disruptive innovation: implications for competitiveness...

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

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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 t

this report implies or expresses a warranty of any kind.

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Commission (2012): Disruptive Innovation: Implications for Competitiveness and Innovation Policy.

INNO-Grips Policy Brief No. 4, prepared by empirica GmbH for DG Enterprise and Industry, as part of

the INNO-Grips project.

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


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


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


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-


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


Grips workshop on the

her the European Commission nor any person acting on behalf of the Commission is responsible


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


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


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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

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ctp

erf

orm

ance

Time or engineering effort

technology 1technology 2

technology 2

Performance asdefined in

Application “A”


Application “B”


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


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.


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


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-


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.


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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.


12


13

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


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.


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.


16

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


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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)


18

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


19

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


20

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’.


21

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


22

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


23

(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.


24

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

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ance


first technology

second technology

third technology

Pro

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technology 1technology 2

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25

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)


26

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).”


27

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


28

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


29

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


30

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


31

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”.


32

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”.


33

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)


34

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


35

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


36

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).


37

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.


38

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


39

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.


40

- 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


41

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


42

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


43

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


44

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.


45

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).


46

Table 4-1).


47

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.


48

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)


49

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


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.


66

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.


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


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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).


73

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.


74

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.

“Hybridinnovation”

conven-tional

innovation

Market competences

Tech

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Inside theindustry

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75

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:


76

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).


77

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


78

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


79

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.


80

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


81

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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:

[email protected]

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:

[email protected]

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