made
on the internet showed steady growth at the expense of other sales channels. Recent figures
(PhoCusWright 2011) indicate that close to 40% of gross bookings (of key travel segments, including
air travel, hotels, car rental, offers provided by tour operators, rail travel and cruise holidays) in
Western Europe and in the USA are made online:
USA: 39%
Western Europe: 38%
Asia-Pacific: 23%
Latin America: 18%
According to PhoCusWright, by 2013, Western Europe is likely to surpass the USA in these statistics.
If so, Western Europe is about to become market leader regarding internet bookings in tourism.
Projections for the next few years expect the growth in the mature online travel markets (Europe and
US) to slow down to single digit rates. The tipping point is considered to be at about 35%: until this
stage, growth rates in online travel are enormous (and this is still true for many regions in the global
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online travel market), while growth in the mature markets in Europe and the US is expected to slow
down somewhat (cf. tnooz talking travel tech, November 2011). Even if the market is maturing and
growth in online travel is no longer exponential, it is still strong and – most important – it is
sustainable. It is changing the travel industry with lasting effects.
The introduction of web-based booking machines has led to two conflicting, parallel trends which
have a profound impact on the role of intermediaries in the tourism market: dis-intermediation and
re-intermediation. While, on the one hand, internet bookings represent a challenge and a threat to
the role of traditional intermediaries in the tourism value chain such as tour operators, they provide
at the same time new opportunities for new entrants such as online intermediaries.
Against this background, Holloway, Humphreys and Davidson (2009) argue that “no business is being
transformed by information technology (IT) faster or more radically than the business of travel – and
tour operating, of all the sectors of this business, is arguably the most affected by developments. […]
It is the scale and pace of development […] that is proving so disruptive for the industry, as new forms
of booking and information facility become available to both the trade and customers.” It is no more
in question whether internet bookings will start to replace traditional methods of booking holidays,
but rather how quickly the transition will occur and how completely it will come to dominate
distribution. This development is threatening both travel agents and tour operators – unless they do
not successfully use internet bookings as their own channel of distribution. Buhalis and Zoge (2007)
argue similarly, as their research shows a dramatic increase in competitive rivalry and that the
bargaining power of suppliers (travel principals, e.g. hotels and airlines) and buyers (consumers) has
been strengthened as the internet has allowed direct communication between them often cutting
out the power of intermediaries– a clear proof of dis-intermediation. Hence, e-commerce in the form
of booking or making reservations on the internet, has a strong disruptive potential in this industry.
Overall, the businesses of tour operating and travel agencies are in a consolidation process, and this
process is likely to continue. Even in the case of re-intermediation, the merging of companies that
has been experienced in Europe over the past two decades will also be seen with many online
operators, which are seeking to establish greater turnover and economies of scale. At the same time,
specialist niche products are likely to become more popular as tourists are becoming ever more
experienced in travelling and seek out more unusual or exotic experiences. This might provide a
distinct opportunity for smaller, independent tour operators and travel agencies, but also the mega
operators like TUI or Thomas Cook are trying to serve this market by fostering specialist brands
within their portfolio.
Especially in the sector of tour operators, Europe’s position is a rather strong and important one:
Many global players are European companies, like e.g. TUI, Thomas Cook and Kuoni. Furthermore,
the European Union is by far the largest outbound travel market globally. As the market share of tour
operators and travel agencies is much higher in international travel compared to domestic trips,
these intermediaries play a more important role in Europe than in most other economies, say for
example in the USA. A risk for the European industry in this context is that European companies in
the tour operator and travel agency sector might lose more business due to dis-intermediation than
their international counterparts.
On the other hand, many European travel principals (hotels, airlines, car hire companies etc.) are
benefitting from dis-intermediation, as they can easier get in direct contact and manage transactions
with customers avoiding the commissions to be paid to intermediaries. This is an opportunity
especially for the accommodation sector, which is much more fragmented in Europe compared to
other parts of the world, where the large hotel chains have a much higher market share (especially in
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the US). In Europe, independent hotels are prevailing by far. These are mostly smaller hotels and
cannot get reservations from Global Distribution Systems (in contrast to large hotel chains).
Therefore, they can benefit more from the internet, as it reduces their relative comparative
disadvantages due to their small size and independence. Hence, especially the European
accommodation sector might benefit more from dis-intermediation than its global counterparts.
Example: Development of Online Travel Agencies (OTAs) in Europe
Europe’s online travel market is thriving: online travel agencies (OTAs) were projected to
grow by 19% in 2011. In comparison, supplier website bookings (like e.g. that of airlines
or hotels) were expected to grow just 9%. This is giving OTAs a substantial edge. Market
research company PhoCusWright expects OTAs to deepen and broaden their travel
content over the next several years and to show further strong growth. This is driven
especially by the top five pan-European OTAs – Priceline, Expedia, Lastminute.com,
Ebookers and the newly formed ODIGEO – which account for over 60% of European OTA
bookings. “Their collective market share continues to grow at the expense of smaller
local OTAs, amidst ongoing consolidation.” (PhoCusWright 2012)
Source: PhoCusWright (2012). Led by Booking.com, OTAs Fuel European Online Travel
Growth. http://www.phocuswright.com/research_updates/led-by-bookingcom-otas-
fuel-european-online-travel-growth
Dynamic packaging
Dynamic packaging (DP) is the travel industry jargon for a user-centred, cheaper and more flexible
way of assembling and booking a personalised holiday, using the web and associated application of
technology. The phrase is rarely seen in the public literature on a travel web site. Instead, marketers
have adopted more straightforward terminology of the technology such as “Book Together and
Save”, “Build Your Own”, or “Flight + Hotel”. From a consumer point of view, DP is an online real-
time service which mimics the experience of visiting a travel agent and negotiating a deal exactly as
the consumer wishes. From the service provider’s view, DP automatically combines offerings from
more than one data source on demand and according to customer preferences. Using pre-
determined packaging rules, which are set and controlled by the service provider, and hiding price
transparency on the individual components, a combined price is determined for the chosen package.
The booking can then be confirmed in a single user purchasing transaction. Depending on the
contracts and “hidden” discounts in place with the inventory providers (such as global distribution
systems, insurance, or travel suppliers such as airlines, hotels, car rental companies, tours, activities)
an attractive price and assurance of a complete travel service can be offered for the entire package.
Some years ago, DP has been strongly discussed –not to say hyped– in the tourism industry. In the
meanwhile, the hype has faded and ever more offers are blurring the boundary between “real” DP
and pre-arranged partially modular packages. In any case, DP –be it “real” or not in its strict
definition– empowers the customer not only to search and book single components, but also to
assemble and book whole travel arrangements in real-time by means of web-based technology
(configurators).
As such, dynamic packaging favours the process of dis-intermediation of traditional travel agencies
by partially outsourcing their assembling-activities directly to customers. On the other hand, DP also
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enables re-intermediation, as there are new online intermediaries such as Expedia that dominate the
field of DP. In general, DP is dominated by large enterprises, as tour operators and travel agencies
with a large network of service providers are best positioned to offer DP.
Yet, DP will not fully substitute pre-packaged deals. Instead, it will complement the traditional pre-
packaged offerings of travel agencies that still provide clear customer benefits such as convenience,
trust, counselling and support to conveniently find the best offer. Therefore, dynamic packaging
should rather be considered an incremental innovation (with aspects of both service and process
innovation). From today’s perspective, there is no evidence that this trend will unfold a disruptive
impact on the industry’s value chain or have major implications for its competitiveness. The
established players are piloting this application and, depending on the success of the model, will
make increasing use of it in how they offer their services. For the next years, the share in dynamically
packaged travel is expected to rise further, but without completely disrupting the market.
Yield management systems
Yield management or revenue management systems are integrated information systems, which
contribute to the revenue optimisation of supply capacities by (semi-)automatically and dynamically
regulating prices and quantities. Yield management does make sense if the respective service offered
poses different values for different target groups at the same time, if demand alternates in time, if
high fixed costs for providing the respective capacities stand vis-à-vis low variable costs, if unsold
capacities perish, i.e. they represent irretrievably lost revenues, and if continuous pre-selling (e.g. via
reservation systems) is possible. The methodology of yield management also involves the concept of
customer segmentation with price discrimination for different target groups. In this way, different
willingness to pay by different target groups can be optimally skimmed. Furthermore, yield
management supports the utilisation of capacities in a revenue-optimised way. This is especially
important in the sector with its strong peaks and lows in demand.
Yield management employs sophisticated systems to statistically predict segments and quantities of
demand. This requires booking and pricing data from former periods as well as data about the
current market, partially delivered by reservation and booking systems. Originally, yield management
has been developed for scheduled airlines, which wanted to optimise revenues and load factors of
the fixed capacity in seats at qualitatively differentiating and quantitatively fluctuating demand. In
the meanwhile, different forms of yield management systems have been deployed by different
stakeholders of the tourism industry: Low-cost airlines, railways, ferry and cruise lines, car rental
companies, hotels, organisers of events as well as tour operators. It is important to mention that
some of the yield management systems are employed in a highly dynamic way with sometimes
basically different concepts: E.g. low-cost airlines have completely reversed the idea of last-minute
price reductions as (formerly) employed by many legacy airlines or accommodation providers.
Information technology is a strong enabler of yield management, but at the same time it delivers
new restrictions to price discrimination as the development of prices is becoming somewhat more
transparent for many consumers.
From the tourism sector’s macro perspective, yield management is positive as it fosters the
industry’s overall utilisation of capacities leading to high gains in efficiency and some mitigation of
the seasonally fluctuating demand. At first employed in the airline business, in the meanwhile, yield
management has also been adopted by providers of accommodations and –possibly the most
complex application area– by tour operators. The overall assessment of the European position
regarding yield management in tourism is quite positive. Yet, according to our assessment, it is an
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incremental innovation, not a disruptive one. An increasing adoption of yield management in more
segments of the tourism industry (and by more players) does not mean replacing an established
technology (it is more a sustaining sophistication of existing systems) or that specific services and
their providers become obsolete. Thus, it does not fulfil any criteria for a disruptive innovation as
presented in Section 3 of this policy brief.
Online review and rating platforms systems
Numerous studies confirm that many travellers have more confidence in travel reports and
recommendations provided by other tourists than in information provided by tourism companies.
Online recommendation platforms like tripadvisor.com or holidaycheck.com have strongly shifted
market power from providers of tourism products and services to consumers. Some hoteliers
consider such platforms as a threat to their business, while other providers of accommodations use
these websites professionally as an additional channel to communicate with their potential
customers. While hoteliers can decide which information to put on their own hotel website, or over
which external booking platforms their hotel can be booked, they cannot prevent tourists from
posting comments or recommendations about the quality of their hotel at third-party web platforms.
According to travel market research firm PhoCusWright, social media use among travellers is growing
far faster than use by the travel industry itself (cf. Mediapost.com, August 2010). To some extent this
is also due to the strong uptake in smartphone usage. Smartphones are changing both the travel
planning period and the in-trip experience. Particularly during the in-trip experience there are still
enormous opportunities to make the tourist better informed, allow him to find the right restaurants
and attractions tailored to his interests and time, and even provide location-based features which
can only be delivered via mobile phones. This is also very important for recommendation platforms
as by using smartphones, travellers are able to post their reviews on the spot, i.e. while they stay at a
certain hotel or restaurant. They do so not just by writing reviews but also by uploading photos taken
at the location. In this way, online reviews are becoming even more authentic – and this is highly
appreciated by other travellers.
Example: Instant personalisation of travel recommendations on tripadvisor in
cooperation with facebook
The most important example, here, is tripadvisor.com, which started to cooperate with
facebook at the end of 2010. The main outcome of this cooperation is the so-called
‘instant personalisation’ of travel recommendations on the tripadvisor platform by
ranking e.g. the ratings of facebook friends in the first places right before the reviews
and ratings from other users of the tripadvisor network. Furthermore, after their login,
users of tripadvisor are presented an overview of continents, countries and cities which
have been visited by their facebook friends. And friends can also send travel
recommendations to each other.
On different web platforms, there is a trend away from pseudonyms or aliases towards
the appearance of real persons. At the same time, ever more persons become aware of
their online reputation, which pushes them to increase the quality of their reviews and
online comments, which – in turn – enforces the quality of online review and rating
platforms. This further improves the trust of travellers into such recommendations.
Sources: www.tripadvisor.com, www.facebook.com
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Online reviews of other travellers have not only become an important source for taking decisions
about which accommodation to choose or which restaurant or attraction to visit; the reviews may
even influence the decision on the destination to travel to. According to a global benchmarking
survey by Travelsat (2011), 38% of international visitors used recommendations by friends and
relatives in their decision on the destination of their vacation. This suggests that internet portals
which offer feed-back from customers who stayed at a certain hotel or visited a site –which is, in
principle, comparable to recommendations obtained from friends or relatives– can play an important
part in travellers’ decision making. According to Travelsat’s survey based on 15,000+ international
tourists from 30+ markets, these are the top ten factors prompting a decision to choose a certain
destination (cf. aboutourism, October 2011):
1. Friends’ or relatives’ recommendation: 38%
2. World renowned must-see destination: 32%
3. Information on the web (including reviews): 22%
4. Cheap deal / special offer: 15%
5. Geographically close destination: 14%
6. Travel agency recommendation: 8%
7. Article in a magazine / newspaper: 6%
8. Movie realised in the country: 5%
9. Appealing advertising on it: 5%
10. Heard about in the TV news: 2%
Given this ranking, it becomes clear that the integration of friends’ or relatives’ recommendations
into online review and rating platforms will strongly enhance the market power of these platforms.
In contrast, recommendations by travel agencies are of minor importance.
Overall, the future of online travel lies in the development that the tourism industry is moving from a
transaction fulfilment model to platforms, systems, content and technology that cover the whole
spectrum of the travel cycle. This is to incorporate inspiration, discovery and recommendation into
the online traveller experience just as much as transactions.
Ultimately, the social web with its online recommendation systems has enabled much greater
interaction among travellers as well as between travellers and tourism enterprises. But, it also places
greater demands on the tourism industry to improve their tourism offering – or undertake corrective
actions in the case of customer complaints. Overall, the European tourism industry is expected to
benefit from online recommendation systems, at least in the short and medium term, as these
systems foster further professionalization in tourism. In international comparison, Europe’s tourism
infrastructure is mature and of a high standard. In most European countries, tourism enterprises are
highly developed and standards of service are good. Therefore, online recommendation systems
should not pose a threat to European tourism, but can be expected to motivate companies to sustain
and further enhance the quality levels of their services, knowing that they will see an immediate
reward by receiving positive (public) customer feed-back. Service providers with inferior product and
service quality may be driven out of business – but this is ‘positive’ from a macro-level perspective.
Customers absolutely appreciate this kind of clearing up the market. Therefore, the impact of online
recommendation systems on the European tourism sector is probably advantageous.
Online recommendation systems may be considered as an electronic and systematised version of
word-of-mouth. They have a strong and probably sustainable impact in the sense that they further
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increase the market transparency. However, there is no evidence that this impact is going to change
products, services, business models or value networks in the tourism industry in any way; as such, we
do not see any ‘disruptive’ impact caused by this innovation. Rather, these rating platforms are likely
to further enhance professionalization in tourism, a process which has gained momentum in the
European industry in the past 10-20 years. Their impact on the behaviour of the existing players is
strong, but not in a disruptive way.
No-frills airlines
In recent decades, the most important change in the airline industry has been the trend towards
privatisation and enhanced competition – most prominently resulting in the emergence of the no-
frills, low-cost carriers (LCC). Low-cost carriers offer a basic product with high seating density,
minimal in-flight service and tend to use cheaper (regional or secondary) airports. LCCs achieve high
utilisation as they offer high-frequency, scheduled, point-to-point short-haul services, using a single
aircraft type with very short times for turn-round. Another important characteristic is that they
mostly sell directly – primarily through the internet (cf. Lumsdon / Page 2004, Klein 2006). Another
advantage of LCCs is that they can apply yield management systems more easily than the network
carriers since –with rare exceptions– they sell only point-to-point, single-sector tickets. Instead of
having 12 to 24 different booking classes like flag carriers, LCCs only use four to six classes which
reflect the separate fares they may offer on any individual route. This makes effective yield
management easier and cheaper to implement (cf. Doganis 2006).
Competition evolves both amongst the LCCs, but also against the full-service airlines, where most
airlines have changed their short-haul strategy in order to compete more effectively. As a result, the
distinction between traditional flag carriers, LCCs and charter airlines is becoming increasingly
blurred.
Overall, a number of smaller LCCs went out of business, but especially the big operators prove to be
successful. Market analysis concludes that the larger LCCs have shown that they can attract a totally
new market while “eating into” the market share of legacy airlines. The growth in low-cost travel
remains the key driver of air travel.
Example: No-frills concept versus full-service airline strategy: the case of Air Berlin
In recent years in Europe, especially the two big no-frills carriers Ryanair and EasyJet
have been dominating the market of low-cost airlines. To some extent, this seems to be
the proof that the low-cost model operated on a sufficient scale is working properly.
For a number of years, also Air Berlin was considered as a high-flyer in the European
aviation business. Yet, as Air Berlin grew rapidly and tried to make the balancing act
between no-frills and full-service airline, it went into economic troubles. The near future
will show whether Air Berlin’s new management is able to make the turnaround and gain
profitability again. Nonetheless, at least some of the trouble of Air Berlin seems to be
caused by its attempts to mix up the low-cost and full-service concepts. Yet, even the
new management of Air Berlin did not yet decide which airline concept to pursue in the
future. The only information publicly available is that Air Berlin intends to implement a
new, more flexible yield management system as its current booking and pricing system
seems to be outdated.
Sources: Flottau 2011; own research
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Overall, there has been strong consolidation in European airlines in general, just as with low-cost
carriers. Some of the smaller, less profitable airlines have been taken over or merged with other
airlines. In any case, the emergence of no-frills airlines has strongly reduced average fares in
European air travel – also the fares of full-service airlines which had to adapt somewhat to the new
level of pricing with ever more price-sensitive customers. In this way, no-frills airlines have strongly
transformed the “European skies”. Their invention was clearly disruptive.
Digital mobile services in tourism
Today, scarcely anyone is prepared to do without the convenience of being connected by mobile
phone at any place and at any time. The rapid diffusion of smartphones has promoted e-tourism
services not just in the travel preparation phase (e.g. when looking for inspiration, researching travel
related data or booking) and in the post-vacation phase (e.g. when traveller reviews are posted
online), but also during vacation, i.e. while travelling. In this way, mobile technologies are gradually
revolutionising tourism. Current mobile applications offer hitherto undreamed possibilities and many
experts conclude that “forecasting rapid growth of the mobile component in e-tourism is a safe bet”
(Leo 2010; cf. also Egger/Jooss 2010, Göll/Lassnig/Rehrl 2010, Egger/Buhalis 2008). Ubiquitous access
to mobile data services, improved usability and enhanced technical capabilities of mobile handsets
will further increase the share of activities executed by smartphones.
Especially the arrival of the “app store” –pioneered by Apple and then quickly taken-up by Android–
has changed the landscape of the tourism industry and the mobile software industry overall. The first
group considers mobile applications (“apps”) as an additional marketing tool to their internet
activities. For the latter group, app stores provide an appropriate environment to easily market their
software products. This community-based development of the “app world” constitutes the major
innovation in the “mobile ecosystem” (cf. Leo 2010).
From tourists’ perspective, mobile apps or the mobile internet allow them, for example, to find the
right restaurants and attractions tailored to their interests and available time. As already mentioned
above, this is also very important for recommendation platforms as by using smartphones, travellers
are able to post their reviews immediately during their vacation, i.e. while they stay at a certain
hotel, restaurant or bar. They do so not just by writing reviews but also by uploading photos taken at
a specific location. In this way, online reviews are becoming more authentic and valuable.
While this is certainly true for tourists on domestic trips who remain within the coverage of their
home network, this picture changes substantially for tourists travelling abroad. In cross-border
travel, which is clearly much more important in Europe compared to, for example, the US, the still
high roaming fees for data services constitute a strong barrier for a further take-up of mobile
services. From the tourism industry’s perspective this also substantially reduces incentives to create
cross-national mobile services. Today, a number of players try to circumvent the problem of roaming
charges for international guests by installing free WiFi hotspots. This is quite common with hotels
and guesthouses, where the provision of free WiFi access has become a sort of basic infrastructure.
More recently, also players, such as cableway companies in skiing resorts or public bodies in city
centres, have started to provide WiFi hotspots for their visitors. Such access points for high speed
internet provide a valuable network infrastructure for both international and domestic visitors, but
they cannot fully substitute for an all-encompassing mobile network access that is provided via
UMTS.
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Overall, digital mobile services in tourism are expected to deliver the next big wave in e-tourism
innovation. Their future prospects indicate strong growth. Tourism services, such as apps for the
iPhone or Android handhelds as well as web pages optimised for mobile usage, will further shift
market power towards consumers, enhance their information capabilities and increase transparency
of the tourism market. Hence, the tourism sector constitutes an important application area for
mobile digital services, which may complement the real travel experience and offer further ways to
differentiate tourism companies and destinations from their competitors. Yet, it will not completely
disrupt the industry and therefore must be considered an incremental innovation. Disruption may
only take place in some very specific areas, for example, in printed travel books which may (partly)
be substituted by digital travel guides, while for most tourism companies digital mobile services tend
to provide a sort of add-on service to their primary offers.
Summary
The importance of innovation was long underestimated in service industries like tourism. In contrast
to the disruptive innovations vital to growth in many manufacturing sectors, innovations in tourism
were often excluded from the scope of government interest and action in many countries, as they
were rather incremental and often also capital-scarce (cf. Decelle 2004). For a number of reasons,
the realisation of radical innovations in a service sector like tourism seems to be more difficult. The
sector is dominated by SMEs which usually lack the resources to strongly pursue innovation
activities. Furthermore, the tourism service chain consists of a number of individual elements all
provided by different suppliers, which rather tend to imitate than develop innovations themselves
(cf. Beritelli / Romer 2006). Therefore, most innovations developed within the tourism industry itself
tend to be incremental, while more radical innovations tend to originate from outside the sector, for
example pursued by software and internet companies, respectively. Table 4-2 summarises the main
impact of the innovation trends described above and our assessment with regard to their disruptive
potential.
Table 4-3: Summary of main innovation trends in tourism and their impact
Innovation trend Main impact on the sector (disruptive / sustaining) Disruptive
impact
Internetbookings
Close to 40% of tourist bookings (hotels and tickets) in WesternEurope are made online. The internet has had a significant impacton value networks. This development is threatening travel agentsand tour operators, has led to the market entry of newintermediaries (online platforms) and offers opportunities andrisks for hotels at the same time.
high
Dynamicpackaging
Dynamic packaging (DP) favours the process of dis-intermediationof traditional travel agencies by partially outsourcing theirassembling-activities directly to customers. However, DP is notexpected to fully substitute pre-packaged deals, but will rathercomplement the traditional pre-packaged offerings of travelagencies, which will continue to provide customer benefits.
low
Yieldmanagement
Yield management systems are a technological and businessmodel innovation. They present an opportunity for hotels,airlines and other companies using it, as they foster the industry’soverall utilisation of capacity and help to somewhat
low
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counterbalance the seasonally fluctuating demand in tourism.Yet, they are rather an incremental innovation – there are nodisruptive impacts visible.
Online reviewand ratingportals
Rating portals with customer reviews increase markettransparency and have an increasing influence on customers’choice of hotels, restaurants and even destinations.
This fosters professionalization; service providers with poorproduct and service quality (and negative ratings) may be drivenout of business faster.
low
Low-costairlines
The emergence of no-frills airlines has strongly reduced averagefares in European air travel – also the fares of full-service airlineswhich had to adapt somewhat to the new level of pricing withever more price-sensitive customers. In this way, no-frills airlineshave strongly transformed the industry.
high
Digital mobileservices
Digital mobile services like, for example, smartphone apps areexpected to deliver the next big wave in e-tourism innovation.Such services offer ways to differentiate tourism companies anddestinations from their competitors. Yet, they will not completelydisrupt the industry and therefore must be considered anincremental innovation.
low
4.3.2 Policy implications
By and large, the major innovation trends in tourism as discussed in this section should present
opportunities for the European tourism industry in the global competition of destinations rather
than threats. Europe’s tourism industry is well positioned to exploit these innovations to their
competitive advantage, as demonstrated by the following examples:
In global comparison, Europe is in the vanguard of ICT adoption and e-business in the tourism
sector. Hence, e-tourism in Europe has already entered a mature stage in that European
tourism is one of the global innovation leaders.
Service standards in the European tourism industry are comparatively high. Therefore,
European tourism companies need not fear overall rising competition.
Disruptive innovations, which yet have to materialise in other regions of the world –such as
the invention of no-frills airlines– have already entered a mature stage in the European
tourism industry.
General implications of the observed trends for innovation policy
The strategic response of economic and innovation policy should therefore consist in creating
positive framework conditions for European tourism companies to adopt innovations in the best
possible way. This should not be misunderstood as a naive statement that there will be only winners.
Innovations offer new opportunities for some and create challenges for others. The goal must be to
maximise the net benefits, by ensuring that the European tourism industry is an innovation leader
with regard to the discussed trends compared to their competitors.
The key question then is whether the discussed innovations, notably those which were found to have
disruptive impacts, should have implications for the design of innovation policy, or whether existing
innovation policy systems are adequate to address any resulting issues in the best possible way. In
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short, do disruptive innovations also require explicit responses in the policy arena or not – should
policy ‘react’ to disruptive trends or are no specific interventions needed in response to disruptive
innovation? On the whole, the authors of this case study do not see any evidence (or opportunity) for
a specific disruptive innovation policy design in the tourism sector. At least, we do not recommend
any short-term interventions specifically in response to any of the described developments. The main
objective of innovation policy targeting the tourism industry should be to strengthen the general
capabilities for innovation in the sector.
Since the industry is highly fragmented, and many of the players are micro and small enterprises,
intermediaries which connect the individual service providers in a destination, notably the tourist
associations in the regions, play a very important role and should be a key stakeholder and target
group of innovation policy. Cooperation within destinations is a critical success factor. It took hotels a
long time to understand that their competitor is not so much the other local hotel across the street,
but that the real competition is between destinations: the French skiing resorts compete with the
Swiss and Austrian resorts, the Canary islands with the Baleares and, possibly, on an international
scale, with the Caribbean, and so on. What matters in this competitive framework is the perceived
quality of service of the destination as a whole – which is a function of many individual factors. In the
future, it will be important to create a rewarding tourism experience through innovation and product
development instead of offering singular tourism elements (cf. Weiermair 2004).
The discussed innovation trends play a role in this context. Examples are:
Weak performance in service provision can no longer be covered up by marketing
campaigns; online review platforms where tourists rate the quality of service they
experienced during their stay provide an accurate picture of the real situation. This is a
reward for destinations which offer good quality, and creates a problem for destinations with
a comparatively poorer performance.
Tourism demand tends to become ever more fragmented. The standard holiday packages
which have been on offer by tour operators for many years are losing market share to more
flexible travel deals like completely individual travel or dynamically packaged offers.
However, we see no direct implication here for a ‘reactive’ response with innovation policy
instruments, apart from possibly launching ‘soft measures’ such as supporting the skills in dealing
with the new technologies.
A good example of ‘soft measures’ in tourism innovation policy is the European EDEN initiative
(“European Destinations of Excellence”). EDEN promotes sustainable tourism development models
across the European Union. It is based on national competitions that take place every year and result
in the selection of a tourist “destination of excellence” for each participating country. In this way, it
tries to raise the awareness for the diversity and quality of tourism in Europe and foster the
exchange of best practices. In 2011, the focus was on the regeneration of physical sites (e.g. former
industrial areas) which have been transformed to tourist destinations leading to a rejuvenation of
specific regions (cf. http://ec.europa.eu/enterprise/sectors/tourism/eden/index_en.htm).
Specific measures to be considered
Only in specific cases and to a certain extent, some adaptations in the regulatory framework may be
needed to strengthen the industry, as declared by industry lobby groups themselves. For example,
ensuring fair practices in the online travel business is a topical issue. HOTREC, the association of
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Hotels, Restaurants & Cafés in Europe, has issued a position paper in this context21 which proposes
measures to ensure fair business with online travel agents such as hotel reservation services. While
the discussion of fair practices is mainly an industry issue or concerns competition policy, it may also
have implications for further innovation in this domain.
Another HOTREC working paper (2010) directly targets the topic of online hotel recommendations by
suggesting principles which hotel review providers should follow, including: ensuring editorial
control, prevention of manipulation, quality assurance, a minimum number of reviews and allowing
hotels to reply to critique. It could be considered whether some of these principles should be
enforced by regulation or at least strengthened by voluntary codes of conduct (or if all of them
should be left to the market).
Another important field for EU policy is the aviation industry. From its very beginning, the airline
business has been one of the most tightly regulated sub-sectors of the tourism industry. More
recently, the whole transformation of the sector by low-cost carriers would not have been possible
without EU deregulation acts in the aviation industry. Today, the most important challenge for EU
policy is to support a balance between low-cost carriers and full-service airlines (and to some extent
even other systems of public transport like railways). It would go beyond the scope of this policy brief
to make specific recommendations in this domain, it should just be stressed that a “healthy”
competition between low-cost carriers and legacy airlines is for the benefit of both consumers and
the tourism industry as a whole.
Finally, there is a specific issue related to the telecommunications industry, which is relevant for
innovative services in tourism: if the data roaming fees in Europe could be decreased, this could
provide a further push for the demand for innovative mobile services, especially in tourism, which by
nature is a largely international sector of economic activity. In a report from July 2011, the European
Commission itself declared that the reductions at the wholesale level on prices for data roaming
(which are already price capped) are not passed through to the retail level and consumers continue
to face very high costs for retail data roaming services. The European Commission as well as BEREC –
the Body of European Regulators for Electronic Communications – conclude that competitive
pressure in retail data roaming services is not sufficiently strong to bring prices down to reasonable
levels and, consequently, recommend regulatory intervention to bring retail data roaming fees down
(cf. European Commission 2011). This could also boost innovation in mobile digital services for
travellers.
21“HOTREC’s Benchmarks of Fair Practises for Online Travel Agents (OTA)” (2011)
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4.4 Disruptive innovation in transport and logistics22
Introduction
It is widely recognised that innovation is a key ingredient in business success as it provides a number
of benefits, including the enhancement of process quality and revenues, that may be able to
improving the competitive position of companies (Porter and Millar, 1985). Innovative capacity has
become one of most important issues for companies in the 21st century, forcing them to re-think
their products, their services and their processes (Tidd et al., 2001).
Information and communication technology (ICT) is considered one of the most important
technological innovations that provides companies with a wide range of opportunities to improve
efficiency and effectiveness and even gain competitive advantage. Nevertheless, employing ICT is
challenging, particularly for small and medium sized enterprises (SMEs). Small Third Party Logistics
Service providers (3PLs) are no exception, as the adoption of ICT innovation presents risks connected
with the unclear returns of investment. The objective of this case study is to provide some policy
implications deriving from the analysis of the potential disruptive impact of ICT innovation in the
European logistics service industry. Such policy implications are particularly focused on small 3PLs
that are much more exposed to the negative effects of the economic downturn.
The case study is organised into four sections. The following section provides an overview of the
structural features of the European logistics service sector and its recent evolution. The main
challenges that logistics companies will face in the near future have been also described. The third
section analyses in more detail the main innovation trends related to the increasing diffusion of ICT
in the sector. Their potential disruptive impact has been assessed. In the concluding section,
guidelines for devising targeted policy interventions specifically oriented towards accelerating the
adoption of ICT by small European logistics companies have been sketched.
4.4.1 The European logistics service industry: recent evolution and key challenges
In today’s turbulent supply chain environment, characterised by ever-increasing level of competition,
logistics has assumed a critical role for the competitiveness of modern companies and innovation in
logistics management, and services is seen as an area of increasing importance.
Logistics relates to the management of several activities along the supply chain that may be roughly
classified into two categories:
Basic Activities, such as inbound and outbound transportation management, fleet
management, warehousing, materials handling;
Advanced Activities which include order fulfilment, logistics network design, inventory
management, supply/demand planning, sourcing and procurement, production planning and
scheduling, packaging and assembly, and customer service.
Since late 1970s, logistics activities have started to be outsourced in order to allow manufacturers
and retailers to focus on their core business. Logistics outsourcing involves the use of external
organisations called Third Party Logistics Service providers (3PLs) to execute logistics activities
22This sector case study was prepared by Dr. Pietro Evangelista, Institute for Service Industry Research at theItalian National Research Council (IRAT-CNR) and University of Naples Federico II.
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previously performed in-house by manufacturers and retailers themselves. For example, a
manufacturer may decide to employ external transportation and warehousing services from a
specialised company. This practice has growth substantially over the last 30 years and the logistics
service industry is now considered an emerging business area providing a relevant contribution to
GDP and employment in many (developed and developing) countries.
The European Union (EU) logistics service market is one of the most largest and important in the
world. Total logistics costs accounted for 6.9% of the EU GDP in the 2004, this percentage increased
to 7.2% in 2009 (AT Kerney, 2010). In 2008, the transport services sector in the EU-27 employed
around 9.1 million people (approximately 4.5 % of the total EU workforce). Around two thirds of
them were employed in land transport and 27 % in warehousing, supporting and transport activities
(European Commission, 2011). In 2008, the total number of enterprises operating in the sector was
about 739.000 (with a share of 81% operating in the road transport segment) and in several EU
countries most of the transport companies are small and micro (European Commission, 2011). In the
sector, 58 % of employees in EU-27 were employed by SMEs in 2005 and 24% were employed in
micro-enterprises (Eurostat, 2009).
The total volume of logistics expenditures in EU-27 (plus Switzerland and Norway) in 2010 was
estimated in 930 billion euros, and 512 billion euros were outsourced to third-party logistics service
providers, leading to an outsourcing rate of 52% (Klaus et al., 2012).
In the past, logistics outsourcing was equated to transportation. In more recent years however, the
breadth of logistics activities outsourced by manufacturers and retailers has changed dramatically as
they have progressively included new types of (value-added) tasks. New activities such as packaging,
order picking, repair services, returns management, or call centre services have supplemented the
basic functions of transport, transhipment, forwarding and warehousing.
Key challenges
This evolution in the industry reflects a number of key challenges that will influence 3PL companies in
the near future, such as:
Globalisation of the 3PL market. Logistics companies are increasingly asked to extend their
operational reach well beyond the boundaries of their domestic markets. This is forcing 3PLs to
enlarge their transportation and facility network in order to provide their customers the same
service level in different geographical areas.
The emergence of global logistics service providers. The development of the global logistics
provider model (e.g. 4PL model) is the result of customer dissatisfaction in doing business with
specific 3PL providers from one region to another. This is reinforcing the trend towards a tiered
structure of the 3PL market, highlighting the different supply chain role of large and small
logistics companies.
Flexibility in service offerings. Customers expect continual improvements in service offering and
ICT capabilities. The challenge for 3PL companies is to reach a flexible service offer that
integrates traditional and value added services, including information service.
Relationship with customers. Although size and geographic coverage are important, the success
of 3PLs will depend on their ability to deliver an integrated, end-to-end solution that provides
significant improvements in customer, financial and operational performance. This is producing
an ongoing shift in 3PL-customer relationships. Such relationships are evolving from relatively
simple resource-driven relationships to more significant strategic partnerships.
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Innovation. Innovation is the key for 3PL business success in the future. The development of
capability to manage an increasing number of links in the supply chain is one of the main areas of
innovation for 3PLs. The role of ICT in the design, delivery, and continuing enhancement of 3PL
services is another area of growing importance. Improving in these areas is imperative for 3PLs.
4.4.2 ICT related innovation trends: an assessment of their disruptive impact
ICT is a key enabler of innovation in logistics service industry. In particular, the enhancement of
customer service and increased productivity and process quality is dependent on the adaption of ICT.
Investment in ICT by logistics providers is usually triggered by specific requests from customers, who
are aware that increased 3PLs’ performance as a result of the adoption of IT will benefit the logistics
performance of the entire supply chain. On the other hand, value-added services, together with ICT
support, could be the key to differentiating businesses and improving 3PLs’ competitive positions.
From this point of view, Van Hoek (2002) points out that the use of specific ICT capabilities may
leverage transport and logistics services and facilitates more effective integration across companies
in the supply chain. For 3PLs, ICT capabilities can ensure the rapid customisation of products and
maintain competitive lead-times. On the other hand, Sauvage (2003) stresses the key role of ICT
technological innovation as a tool for services differentiation. As a consequence, ICT innovation may
be considered a vector of emancipation for small logistics companies (e.g. road haulage companies)
who aspire to shake off their status of simple subcontractors.
However, when specifically focusing on the adoption of ICT and implementation in logistics
companies, the size of companies is an important element to be considered (Evangelista, 2011).
Large multinational logistics groups have invested in ICT to support their operations for a long time,
gaining substantial benefits. Small 3PL companies, on the other hand, have more difficulties in setting
up ICT applications and the potential of technology is largely underestimated. In the EU, the vast
majority of transport and logistics companies are small (Eurostat, 2009) and the EU logistics service
industry is characterised by a huge digital divide between large and small 3PLs, as documented by a
recent report of the European Commission (e-Business Watch, 2008). This is significant particularly
for those countries with a large proportion of small and medium sized transport and logistics
companies.
What are the main innovation trends associated with ICT in logistics companies? and what is their
potential disruptive impact? Looking at the business practice and academic literature, the following
three trends have been identified (see Figure 4-5):
Figure 4-4: Main ICT related innovation trends in 3PL industry
Source: Evangelista, 2011
Basic servicescombined with ICT
New e-services
New players Disintermediation(e-marketplace)
New alliancesChange business
model (4PL)
High disruptivepotential
Low disruptivepotential
High disruptivepotential
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New e-services consist in the increasing integration of traditional services (e.g. transport and
warehousing) with information services (e.g. shipment tracking & tracing, download of cargo
documentation); new players relate to the development of new virtual intermediaries such as online
freight e-marketplaces; new alliances between 3PLs and other firms operating in complementary
sectors, (e.g. ICT, management consulting and financial services) that have given rise to the creation
of a new category of service provider called Fourth Party Logistics Providers (4PLs).
New e-services
One of the first visible effects is the integration of traditional services with information services
facilitated by the dissemination of the Internet. Over the last decade, transport and logistics
companies have made significant progress in their adoption of new technologies, particularly those
linked to the Internet and e-Business. Low-cost access to the Web and the dissemination of e-
Business technologies have provided these firms with the tools to satisfy customer demand by using
traditional services in conjunction with growing information-based services. Today, the main
transport and logistics service companies provide a variety of information via the Internet and to
secure transactions online with customers. However, the range of web initiatives appears to be
somewhat diversified. There are companies that used their own websites simply as e-service
catalogues, while some other firms offer limited functionalities (such as tracking and booking
services). In other cases, customised portals have been developed by logistics companies to provide a
wide range of online e-service and capabilities to support the company’s competitive advantage. As
new e-service concept is based on integrating transportation and warehousing services with some
form of information support, the disruptive potential of this trend appears quite low as it does not
has any significant impact on the business model of the logistics service companies. Similarly, it does
not affect the activity of logistics companies to the extent that existing markets or services may
become obsolete.
New players
The dissemination of ICT in the sector has opened up opportunities for the development of new
players, the so-called on-line transportation e-marketplace. The purpose of these web-based
intermediaries is to give added value to the transport and logistics business through greater
efficiency and information transparency. Transportation portal provides the buyer with information
and makes communication between buyer and seller faster and more direct. Transportation e-
marketplaces operate through Internet portals, which bring together buyers and sellers of transport
services, but other trading partners in the shipment of goods (e.g. freight forwarders and carriers)
may be involved in the electronic transactions and procedures as shown in Figure 4-5.
There are several different categories of transportation e-marketplaces. A comprehensive taxonomy
is provided by Regan and Song (2001). The widespread diffusion of these electronic e-marketplaces
may have a high disruptive potential in the sense that it may influence several aspects of the logistics
industry. Firstly, the development of transportation e-marketplaces tends to alter the role of
traditional transport intermediaries (e.g. freight forwarders) and the relationships between these
firms and other actors in the supply chain. There is little doubt that the development of these new
players have led to far more information being made available to all actors along the supply chain.
This may be a threat for agents and freight forwarders that have based their business on information
asymmetries between demand and supply of transport and logistics services.
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Figure 4-5: A digital transportation e-marketplace model
Source: Evangelista, 2011
Secondly, some intermediary functions risk becoming redundant, to be subsequently replaced by the
phenomenon of disintermediation.23 These pressures have forced intermediaries to reinforce
relationships with other transport operators, as in the case of consortium formed by freight
forwarders and shipping lines to send standard EDI shipping instructions and bookings and receive
tracking information in return. Thirdly, the diffusion of transportation e-marketplaces may provide
traditional intermediaries with an opportunity to extend and differentiate their own businesses. For
example, freight forwarders may become global and multimodal logistics service providers, focusing
on the entire supply chain processes rather than on the narrow region of origin or destination using
the traditional approach. Consequently their key competencies are shifting from traditional agency-
based freight forwarding services (e.g. freight documentation, customs clearance) to optimising the
total transport and logistics needs of customer. In the maritime transport industry, a similar process
is affecting shipping agents non-vessel operating common carriers (NVOCCs). The use of web
technologies by these companies could even be a means of entering into direct competition with the
carriers themselves.
New alliances
Another trend emerging alongside the diffusion of ICT and web technologies is the formation of new
types of alliances between 3PLs and companies operating in other service sectors such as financial
services, management consulting and ICT vendor. Some of these alliances have give rise to the
creation of a new category of service provider called fourth-party logistics provider (4PL). The
emergence of 4PLs derives from the fact that many manufacturers and retailers operating at an
international level find it increasingly difficult to satisfy the growing and diversified expectations of
their customers. For this reason, high priority has been placed on process integration and supply
chain re-engineering in terms of strategy, operations and technology. In order to address this
customer need, 3PLcompanies have secured alliances with companies operating in complementary
23Stough (2001) defines the disintermediation process as “…the bypassing of intermediaries between buyerand seller by introducing a middle man’.
TRANSPORTATION
E-MARKETPLACE
INTERNET PORTAL
3PL DistributorManufacturer
Physical flow
Information flowDistributor
Supplier
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sectors such as management consulting companies and ICT providers to complement their
competencies.
Often the 4PL company is formed through the setting up of a joint venture that includes the
customer company, which transfers its logistics assets (e.g. warehouses, distribution centres) to the
new company (Christopher, 2005). When this model is pursued through a 3PL company division fully
dedicated to provide 4PL solutions, the arrangement is called Lead Logistics Provide (LLP). The 4PL
model enables customers to outsource to a single organisation the entire re-engineering of their
supply chain processes, beginning with the design stage through to implementation, and ending with
the execution of comprehensive supply chain solutions. Such characteristics of the 4PL arrangement
are considered highly disruptive for a number of reasons.
The first relates to the fact that the 4PL model substantially alters the traditional business model in
the sector as it elevates 3PLs to a coordinator of the flow of goods, not just an operator in the
physical movement of goods. This potentially increase revenues but also, more importantly,
contribute to offering higher value added activities in the supply chain than the warehousing and
transport services traditionally offered. Secondly, the 4PL model tend to change the competition
rules in the sector forcing competitors to reach a higher critical mass to compete or they risk to be
forced out from the market. Finally, the 4PL model is low-asset intensive as it is focused more on
coordination and supply chain orchestration, rather than just operating assets. This feature of the
4PL model requires a strong emphasis on ICT. In fact, to manage relationships with multiple 3PL
providers operating in different geographical areas and performing different logistics activities,
outstanding information management capabilities are required. This element requires that the 3PL
companies need to increase its human and technological skills and investments.
4.4.3 Policy implications
As shown above the ICT innovation is shaping the logistics service industry and having a significant
impact on logistics companies and small 3PLs particularly. A recent study on ICT dissemination in
small Italian 3PL companies (Evangelista, 2011) has highlighted three main barriers that inhibit
technology usage in the small 3PLs sector. Policy actions should be oriented primarily to remove
these barriers in order to support and accelerate the use of ICT in small 3PLs:
Firstly, the study indicates that the overall level of ICT expenditure compared with total company
costs is fairly low and it does not significantly vary across provider categories. The implication for
policy intervention here is to stimulate higher ICT expenditure through fiscal actions that may
be able to reduce tax charges on technology investments.
Secondly, lack of technology skills in the workforce is seen as a major constraint both on ICT
adoption and the exploitation of ICT potential. Policy interventions should concentrate on
reassessing education and training systems at all levels in this sector in order to meet the
professional and skills needs of companies, thereby enabling them to evolve in line with
technological innovation processes. This means to exploit actions aimed at adjusting existing
programmes and/or developing new ones to meet the new needs in executive development
targeted at entry-level management positions. More specifically, mixed education and training
programmes on cross-functional knowledge and skills across and within the supply chain context
combining, for example, knowledge on ICT and supply chain management should be provided.
Thirdly, the study indicates that the ICT supply side is considered a bottleneck particularly in
relation to the lack of standards and difficulties in selecting ICT products and services for small
Policy Brief: Disruptive innovation
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3PLs. Policy should be aimed at achieving a better coordination of initiatives for disseminating
technology solutions supporting the transport and logistics systems. Fragmentation in this area
is one of the most critical inhibiting factors preventing small 3PLs to share data and information
with other supply chain actors and appreciate the benefits associated to a more effective system.
More in details, policy in this area should stimulate cooperative technology platforms through
which ICT vendors may design solutions more closely aligned with the characteristics of small
3PLs and their customers. Considering the proliferation of logistics-related ICT tools and
applications in recent years, this action may allow overcoming the difficulties of small 3PLs to
select appropriate tools for their business.
Finally, the study indicates that to fully exploit the potential of ICT for developing supply chain
innovation the combination between “service strategy” and “technology strategy” is an important
factor. In addition, policy makers should pay attention to the fact that when planning technology
investment, the focus of small 3PLs has to be on using ICT to change supply chain relationships
rather than on technology itself. ICT is a valuable, but no longer rare, resource. Technology
investments may be easily replicated by competitors and thus provide only temporary advantages.
The way technology is used can enable differentiation advantage. To this end, policy action aimed at
supporting ICT innovations has to be directed at building up non-imitable supply chain coordinated
and collaborative strategies.
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5 Strategic responses for innovation policy
5.1 General conclusion
It is widely uncontested that Europe must take a pro-active approach to maintain its role as an
innovation leader, in particular in cutting-edge domains which may have disruptive impacts in
different areas of the economy. The examples from different sectors discussed in this policy brief
(see Section 4) belong to this category. The line of argument is essentially the same as for innovation
in general – European companies need to be highly productive and innovative in order to keep the
part of the value added created by globally operating businesses in Europe as high as possible. The
more ‘disruptive’ the impact of a new technology is, the more important it is that European
companies are at the forefront in its development.
The key question then is whether innovation trends which are expected to have a disruptive impact
in the economy require special treatment by innovation policy, or whether the existing innovation
policy frameworks with their ‘conventional’ instruments are adequate to address the implications of
disruptive innovation as well. In short, do disruptive innovations also require disruptive innovation
policy, i.e. explicit, different types of responses, or not? Should policy ‘react’ to disruptive trends?
The case against a specific ‘disruptive innovation policy’ framework
On the whole, the authors of this policy brief do neither see clear evidence for the need nor an
opportunity for a specific ‘disruptive innovation policy’ intervention. In particular, given the long term
nature of disruptive technology development (which typically takes 10-20 years from their invention
to their widespread deployment in products), this policy brief does not recommend any short-term
interventions specifically in response to any of the described developments.
Rather, the strategic response of economic and innovation policy should consist in creating positive
framework conditions for innovation in Europe (irrespectively of whether innovations will be
incremental or disruptive in their impact), with the objective to strengthen the general capabilities
for innovation.
The main reasons for not recommending a specific, targeted approach to address disruptive
innovation by specific policy interventions are:
High degree of uncertainty / lack of predictability: disruptive technology is best understood with
hindsight; predicting the time and scope of the impact of disruptive technologies is hardly
possible (see Section 3.4, and the example of battery electric vehicles in Section 4.2 as an
example).
‘Disruptive innovation’ differs between industries: the innovation examples presented in
Section 4 demonstrate that ‘disruptive innovation’ can mean fundamentally different things in
different industries: ‘innovation’ in high-tech sectors is different from ‘innovation’ in tourism.
Acknowledging these differences, a first conclusion is that there is no single policy framework
(that applies equally to all sectors) for specifically dealing with disruptive innovation. We support
the argument by Markides that disruptive business-model innovations are completely different in
their impact on established firms than product innovations (see Section 3.4).
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Industrial policy vs. innovation policy: supporting the breakthrough of disruptive innovation
through policy interventions is probably more a case of industrial policy than of innovation
policy. A good example is China’s policy to promote the development and deployment of electric
vehicles through massive subsidises and further incentives.
Conventional innovation policy instruments are adequate: there is no evidence why
conventional innovation policy instruments should not work for fostering advancements in
disruptive technologies, provided that they work for fostering innovation in general.
5.2 Specific issues and recommendations
However, even if we do not see a business case for a specific framework for disruptive innovation
policy, some issues for innovation policy arise from the sector case studies which should be
considered when discussing disruptive technologies. These are general implications for innovation
policy (also for economic policy), i.e. the issues are not restricted to cases of dealing with disruptive
technology; but the more ‘disruptive’ a new technology is likely to be, the more important it is to
reflect upon these issues. In particular, we consider the following issues, which are briefly discussed
in this Section, as relevant:
(1)
The cross-sectoral
nature of disruptive
innovations
A common feature of many disruptive technologies is that their develop-
ment requires expertise and contributions from different industries.
Strengthening cross-boundary innovation processes may require
innovative mechanisms, e.g. establishing technology platforms involving
stakeholders from different industries.
(2)
Dealing with ‘business
case conflicts’
A major challenge for innovation policy arises if the desired and ex-
pected externalities from accelerating disruptive innovation deployment
do not coincide with the industry’s business case (at least in the short
and medium term): how should the cost for shortening the S-curve be
shared?
(3)
Anticipating unwanted
side-effects of
interventions
Subsidies and grants are a policy instrument frequently used to
accelerate the adoption of new technologies, for instance in the area of
renewable energies (e.g. subsidies for photovoltaic power generation).
However, this is not without risk – policy is well advised to conduct an
impact assessment of possible side-effects and of the longer-term
impacts before launching such measures.
(4)
Understanding
disruptive innovation
in service sectors
The case studies on tourism and transport show that ‘disruptive
innovation’ can have a totally different meaning in services than in
manufacturing. In services, disruptive innovation is typically linked to
new business models that have been made possible by innovative uses
of technologies provided by other sectors, notably ICT, rather than
conducting R&D. The implications for innovation policy are therefore
quite different.
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5.2.1 Addressing the cross-sectoral nature of disruptive innovations
A common feature of many disruptive technologies is that their development requires expertise
–both technological and of the market– from different industries. In this way, they can be referred to
as “hybrid innovation” (see Figure 5-1), in contrast to conventional innovations which are developed
and applied within a single company (or collaborative innovations within one sector). Advancing such
hybrid innovations may require innovative policy mechanisms, e.g. establishing technology platforms
involving stakeholders from different industries. This concept is related to the ‘open innovation’
concept, but has an even stronger focus on the cross-industry aspect.
The chemical and automotive industries
provide good illustrations of this point.
Innovations in the chemical industry, as
shown in the case study, often have their
greatest impact in other sectors.
Disruptive innovations in the automotive
industry such as electric engines or light-
weight constructions for car bodies, for
instance, require new substances and
materials developed by the chemical
industry – albeit achieved in close
collaboration with the client industry.
Innovative concepts of industrial
innovation policy should seek to build on
this distinctive feature and seek to
strengthen joint, cooperative develop-
ments.
Figure 5-1: Hybrid innovation
Source: Dröscher (2009) / Evonik Industries
The High-Level-Group on the competitiveness in the chemical industry has made suggestions as to
how this goal can be achieved, for example by encouraging clusters and technology platforms which
enable longer-term innovation cooperation (see Final Report, p. IV/V).
The EU has already initiated the establishment of European Technology Platforms (ETPs) as industry-
led stakeholder fora charged with defining research priorities in a broad range of technological areas.
Currently, there are 36 such platforms in five domains (energy, ICT, bio-based economy, production
and processes, transport).24 These platforms could provide an excellent baseline infrastructure for
fostering cross-sectoral cooperation geared towards innovation and, in particular, accelerating the
deployment of desired disruptive innovations.
There are also some individual projects which are aimed in the same direction. The SPIRE proposal
(see Section 4.1) could be a very interesting pilot for a public-private-partnership that fully recognises
the shift from conventional to ‘hybrid’ innovation, characterised by bringing together technological
and market competencies from different industries. In addition, future R&D programmes supporting
24see http://cordis.europa.eu/technology-platforms/individual_en.html for details.
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advances in disruptive innovations should also be considered. The framing of themes and
instruments for Horizon 2020, as currently being discussed, should take this into consideration.
In summary, to encourage hybrid innovations, this policy brief suggests the following strategic
responses by innovation policy:
Exploring innovative mechanisms to support innovation processes which require technological
and market know-how from different industries, building on the existing infrastructure of the
European Technology Platforms.
Initiating public-private-partnerships for the establishment of cross-boundary technology
platforms with a longer-term research agenda.
Considering options to encourage cross-sector R&D activities in key technology domains with a
disruptive potential in the context of planning Horizon 2020 (or other framework programmes).
Promoting open innovation concepts and set up topical innovation networks.
Using the mechanism of High-Level Groups to explore factors for the innovativeness and com-
petiveness of the European industry, involving representatives of the whole value network;
continue the work of existing HLGs (e.g. by updating their reports every two years).
5.2.2 Dealing with ‘business case’ conflicts: who should bear the additional cost forshortening the S-curve?
Disruptive break-through technologies in the chemical and automotive industry are seen as
important developments in addressing global environmental issues such as advancing renewable
energies and reducing carbon emissions. However, the positive externalities from a faster
development and deployment of the disruptive technologies (which could be framed as the societal
‘business case’ for advancing the technologies) may not fully coincide with the relevant industry’s
business case for advancing them (at least regarding the time scale of switching from the existing to
the new technology). The case study on the chemical industry illustrates this point for innovations in
materials processing (see section on ‘process intensification’). In capital intensive industries such as
the chemical and automotive industries, investments in new production plants before the existing
ones are written off is an additional expense. This raises the issue of how the costs for advancing
(even forcibly) the new technologies shall be shared among the stakeholders concerned, including
the companies from the respective industries, their client industries and citizens (as tax payers in the
case of costs being paid by government, or as customers if the switch results in higher prices for
products and services).
If a decision on policy to proactively accelerate the wide adoption of the disruptive technology is
made nonetheless, the question arises as to how the cost for shortening the S-curve can be shared
among stakeholders, e.g. if the changes are ‘imposed’ upon the respective industries by regulation.
This is a common issue with most environmental policies (take, for example, the ETS – Emissions
Trading Scheme, REACH regulation in the chemical industry etc.) and not limited to disruptive
technology, but it needs to be discussed here as well.
The issues are too complex to permit any general recommendations as to how to deal with them;
this will have to be considered specifically for each case. Some possible instruments to achieve a
consensus include well-known consultation procedures such as:
Policy Brief: Disruptive innovation
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Launching stakeholder consultations to discuss the opportunities and implications for advancing
disruptive technology
Seeking international agreements (to avoid short-term negative impacts for first-movers)
Conducting impact assessments of specific regulations (or other policy interventions) to advance
disruptive technologies
5.2.3 Anticipating unwanted side-effects of demand-side interventions
Subsidies and grants are a policy instrument frequently used to accelerate the adoption of new
technologies, for instance in the area of renewable energies (e.g. subsidies for photovoltaic power
generation). However, this instrument is not without risk (such as causing unexpected and unwanted
effects) – policy is well advised to conduct an impact assessment on possible side-effects and on the
longer-term impacts before implementing such measures. The High-Level Group on the
competitiveness in the chemical industry has warned, given this context, against negative side-
effects of incentives (through subsidies or regulation) in agriculture or energy policy which can
“seriously jeopardise attractive established uses of bio-based raw materials in the chemicals industry
by favouring other applications” (p. 43). For instance, the availability of feedstock for the detergent
industry is jeopardised due to higher subsidies for bio-fuel use, according to the HLG.
It is therefore recommended that the side-effects of interventions in favour of specific technologies
should be carefully assessed:
Conduct an ex-ante impact assessment when launching subsidies or other demand-side
measures to promote the uptake of specific technologies.
Consult with industry representatives not only from the sector directly targeted by the respective
policy but also from sectors indirectly affected.
5.2.4 Understanding disruptive innovation in services
The cases of tourism and transport discussed in this brief show that disruptive innovation has a
different meaning in services than it usually has in manufacturing sectors. In services, disruptive
innovations are typically linked to new business models that have been made possible by innovative
uses of technologies provided by other sectors, notably ICT. The implications for innovation policy
here are therefore quite different from those relating to manufacturing. Some strategic responses
recommended for innovation policy addressing disruptive innovation in service sectors are:
Identifying the key trends and their disruptive potential for different service sectors.
Analysing the framework conditions for the sector in Europe (political, economic, social,
technological dimension) and to correlate them with the identified trends: what are the
opportunities and threats arising from the identified disruptive trends for the European industry?
Using, as much as possible, existing innovation policy schemes to support companies in coping
with the anticipated developments and challenges (e.g. through raising awareness and schemes
to provide information and advice).
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Annex I: Sector definitions and additional information
Table A1-1: Business activities covered by the chemical industry (definition based on NACE Rev. 2)
NACE Rev. 2 Business activities: Manufacturing of…
20 Chemicals, chemical products and man-made fibres
20.1 Basic chemicals, fertilizers and nitrogen compounds, plastics and synthetic rubber inprimary forms
20.2 Pesticides and other agro-chemical products
20.3 Paints, varnishes and similar coatings, printing inks and mastics
20.4 Soap and detergents, cleaning and polishing preparations, perfumes and toiletpreparations
20.5 Other chemical products
20.6 Chemical fibres
Table A1-2: Business activities covered by the automotive industry (definition based on NACE Rev.
2)
NACE Rev. 2 Business activities: Manufacturing of…
29 Motor vehicles, trailers and semi-trailers
29.1 Motor vehicles
29.2 Bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers
29.3 Parts and accessories for motor vehicles and their engines
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Table A1-3: Business activities covered by the tourism industry (definition based on NACE Rev. 2)
NACE Rev. 2Business activities
Divisions Groups
Core business activities of the tourism industry
H 55 Accommodation
55.1 Hotels and similar accommodation
55.2 Holiday and other short-stay accommodation
55.3 Camping grounds, recreational vehicle parks and trailer parks
55.9 Other accommodation
N 79 Travel agency, tour operator reservation service and related activities
79.1 Travel agency and tour operator activities
79.9 Other reservation service and related activities
Further relevant business activities
H 49 Land transport
49.1 Passenger rail transport
49.3 Other passenger land transport
H 50 Water transport
50.1 Sea and coastal passenger water transport
50.3 Inland passenger water transport
H 51 Air transport
51.1 Passenger air transport
H 56 Food and beverage service activities
56.1 Restaurants and mobile food service activities
56.3 Beverage serving activities
N 77 Rental and leasing activities
77.1 Renting and leasing of motor vehicles
R 91 Libraries, archives, museums and other cultural activities
91.0 Museums activities; operation of historical sites and buildings and similarvisitor attractions; botanical and zoological gardens and nature reserveactivities
R 93 Sports activities and amusement and recreation activities
93.1 Sports activities
93.2 Amusement and recreation activities
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Table A1-4: Policy recommendations of the High Level Group on the Competitiveness of the
European Chemicals Industry (2008)
Objectives Measures recommended by the HLG
Strengthening
innovation networks
industry, in cooperation with governments, should set up topical
innovation networks to promote key strategic innovations;
industry and public authorities at all levels should strengthen
clusters which facilitate co-operation across sectors and across
borders, with the aim of further stimulating and facilitating cross-
cutting innovations throughout the value chain;
the technology platform SusChem should explore opportunities to
extend its scope of work to include innovation leadership issues.
Increased spending in
Research and
Development (R&D)
the private sector should accelerate its efforts to speed up
innovation, because the chemicals industry has a strategic interest in
occupying high-knowledge-based segments assuring higher long-
term growth and profitability;
the public sector should provide effective support in this context.
Better development of
human resources
EU member states should step up promotion of chemical and science
education starting in primary schools;
chemical engineering faculties should define the profiles of new
professions in cooperation with industry
the industry should intensify efforts to forecast its requirements of
human resources in various locations and regions.
Improvements in
information and
communications
the chemicals industry needs to develop a more effective dialogue
with society based on mutual understanding and trust;
the Commission and Member State authorities should improve
communication with industry and other stakeholders to facilitate
proper understanding and observance of regulatory requirements;
the Commission should ensure that impacts on innovation and any
further research needs are addressed in impact assessments
accompanying new legislative proposals where appropriate.
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Table A1-5: Worldwide car production
Source: ACEA/OICA 2011
Figure AI-1: Car sharing growth worldwide
Source: Shaheen / Cohen (2007)
Production of
cars in…
Units produced in
2010
Share of worldwide
production
% chg ‘09 to ‘10
EU 15,068,473 25.8 8.3
China 13,897,083 23.8 33.8
Japan 8,307,382 14.2 21.1
South Korea 3,866,206 6.6 22.4
Brazil 2,828,273 4.8 9.8
India 2,814,584 4.8 29.4
USA 2,731,105 4.7 24.4
Mexico 1,390,163 2.4 47.4
Iran 1,367,014 2.3 16.8
Russia 1,208,362 2.1 101.6
Canada 968,860 1.7 17.8
Turkey 603,394 1.0 18.1
Thailand 554,387 0.9 76.9
Malaysia 522,568 0.9 16.9
Argentina 508,401 0.9 33.8
Indonesia 496,524 0.8 41.0
World 58,478,810 100.0 22.4
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Annex II: References
Chapter 3 – The concept of disruptive innovation
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Chapter 4.2 – Automotive industry
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Annex II: Study team
The following authors have contributed to this policy brief:
Hannes Selhofer is a project manager and senior consultant at empirica GmbH, a research and
consulting company based in Bonn, Germany. His recent work has focused on innovation policy, the
role of ICT for innovation and productivity, the development of electronic business models and the
evaluation of related policies in different EU member states. Since 2010, he has been project
manager of INNO-Grips. He has coordinated the work on this policy brief and authored several of the
sections. Contact: [email protected].
René Arnold is a Research Analyst at IW Consult, a subsidiary of the Institut der deutschen Wirtschaft
Köln e.V. He conducts research in a fields relating to EU, national, regional, and local policy-making
and development. His focus is in the areas of ICT, internet and innovation. He studied at the
University Heilbronn and is completing his PhD in Marketing at the University of Edinburgh. He joined
IW Consult in 2010 and has been member of the INNO-Grips study team since then. He contributed
the sector case study on the automotive industry to this policy brief (Section 4.2). Contact:
Pietro Evangelista is senior researcher in logistics and supply chain management at the Italian
National Research Council. His current scientific interest is focused on supply chain innovation with
particular reference to ICT and environmental sustainability innovation in the transport and logistics
industry. Pietro is lecturer in Business Economics and Management at the faculty of Engineering of
the University of Naples Federico II. He assists the EU Commission as an independent expert in the
evaluation of project proposals in the field of transport and logistics for the VII Framework and TEN-T
programmes. He contributed the sector case study on transport and logistics to this policy brief
(Section 4.4). Contact: [email protected].
Markus Lassnig is a senior consultant and head of the competence field e-tourism at Salzburg
Research GmbH, a research company based in Salzburg, Austria. His recent work has focused on
research, development and innovation projects in the tourism, sport and leisure industries, trend
analysis and consulting in innovation management. In the context of INNO-Grips, he has authored
the chapter on innovation in the tourism industry in this policy brief (Section 4.3). Contact: