Ph d dissertation christian sandström

Thesis for the degree of Doctor of Philosophy

A revised perspective on Disruptive Innovation

– Exploring Value, Networks and Business models

Christian G. Sandström

Division of Innovation Engineering and Management
Department of Technology Management and Economics
Chalmers University of Technology
Göteborg, Sweden
2010

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A REVISED PERSPECTIVE ON DISRUPTIVE INNOVATION
– EXPLORING VALUE, NETWORKS AND BUSINESS MODELS

CHRISTIAN G. SANDSTRÖM
ISBN 978-91-7385-440-5

© Christian G. Sandström, 2010.

Doktorsavhandlingar vid Chalmers tekniska högskola
Ny serie nr 3121
ISSN 0346-718x

Division of Innovation Engineering and Management
SE-41296 Göteborg
Sweden
Phone + 46 (0)31 772 1000

Printed by Chalmers Reproservice
Göteborg, Sweden, 2010

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A revised perspective on Disruptive Innovation
- Exploring Value, Networks and Business models

Christian Sandström

Abstract

The concept of disruptive innovation has received much attention in recent years. These
innovations can be defined as offering an initially lower performance while at the same time
bringing some new attributes to the market. This thesis aims to develop and extend existing
theory on disruptive innovation with an emphasis on business models and value networks.

Previous work in this area has shown that incumbents are often toppled by entrants when
disruptive innovations are introduced since these technologies are not initially demanded by
the established firms’ customers. Much attention has been devoted to how disruptive
innovations emerge in low-end segments and in new markets. However, more knowledge is
needed about whether and how they can prosper inside an incumbent firm’s established
market segment. Moreover, the challenges related to these innovations have increasingly
been framed as related to the business model of firms, but little is known regarding how and
why this is the case.

Drawing upon data from several case studies, the empirical findings in this dissertation
suggest that disruptive innovations may prosper in a segment where incumbents are already
present. They do so by compensating the lower traditional performance with some new ways
of creating value, for instance by removing labor or changing activities inside the customer’s
organization. These findings in turn suggest that this theory needs to focus more on how
different performance dimensions create value. Additionally, it is argued that a more nuanced
conceptualization of customers and networks is needed. When regarding customers as a
collection of actors with different competencies and incentives, it becomes clear that
disruptive innovations are problematic even when a firm’s existing customers demand them.
These innovations may be incompatible with the different activities and incentives of some
actors, which may result in a barrier to adoption. Disruptive innovation can therefore be
regarded as a business model challenge in the sense that the new value creation and
distribution distorts the firm’s surrounding constellation of actors. Firms need to change their
network, but struggle to do so since business models transcend their boundaries and they are
therefore forced to act under conditions of interdependence.

Keywords: Disruptive innovation, discontinuous, business model, network, value,
Hasselblad, Facit.

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Appended papers
The thesis is based on the following papers, referred to by Roman numerals in the text.

Paper I

Sandström, C., Magnusson, M., and Jörnmark, J. (2009) Exploring factors influencing
incumbents’ response to disruptive innovation, Creativity and Innovation Management,
Vol 18(1), pp. 8-15.

Paper II

Sandström, C. (2010). Hasselblad and the shift to digital imaging, forthcoming in Annals of
the History of Computing.

Paper III

Sandström, C. (2010). High-end disruptive technologies with an inferior performance,
forthcoming in International Journal of Technology Management.

Paper IV

Sandström, C., Magnusson, M. (2010). Value, Actors and Networks - A revised perspective
on disruptive innovation, presented at the DIME conference ‘Organizing for networked
innovation’ in Milan, 14-16 April. Under review for publication in a special issue of Industry
& Innovation.

Paper V

Sandström, C., Osborne, R. (2010). Managing business model renewal, forthcoming in
International Journal of Business and Systems Research.

Paper VI

Magnusson, M., Sandström, C. (2010). Disruptive innovation as a business model challenge,
IMIT working paper 2010:142. Submitted to Long Range Planning.

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Acknowledgements
The pursuit of a doctoral dissertation is often thought of as an individual project. In
retrospective it is clear to me that this is true only to a certain extent. The process and the
eventual outcome depend largely on the surrounding environment, and in this respect I have
been very fortunate. Over the past years I have enjoyed a daily work that has been
intellectually challenging and rewarding. This would not have been the case without the
contributions by people in my vicinity.

I am grateful for the support and supervision given by Mats Magnusson. Mats has shared his
encyclopedic knowledge and never-ending optimism with me and is acknowledged for
having made these years so rewarding. He has challenged me when I needed it, and
encouraged me when I needed it, always being genuinely helpful and constructive. Thank
you.

Henrik Berglund and Maria Elmquist have assisted me as co-supervisors throughout this
process. Henrik made valuable contributions in the latter phases and the covering paper has
been greatly improved thanks to his advice. Maria helped me a lot when working towards my
licentiate level, which can be regarded as a precursor to this dissertation. Her guidance was
very valuable in preparing me for the writing of this covering paper.

I am very grateful for all the inspiration, advice and mentoring given by Jan Jörnmark. Not
only has he helped me to understand the process of creative destruction, he has also given
important suggestions regarding what studies to undertake and shared his time and
experiences with me very generously. Moreover, when I started to question how disruptive
innovations actually emerge, Jan was a great discussion partner as he had had similar
thoughts himself.

The CBI environment was one important rationale for why I wanted to pursue a PhD. I
would like to thank Sören Sjölander for taking this initiative, for believing in me as a PhD
student, for giving creative input during the process and for making me think about research
in an industrially relevant way. As the director of CBI, Sofia Börjesson has created a
platform where it has been possible to conduct good and relevant research. Sofia has also
been very helpful in the latter phases of this research process.

I am grateful for having had great colleagues at the Center for Business Innovation. Writing a
doctoral thesis is at times a lonesome and uncertain journey and it is of great importance to
have supportive and friendly colleagues. I started as a PhD student at about the same time as
Jennie Björk. Having gone through this process in parallel, Jennie has been a great friend.
The hardships have been easier to handle and the accomplishments have become more
enjoyable thanks to Jennie. Sweden will not be the same without Tom Hordern, it has been
great getting to know you, and yes, I will come and visit you in New York. Marcus Linder

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has been a great colleague and friend with whom I’ve had many rewarding discussions. The
intellectual rigor, humor and integrity of Jonas Larsson have been a great source of
inspiration to me. Joakim Björkdahl has given good advice regarding how to write a PhD,
both before I was enrolled and throughout the process. Jan Wickenberg’s experiences from
industry have offered perspectives that we sometimes miss out on and I believe that more
people like Jan are needed in academia. Ulrika Badenfelt has shared important insights
concerning how to finalize a doctoral project. I really enjoyed working together with Ralf-
Geert Osborne in spring 2008 and want to thank you for a great collaboration.

My appreciation goes to the Department of Technology Management and Economics for
being a great work environment. Magnus Holmén, Daniel Ljungberg, Bo Nilsson, Torbjörn
Jacobsson, Marcus Finlöf Holgersson and Maximilian Pasche – it has been great to get to
know you.

A special thanks also to the Continuous Innovation Network and the EITIM doctoral network
for being great platforms. The constructive and ambitious feedback given by Anders Richtnér
at my final seminar should also be acknowledged.

I am very grateful to everyone who has provided me with the information that this thesis is
based on. Special thanks to: Bengt Ahlgren, Britt Svensson, Roy Andersson, Lennart
Stålfors, Patrik Mark, Per Knudsen, Bengt Järrehult, Nicola Rehnberg, Jerry Öster, Lennart
Gustafsson and Göran Arvidsson. You have been very generous in sharing your time and
experiences with me over the years and I am in debt to you all.

Bengt Karlsson and Birgitta Andersson at IMIT have always been helpful and supportive.
Jon van Leuven and Cynthia Little have edited my language and been very constructive in
doing so. Funding from Center for Business Innovation and Vinnova is gratefully
acknowledged.

I have also been fortunate to be surrounded by a fantastic family and some great friends. A
big thanks to all of you.

Finally I want to thank the students at the department of technology management and
economics. To interact with ambitious, curious and bright people like you has been a
fantastic experience that I will remember.

Christian G. Sandström

Göteborg, September, 2010

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Contents

1. Introduction ........................................................................................................................................ 1
2. Theories on discontinuous and disruptive innovation ........................................................................ 3
2.1 Discontinuous Innovation ............................................................................................................ 3
2.2 Discontinuous innovation and the environment ........................................................................... 6
2.3 Disruptive innovation .................................................................................................................. 8
.
2.3.1 Extensions and improvements of the theory on disruptive innovation ............................... 11
2.4 Business models, value and networks ........................................................................................ 14
2.4.1 Value and utility .................................................................................................................. 15
2.4.2 Networks ............................................................................................................................. 16
2.5 Disruptive innovation − some areas in need of development .................................................... 18
2.5.1 Disruptive innovations in established value networks ........................................................ 18
2.5.2 Disruptive innovation as a business model challenge ......................................................... 20
3. Methodology .................................................................................................................................... 23
3.1 Choice of method ....................................................................................................................... 23
3.2 Data collection and analysis ....................................................................................................... 24
3.2.1 Study 1 − Surviving Disruptive Innovation ........................................................................ 24
3.2.2 Study 2 – Managing discontinuous innovation ................................................................... 29
3.2.3 Study 3 – Inhibitors and triggers of discontinuous innovation ........................................... 31
3.2.4 Study 4 – Facit and the displacement of mechanical calculators ........................................ 35
3.2.5 Study 5 – Disruptive innovation and business model renewal............................................ 37
3.3 Validity and reliability ............................................................................................................... 39
3.4 Reflections on the research process ........................................................................................... 41
4. Summary of appended papers .......................................................................................................... 43
4.1 Paper I: Exploring factors influencing incumbents’ response to disruptive innovation ............ 43
4.2 Paper II: Hasselblad and the shift to digital imaging ................................................................. 44
4.3 Paper III: High-end disruptive technologies with an inferior performance ............................... 44
4.4 Paper IV: Value, Actors and Networks – a revised perspective on disruptive innovation ........ 45
4.5 Paper V: Managing business model renewal ............................................................................. 46
4.6 Paper VI: Disruptive innovation as a business model challenge ............................................... 47

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5 Analysis ............................................................................................................................................. 48
5.1 Disruptive innovations in established value networks ............................................................... 48
5.2 Disruptive innovation as a business model challenge ................................................................ 50
6. Discussion ........................................................................................................................................ 56
6.1 Problems with the existing theory on disruptive innovation ...................................................... 56
6.2 Proposed theoretical improvements............................................................................................ 58
6.2.1 From performance to value and utility ................................................................................ 58
6.2.2 A more comprehensive view of networks ........................................................................... 59
6.2.3 Towards a more symmetric theory on disruptive innovation .............................................. 62
6.2.4 A symmetric theory opens up for new managerial solutions .............................................. 62
6.3 Reflections on proposed changes towards symmetry ................................................................. 64
7. Conclusions ...................................................................................................................................... 66
7.1 Disruptive innovations in established value networks ............................................................... 66
7.2 Challenges related to disruptive innovation and business models ............................................. 67
.
7.3 Directions for future research ..................................................................................................... 68
8. Managerial implications ................................................................................................................... 70
8.1 Map and analyze networks and value ......................................................................................... 72
8.2 Adapt and align the network and the business model ................................................................ 73
8.3 Reflections on the guidelines ..................................................................................................... 75
.
9. References ........................................................................................................................................ 78

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1. Introduction
“Individual innovations imply, by virtue of their nature, a "big" step and a "big" change. A
railroad through new country, i.e., country not yet served by railroads, as soon as it gets into
working order upsets all conditions of location, all cost calculations, all production functions
within its radius of influence; and hardly any "ways of doing things" which have been
optimal before remain so afterward.“

Joseph Schumpeter (1939, p. 101)

Few people today dispute that innovation lies at the heart of economic development. Ever
since Schumpeter wrote his book The Theory of Economic Development (1912, 1936),
scholars have emphasized the importance of innovation as a driver of structural change and
economic growth. Schumpeter (1942) argued that economic growth in a capitalist regime
happens through creative destruction, a process where the old is continuously being
destroyed and thereby freeing resources for the new.

The process of creative destruction has often caused insurmountable problems for established
firms (Gilfillan, 1935). This phenomenon is almost as old as capitalism itself and there are
many historical examples of how established firms encounter problems under conditions of
discontinuous change. Few of the typewriter manufacturers survived the shift to personal
computers, the shift from sailing ships to steam ships put incumbent firms in great trouble
and the companies operating in the ice industry went out of business with the rise of fridges
(Utterback, 1994). The shift from vacuum tube radios to transistor radios entailed great
difficulties for established firms like RCA and created an innovative opportunity for entrants
like Sony (Henderson and Clark, 1990). When minimill technology for steel production
emerged in Northern Italy in the 1960s the large integrated steel mill manufacturers in
France, Germany and Belgium encountered severe difficulties (Jörnmark, 1993).

Needless to say, there are many more examples of this pattern. Though technological
discontinuities have had a great impact on changes in industrial leadership, discontinuities in
general seem to cause problems for incumbents. Also, changes in the regulatory environment
or the emergence of new business models have toppled former industry leaders (Chesbrough,
2003; Markides, 2006).

Many scholars have addressed this dilemma which is sometimes referred to as the
“incumbent’s curse” (Foster, 1986). For instance, Tushman and Anderson (1986) argued that
discontinuities which render existing competencies obsolete tend to overthrow established
firms. Henderson and Clark (1990) pointed at organizational impediments in order to explain
changes in the competitive landscape.

This dissertation focuses on the phenomenon of disruptive innovation, which can be regarded
as an important sub-set of discontinuous innovation. A disruptive innovation can be defined

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as a technology which initially underperforms along performance dimensions that
mainstream customers have historically valued, while at the same time bringing new
performance attributes to the market (Govindarajan and Kopalle, 2006a). Theory on
disruptive innovation has received a lot of interest from practitioners and scholars. However,
more knowledge is still needed regarding how these innovations emerge and why they are
problematic to handle. The aim of this thesis is to nuance and improve existing theory
related to disruptive innovation, and in particular to describe and analyze the roles played by
value networks and business models. More specifically, it seeks to answer the following
research questions:

Research question 1: Can a disruptive innovation emerge in an established value network and
if so, how can this be explained?

Research question 2: How and why is a disruptive innovation a business model challenge?

The thesis consists of six appended articles along with this covering paper. The covering
paper starts with a review of the literature on discontinuous innovation, disruptive innovation
and related bodies of literature. Towards the end of this section, the two research questions
above are derived and justified. Section 3 provides a sketch of the methods that have been
employed and also describes the research setting more generally. The fourth section contains
a summary of the appended papers whereas the subsequent sections analyze these findings
and seek to develop existing theory on disruptive innovation. The conclusions are presented
in the seventh section and eventually, some managerial implications are provided.

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2. Theories on discontinuous and disruptive innovation
This section contains a review of existing literature on discontinuous and disruptive
innovation. The first part provides a more general overview of the field and the following
sections go into more detail regarding disruptive innovation, value and networks. Some areas
in need of further development are identified and explicated as two research questions
towards the end.

2.1 Discontinuous Innovation
It is not the owner of stage-coaches who builds railways.

Joseph Schumpeter (1936, p. 66)

It is well documented today that established firms may encounter difficulties in the face of
discontinuous innovations (Cooper and Schendel, 1976; Anderson and Tushman, 1990). A
discontinuous innovation can be regarded as an innovation which creates a discrete and
momentous shift related to a firm’s competence base or network.1 Such a shift can be created
by new technologies, business models or regulatory changes.2 A technological discontinuity
can be defined as “a major technological change resulting in the creation of a substitute
technology for a particular industry’s products or processes” (Hamilton and Singh, 1992).
The emergence and eventual domination of digital imaging as opposed to analog
photography can serve as an illustrative example of a discontinuous innovation since it
implied a momentous shift in the industry, for instance with regard to its competence base
and the way that value is created.

Incumbent companies are usually good at innovation under steady, stable circumstances, but
when technologies shift or new business models are introduced they can all of a sudden
become vulnerable. Their attempts to develop significantly new technologies are often less
productive than when entrant firms try to do so (Henderson, 1993). Frequently, established

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Steady-state innovations will throughout this thesis be thought of as the opposite of discontinuous innovations
(Bessant, 2008). While the term continuous innovation is in some cases considered to be the opposite of
discontinuous innovation, it has a different meaning for other scholars. For instance, Boer and Gertsen (2003)
define continuous innovation with regard to the firm’s “ability to combine operational effectiveness and
strategic flexibility - exploitation and exploration - capabilities that have traditionally been regarded as
antithetical” (p. 805). This stream of literature thus considers continuous innovation to be a capability of a firm
rather than an attribute of certain innovations. In order to avoid confusion, the term steady-state innovation is
regarded as the opposite of discontinuous innovation in this thesis.
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Sometimes, the term radical innovation is used in order to describe similar phenomena. Throughout this thesis,
a radical innovation is rather associated with a significantly enhanced performance (Leifer et al., 2001). Such an
innovation does not necessarily have to be discontinuous or disruptive; it might create a much greater
performance without implying any discontinuities for the firm or its surrounding network.

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firms fail to cope with these changes, they lose market shares and the successful firms are
found among newcomers (Utterback, 1994)3.

Dosi (1982) introduced the concepts of technology paradigm and technology trajectories in
an attempt to describe continuous and discontinuous change. He identified a parallel to
Kuhnian theories of development of new science. According to Dosi, technologies tend to
evolve along certain trajectories and occasionally, these trajectories are punctuated by a
discontinuous change that upsets the existing paradigm. Firms which have built their
competencies around an existing paradigm are therefore likely to encounter problems when a
new trajectory is introduced. It has also been argued that technological change is inherently
path dependent (e.g. Rosenberg, 1972). For example, Clark (1985) observed that the early
decisions by engineers in the automotive industry to develop the combustion engine instead
of steam or electrical engines affected the decisions by the following generations of
engineers. Hence, through path dependency, established firms become increasingly reliant on
one particular technology and therefore also more vulnerable to changes in the underlying
technology.

Dosi’s argument was nuanced by Abernathy and Clark (1985) who argued that the
discontinuity’s impact can be understood in terms of to what extent it changes the existing
competence and to what extent it disrupts established market linkages. In more general terms,
literature on discontinuous innovation can therefore be classified as related to either the
supply-side and a firm’s existing resources and capabilities or the demand-side and its impact
on the market and the surrounding environment.

Starting with the supply-side related literature, several explanations for why established firms
struggle under conditions of discontinuous change have been presented. It has for instance
been suggested that established firms build organizational structures, values, and processes
over time that enable them to efficiently process information within the context of an existing
technological paradigm. As firms grow large they tend to become more mechanistic
organizations, i.e. more structured and hierarchical (Burns and Stalker, 1961). The same
authors also noted that the appropriate organizational structures and management skills
depend upon the kind of innovation that a firm aims to introduce. A shift towards a
mechanistic organization often results in an improved efficiency, but may at the same time

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While the incumbent’s curse has received a lot of attention, some scholars have argued that this dilemma may
in fact be a bit exaggerated. Chandy and Tellis (2000) write: “Events in which the mighty are humbled and the
little guy finishes first are likely to be more eye-catching than are those in which the mighty remain mighty… …
Our research of innovations in the consumer durables and office product categories suggests that incumbents
or large firms are not necessarily doomed to obsolescence by nimble outsiders” (p. 14).
Olleros (1986) investigated another often neglected aspect of this issue, namely the burn-out of pioneers, thus
suggesting that entrant firms might also encounter problems under conditions of discontinuous change. Other
scholars have focused on key determinants of incumbent survival and argued that strong, visionary leadership is
one such important capability (Rosenbloom, 2000; Tellis, 2006). Hence, while it is clear that incumbents
sometimes fail due to discontinuities, it should be pointed out that this is not always the case and that there is
some conflicting evidence.

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hamper a firm’s innovative efforts and make the firm vulnerable to profound changes in the
underlying technology. Similar patterns have been identified by other scholars. For example,
Abernathy (1978) noted that the decreased competitiveness of some firms in the automotive
industry was related to their striving for increased efficiency since these efforts reduced their
ability to be innovative. He argued that in order to remain competitive over time a firm needs
to be efficient and innovative simultaneously (Abernathy, 1978; Hayes & Abernathy, 1980)
and referred to this challenge as the productivity dilemma.

Firms therefore face a paradox when developing new products and processes: they need to
take advantage of their core capabilities without letting them be turned into core rigidities
(Leonard-Barton, 1992). This dilemma has often been described as a key challenge in
innovation management (Magnusson and Martini, 2008). One reason for these difficulties is
that capabilities are associated with certain values, which are difficult to change. As
managers work together they tend to develop a common set of beliefs, a ‘dominant logic’
based upon their history (Prahalad and Bettis, 1986). Other scholars have used the term
‘inertia’ when describing how people within an organization tend to proceed as they always
have (Adams et al., 1998). Argyris (1977) underlined the importance of double-loop learning,
i.e. that firms need to learn not only by identifying errors but also by revising underlying
values and assumptions.

The literature on discontinuous innovation and incumbent failure has often looked at the
firm’s resources and capabilities when trying to explain the difficulties that are encountered.
Tushman and Anderson (1986) made a distinction between competence-enhancing and
competence-destroying innovations. They argued that innovations which destroy the value of
a firm’s existing competencies are very difficult to manage, because established firms are
bound by traditions, sunk costs and internal political constraints. Henderson and Clark (1990)
nuanced those arguments related to competence destruction by classifying innovations as
either architectural or modular. In their study of the photolithographic alignment industry, it
was found that incumbents were good at handling innovation on a modular level, but often
failed to recognize and respond to architectural innovations, i.e. changes in the linkages
between different components in a given product. The authors pointed out inertia on the
organizational level and bounded rationality as the main reasons for this dilemma.
Christensen (1997, p. 34) used the following quote in order to illustrate how organizational
structures and product architectures are interlinked: “When Tom West, Data General’s
project leader and a former long-time DEC employee, removed the cover of the DEC
minicomputer and examined its structure, he saw ‘Digital’s organization chart in the design
of the product’”. Hence, competence destruction seems to be easier to handle on a component
level than on an architectural level.

Another competence-related aspect of discontinuous innovation is the role of complementary
assets. The term was coined by Teece (1986) who looked at how firms sustain their
competitive advantages under different appropriability regimes. He argued that firms may

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retain their competitiveness under a weak appropriability regime if they have access to
complementary assets. A complementary asset can be defined as a resource or capability that
is needed in order to retain the investments in a new technology. Those assets can include for
example distribution channels, service organizations, relationships in the value chain, brands,
complementary products and technologies. It has been shown that a key determinant of how
incumbents perform under conditions of technological change is related to whether their
complementary assets are rendered obsolete or not (Tripsas, 1997). Studying the typesetter
industry, Tripsas found that established firms could manage a competence-destroying shift by
relying upon their complementary assets and thereby obtain more time to renew their
resources and capabilities.

Scholars in organization theory have emphasized that power and politics may hamper an
incumbent’s response to a discontinuity. An organization can be thought of as a set of
different actors, which must cooperate to accomplish something, but at the same time
compete for the internal pool of resources. Since organizational changes tend to imply a shift
in the existing constellation of power, a resistance to change is created (Cyert and March,
1963). Studying Olivetti’s response to the shift to electronic calculators, Danneels et al.
(2009) pointed out how attempts to enter the new technology were continuously hampered by
what the electronics engineers at the company referred to as “the mechanical establishment”.
Similar conflicts seem to have taken place at Kodak in the 1990s (Swasy, 1997). Cooper and
Schendel (1976) provided analogous arguments, stating that “decisions about allocating
resources to old and new technologies within the organization are loaded with implications
for the decision makers; not only are old product lines threatened, but also old skills and
positions of influence” (p. 68). Drawing upon evidence from Polaroid’s efforts to manage the
shift to digital imaging, Tripsas and Gavetti (2000) further suggested that another source of
inertia may be related to the cognitive capabilities among senior managers.

Neoclassical economic theory has also highlighted some explanations of incumbent failure
under conditions of discontinuous change. Arrow (1962) claimed that firms with an existing
strong market position have low incentives to invest in innovation initiatives. Several reasons
for this unwillingness have been pointed out; Reinganum (1983; 1984) suggested that
incumbents are less willing to cannibalize on their existing revenue streams and have lower
incentives to undertake ventures which are more uncertain.

2.2 Discontinuous innovation and the environment
Over time, increased attention has been paid to the position of firms and how they interact
with the surrounding environment. Afuah (2001) suggested that the benefits of vertical
integration change as the industry evolves; once a new technology has displaced the former
one, the industry enters a period of high uncertainty, as suggested by Utterback (1994).
However, as the industry starts to stabilize, firms must obtain skills and knowledge that make

6

them competitive, which usually implies a closer interaction with suppliers and this often
results in a higher degree of vertical integration (Conner and Prahalad, 1996). Afuah (2001)
underlined that firm boundaries are not static and called for more research into how
technological discontinuities affect transaction costs and the industry structure.

It has also been argued that the effects an innovation has on customers and suppliers must be
taken into consideration (Afuah and Bahram, 1995). Innovations may be competence-
destroying or architectural not only for the firm, but also for customers and other actors. In
line with this argument, Afuah (2000) looked at co-opetitors, defined as the “suppliers,
customers, complementors and alliance partners with whom it must collaborate and
compete” (p. 387), as a complementary asset. He argued that the technological shifts which
destroy the value of those co-opetitors may create particular problems for established firms.

In addition, more attention has been given to the role of the market and customers. It has
been suggested that competence destruction is the least explanatory variable of discontinuous
changes, whereas the extent to which the technology expands the market or breaks
established linkages between manufacturing and the market are more important (Utterback,
1994; Utterback and Kim, 1986). Mitchell (1989, 1992) made similar observations,
suggesting that those shifts which did not change the existing linkages with existing markets
and customers were easier to handle for incumbents. Glasmeier’s (1991) study of the Swiss
watch industry’s response to the rise of digital watches can be regarded as a good illustration
of this argument. She claimed that an established production network in a region tends to be
beneficial for the involved actors if the underlying technology does not change. When the
technology shifted, the lack of coordination in the network turned into a core rigidity.
Additionally, the distribution model for watches was altered. The Swiss watch manufacturers
had built a distribution network which was based on jewellery stores. These stores made a
steady profit from repairing watches, and hence they were less willing to sell cheap
electronic watches that did not need to be repaired.

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2.3 Disruptive innovation
As outlined in the previous section, several scholars have pointed out the importance of
looking beyond firm boundaries and into the role of the market when trying to understand the
difficulties that discontinuous innovations imply. These ideas were further developed by
Clayton Christensen in a series of articles (e.g. Christensen, 1993; Christensen and Bower,
1996; Christensen and Rosenbloom, 1995; Christensen, 1996; Christensen et al, 1998) and
popularized in The Innovator’s Dilemma (1997) by the same author.

Christensen wrote his doctoral dissertation about the rigid disk drive industry (1992) and
identified an anomaly – something that previous literature could not explain. The pattern of
entrant-incumbent dynamics in this industry was inconsistent with the findings in e.g.
Tushman and Anderson (1986) and Henderson and Clark (1990). Several technological shifts
occurred in the disk drive industry during the period 1970-1990, but the discontinuities that
toppled established firms were not competence-destroying or architectural. Instead, it was the
emergence of smaller, simpler and cheaper disk drives with an initially lower storage
capacity which often created insurmountable problems for established firms. Over the six
generations of disk drives that were studied, incumbents lost market share to entrants when a
new generation was introduced, something that previous theory could not account for.
Christensen (1997) therefore rejected those explanations which had primarily looked at
supply-side factors4.

Instead, he looked at the role of the market and drew upon resource dependence theory
(Pfeffer and Salancik, 1978; Pfeffer, 1982) and the concept of value networks (Christensen
and Rosenbloom, 1995) in order to explain incumbent failure.5 Given that this theory had
hardly been used in previous literature on entrant-incumbent dynamics, it merits some further
explanation. Resource dependence theory drew largely upon Katz and Kahn’s (1966) work
which argued that organizations must be regarded as open systems. Pfeffer and Salancik
(1978) claimed that previous studies of organizations had been too focused on the internal
issues and overlooked the role of the environment. As indicated by their book titled The
external control of organizations: a resource dependence perspective, the authors instead
looked beyond the boundaries of the organization. They argued that organizations depend on

4
Christensen and Bower (1996) write: “We contest the conclusions of scholars such as Tushman and Anderson
(1986), who have argued that incumbent firms are most threatened by attacking entrants when the innovation in
question destroys, or does not build upon, the competence of the firm. We observe that established firms, though
often at great cost, have led their industries in developing critical competence-destroying technologies, when
the new technology was needed to meet existing customers’ demands” (p.199).
5
It is clear from several of the publications by Christensen that he draws upon resource dependence theory. For
instance, Christensen (1997, p. xxiii) states that: “Companies depend on customers and investors for resources”.
After having described the events that took place in the disk drive industry, the same author (1997) wrote: “this
observation supports a somewhat controversial theory called resource dependence, propounded by a minority
of management scholars, which posits that companies’ freedom of action is limited to satisfying the needs of
those entities outside the firm (customers and investors, primarily) that give it the resources it needs to survive.”
(p. 117). For further illustrations of this point, see for instance Christensen and Bower (1996, p. 3).

8

critical resources in order to survive. When an organization does not control all factors
required to achieve its objectives, it needs to obtain resources from its environment and
consequently, it is to some extent controlled by those actors who supply the resources it
needs. Hence, it is uncertain whether an organization would obtain its required resources
given the unpredictable nature of the environment. This idea has several implications, for
instance, that firms tend to serve those actors which provide them with resources and that
organizations often reduce their freedom by building relations to others in order to lower the
uncertainty. Since the customers and owners are often the key stakeholders that provide the
firm with resources, they exercise an indirect but still significant control on what decisions
are taken and how resources are allocated inside a firm6.

Bower (1970) provided similar arguments when suggesting that the demands of established
customers constrain the freedom of action for firms. This perspective is manifested in
Christensen’s research in the concept of value networks defined as “the context within which
the firm identifies and responds to customer’s needs, procures inputs and reacts to
competitors” (Christensen and Rosenbloom, 1995, p. 234).7

Christensen explained the pattern of incumbent failure in the disk drive industry by arguing
that the smaller drives which offered a lower storage capacity were problematic since they
did not fit into the firm’s established value network. The initially inferior performance
implied that such products could only prosper in niche segments which were small and
offered lower margins. Existing customers did not demand smaller disk drives and therefore,
the incumbent made a seemingly rational decision when not developing such drives. Instead,
the established firm kept launching products which eventually overshot its customers’ needs
of storage capacity. As the storage capacity of the smaller disk drives improved, they
eventually became good enough to displace the former generation. A firm’s existing products
may therefore be substituted by products which initially underperform along the most
important dimensions, but provide sufficient performance while at the same time bringing
new attributes to the market. Consequently, the firms which listened to their most profitable
customers and moved up-market were misled. Eventually they lost market shares to entrant
firms who had emerged in a new value network, with new customers. Christensen (1997)
documented similar patterns in many other areas, such as mechanical excavators, steel
production and motorbikes.

A key determinant of the probability of success for incumbents is therefore the extent to
which a new technology addresses the demands of existing customers, since they seem to

6
The link between resource dependence and the resource allocation process is further explicated in Christensen
(1997, p. 119): “Good resource allocation processes are designed to weed out proposals that customers don’t
want. When these decision-making processes work well, if customers don’t want a product, it won’t get funded;
if they do want it, it will.”
7
Almost identical definitions can be found in Christensen (1997, p. 36) and in Christensen and Raynor (2003, p.
44).

9

influence the firm’s resource allocation process to a great extent. A firm has good reasons to
satisfy its existing value network since this largely defines its competitive advantage and
supplies it with resources. But at the same time, the network hampers attempts at developing
innovations which are not requested by existing customers. From this theoretical standpoint,
Christensen explains the pattern of incumbent failure by making a distinction between
sustaining and disruptive technologies. Sustaining technologies have in common that they
improve the performance of established products along the dimensions that existing
customers value. Disruptive technologies on the other hand, start with a lower performance
along these dimensions and also introduce some new functions or attributes. They are
described as typically being simpler and cheaper than the sustaining technology.8 Hence, this
dichotomy is different from more widely used ones like “incremental” versus “radical” or
“competence-enhancing” versus “competence-destroying”. The disruptive versus sustaining
terminology instead addresses to what extent an innovation is demanded by existing
customers in an established value network or not. Therefore, a radical innovation can be
sustaining and an incremental innovation can be disruptive, depending upon their impact on
existing customers.

Through his studies of the disk drive industry among others, Christensen showed that
established firms usually win sustaining battles whereas entrants often succeed in disruptive
battles. Incumbents appear to be “held captive” by their investors and their most important
customers. Therefore, resources are not allocated to initiatives that are initially less
profitable.9 Christensen referred to this pattern as the innovator’s dilemma, arguing that
disruptive technologies present a particular challenge for incumbents since they require
managerial skills that are different from the ones needed to succeed in sustaining battles.

Theory on disruptive innovation has often been perceived as rather pessimistic regarding the
ability of established firms to succeed in these shifts. The main reason for this appears to be
that firms are controlled by forces beyond their own boundaries (customers). However,
Christensen (1997) also proposed a couple of managerial solutions to this problem. One of
the most influential ones is that incumbent firms can develop disruptive innovations by
nursing them in an independent organization. Such a structure can shelter the initiative from
the forces of resource dependence that tend to allocate resources towards sustaining
innovations. By doing so, firms avoid letting existing customers control their resource
allocation process, which tends to drain disruptive initiative of funding. Some guidelines for
how to commercialize such innovations have also been offered. Given that the eventual

8
Christensen (1997) defines disruptive technologies in the following way: “Generally, disruptive technologies
underperform established products in mainstream markets. But they have other features that a few fringe (and
generally new) customers value. Products based upon disruptive technologies are typically cheaper, simpler,
smaller, and, frequently, more convenient to use” (p. xviii).
9
Christensen (1997) writes: “The evidence is very strong that as long as the new technology was required to
address the needs of their customers, established firms were able to muster the expertise, capital, suppliers,
energy, and rationale to develop and implement the requisite technology both competitively and effectively” (p.
111).

10

application of a disruptive technology is often uncertain, a trial-and-error process is
recommended where firms should try to fail early and inexpensively. Another option could
be to obtain the required resources and capabilities by acquiring another company.

2.3.1 Extensions and improvements of the theory on disruptive innovation
Over the last decade, the theory of disruptive innovation has received a lot of interest, in a
wide range of different settings. For example, two renowned journals in the innovation
management field have devoted special issues to the subject, the Journal of Product
Innovation Management (2006) and IEEE Transactions on Engineering Management
(2002).10

The researchers working in this field have increasingly sought to frame disruption as a
theory.11 A number of books have been co-written by Christensen, applying the disruptive
innovation theory to many different issues, e.g. healthcare and education.12 Scholars have
used this notion in fields such as psychotherapy (Simon and Ludman, 2009), orthopedics
(Hansen and Bozic, 2009) and political science (Mukunda, 2010). The concept has also had a
profound impact on management. Christensen (2006) describes how several large companies
such as Kodak and Intel have used his model to develop and launch disruptive innovations
successfully.13

The theory has also been improved in several different ways. Christensen and Raynor (2003)
made a distinction between low-end and new market disruptions. Low-end disruptive
innovations evolve in the lower segments of the market, typically by having a business model
which enables the firm to offer cheaper products with a performance that is initially inferior.
Steel minimills and discount retailing are both examples of this. New-market disruptive
innovations prosper among customers that have not been addressed previously. The personal
computer and the first portable transistor radios can serve as illustrative examples of new
market disruptive innovations. Schmidt and Druehl (2008) elaborated further on these

10
Danneels (2004, p. 246) provided a compelling illustration of the wide impact that Christensen’s work on
disruptive innovation has had: “It is rare that a scholarly work draws so much attention as Harvard Business
School professor Clayton Christensen’s work on disruptive technology. His book The Innovator’s Dilemma
(1997) has sold over 200,000 copies since its release in May 1997 and has received extensive coverage in
business publications. Christensen was elevated by the business press to the status of ‘‘guru’’ (Scherreik, 2000).
His work also has been cited extensively by scholars working in diverse disciplines and topic areas, including
new product development (NPD), marketing, strategy, management, technology management, and so forth.”
11
Christensen and Raynor (2003, p. 55) state that: “Disruption is a theory: a conceptual model of cause and
effect that makes it possible to better predict the outcomes of competitive battles in different circumstances.”
12
See e.g. Christensen et al. (2009), Christensen et al. (2004) and Christensen et al. (2008).
13
There are other examples of less successful attempts to apply these theories. For instance, Christensen
founded the Disruptive Growth Fund together with Neil A. Eisner in 2000. The fund made investments based
on the theory of disruptive innovation. It was closed a year later, after having lost 64 percent of its value
(Nasdaq lost about 50 percent in this period). For more information, see Scherreik (2001).

11

concepts, arguing that new market disruptions can be categorized as emerging either in fringe
markets or in more detached markets.

Govindarajan and Kopalle (2006a) also sought to improve existing classifications, claiming
that Christensen’s original definition was too narrow since it only took cheaper, simpler and
initially lower performance products into consideration. They instead proposed that a
disruptive innovation can be defined as: “an innovation which introduces a different set of
features, performance, and price attributes relative to the existing product, an unattractive
combination for mainstream customers at the time of product introduction because of
inferior performance on the attributes these customers value and/or a high price—although a
different customer segment may value the new attributes.” (Govindarajan and Kopalle,
2006a, p. 15). Christensen (2006) acknowledged that this definition is better than his original
1997 definition since it captures a wider range of similar phenomena. Therefore, it makes
sense to relate to Govindarajan and Kopalle’s definition throughout this dissertation.14

Other scholars have developed Christensen’s theories, for instance by addressing the
competitive dynamics (Adner and Zemsky, 2005) and by developing ways to measure and
assess the disruptiveness of an innovation (Govindarajan and Kopalle, 2006b). Further
contributions have been made by drawing upon diffusion theory and by looking at various
aspects of the market and the customer. Christensen (1997) essentially explains the pattern of
disruption by looking at different customer segments, suggesting that a disruptive technology
prospers in low-end segments or in new markets and later on invade the mainstream market.
Hence, existing literature has to a large extent maintained a diffusion-oriented view on
customer attributes such as the perspective developed by Rogers (1995) and used by Moore
(2002). Slater and Mohr (2006) identified parallels between the work by Christensen (1997)
and Gordon Moore’s book Crossing the chasm (2002). Moore (2002) drew upon diffusion
theories which suggest that an innovation penetrates a market according to an S-shaped,
epidemic pattern. He claimed that many innovations do not reach the mass markets and
presented several ways of approaching the early majority of the market. Slater and Mohr
(2006) argued that the challenges related to disruptive innovation are similar in many ways.

The diffusion perspective on disruptive innovation has been further developed by several
other scholars. Linton (2002) explained how the diffusion of disruptive innovations can be
forecasted and Kassiech et al. (2002) presented several differentiating market strategies.
Adner (2002) also maintained a diffusion oriented perspective, stating that the structure of
demand needs to be addressed in order to understand the impact of disruptive innovations.
He looked at different performance thresholds, i.e. critical performance levels that must be

14
Disruptive innovation is a notion that has become very popular. It is often used in many different ways and
the original meaning of the term is therefore sometimes lost (Lindsay and Hopkins, 2010; Linton, 2009).
Frequently, such terms as discontinuous, disruptive and radical are used interchangeably (e.g. Assink, 2006).
Govindarajan and Kopalle’s definition is useful as it is similar to the original work on the topic, albeit a bit
extended.

12

met. The functional threshold can be thought of as the minimum performance that the
customer can tolerate and the net utility threshold also takes price into consideration. Adner
further argued that an important reason for displacement of one technology was the
decreasing marginal utility associated with further improvements of the sustaining
technology. Hence, several extensions and improvements have been made over time,
primarily by drawing upon diffusion theory and by developing a more detailed understanding
of the market.

The managerial recommendations related to disruptive innovation have also been improved
over time. As stated previously, the resource allocation process can be managed by creating a
separate organization. Another way of managing it is to make use of strategic buckets, i.e.
specifying which resources should be used for disruptive and sustaining initiatives (Chao and
Kavadias, 2007; Hogan, 2005).

When it comes to the actual commercialization, other scholars have provided some
guidelines. Some of the recent work in this area has focused increasingly on the role of the
market and the customer. For instance, Danneels (2004) and Henderson (2006) underlined
the importance of developing a “customer competence” in order to succeed with disruptive
innovation. In line with these suggestions, King and Tucci (2002) claimed that those firms
which had “transformational experience”, i.e. a history of experimenting with new markets
and value propositions were more likely to handle these innovations in a better way. Similar
arguments were brought forward by Dew et al. (2008) who argued that effectual reasoning
was probably a better alternative than causational reasoning when handling disruptive
initiatives. Causation refers to the process of creating and prioritizing means to achieve a pre-
specified goal whereas effectuation concerns the opposite – how to use existing means to
achieve an unknown goal. The arguments presented by Kassiech et al. (2002) resemble the
ideas postulated by other scholars. Drawing upon Prahalad and Hamel’s (1994) notion of
expeditionary marketing they suggested that a more open-ended approach was needed when
dealing with disruptive innovation, since its placement in the value network may not be clear
from the beginning. Govindarajan and Kopalle (2004) provided an analogous argument,
stating that firms must be aware of what is happening to the needs of their customers.
Christensen and Raynor (2003) argued that one way of doing so would be to focus on the job
that customers try to get done, rather than looking at different performance dimensions.
Hence, many scholars have pointed out the importance of a more experimental approach.
They use different terms and draw upon slightly different bodies of literature, but remain
vague regarding what actually constitutes a “customer competence” or “expeditionary
marketing” and how firms can develop such capabilities.

Over time, the literature on disruptive innovation has also paid more attention to the business
model concept. Some authors have tried to extend the theory to incorporate disruptive
services and business models, i.e. innovations which are not technological but are business
models which possess characteristics similar to those of disruptive technologies (Christensen

13

and Raynor, 2003; Charitou, 2001; Charitou and Markides, 2003). Markides (2006) contested
this notion and argued that business model innovation was a significantly different
phenomenon than the one originally described by Christensen (1997). Christensen provided a
nuanced and extended argument when he reframed the fundamental challenge of disruptive
technologies as “a business model problem, not a technology problem” (2006, p. 48). As an
illustration, he quoted Andy Grove of Intel who explained why Digital Equipment
Corporation (DEC) declined in the shift to computers that are based on microprocessors: “It
wasn’t a technology problem. Digital’s engineers could design a PC with their eyes shut. It
was a business model problem, and that’s what made the PC so difficult for DEC”
(Christensen, 2006, p. 49). This is the main reason why Christensen used the term innovation
instead of technology in his more recent work (e.g. Christensen and Raynor, 2003;
Christensen, 2006). Hence, a disruptive technology now seems to be thought of as a
technology that is incompatible with an incumbent firm’s existing business model. However,
it is still a bit unclear what is actually meant by this and what the implications of such an
expanded conceptualization are, both for theory and for management. This statement
therefore necessitates a review of the literature on business models and related theory on
value and networks.

2.4 Business models, value and networks
While traditional theory in strategic management has addressed the fit between resources and
markets, the business model literature has provided a more holistic and systemic perspective
upon this issue. Existing literature is still somewhat ambiguous regarding what actually
constitutes a business model, but generally, the business model concept is concerned with
how a firm creates and captures value (Chesbrough and Rosenbloom, 2002).

Some scholars have defined it in terms of a set of answers to certain questions (e.g. Yip,
2004; Osterwalder and Pigneur, 2005;). The definitions that focus on a set of questions or
parameters are problematic for several reasons. Firstly, the theoretical foundations are often
lost when stating that a business model is an answer to some questions. Secondly, these
definitions become arbitrary since there is no obvious delimitation regarding which factors
should be excluded, and consequently the concept becomes a blurred. The fact that Shafer et
al. (2005) identified 12 different definitions during the period 1998-2002, which in turn
generated 42 different business model components, can be regarded as one indication of this
confusion. Thirdly, and perhaps most important, when thinking of business models as
frameworks or answers to a set of questions, it becomes difficult to point out in what ways
and why established firms often struggle to renew their business models.

Another stream of research has focused more explicitly on the interactive and holistic nature
of business models. For instance, Zott and Amit (2009) regard the business model as “a
system of interdependent activities that transcends the focal firm and spans its boundaries”.

14

Similar interpretations have been provided by e.g. Itami and Nishino (2009), who stated that
a business model contains two components – a business system and a profit model. They also
underline that such a system exists beyond firm boundaries. Weill and Vitale (2001) argued
that there are three important dimensions of a business model: the participants, the
relationships and the flows that connect these participants. Other scholars have also pointed
out the boundary spanning nature of business models and that this concept addresses how and
why value is created and distributed in a network (Akkermans, 2001).

Based on the above, it can be concluded that business models are generally concerned with
how firms create and appropriate value by interacting with their environment. Hence, value
and networks can be thought of as two important components of the business model concept.
These two notions are therefore briefly described in the coming two sub-sections.

2.4.1 Value and utility
There are many different definitions of value and utility. Given the importance of the
concepts with regard to disruptive innovation and business models, they merit some further
elaboration here.

Economists have often referred to utility theory and marginal utility when trying to
understand value. Total utility refers to the satisfaction that comes from the possession of a
good (Bowman and Ambrosini, 2000). A basic assumption is that consumers use their
income in a way that optimizes their utility. Marginal utility is usually defined as the utility
someone gets from obtaining or losing one unit.

In economics, value is often considered to be subjective. This means that a good or service
can be valued by one actor but considered useless by someone else (von Mises, 1963). From
this standpoint, Menger (1950) developed the notions of use value and exchange value. The
use value is the actual value a user retrieves from a good or service, and the exchange value
is normally the price that is paid for it. If the use value is larger than the exchange value, a
consumer surplus has occurred. Buyers may have different objectives when they acquire a
product, and therefore they are also willing to pay different prices. Since the value of a
product is normally not realized until it is used, which often happens at a different point in
time than the purchase, there is usually an inherent uncertainty or degree of speculation in
most transactions.

The distinction between value and price is also common in the marketing literature. Value is
sometimes considered to be a financial expression of what a customer obtains for what is
paid. Anderson and Narus (1998) argue that the customer’s incentive to buy can be thought
of as the difference between the value and the price. Hence, a price reduction does not

15

change the obtained value according to this definition; it would merely increase the
customer’s willingness to buy.

Other scholars have pointed further at the subjectivity of value and argued that it can be
defined as the perceived benefits in relation to the perceived sacrifices (Monroe, 1991; Flint
et al., 1997; Christopher et al., 1991). Interestingly, such definitions do not aim to quantify
value in monetary terms. While the paid price can be thought of as one out of many potential
sacrifices, this definition would suggest that value is subjective in the sense that different
actors obtain different benefits and make different sacrifices. These include for instance the
costs related to the transaction, installation and maintenance (Walters and Lancaster, 1999).

From this perspective, it has been argued that value is something context dependent and that
it can be created in many different ways. Normann and Ramirez (1994) refer to the relation
between customers and suppliers as offerings, which are valuable if they create either
relieving value or enabling value. Relieving value is thought of as the labor that is removed,
and enabling value is created by helping the purchasers to do things differently or enable
them to do what was not possible before. According to the authors, offerings do not
necessarily have to be products or services, but can also consist of e.g. risk distribution and
access to information.

Value can therefore be thought of as being created in a certain context, and hence the value
of an offering is dependent upon its surrounding environment (Håkansson and Waluszewski,
2001). Consequently, actors may have diverging preferences since they are exposed to
different tradeoffs between benefits and sacrifices. Additionally, it should be pointed out that
value creation does not equal value appropriation since a new creation of value can result in
an undesired distribution of value (Björkdahl, 2007).

Summing up this section, it can be concluded that value is something subjective, since
tradeoffs between benefits and sacrifices are both perceived and context-dependent. What is
considered to be valuable is determined by who makes the assessment and on what level it is
done. Value can be created on many different levels and be distributed on several levels, both
inside a firm and in a network.

2.4.2 Networks
The amount of management research that maintains a network approach has increased
significantly over the last decades. This trend marks a shift from research that centers around
individuals or single firms towards a more systemic and contextual way of addressing social
phenomenon (Borgatti and Foster, 2003). Generally, networks can be defined by a set of ties
(relations) among nodes (actors). Nodes can be different types of organizations as well as

16

individuals or groups (Wasserman and Faust, 1994). Hence, networks exist and can be
analyzed on many different levels (Ford et al, 2002).

Networks can be thought of as a view alternative to the market-and-hierarchy argument
developed in transaction-cost reasoning (Williamson, 1975). Transaction-cost scholars
suggest that firms exist in order to handle transaction costs. To search, specify and implement
a purchase on the market is sometimes very expensive and under these circumstances, firms
may decide to internalize an activity instead. This way of reasoning therefore suggests that
the boundaries of the firm are determined by the transaction costs. A low transaction cost
implies that firms are more willing to use the market in order to acquire a certain good or
service. Networks, on the other hand, can be regarded of as a hybrid form of firms and
markets. It is an alternative to organizing with distance to customers or through vertical
integration.

Over the last decades, network theories have become increasingly prevalent in a wide range
of literature streams related to e.g. leadership, supply chain management, power, stakeholder
relations and innovation. Moreover, social network analysis has emerged as a method for
describing networks and how they evolve. This dissertation will primarily draw upon
industrial network theory (e.g. Håkansson, 1989), and partly upon actor network theory,
which is often referred to as ANT (e.g. Latour, 1987).

The industrial network approach offers some different dimensions for analyzing interaction
among actors in an industrial network (Håkansson, 1987), which makes it suitable for the
purpose of this dissertation. This stream of literature differs from more diffusion-based
theories of innovation in that a much more nuanced view of the network is maintained. While
diffusion theory tends to look primarily at customers (or adopters) the network approach
maintains a more complex and systemic view of adopters and looks at other actors as well.
Scholars who draw upon this perspective often analyze networks by looking at actors, the
resources they control and the activities that they perform.

The resources that actors possess and transform have a value in a network and thus, firms
depend upon their context. The outcome for an individual company is not solely based upon
its own decisions. Rather, it is the result of all interactions taking place in a network and
companies have to adapt to their environment continuously. In this sense, networks are based
upon restricted freedom (Ford et al., 2002) and actors are thus thought of as interdependent in
the sense that the outcome is not entirely controlled by one single actor (Pfeffer and Salancik,
1978).

Actor Network Theory (ANT), has some commonalities with the industrial network
approach. This network perspective emerged in the field of Science and Technology Studies
(STS). One noteworthy difference from other theories in social science is the idea that non-
human artefacts such as technology are also regarded as actors in a network. Proponents of

17

ANT often argue that the interplay between human and non-human agents is often missed by
other perspectives. Latour (1993) claimed that while a separation is often made between
human and non-human, there is always an interplay between them, and that this interaction
needs to be better understood. Networks are therefore assumed not only to contain firms or
individuals, but also machines, culture, nature etc. – actors which in turn have their own
impact on the network. An ANT scholar is therefore interested in studying and describing
how networks result in organizations, how hierarchies prevail and collapse. In this sense,
ANT is different in focusing more explicitly on issues like power and politics. This theory
has often been used in order to describe and explain how networks or power structures are
created and how they evolve over time. Such processes are considered to be highly uncertain
and a matter of continuous negotiation and conflict (Law, 1992). Changing or building an
actor network is largely a matter of handling controversies and overcoming resistance.
ANT’s more explicit focus on power and conflict makes it a good complementary
perspective to industrial network theory (Mattsson, 2003) when looking at disruptive
innovation from a network point of view.

2.5 Disruptive innovation − some areas in need of development
Clearly, the concept of value networks and the work by Christensen among others have
contributed to an increased understanding of the challenges related to discontinuities, but
there are still several questions that have been insufficiently attended to, especially with
regard to business models and value networks. However, few studies have addressed them in
a more focused manner. The preceding sections have described existing theory on disruptive
innovation, its foundations and how it has evolved over time. This section seeks to identify
areas that need to be developed further. Towards the end of each sub-section, a research
question (RQ) is formulated.

2.5.1 Disruptive innovations in established value networks
The literature on disruptive innovation now distinguishes between low-end and new market
disruptive innovations. Additional work has been conducted regarding in what segments
these innovations actually emerge. Utterback and Acee (2005) argued that too much
emphasis had been put on “attack from below”. They noted that many technologies such as
fuel injectors and wafer boards were not initially cheaper or simpler than the technology that
they later on replaced. By explicating a third dimension of technological innovation called
ancillary performance, they noted that Christensen’s original definition (lower price, lower
traditional performance and ancillary performance) was only one out of eight possible
situations. In doing so, they called for an expanded view of the phenomenon. Carr (2005)
also argued that too much attention had been given to disruption from the low-end and

18

suggested that many disruptive innovations in fact start to prosper in high-end segments and
later on take over the mainstream market.

As stated previously, Govindarajan and Kopalle (2006a) suggested a broader definition
which also included high-end and mainstream products with a lower traditional performance
and new attributes. The authors claim that there are several reasons why such innovations are
problematic for established firms. Mainstream customers may not demand the new
performance attributes, the product can have an insufficient initial traditional performance,
the market niche may be too small and therefore it may not offer any significant profits. They
use the cellular phone as an illustrative example. It emerged in the 1980s among executives
who were willing to pay a high price for a phone which offered worse sound quality but was
portable. At this point, the mainstream customers still demanded regular phones since they
did not appreciate the value proposition that mobile phones offered then. As the performance
improved and the prices declined, cellular phones eventually penetrated the mainstream
customer segments.

In his review and critique of the disruptive innovation framework, Danneels (2004) asked
whether disruptive innovations never emerge in high-end or mainstream segments of the
market. Apart from this paper which raised the question, little attention has been paid to
disruptive innovations which flourish in established value networks. Christensen (1997)
argued that the characteristics of disruptive innovations made them prosper in new value
networks since the established customers do not demand a technology with these properties.
While his empirical work on disk drives, mechanical excavators and steel production
illustrated such a pattern, this may however not always be the case.

One reason why this issue has been neglected could be that existing literature on the topic has
maintained a diffusion-oriented view of the market. As was mentioned before, several
contributions to the disruptive innovation literature have been made by drawing upon
traditional diffusion theories (e.g. Slater and Mohr, 2006; Linton, 2002; Adner, 2002). While
these improvements are important, this stream of literature has primarily sought to
understand the role of the market in terms of different segments, not the customer or the
surrounding value network. The role of the customer is often highlighted, but rarely
addressed in further detail. Such a simplification may be valid for consumer products or in
other cases when the buyer is one homogeneous actor, with one specified utility function. But
it may be overly simplistic and conceal some important issues when a disruptive innovation
is introduced in a more complex business-to-business setting. Thus, previous literature has
maintained a somewhat binary view of the market and assumed that an innovation is either
demanded by a firm’s existing customers and becomes easy to handle, or prospers elsewhere
and thereby becomes problematic to commercialize due to the forces of resource dependence.

Another reason why disruptive innovation in existing value networks has been overlooked
could be that it may be thought of as a contradiction in terms. Why would a technology with

19

an inferior performance and some new properties be in demand from an established customer
base? But since mobile phones and many other products with disruptive characteristics have
initially prospered in a high-end segment, it should arguably be possible that they can also
emerge in established customer segments15. Given that previous literature has stated that
disruptive innovations may prosper in low-end segments, in new markets and in high-end
segments, it would be strange if they could not also emerge in an established customer
segment. Moreover, as firms operate in different segments of the market, a disruptive
innovation is likely to be introduced in the value network of some firm. However, it is
unclear how and why this would happen and therefore, more empirical evidence is needed on
this issue along with further theoretical development. Hence, the first research question
concerns the phenomenon of disruptive innovations in existing value networks:

Research question 1: Can a disruptive innovation emerge in an established value network and
if so, how can this be explained?

2.5.2 Disruptive innovation as a business model challenge
As stated above, if disruption is a relative phenomenon, happening to different firms at
different points in time16 (Christensen and Raynor, 2003), virtually all disruptive innovations
should prosper in the value network of some firms, unless they create a completely new
market. This observation raises the question of what challenges firms encounter when trying
to introduce a disruptive innovation in an existing value network. Would those firms which
are operating in a segment where the disruptive innovation emerges be better off than others?
And if not, what challenges would they encounter when trying to bring a disruptive
innovation to an established customer?

Existing theory on disruptive innovation is somewhat ambiguous on this matter. The early
work by Christensen would arguably suggest that this issue is not very problematic for
established firms. Christensen (1997) showed that incumbent firms failed to introduce such
technologies since they could not find any financial logic in doing so. Drawing upon resource
dependence theory, he argued that these forces controlled the resource allocation process of
the firm and therefore, firms failed to invest in such initiatives and were displaced later on.
Hence, it seems that previous literature would not regard disruptive innovations in a firm’s

15
Mobile internet connections can serve as an illustrative example – while the traditional performance in terms
of speed was lower than for broadband, it introduced portability as a new performance dimension. Despite these
disruptive properties, regular broadband users were willing to trade off some speed in order to have a portable
internet connection.
16
Christensen and Raynor (2003, p. 50) points out that a key determinant of success for an entrant firm is
whether the innovation is disruptive to all incumbents: “If it appears to be sustaining to one or more significant
players in the industry, then the odds will be stacked in that firm’s favor, and the entrant is unlikely to win.”

20

established value network as problematic since such an initiative would be aligned with the
existing forces of resource dependence.

On the other hand, the statement that disruptive innovation is a business model problem
(Christensen, 2006) indicates that it might actually be rather problematic to introduce these
innovations in an established value network. Business models are largely concerned with
how value is created and appropriated from a firm’s surrounding network. Hence, the term
has a lot in common with Christensen’s work, which introduced value networks as a key
determinant of incumbent failure. Though new business models can be developed in a new
value network, this is arguably not necessarily the case. A new business model can be
introduced while still targeting existing customers. It is clear from the section on business
models above that there are many other aspects of a business model than just the customer,
for instance the value proposition, the revenue model, the way to reach the customer etc. But
these dimensions have not been further investigated in the disruptive innovation literature,
which has addressed one element of a business model, namely whether existing customers
demand an innovation or not17.

An additional reason for studying in what ways a disruptive innovation is a business model
challenge is that insights into this matter can generate important managerial implications.
While the work on disruptive innovation pointed out that the environment imposes
constraints on incumbent firms, the managerial solutions have been surprisingly focused on
how firms should organize themselves and not on how they can manage the environment.
Thus, the main managerial recommendations related to disruptive innovation have either
focused on issues related to the firm itself, or pointed out the importance of experimenting
and understanding customers, but remained vague regarding how this can actually be done.
This could be one reason why practitioners have often found the work on disruptive
innovation to be good at predicting and describing difficulties, but weaker in terms of
solutions18.

If a disruptive innovation is viewed as a business model challenge, it should arguably be
possible to develop new managerial solutions to the innovator’s dilemma that do not concern
how the internal resource allocation process should be handled. In the case when a firm is
highly vertically integrated and controls the entire supply chain, this solution may suffice.
But when a firm interacts with an external network of actors, the launch of an independent
venture can be thought of as a prerequisite for succeeding with disruptive innovation. This is

17
Christensen and Bower (1996, p. 212) write “Our findings support many of the conclusions of the resource
dependence theorists, who contend that a firm's scope for strategic change is strongly bounded by the interests
of external entities (customers, in this study) who provide the resources the firm needs to survive.” This quote
can be regarded as an important illustration of the fact that previous literature has primarily looked at customers,
but paid little attention to other elements of the business model or the surrounding environment.
18
For instance, Simon Waldman, Director of Digital Strategy & Development at The Guardian, wrote in an
email conversation that he found Christensen to be brilliant at diagnosis but quite one-dimensional in terms of a
cure.

21

an internal, organizational issue and has in fact little to do with business models. Though the
main problem has been described as related to the firm’s external environment, the
managerial solutions have thus far focused mainly on internal organizational issues rather
than business models and the interaction with other actors. As noted by Pfeffer and Salancik
(1978), a firm which depends on the environment for resources, can either adapt its internal
activities or try to change the environment. Previous literature on disruptive innovation has
primarily focused on the first option, but at the same time, Christensen’s (2006) statement
that disruptive innovation is a business model problem suggests that more work can be done
on how firms interact with their environments.19 Hence, the issue of how a disruptive
innovation is a business model challenge needs to be studied, partly since it may generate
some important managerial implications. The second research question can be formulated as
follows:

Research question 2: How and why is a disruptive innovation a business model challenge?

19
Interestingly, Christensen has also written extensively about business model innovation (see e.g. Johnson et
al, 2008), but has not really integrated this with his work on disruptive innovation or explained further in what
way this is a business model problem. Moreover, it is clear that Christensen and many other scholars writing on
disruptive innovation acknowledge that there are other aspects of a business model than whether a customer
demands an innovation or not (see e.g. Hwang and Christensen, 2007). However, within the theory on
disruptive innovation these aspects are hardly attended to.

22

3. Methodology
This chapter provides a description of the research design and methods that have been used
in order to answer the aforementioned research questions. The first section contains a
motivation of the methods employed in this dissertation and the following section covers data
collection, sample selection and analysis. This section also provides some brief information
about the different industrial contexts where the studies have been conducted. The last
sections discuss the validity and reliability of the employed method and also contain some
reflections on the research process.

3.1 Choice of method
The literature review in the preceding section found that there are certain phenomena related
to disruptive innovations which need to be better understood, for instance if these innovations
can prosper in established value networks. Given that detailed illustrations are needed in
order both to address these issues and to outline more particular challenges and managerial
implications, a qualitative method would enable the kind of descriptions that are needed
when addressing these research questions as it enables “richness and holism, with strong
potential for revealing complexity” (Miles and Huberman, 1994, p. 10). Moreover, a
qualitative approach is often preferred when the research aims to develop new theory (Flick,
2006).

Moving on from the choice of method to the choice of a research design, it was decided to
use a case study approach. A case study concerns the detailed and intensive analysis of one
phenomenon, for instance an organization, a technology, or an individual. Such a study often
seeks to highlight the complex, dynamic and specific nature of a case rather than overlooking
it. Hence, this approach is significantly different from a deductive, quantitative approach
which rather aims to downplay the particularities of the context and the specifics of the data.

Case studies often impose constraints upon the generalizability of the findings. But this
research design is still to be preferred here since the thesis is of an exploratory character
seeking to understand some specific issues related to disruptive innovation. It is often useful
to conduct case studies when trying to develop new theory rather than testing existing theory
(Eisenhardt, 1989). A case study approach is therefore chosen since it enables the kind of
nuanced documentations that are required in order to address the above formulated research
questions.

23

3.2 Data collection and analysis
The research questions explicated above have been addressed by conducting five empirical
studies (see Table 1). The data collection and analysis related to each study are described in
the following sub-sections.

3.2.1 Study 1 − Surviving Disruptive Innovation
The first study that was performed within the scope of this PhD research concerned the
problems incumbent firms face under conditions of disruptive technological change. The
main purpose of this study was to gain practical and detailed insight into the challenges
related to this kind of shifts. Additionally, the study aimed to address how and why
disruptive innovations prosper in an established value network and what challenges
incumbent firms encounter in these situations.

In order to explore this further, a camera manufacturer named Hasselblad was targeted. The
firm was approached since it had gone through a technological shift recently and encountered
significant difficulties when doing so. The change from analog to digital imaging implied
that the company went from stable profits to collapsing revenues within only a couple of
years. An additional reason for studying a firm that had experienced the shift to digital
imaging is that Christensen (1997) stated that this was a disruptive technology vis-à-vis
analog photography. 20

While many articles had been written in the popular press about how Hasselblad had
‘overslept’ the digital revolution, no one had really performed a detailed investigation of
what actually happened to the company. This fact created further reason to study the fate of
Hasselblad. An additional reason for targeting this company was its geographical proximity
and the opportunity to approach key persons who had been working at the company. It turned
out that the firm had explored digital imaging in various applications since the late 1970s. In
order to fully understand the problems that were encountered, a historical study of the
company was deemed to be the right method. By doing so, insights could be gained
regarding how a disruptive innovation emerges and what challenges a firm encounters when
trying to commercialize it. Given that disruption is a relative phenomenon and that these
events take place during a long period of time, a study of this firm provided an opportunity to
study the dynamics of the process in a comprehensive way.

20
Christensen (1997, p. xxix) stated that digital imaging was a disruptive technology that would displace silver
halide photographic film. While it is clear that a technological shift has occurred and that it has caused a lot of
industrial turbulence, it is still interesting to look at this shift in retrospective and see how the transition took
place and why some established firms encountered problems.

24

Study 1 Study 2 Study 3 Study 4 Study 5

Name of study Surviving Managing Inhibitors and Facit and the Disruptive
disruptive discontinuous triggers of displacement of innovation and
innovation innovation discontinuous mechanical calculators business model
innovation renewal
Research Explore To understand how Explore what factors Investigate how and Explore barriers and
objectives disruptive firms work actively influence the success why a disruptive enablers of business
innovation with generating or failure of innovation may emerge model renewal in
empirically discontinuous discontinuous in a high-end or relation to disruptive
innovations innovations mainstream market innovation
Unit of analysis Firm level Firm level and Product and business Firm level Product and business
product level model model

25
Research design Qualitative: Qualitative: multiple Qualitative study of Qualitative: in-depth Qualitative: multiple
in-depth case study, combined nine discontinuous historical case study case study
historical with some product innovations
case study quantitative data and their success or
failure

Data collection Interviews, Interviews, Interviews, Interviews, archival Interviews
access to discussions, discussions, studies
internal workshops, access to workshops
documents innovation idea
databases

Table 1 gives an overview of the studies that have been conducted within the scope of this thesis.

Though no formal relationship with Hasselblad has been maintained, extensive amounts of
information have been accessed. After having performed a couple of open-ended interviews
with people who have been in top management positions at Hasselblad over the years, plenty
of internal documents such as annual reports, strategy documents, business plans and mail
conversations were reviewed (see Table 2 and 3 on the following pages). Archival sources
can be regarded as a good complement to other sources of data. Such data can help the
researcher to comprehend how certain events unfolded over time and to understand what
certain actors did at a certain point in time. But when only using such sources, it may lead to
a fragmented view with a lack of contextual understanding (Flick, 2006).

In this study, archival data were mainly used in order to ensure the accuracy of the
information obtained from the conducted interviews. Former CEOs and managers of R&D
and business development have been accessed in order to understand the specific challenges
they faced when shifting from analog to digital imaging. The field research interviews began
with general open-ended questions, asking the interviewees how they perceived the
challenges posed by the disruptive technology and how they tried to deal with them. Follow-
up interviews and discussions also took place in order to confirm that the gathered
information had been interpreted correctly. This interaction has taken place over more than
two years, and often the follow-up discussions have been held by phone. It is difficult to
estimate how much time this work sums up to, but it is clear that these sessions have helped
to verify and sometimes nuance certain findings. Additionally, some email correspondence
with photographers who had experienced the technological shift has taken place, mainly in
order to confirm the firm-internal sources.

The data collection and analysis have largely been conducted in parallel, thus following an
abductive approach to research (Dubois and Gadde, 2002). After the first round of data
collection in 2007, the data were discussed and analyzed during several sessions together
with the other authors of the first appended article. Based on these interactions, a first write-
up and within-case analysis was performed, which eventually resulted in the first paper. One
way of structuring such an analysis is to put information in chronological order and to
identify certain key events (Miles and Huberman, 1994). This approach was employed and a
couple of critical events were identified by observing that many interviewees referred to
certain incidents. These include for instance when Sony launched one of the first cameras not
using film in 1981, the founding of Hasselblad Electronic Imaging in 1985, the attempts at
developing a digital camera in the 1990s, the ownership changes that took place and the
development of a new camera system in the late 1990s.

26

Type of document Time
Hasselblad annual reports, Hasselblad Electronic Imaging Annual reports 1984-1994, 1985-1992
Minutes from board meetings 1989-1995
2 Internal company presentations regarding digital imaging 1997, 1997
Mail conversation between the R&D manager and the CEO 1995; 14/2, 1996;
8/10,1995
Internal memorandums regarding digital imaging 27/10, 1992; 14/6,
1997; 14/8, 1995;
1996*21; 13/1, 1997;
1994-95; 16/6, 1996;
6/1, 1997; 9/10, 1996
Report concerning Hasselblad Electronic Imaging June, 1993
Minutes from meetings at the division for digital photography 24-25/3, 1994, 18/8,
1995
The Tokyo Meeting (on product strategies for the future) Short summary 1996
New Camera – Market Research and Concept Studies 7/4, 1997
Minutes from 14 product board meetings 1996-1998
A proposal for a new analog camera system 4/7, 1997
Product Proposal – Wedding photographer’s digital camera system 13/5, 1996
Mail conversations between the digital and analog R&D managers 19/2, 1998; 3/4, 1997
Business plans − technical photography and digital imaging 14/5, 1998; 27/2, 1998
Mail conversation between Hasselblad and Philips 4/9 – 22/11 1997
Requirements and preferences in the Project Crystal Ball 30/8, 1995
The “Facit” crisis of Hasselblad, internal PM 1/1, 1994
A proposal regarding tasks for the division of digital photography 27/2, 1997
Mail conversation between an R&D manager and UBS 16/1, 1997
Agreement for a CCD sensor component between Hasselblad and Philips 3/11, 1994
PM “The exclusivity issue of the Philips FT19 CCD-sensor” 2/9, 1996
Hasselblad product development process 6/6, 1995
Summary of the Hasselblad International Marketing Conference 19/4, 1991
Report to the Hasselblad foundation about the future of digital imaging November, 1997
PM regarding corporate culture at HEIAB 10/9, 1990
Meeting notes: Distribution Strategy & Hasselblad Customer Care 23,4, 1996
Interaction with Leaf Systems 9/4, 1996; 29/3, 1996
Hasselblad “Works” − Digital Photography Business Concept 22/4, 1996
Area sensors for High Quality Digital Cameras 1996*
Minutes from meeting regarding Digital Photography Strategy 24/4, 1996
Concept study of digital flexbody and an internal PM on the subject 1997*; 19/6, 1996
Definition and positioning of products for digital imaging 11/5, 1993
The mK*nK image sensor, by Philips Imaging Technology 1995
Table 2 provides an overview of some of the most important archival sources that have been
accessed in this study.

21
The documents which are marked with a * in the right hand column do not have a date on them, they have
been dated according to where in the archives they have been found.

27

Respondent title Respondent function Interaction
Three CEOs from the In charge of creating and enacting Four interviews, totaling
period 1976-2004 the corporate strategy. approximately twelve
hours.

CFO, 1978-2004 Responsible for financial issues.
Three interviews, totaling
more than ten hours,
extensive discussions and
follow-up interaction.
Board member, 1990-2006 Labour union representative Two interviews, totaling
about five hours,
discussions by phone.
R&D Manager, 1979-1998 Founder and CEO of the subsidiary Three interviews, in total
Hasselblad Electronic Imaging more than ten hours.
(HEIAB), 1985-1992, responsible Several follow-up
for digital photography, 1992- discussions both by
1996. phone, mail and in
person.
Market Manager and Area manager in South America Three interviews of about
developer of digital during the 1990s, in charge of 10 hours in total. Several
business strategy, 1996- digital business development for mail conversations and
2004 several years. discussions by phone.
Three electronics Worked at HEIAB and then on Three interviews, in total
engineers digital imaging in the 1990s. about five hours.

Hasselblad manager In charge of the Swedish One interview, about one
operations for several recent years. hour.
Table 3 contains information about some of the people who were interviewed within the
scope of this study as well as their functions and the kinds of interactions that have taken
place.

After this first round of data collection and analysis, theory on disruptive innovation was
revisited and it became clear that this case exhibited some characteristics that made it
theoretically interesting. Digital imaging had unlike many historical examples emerged in the
established value network of the incumbent firm Hasselblad. Hence, the case presented an
interesting contrast to the typical pattern of low-end disruption as described by Christensen
(1997), and therefore offered an opportunity to explore how a disruptive technology prospers
in an established value network. Moreover, the fact that Hasselblad’s customers demanded
digital photography at a rather early point as a complement to analog photography made it
possible to study other parameters than the customer, and thereby to address in what ways a
disruptive innovation is a business model problem. These observations triggered additional
research into the case. The study therefore went into further detail regarding how and why

28

digital imaging prospered in this value network and what challenges the studied firm
encountered. Questions related to these issues were asked to at least two senior managers
from one era and compared to the internal documents that had been accessed.

The case descriptions about Hasselblad emerged once similarities had been observed
between the archival data and the interview data, thereby triangulating the findings. The large
amounts of primary and secondary sources of evidence along with the follow-up sessions
should most likely have resulted in an accurate interpretation of the studied events. A
detailed case description of approximately 50 pages was written based upon these data and
another within-case analysis was performed. The second appended paper and the description
of the Hasselblad case in the third paper emerged from this analysis.

3.2.2 Study 2 – Managing discontinuous innovation
This study has been performed as one part of a research project called the Discontinuous
Innovation Project (DIP). Within the scope of this work, empirical data have been gathered
from three Swedish firms. They come from the personal care industry (more on this in study
3), the mechanical engineering industry and video surveillance.

Initially, the study was quite broad and exploratory in order to look for interesting empirical
observations that could be further investigated. The main purpose was to explore how firms
are working with challenges related to discontinuous innovation and more specifically to
disruptive innovation. Open-ended, semi-structured interviews were conducted at these firms,
in several cases together with one or two other researchers22. The questions concerned such
issues as idea management and discontinuous innovation, selection mechanisms and business
development. This broad scope enabled the researchers to obtain insights which helped them
to identify issues of further interest. Hence, the study was largely abductive, where the initial
round of interviews generated knowledge that could be followed up with more detailed
investigations later on. The interviewees all had in common that they had been working on
some projects which were of a more discontinuous nature compared to the established
business. Additionally, some technology-specific documents were obtained under secrecy. In
total, three workshops were also held together with these and other firms where key findings
were reported, validated and discussed in further detail.

A formal relationship has been maintained with two of these companies during 2007-2009.
These relationships enabled extensive access to information that it would have been difficult
to access otherwise. Moreover, innovation audits were performed at these two firms during
2007 by the Center for Business Innovation, which the author belongs to. Within the scope of
these two audits, interviews were conducted with managers and directors who had positions
that were related to the innovation process. The interviews were semi-structured, asking the

22
Jennie Björk and Mats Magnusson.

29

respondents about such issues as the company’s current processes, its organization, its idea
management system and innovation strategy. In addition to this, scorecards regarding the
creative climate and the innovation work in general were sent out on a broader scale. While
this work was performed by a team of researchers and industry partners and did not directly
generate any data that were used in the papers, it still served as vital background information.
Furthermore, it helped the author to gain more practical insights into innovation work at
companies, which in turn made it easier to understand what kinds of challenges were both
industrially and theoretically relevant. This partnership also enabled access to databases,
internal presentations, follow-up discussions and key employees. Working together with
firms over a longer period of time also creates an important contextual understanding of
present challenges and ways of working.

During this first round of data collection, four interviews were conducted at each firm. At the
firm in the mechanical engineering industry, the respondents came primarily from the
concept development department. The main task for these people is to test and develop ideas
into concepts, which in turn can result in new products. The interviews lasted for about one
hour. Each interview concerned one discontinuous product innovation, how it had been
developed and the main problems which had been encountered.

Similar issues were addressed at the second firm, where four interviews of approximately 90
minutes were performed. The company is present in the video surveillance industry and is
driving the ongoing shift from analog CCTV to digital, IP-based video surveillance. Some of
the interviewees were working on technological issues, others were managers of R&D and
one of the co-founders of the company was also interviewed. The questions concerned how
the firm is working with new ideas which lie beyond the scope of its current business. The
fact that this technological shift was disruptive in many respects triggered further interest in
the company and the industry and it was therefore revisited in the fifth study.

Case descriptions were written based upon this information after a round of discussions with
the other two researchers participating in the study. The descriptions were related to existing
literature on discontinuous innovation and it was concluded that this stream had largely
overlooked the difficulties encountered by firms which try to launch innovations that are
discontinuous for the customer, i.e. incompatible with existing processes and practices or
require a significant change in firm behavior.

The study went into further detail at the firm operating in the personal care industry, looking
at how idea management systems can be designed in order to capture, generate and develop
both discontinuous and steady-state innovation ideas. This issue was considered of particular
interest at that time since it has been stated in the literature that discontinuous and disruptive
innovations need to be treated differently, but that knowledge is needed regarding how such
systems can be designed. The studied firm was targeted since it had a long experience of idea
management and had tried to change its system in order to handle both minor and more

30

discontinuous initiatives. In total, more than 30 interviews were performed. Many of these
interviews were conducted together with other researchers within the scope of the previously
mentioned innovation audit. This work provided important background information but also
offered an opportunity to ask different people at the firm how the idea management system
worked in practice. People who had a relation to the idea management system were targeted,
for instance R&D managers, contributors to the system and the persons who were in charge
of it and had designed the system. The interviews were semi-structured and focused
explicitly on the idea management system, how it works, its advantages and drawbacks and
how it has changed over time. Follow-up interviews were also conducted in order to make
sure that the results were correct. These, in combination with key statistics from the firm’s
idea database where descriptions of ideas within the company are stored, have increased the
validity of the findings.

One consequence of a broad and exploratory approach when undertaking a study is that its
final results are beyond the original objective. This was the case with some parts of the
described study and therefore, it did not directly lead to any corresponding paper in this
dissertation. However, it still helped to identify some areas of interest which have been
further addressed in other studies like the third and fifth ones. The aforementioned idea
management case resulted in a paper; see Sandström and Björk (2010) for further
information. This article was not included since in the end, it did not really fit into the overall
research objectives of the dissertation.

3.2.3 Study 3 – Inhibitors and triggers of discontinuous innovation
The third study was performed at the previously mentioned established firm which has been a
global player in the personal care industry for many decades. The company is developing and
manufacturing diapers, feminine pads and incontinence products. These products have in
common that they are mainly based upon absorption technology. The industry can be
regarded as technologically mature and well consolidated. There are a couple of large
companies such as Kimberley-Clark and Proctor & Gamble which dominate the industry on a
global level.

From the 1980s onward, the studied company lost market shares in Europe within the diaper
and feminine pad categories due to increased competition. The firm pioneered the
incontinence market in the 1970s and is a dominant actor in this business today. Over the
years, the company has sought to sustain its leading position by launching innovative
incontinence products, but it has remained a follower in the diaper and feminine pad markets.
Incontinence products are sold to end-consumers, retirement homes and hospitals. The
performance of these products in terms of absorption capacity has increased steadily over
time, and thus the company has focused increasingly on new attributes over the last decade.

31

The study at this company was initiated after the aforementioned innovation audit had been
performed by the Center for Business Innovation in November 2007. One outcome of the
audit was that the company needed to better understand how discontinuous innovations could
be selected and developed. A five-month research project was started which aimed to
understand how discontinuous innovations had been both rejected and developed in the past.
This input would in turn generate recommendations regarding how the firm could design its
development process related to the recently launched New Business Development unit.

Though it was not obvious that the study would ultimately fit into this thesis, it resulted in an
article that met the overall purpose of the thesis, and therefore it was included. The project
was performed together with Ralf-Geert Osborne, master thesis student from Delft
University. In total, the evolution and fate of eight discontinuous innovation projects were
studied and documented through semi-structured interviews with both current and former
employees at the company.

Two rounds of interviews were conducted within the scope of this study. The interviews
were carried out by two researchers, thereby eliminating any potential personal bias. All
interviews were recorded, transcribed and listened to afterwards. This work has been
documented in Osborne (2008) and should be regarded as important background information
about innovation activities at the studied company. In the first round of interviews, the
questions were more general and open-ended. The respondents were asked to identify
innovation projects which had been discontinuous to the firm as well as the main inhibitors
and triggers of them. All the respondents had worked at the company for a long time and
were able to explain how different innovation initiatives had evolved. A majority of the
respondents were working in the R&D department and others were more involved in market-
related activities (see Table 4); thereby insights were gained regarding both technological and
more commercial issues.

32

Respondent title Respondent function Interaction
Manager of Innovation and Responsible for the Two interviews, about
Knowledge development of the screening one hour each. Extensive
process. Primary contact interaction by phone. The
person during the course of the respondent read and
study. validated the paper
emerging from the study.
Research Director In charge of research at the Two one hour interviews.
studied firm.
Two fellow scientists and one The most senior position for Two one hour interviews
former fellow scientist scientists. per person in all but one
case.
Two senior scientists The second most senior Two interviews per
position for scientists person, approximately
one for each session.
Three persons in charge of Responsible for the One 90 minute interview
product portfolio management development of the resource with all three respondents
allocation process for more and to individual 60
incremental product minute follow-up
development projects. interviews with two of the
respondents.
One sales manager In charge of supporting and One interview which
developing the sales of heavy lasted about 90 minutes,
incontinence products. discussions by phone.
The respondent also
proofread the resulting
article.
One manager of the idea Responsible for the idea One interview by phone
system management system and had which lasted for about
been working previously on one hour.
developing a discontinuous
product innovation.
Table 4 provides information about the people who were interviewed within the scope of this
study (adopted from Osborne, 2008).

The gathered data were compared and contrasted to existing literature on discontinuous
innovation and business model renewal through a cross-case analysis. Some of the cases
were discontinuous with regard to the firm’s established competence base whereas other
cases were more related to the customer and the surrounding value network. After this
analysis it became clear that one of those eight projects had some disruptive characteristics
and was therefore deemed to be particularly interesting for this dissertation. It was identified
as more relevant in relation to the other ones since value networks and business models
seemed to play important roles in determining the success or failure of this product launch. In
addition to this, the case provided an opportunity to understand how challenges related to the
value network can be managed since the studied product started as a commercial failure but

33

eventually took off after a couple of business model changes had been made. In this sense,
the case was interesting since it was largely related to the second research question that is
dealt with in this thesis.

More emphasis was put on this case in the second round of interviews. As the challenges of
particular interest were related to the commercialization aspects, people in charge of those
issues were specifically targeted. All of the interviews were recorded and transcribed except
the two interviews which were performed by phone. The case description that emerged from
this research was later on read and validated by the person who had been working with the
main business model changes that this product had implied, and by the innovation manager.
A within-case analysis was now conducted where the gathered data were compared to
existing challenges related to business model renewal. This analysis resulted in the fifth
appended paper. After the termination of the project, a final presentation was given to the
company where the main findings and conclusions were communicated. During this session,
the general interpretation of the collected data could be validated one more time.

Hence, this study was in many ways a collaborative one in the sense that it involved an
interaction with a firm which in turn had specified a couple of deliverables from the project.
Collaborative research is often criticized for reducing the reliability and replicability of the
undertaken research. However, this should not be regarded as a major concern for the study
above. The main reason is that while some of the research has created recommendations that
have in some cases been enacted by the company, this was not the case for the parts of the
studies that the related paper and its conclusions were based upon. These recommendations
were concerned with the evaluation of business ideas within the scope of the new business
development unit. The paper that emerged from this study is based on a case that the authors
have not been influencing during the course of the study.

As can be seen above, an abductive approach has been employed in this research project. It
started as a general exploration of inhibitors and triggers of discontinuous innovation; several
different cases were identified, and after a cross-case analysis one seemed to be of particular
interest, which in turn triggered further research into this case. As can be seen in this study
and the previous one, a broad approach results in a lot of freedom, which in turn may imply
that some of the gathered data are eventually not of direct use for the dissertation.
Nevertheless, they have generated important insights which have been further developed in
other studies and corresponding papers.

34

3.2.4 Study 4 – Facit and the displacement of mechanical calculators
Facit was a Swedish manufacturer of typewriters, mechanical calculators and office
machines. In 1971-1972, the company went from almost 50 years of expansion and
continued profitability to being close to bankruptcy. The shift from mechanical to electronic
calculators was the main reason why Facit encountered problems. Prior to the transition, the
industry was characterized by high entry barriers and extensive vertical integration, both up-
stream and downstream. A few large companies which controlled specialized machinery for
the manufacturing of components dominated the industry (Majumdar, 1982). These firms
also had large sales organizations and maintained close relationships to their industrial
customers. The shift to electronics created insurmountable challenges for many of these
companies, and Japanese firms like Sharp, Casio, Canon and Busicom entered the scene in
the mid-1960s. By the early 1970s, some Western semiconductor firms like Texas
Instruments and Rockwell entered the industry, which was now subject to rapid incremental
development and a sharp decline in prices.

While some work has been done regarding Facit and the shift to electronics (e.g. Starbuck
and Hedberg, 1977; Starbuck et al., 1978), this case has not yet been addressed from a
disruptive innovation perspective. Other scholars have focused on such aspects as leadership
and organizational impediments (Pettersson, 2003), but the value network dimension of this
incumbent failure has not been investigated before. Moreover, the fate of Facit is often
mentioned by scholars, but rarely treated in detail.

The fact that the initial diffusion of digital technology happened in very advanced segments
such as military or scientific applications (Utterback, 1994), then entered Facit’s segment of
office machines, and later on yielded consumer products triggered the author’s interest in the
industry and the company. While it was clear that electronic calculators had disruptive
properties, the initial investigation made it plain that electronic calculators did not emerge in
the way that Christensen’s framework would suggest. Nevertheless, it was evident from an
early point that value networks and the environment played an important role in the transition
from mechanical to electronic calculators. Additionally, the fact that electronic calculators
prospered in Facit’s market segment in the late 1960s and early 1970s made it an interesting
case to study within the scope of this dissertation. A historical case like this was also deemed
to be suitable since the dynamics of the shift could be followed and analyzed in retrospect.
An additional reason for studying these companies was that extensive information could be
accessed at the Facit archives in Åtvidaberg, Sweden.

A study of Facit would therefore be suitable for exploring where and how a disruptive
innovation actually prospers and what challenges a firm encounters. The books and texts that
had been published regarding the company’s fate (Pettersson, 2003; Torekull et al., 1982;
von Kantzow, 1991) were read and then an extensive amount of historical documents were
reviewed. In total, two weeks were spent going through the Facit archives in Åtvidaberg,
Sweden, where the company used to be headquartered. Two weeks were not enough to allow
35

a complete investigation of the abundant sources available. The author therefore decided to
focus on documents which concerned strategic decisions related to the transition from
mechanical to electronic calculators. The following documents were reviewed:

• Annual reports from the period 1959-1974
• Minutes from board meetings, 1964-70, 1972
• Minutes from top management meetings, 1961-72
• Forecast of future sales of electronic calculators 1970-72, 1970
• Statistics regarding prices on electronic calculators 1967-1970, 1970
• Data on Facit’s profitability 1960-1970, 1970
• Consulting report on cost savings by H. Bohlin et al., 1962
• Ciceronen, company magazine, 1960-72
• Internal documents related to the collaboration with Sharp
In addition to the archival sources, interviews have been conducted with former directors of
the company, e.g. the CEO of Facit from 1957 to 1968, one member of the top management
team and one person who worked with the market-related aspects of electronic calculators. In
total, six interviews were performed, totaling approximately 20 hours. The interviewees were
centered around open-ended questions regarding the emergence of electronic calculators, its
impact on the company’s capabilities and the established business model. Moreover, those
issues which were identified as particularly interesting from the archival studies were further
addressed during the interview sessions. One potential weakness of this study is that some
people whom it would have been interesting to interview have passed away. However, the
combination of interaction with key individuals and access to rich archival sources has still
generated a sufficiently good understanding of this case to address the issue of value
networks and disruptive innovation.

The collection and analysis of the data were guided by existing theory on disruptive
innovation. After the first week of studies in the archives, it became clearer in what ways the
introduction of electronic calculators illustrated several important challenges that existing
theory had largely overlooked. This interpretation of the gathered data was presented to other
researchers who had been interested in the case.23 A case write-up and a within-case analysis
were conducted. These data were in turn compared with the data from the first study
regarding Hasselblad and the gathered data about IP video surveillance. The third appended
article is based upon this analysis.

23
Mats Magnusson and Jan Jörnmark.

36

3.2.5 Study 5 – Disruptive innovation and business model renewal
Previous studies and existing literature have identified the importance of changing the
business model in order to succeed with innovations which have more disruptive properties
(e.g. Christensen, 2006). However, little is known regarding the specific challenges and
managerial solutions in terms of business model renewal in relation to these innovations. The
study was arranged in order to fill this gap and sought to investigate what challenges firms
encounter when trying to renew their business models in relation to innovations of a more
disruptive nature.

In order to understand why incumbent firms seem to struggle under conditions of disruptive
change, both established firms and entrants were targeted. By doing so, these groups can also
be contrasted to one another. The companies come from a wide range of different industrial
settings such as video surveillance, floor finishes and healthcare products. The video
surveillance case had been identified as interesting within the scope of the second study and
was revisited. The other case companies were targeted because they had experience of
launching product innovations which required changes in the business model. An additional
reason for studying these firms was that they could be accessed. By approaching these
companies, insights could be gained into what factors influence the success or failure of these
innovations.

Having looked at the phenomenon of disruptive innovation in great detail in several of the
previously described studies, this study broadened the sample a bit and went into less detail.
Since the study aimed to point out how firms actually try to handle these challenges and since
one can expect some variety here, a lower level of detail and a larger sample were deemed to
be appropriate. Hopefully, this research strategy could also help to improve the
generalizability of the findings. As has been stated by Christensen (2006), disruptive
innovation is primarily a business model problem. Hence, a special emphasis was put in the
interviews on how and why the innovation required a new business model, how the firms
went about undertaking such a change and what challenges they encountered. On average, 2-
3 interviews were conducted at each company. The respondents all had in common that they
had tried to align the business model with the value creation associated with the disruptive
innovation (see Table 5). They were targeted with specific questions regarding how the
innovation created value, for whom and in what ways this creation and distribution of value
required changes in the business model. Thus, as stated previously, this data collection did
not go into as much detail as the other ones, but instead drew upon a slightly wider sample.
By carefully targeting interviewees with well-specified questions, the relatively low number
of interviewees per case was partly offset. All interviews were recorded and listened to
afterwards. In addition to this material, official documents such as annual reports, press
releases and marketing material were reviewed.

Case write-ups were made afterwards, the respondents proofread the case descriptions and
were offered the opportunity to make the cases more anonymous if needed. The different
37

cases were compared and contrasted to each other in a cross-case analysis in order to look for
patterns across them.

Company and cases Respondent Interaction
A European company in the The director of marketing One interview which
healthcare industry lasted for about two
hours, some discussion by
phone
The engineer who developed One phone interview for
the product and worked with it about one hour.
for 25 years
An entrant firm in the floor The founder and CEO of the One two hour interview
finishes industry company.
A European entrant firm into The technology manager One interview, which
the video surveillance industry lasted for about two
hours.
Two people in Business One two-hour interview
development session.
Two PhD students working on One discussion section
technological convergence and which lasted for about 90
industrial transformation in the minutes.
security industry
An established firm in the R&D manager An interview and
floor finishes industry, two discussion session of
different cases. about two hours.
Senior engineer Extensive contact by
phone on several
occasions.
Division manager One interview which
lasted for about two
hours.
Former director of the market Two interviews, about
organization two hours each.
Table 5 provides information about the people who were interviewed within the scope of the
fifth study.

38

3.3 Validity and reliability
When assessing the employed methodologies, reliability and validity are two important
criteria. Reliability can be defined as the possibility to replicate the study. Given that several
of the conducted case studies are based upon historical events which have been described
through both accessing key interviewees and internal documents, it should be possible to
replicate these studies. This kind of formal documentation is often considered to be stable,
unobtrusive and exact (Yin, 1994). It can be reviewed by another person who would most
likely draw similar conclusions. The reliability of the three studies which do not rely upon
archival sources is admittedly weaker. However, the documentations and explanations of the
explained methods above should still make it possible to repeat the studies.

Validity can be thought of as either internal or external. Internal validity refers to how well
the collected data match the reality that they seek to represent. There are several ways to
improve the internal validity. One way of doing so is to use different sources of data and then
triangulate (Yin, 1994). In the abovementioned studies, the internal validity was enhanced by
using several different sources such as interviews and access to a vast amount of archival
data. Since the case studies emerged from similarities in those different sources and were
often subsequently confirmed by conducting follow-up interviews, the internal validity could
be increased. Another way of improving it is to compare data with existing literature
(Eisenhardt, 1989). Such comparisons and contrasts have to some extent been made in the
articles that emerged from the different studies.

Interviews are subject to selection and respondent bias, as these data by necessity mirror an
individual’s beliefs, values and experiences (Flick, 2006). As was stated in the descriptions
above, this issue has been handled by interacting with the respondents throughout the studies.
Key respondents have been asked to proofread and comment on case descriptions and
moreover, the follow-up sessions, seminars, workshops and company presentations that have
been held have contributed to ensuring a correct documentation. Furthermore, interviews
have often been recorded and transcribed and in many cases performed together with another
person, which also contributed to increasing the reliability of the studies.

A couple of other measures have been taken throughout the course of this research in order to
offset the abovementioned problems. It is important to make sure that the interviewee can
express opinions without being subject to undesired repercussions. When required, the author
has therefore on several occasions signed Non-Disclosure Agreements. However, as the
presented work is more concerned with innovation processes and networks than with
innovation content, this was often not necessary. In those cases when an interviewee wished
to be anonymous this was also arranged.

While this dissertation addresses the role of value networks and business models with regard
to disruptive innovation, it has primarily relied upon sources from focal firms rather than
their surrounding networks. There are several reasons why this approach has been employed.

39

Firstly, the thesis is primarily concerned with the challenges that these firms encounter, how
they introduce disruptive innovations and try to change their business models. Secondly,
while the firm’s environment is of great interest, it can still be studied and understood by
approaching the firm. After all, the focal firm is the one actor that is subject to the external
control and is the one that encounters the difficulties which need to be studied with regard to
disruptive innovation. As the conducted research is concerned with the challenges a firm
encounters and how the innovations emerge, the focal firm is arguably the actor that it is
most suitable to address. Thirdly, it would be interesting to study a network in its entirety,
but such an approach is by necessity more time consuming and would thus have drawn upon
fewer, more detailed studies which in turn would have resulted in a reduced generalizability.
Within the scope of this doctoral research project it has therefore not been possible to collect
data from entire networks.

The external validity can be defined as the possibility to draw general conclusions from the
conducted research. It is often argued that case studies impose constraints upon the external
validity of the findings, given the explicit focus on a certain event (Yin, 1994). It should be
pointed out here that the presented work aims to develop new theory rather than testing
existing theory. According to Eisenhardt (1989) a case study is the appropriate research
strategy when little is known about a phenomenon and existing theories seem inadequate or
insufficient. This dissertation does not aim to provide an exhaustive set of answers. The
purpose is rather to improve existing theory related to disruptive innovation.

The potential weakness in terms of external validity has been handled in a couple of different
ways. Some generalizations can be made by carefully choosing which cases to investigate.
An attempt to do so is made in the first study and the resulting paper about Hasselblad and
the shift to digital imaging. The second appended article draws upon this study of one firm in
the camera industry, and then discusses on a more general level whether this pattern is
applicable to other industries where microelectronics has displaced other technologies. While
such generalizations are partly speculative, they may still inform the reader and trigger
further research into the same area.

The external validity can be increased analytically, i.e. by relating cases to theory and
thereby reaching conclusions which are more general. The cases have helped to illustrate and
point out issues which need to be better understood theoretically. Such an empirically
informed perspective can hopefully in turn result in conclusions which are still valid. The
fourth appended article and this covering paper focus explicitly on doing so. These
documents seek to develop theory by synthesizing theory and the observations that have been
made in other articles and studies.

The fact that some studies draw on a wider set of cases should hopefully also result in a
higher external validity since they can be compared and contrasted to each other. In this
dissertation the studies and corresponding papers differ in terms of how detailed the cases

40

are. Some of the articles are written with a high level of detail whereas other studies draw
upon a wider range of cases. The articles which draw upon a wider sample should hopefully
result in a broader and more comprehensive understanding of the studied questions.

3.4 Reflections on the research process
As can be seen in the descriptions of study 2 and study 3, the undertaken work has not
always been as structured and linear as its eventual outcome in the form of this dissertation.
Therefore, a couple of remarks on the research process need to be made.

Throughout this research process, the issue of discontinuous innovation has been addressed
more generally in some studies and thus, not all of the gathered data made a direct
contribution to the dissertation. Though the final outcome of this doctoral work follows an
overall research objective, the underlying research has in many ways been less
straightforward.

During the course of this doctoral work, a couple of critical incidents have driven the
dissertation towards its outcome. One such event was when the author realized that the
emergence of digital imaging in Hasselblad’s high-end segment of the market and the
resulting challenges were in many ways inconsistent with what existing theory on disruptive
innovation would predict. In 2007, discussions took place with Jan Jörnmark24 regarding
whether the displacement of Facit’s mechanical calculators was a disruptive event or not. The
argument was never really settled, which in turn compelled the author to take a closer look at
what actually happened to the company. The third study helped generated the important
insight that existing literature on discontinuous innovation had maintained a somewhat
simplistic view on customers and value creation. This observation also shed some light on
the IP video case and the fate of Hasselblad. A conference paper was written based on these
thoughts but was eventually excluded from the dissertation (Sandström, 2008). In order to
better explain the theoretical inconsistencies that had been observed, the author then revisited
existing work on disruptive innovation and started to read more literature on value, networks
and business models. This work in turn resulted in the fourth appended article, which is a
purely theoretical article. The last two articles are largely based upon these insights, but are
more empirically oriented.

The performed research has therefore been iterative; empirical studies have shed new light on
existing theory and previous studies, which in turn has had an impact on the design of the
following studies and articles. One of the main challenges related to case study research is to
find and construct a study that is so detailed and specific that it addresses the formulated
research questions (Yin, 1994). Hence, the method used implies a high demand on the

24
Associate professor in economic history at Chalmers University of Technology.

41

sampling of cases and the collection of data. The sampling procedure employed in this
dissertation has been largely driven by theory (Miles and Huberman, 1994). Cases which
have been relevant for the literature on disruptive innovation, value networks and business
models have been identified. Those cases which have exhibited theoretically interesting
characteristics have been revisited and studied in further depth. Thus, the sampling procedure
has been based upon theory, but the process has also been largely iterative.

The obvious drawback of this approach is that some studies have been of little direct
importance for the dissertation. However, this process has enabled the kind of flexibility and
continuous learning that is often necessary, since the eventual outcome was unclear when the
work was initiated.

42

4. Summary of appended papers
This thesis is based on six papers, which are appended in full versions at the end. In this
chapter, the main findings from each paper are briefly presented. These results are developed
further in the coming two chapters, which contain an analysis and discussion.

The first article was also the first publication that emerged from this doctoral research. It was
written in mid 2007 after the first round of interviews and data collection had been conducted
regarding Hasselblad and the transition to digital imaging. It is therefore less detailed than
the following articles on the firm. One key finding that emerged in the article was that
existing theory had not really dealt with the specific challenges that different firms face. This
finding helped the author to realize that theory on disruptive innovation needs to be
improved, which in turn triggered a more detailed investigation of Hasselblad as well as
further theoretical and empirical work on the subject. Hence, this paper has played an
important role in the development of this thesis, but primarily by identifying issues that could
be further explored. Therefore, it has been included in the dissertation.

The following two papers essentially provide empirical illustrations of how disruptive
innovations arise in established value networks and in what way they are business model
challenges. These observations in turn called for further theoretical development and
therefore, the third paper aims to develop the theory on disruptive innovation, partly by
introducing new theoretical perspectives on the subject.

The fifth and sixth articles to some extent give further case evidence of the challenges related
to disruptive innovation and business models, but they are also more managerially oriented
and have thus contributed to the managerial implications described in section 8.

4.1 Paper I: Exploring factors influencing incumbents’ response to
disruptive innovation
This paper looks at how the characteristics of an incumbent firm affect its response to
disruptive innovation. Studying a high-end, niche player in the camera industry like
Hasselblad, it is argued that previous literature has maintained a somewhat simplified view of
established firms. Frequently, these firms are treated as one population vis-à-vis entrants and
little attention is paid to the different challenges that they face.

The paper shows that Hasselblad’s niche strategy and its limited resources created specific
problems. The initially lower image quality associated with digital technology made it
difficult for the firm to experiment with it, despite the fact that many studio and catalog
photographers benefited largely from digital imaging at an early point. Having focused on the

43

high-end segment for decades and built up a reputation for delivering supreme image quality,
it became difficult to experiment with the technology. Additionally, the limited resources
available implied that Hasselblad had to collaborate extensively in order to meet the digital
challenge. The paper also illustrates how various changes in ownership over the years created
a strategic inconsistency which further augmented the difficulties. In conclusion, this paper
suggests that both challenges and managerial solutions to the innovator’s dilemma are largely
dependent upon the particular characteristics of firms.

4.2 Paper II: Hasselblad and the shift to digital imaging
As stated in the literature review, previous research has suggested that disruptive innovations
emerge either in low-end segments or in new markets. However, it is unclear whether and
why they also can prosper in mainstream or high-end segments, and what the challenges
would be under these circumstances.

It is clear from the descriptions in the paper that it is problematic to illustrate this emergence
by using Christensen’s (1997) graphs of how disruptive innovations prosper. These graphs
essentially suggest that technologies with an initially lower traditional performance start to
prosper in lower segments where the ancillary attributes are valued. Digital imaging, on the
other hand, grew in a high-end segment despite its lower image quality and thanks to its other
properties. Hence, it attacked from below in terms of performance, but emerged in a high-end
segment, i.e. in Hasselblad’s part of the market. Such a pattern is largely incompatible with
Christensen’s framework and thus calls for an improvement of it.

The paper provides a detailed empirical illustration of how and why a technology with
disruptive characteristics may emerge in an established value network, despite its lower
traditional performance. This pattern is largely inconsistent with Christensen’s framework
and it indicates that the challenges were more related to the established business model and
the value proposition Hasselblad had historically brought to the market, which in turn
implied that less resources were allocated to digital imaging in the 1990s.

4.3 Paper III: High-end disruptive technologies with an inferior
performance
The third article in this dissertation resembles the second one in being rather empirically
oriented. It draws upon case studies and aims to further investigate how and why disruptive
innovations emerge in established value networks, as well as pointing out some related
challenges. As stated in the literature review, little attention has been paid to this issue and
more knowledge is needed in this area. The article aims to fill this gap by presenting and
analyzing three illustrative case studies. They are all related to a transition from analog to

44

digital technology: calculators, cameras and video surveillance. In the first two cases
incumbent firms were studied (Hasselblad and Facit) and in the case of video surveillance an
entrant firm was targeted. These cases also have in common that the new technology
exhibited disruptive characteristics, but did not prosper in a low-end segment or a new
market. Rather, they were introduced either in the mainstream or the high-end segments of
the market where the former technology had existed previously. The main reason for this
seems to be that the ancillary attributes of the technology could compensate the lower
traditional performance, for instance by removing certain activities and actors thereby
creating an increased value for the customer.

The article argues that the questions of how and for whom value is created need to be further
addressed in order to fully comprehend the challenges related to disruptive innovation.
Moreover, diffusion models may be over-simplified and a more nuanced view of customers
and networks is needed, particularly in a business-to-business setting where there are several
different actors affecting adoption.

4.4 Paper IV: Value, Actors and Networks – a revised perspective on
disruptive innovation
The previous articles identified two main areas of disruptive innovation theory which need to
be improved. Firstly, it was argued that too much focus has been put on performance
dimensions rather than value and utility. Secondly, existing literature had maintained a
somewhat simplistic view of customers and networks. These findings call for a better
theoretical understanding of the phenomenon of disruptive innovation. The fourth appended
paper aims to nuance and improve existing literature on this topic by drawing upon several
bodies of literature that have not been used in this setting before.

The article seeks to develop theory on disruptive innovation with regard to these two aspects.
An extended conceptualization of the phenomenon of disruptive innovation is proposed. It is
argued that these innovations can be understood as a change along two dimensions – actors
and value. Disruptive innovations create utility in new ways and may imply a new
distribution of value in a network of actors that control different resources and perform
different activities. This perspective also makes it more clear in what way a disruptive
innovation is a business model problem (Christensen, 2006). This issue is dealt with in
further detail in the following articles and in the coming sections of this covering paper.

45

4.5 Paper V: Managing business model renewal
Literature on disruptive innovation has stated that disruptive innovation is a business model
problem, but remained unclear regarding how and why this is the case (Christensen, 2006).
The fourth article in this dissertation provided additional insight into this issue by drawing
upon literature on networks, value and utility, but also pointed out that more knowledge is
needed regarding how firms can renew their business models and why it has often turned out
to be difficult to do so. The fifth and the sixth articles in this dissertation address these issues.

While several scholars have pointed out that a competitive advantage can be obtained by
changing the business model (Teece, 2009; Chesbrough, 2007) and that this may be
particularly important when introducing disruptive innovations (Doz and Kosonen, 2009),
more work is needed concerning how firms can actually go about doing so. Furthermore,
given that established firms seem to be better at introducing products than changing their
business models, more knowledge is needed both regarding the challenges and managerial
solutions related to business model renewal.

In order to fill this gap, the article first reviews existing literature on business models. It gives
special attention to the interdependent nature of business models and Zott and Amit’s (2009)
definition of a business model as “a system of interdependent activities that transcends the
focal firm and spans its boundaries”. The paper moves into further detail regarding
interdependence by using literature on industrial networks, stating that networks are based
upon restricted freedom (Ford et al., 2002) and that they can be analyzed in terms of actors,
resources and activities (Håkansson, 1987).

The article draws upon an illustrative case study which is particularly interesting in not only
offering insights into challenges, but also showing how firms can go about renewing their
existing business models. It is argued that business models are difficult to reconfigure since
such a change often requires a shift in existing linkages between a firm and its surrounding
network. Developing a product innovation is in this sense easier since it is much more an
internal issue than a boundary spanning activity. Bearing this interdependence and restricted
freedom in mind, the article offers some guidelines regarding how firms can go about trying
to change a business model when having introduced a disruptive product innovation.

46

4.6 Paper VI: Disruptive innovation as a business model challenge
This paper draws upon several different case studies, which illustrate both the challenges and
how firms can proceed when trying to change their business models. It uses data from both
incumbents and entrant firms, since it is widely believed that they have different abilities to
succeed with disruptive innovation. As was mentioned in the literature review in section 2,
several scholars have pointed out the importance of having a customer competence
(Danneels, 2004) and that disruptive innovation is a business model challenge (Christensen,
2006). But little is known regarding in what way this is the case and how firms can actually
implement this advice or what the specific challenges are.

The article aims to fill this gap in the literature by pointing out how firms work when trying
to change their business models and what problems they encounter. One challenge concerns
how the new value creation associated with the innovation is sometimes incompatible with
the existing competencies and activities of key actors. Disruptive innovations may also create
a new distribution of value, which in turn can imply that some actors lose power or status.
Drawing upon Zott and Amit’s (2009) interpretation of business models as interdependent
and boundary-spanning, it is argued that changing a business model is difficult since such a
change often involves actors beyond the boundaries of the firm. Attempts at business model
renewal therefore take place under conditions of interdependence. Clearly, this issue imposes
constraints upon efforts to change the business model as firms cannot maintain a complete
control over their network. Nevertheless, the empirical illustrations show that networks can
be changed and some managerial implications are provided.

47

5 Analysis
This section reviews key findings from the appended articles in order to answer the
previously explicated research questions. It serves also as input for the more theoretical
discussion in section 6 and the managerial implications provided in section 8.

5.1 Disruptive innovations in established value networks
As already described in the theoretical review in chapter 2, there has been little focus on
disruptive innovations which emerge in established value networks. Since these innovations
can emerge in both low-end and high-end segments and in new markets it would be strange if
they were not sometimes in demand from the mainstream market, despite their lower
traditional performance. Moreover, given that different firms operate in different segments, a
disruptive innovation is likely to emerge in the value networks of some firms, unless it
evolves in a completely new market. The empirical data in the appended papers show that
this is indeed the case and point out that ancillary performance in some cases may
compensate for the lower traditional performance associated with a disruptive innovation.

Both digital imaging and internet-based, digital video surveillance emerged by creating value
in a new way for the customer’s organization through the removal of labor, simplification of
the work process and the introduction of new performance dimensions. For instance, IP-
based digital video cameras allow easier installation and lower maintenance costs. These
attributes compensate for the initially higher price and lower image quality in some
traditional market segments. The net utility threshold for a disruptive technology (Adner,
2002) seems sometimes to be lower in high-end or mainstream segments since these
customers can use the technology in order to lower overall expenses. While the price was
higher and the technology in many ways inferior, its ancillary performance attributes
conveyed value at a more systemic level and justified investment. The case of IP video
suggests also that this threshold may be different depending upon the actor being targeted
within the customer’s organization. The studied firm chose to approach IT rather than
security departments since surveillance has increasingly become based on IT. When
installing cameras in an existing network, the overall cost of owning a surveillance system
can be reduced and this value creation compensates for the higher price and the lower
traditional performance in terms of image quality. Moreover, while the popularity of the
technology has grown among mainstream customers, the other parts of the value network
have changed to some extent. One such notable difference is that IT companies have become
increasingly prevalent in the installation phase while traditional installers of analog CCTV
have been slower to adapt the new technology.

48

Hasselblad, the camera industry and the shift to digital imaging is another interesting
example of how a technology with initially lower traditional performance emerged in an
established value network. Digital imaging exhibited disruptive characteristics since it
offered a lower mainstream performance in terms of image quality and also brought new
attributes to the market. These include for instance the ability to take a huge number of
pictures at a low cost, to view photos instantly, and to replicate, send and manipulate them
more easily. Despite its lower image quality, digital imaging started to prosper in the high-
end segment which Hasselblad had dominated for decades. The technology emerged in the
shape of digital backs, which are components that could be attached to Hasselblad’s medium
format cameras instead of a film magazine. A digital back essentially contains an image
sensor and image processing software. In the 1990s several firms emerged based on the
business idea to manufacture digital backs and sell them to the large installed base of
Hasselblad photographers. This add-on was particularly appealing to studio photographers
who could save days of downtime waiting and finish assignments in much less time.
Additionally, the fact that the images were digital, enabled the photographers to manipulate
and edit them, and to produce a relatively better end result, despite the lower image quality.
This utility was so great that throughout most of the 1990s, photographers were willing to
pay up to 15 000 USD for a back that offered a lower image quality than film. The first
digital backs offered 4 megapixels whereas Hasselblad’s analog medium format photos
corresponded to approximately 36 megapixels.

The case of industrially coated wooden floors based upon UV technology, which is presented
in the sixth paper, is another illustration of how a disruptive innovation can prosper in an
established value network. For a long time, this technology offered poor traditional
performance in terms of durability. It was therefore often used to complement traditional
coatings. Nevertheless, UV-based coating was adopted rapidly by the manufacturers of
wooden floors, mainly because it enabled radically more efficient production. The production
line could be shortened, and the process was more stable and consumed less energy. In this
case, the end-user of the floors had to bear the lower durability while the floor manufacturers
benefited from the ancillary benefits of the disruptive technology. The technology was
therefore quickly adopted by the industry and, over time, the durability has improved.

While the literature on disruptive innovation assumes that the properties of these innovations
imply that they emerge in new value networks, the above findings show that this is not
necessarily the case. They may also prosper by distorting or modifying existing value
networks, despite their lower traditional performance. Such innovations seem to do so by
creating value in new ways, for instance by removing labor or changing established
activities. The new performance attributes may compensate for lower traditional performance
to the extent that the technology is demanded by mainstream customers.

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5.2 Disruptive innovation as a business model challenge
It was pointed out earlier that the literature on disruptive innovation states that the main
challenge is related to the business models of established firms (Christensen, 2006).
However, there are no good explanations for how and why this is the case, apart from those
related to being “held captive” by existing customers and inability to look for new segments.
Certainly, the customer and the resources it provides to the firm constitute one key element
of a business model, but not the only one. Many definitions of business models focus
explicitly on the creation and appropriation of value (e.g. Chesbrough and Rosenbloom,
2002; Hwang and Christensen, 2007) and others regard the business model as a structural
template which answers a set of questions (e.g. Chesbrough, 2007; Yip, 2004; Teece, 2009;
Osterwalder and Pigneur, 2005). These questions are often related to the value proposition,
the revenue model, the customer, how to reach the customer, etc. Hence, although the
customer is not the only component in a business model, the other parameters have received
little attention. The empirical evidence provided in this thesis illustrate in what ways a
disruptive innovation is a business model challenge.

The case of Facit is described in the third appended paper and provides a description of how
a disruptive technology becomes more problematic once it starts to distort the established
business model. Electronic calculators followed a top-down diffusion pattern in parallel with
the sharp decline in prices during 1960-75. These products initially were very large and
expensive and primarily used by the military or by larger research facilities. As their price
went down, the technology entered Facit’s business machines segment. Electronics in many
ways was competence-destroying for Facit and therefore, the firm began to collaborate with
the Japanese firm Sharp. Facit bought calculators from Sharp, gave them a different design
and sold them on under its own brand. The data collected suggests that this collaboration
worked quite well in the period 1965-1970. Facit was able to get a foothold in the growing
yet still small market for electronic calculators while Sharp got an opportunity to sell larger
volumes benefiting from Facit’s global sales organization. At this point, digital technology
did not distort Facit’s established network – the value proposition was similar to that offered
by mechanical calculators and it fitted into the company’s vertically integrated business-to-
business sales model.

In the early 1970s, however, the rapid miniaturization of electronics meant that a new,
significantly different value proposition entered the market. Portable, pocket calculators were
introduced and Japanese producers were increasing their volumes and targeting consumer
markets25. Since Facit’s sales model was based on small volumes and directed to professional

25
The pocket calculator can be regarded as a new market disruptive innovation. It offered lower computing
performance than the electronic desktop calculator but was smaller, simpler, cheaper and brought a new
performance dimension to the market, namely portability. However, it should be underlined that the technology
had prospered in significantly more advanced segments prior to reaching the consumer market, thus following
more of a top-down diffusion pattern. Moreover, pocket calculators were in demand from both professionals
and consumers. The case of digital imaging followed a similar, but not identical pattern.

50

users, its established, strong relations with customers had become less important. Calculators
for both professionals and other users increasingly were being sold via other sales channels,
e.g. bookstores and discount stores. The declining prices and reduced size of these products
implied that manufacturers had to sell much larger volumes in order to remain profitable and
Facit’s sales model was not designed for this purpose. This issue appears to have exacerbated
the difficulties Facit encountered and can be regarded as an important explanation of why the
collaboration with Sharp became increasingly problematic over time as new sales channels
became more important.

This case provides a compelling description of how the network impact determines the
performance of a firm under conditions of disruptive change. In 1965-1970, electronic
calculators fitted into Facit’s existing business model. At this time, the main challenge for the
company was of a competence-destroying nature. But as the technology improved, the sales
model shifted from one based upon strong ties with a few customers to one based on mass
distribution and lower margins. This made Facit’s sales model and its strong relations to
customers obsolete.

The Hasselblad case is another good illustration of how a disruptive innovation is a business
model challenge. The firm struggled to enter digital imaging, despite the fact that their
customers were demanding the technology from quite an early point. One of the reasons for
this was that digital imaging was competence-destroying since the company’s capabilities
were related largely to precise mechanics and not electronics. However, the internal conflicts
and struggles can also be explained by the fact that digital imaging was in many ways
incompatible with the value proposition that Hasselblad had offered in the past. In the 1980s,
the company had built a successful and profitable business around digital technology and
image transmission. But this business was based on products other than cameras, for instance
scanners for tele-photo transmission and various software applications. In these applications,
digital technology could be used to improve the quality of the transmitted images and
therefore was compatible with Hasselblad’s core values. Moreover, this business was never
really a threat to existing activities but was rather a complement. This initiative also
struggled to gain legitimism in the beginning, but it is clear from the case description that
developing a digital camera was a much more controversial issue. Ever since Hasselblad’s
cameras had been used on the moon in 1969, the brand had been associated with very high
image quality. Digital photography created value in a different way and many elements of the
firm such as the market organization and the mechanical engineers, believed that this offering
was incompatible with the brand, which was perhaps the firm’s greatest asset. Consequently,
Hasselblad became increasingly polarized from 1993 and on. Eventually, a new, financially
oriented owner stopped the digital development project in 1996 and changed the focus to a
new camera system with modern features such as autofocus that would be compatible with
the digital backs manufactured by other firms. This camera kept to the traditional values of
Hasselblad such as superior image quality and became the firm’s main priority in 1998-2003.

51

However, the project was severely delayed and the company struggled during these years
when the transition to digital imaging came into motion. When the new system was finally
launched it emerged that many customers had shifted to Canon’s and Nikon’s high-end
cameras and hence, the new camera could only offset the sharp decline to an extent.
Eventually, Hasselblad had to acquire a manufacturer of digital backs and could deliver a
complete digital system in 2005, after being on the brink of bankruptcy for several years.

It can be seen from the two case descriptions above how the challenges that Hasselblad
encountered were different from those confronting Facit during the time when the technology
prospered in the segments in which these firms were operating. While the customers of both
firms were demanding the technology, it brought a significantly different value proposition to
Hasselblad’s customers, at an early point. In other words, in the case of Facit, the technology
was initially compatible with the business model, but this was not the case for Hasselblad. In
the case of Hasselblad, the value proposition related to digital imaging did not fit the
historical relations with customers. Digital imaging therefore became a highly controversial
issue inside the firm – it provoked much conflict which seems to have paralyzed the
company. Eventually efforts in this direction were stopped in favor of an initiative which was
more in line with the value proposition Hasselblad had offered in the past.

These empirical cases suggest that the magnitude of the challenges faced by an incumbent
not only depends on whether the disruptive innovation prospers in a new value network or
not. If it prospers by distorting an established value network, it can become problematic if it
imposes changes to the existing business model. These challenges seem to be different from
those described in the original disruptive innovation theory which states that that the main
problem is related to the control that existing customers impose on the resource allocation
process within a firm. Incumbents essentially struggled to find a financial logic for entering a
technology that their customers were not demanding, and which offered smaller profit
margins.

The Hasselblad case shows that there was in fact demand for digital imaging from
Hasselblad’s customers, on which basis the company could have obtained profitable
revenues. Given that several firms were founded and grew based on manufacturing digital
backs it seems that a sufficiently large market existed and that the opportunity could have
been financially attractive. Digital imaging emerged in the same segment as analog
photography and thus the company became reliant upon the established market organization
and relations to these customers. Hence, the main problem was rather that the new value
proposition that was associated with digital imaging might distort the relations Hasselblad
had with its customers in the past. It seems that customers control firms not only by
supplying them with resources. The relations and value propositions that customers associate
with a certain firm may hamper its efforts to introduce a disruptive technology.

52

The case of IP video is another example. IP-based video surveillance created value in a new
way. Initially, it offered worse traditional performance that was accompanied by some new
performance attributes. As a consequence of this new value creation, the technology distorted
the established network constellation in several ways. Many integrators and users of video
surveillance had little knowledge about how IP cameras were installed and used. Hence, the
technology had an impact on the activities of several actors. Additionally, IP video affected
the role of security managers in the end customers’ organizations. IP surveillance meant that
security was increasingly becoming an IT issue, which in turn reduces the power of the
security manager vis-à-vis the IT manager. This caused security managers to be skeptical
about the new technology.

The dominant analog players in the CCTV industry were used to targeting security
departments with a different value proposition and could therefore be “held captive” by one
actor in the customer’s organization since security departments did not appreciate or
understand IP video in the same way as IT departments. Conversely, entrant firms faced a
challenge since the adoption of their technology depended upon changes often beyond their
direct control. When value is created on a more systemic level and the disruptive technology
prospers in another part of the customer’s organization, some actors may gain influence at
the expense of others. The convergence of IT and security is an ongoing process and entrant
firms can influence it to some extent, but are nevertheless depending upon it and those
changes may be complicated due to political barriers inside the adopting organization.

This case shows that there are many different distortions that can occur in established
networks. Actors may need to change their activities, some of their resources may lose value,
they may lose power and the new distribution of value may create resistance. Hence,
disruptive innovation can be considered to be a business model challenge since it can distort
the firm’s existing network constellation and may break the established linkage between
value creation and appropriation. A network is held together by mutual interest but at the
same time is characterized by converging and diverging incentives (Law, 1992). The
introduction of a disruptive innovation which in its turn has an impact on the surrounding
network is therefore likely to be met with resistance from some actors.

It seems to be difficult for a firm to impose executive power against actors that are beyond its
boundaries. In this sense, business model initiatives seem to be different from the
development of new products, which is more an internal, firm-specific challenge. For sure,
product innovation efforts also depend upon linkages with the external environment, for
instance when it comes to purchasing critical components, but business models are concerned
explicitly with value and the linkages between the firm and its surrounding environment.

Put differently, several of the supply-side related challenges described in the literature on
discontinuous innovation can also be found beyond the firm’s boundaries. For instance, a
distortion of an established network constellation can occur when a disruptive innovation is

53

competence-destroying (Tushman and Anderson, 1986) for certain actors. This was the case
with IP video surveillance, which rendered obsolete many of the skills of traditional security
integrators. A similar dilemma can be identified in the fifth paper which concerned an
incontinence diaper that introduced many disruptive characteristics. In this case, certain key
actors needed to renew their skills since the new product had to be used in a different way. A
disruptive innovation can also be architectural and change the linkages between different
components (Henderson and Clark, 1990) inside the customer’s organization. Here, the case
of IP video is illustrative. As security becomes increasingly an IT issue, the adoption of IP
video implies that cameras are installed into an IT infrastructure, which is different to an
analog environment. These changes create political barriers to adoption. As pointed out by
Cyert and March (1963), firms compete with other organizations but there is also internal
competition within a firm. An architectural change may distort the established constellation
of power and some actors may be hesitant about an innovation. In the case of IP video,
conflicts between IT managers and security managers can be thought of as an example of this
argument.

It would be strange if challenges such as the ones described above could only be found on the
supply-side of the market. Companies in the vicinity of a focal firm also have an established
set of structures, resources and capabilities, and disruptive innovations which imply creative
destruction along any of these dimensions will be inherently problematic, even though the
customer would benefit from adopting them. Afuah and Bahram (1995) offered similar
arguments in stating that a discontinuous innovation must be analyzed in terms of its impact
on the supply chain where the firm is present. The findings in this dissertation indicate that
such ideas have been largely overlooked by the literature on disruptive innovation which
would benefit from this approach. Moreover, the findings presented here reveal another
aspect of these challenges which Afuah and Bahram (1995) paid little attention to, namely
the interconnectedness that characterizes these networks and the fact that a firm often cannot
exercise full control over its surrounding network, which it still depends on.

Disruptive innovations seem to be problematic since a shift in an established business model
is dependent upon actors that are beyond the boundaries of the firm. At first sight, this
challenge in many ways is similar to the one originally described by Christensen (1997)
which emphasized how firms are held captive by established customers. However,
Christensen focused explicitly on the resource allocation process and argued that firms
struggle because the disruptive innovation is not demanded by its current customer base. The
findings in this dissertation suggest that while the power of customers plays an important
role, disruptive innovations may be problematic even though they may be in demand from
existing customers and other elements of the network.

54

The disruptive innovation is sometimes not demanded by certain actors in the firm’s existing
business model. The reasons for this seem to be related not just to the performance of the
innovation but also to value creation and distribution, as well as the impact on different
actors, their incentives and their competencies. Hence, rather than being subject to resource
dependence as described by the existing theory on disruptive innovation, firms seem to
struggle with disruptive innovation due to interdependence, which can be defined as follows:

“Any event that depends on more than a single causal agent is an outcome based on
interdependent agent. (…) Interdependence exists whenever one actor does not entirely
control all of the conditions necessary for the achievement of an action or for obtaining the
outcome desired from the action” (Pfeffer and Salancik, 1978. p. 40).

The empirical findings reviewed in this section show that neither the customer nor the firm
controls all the means for accomplishing something. Rather, there seems to be an interplay
between different actors throughout the network which in turn imposes constraints upon the
focal firm. In this sense the challenges described above differ from those originally
formulated regarding disruptive innovation. The external environment imposes control over
firms in other ways than providing them with resources. Actors and their power, as well as
the established activities and flows of resources in a network make it difficult for firms to
experiment with their business models. Hence, a disruptive innovation can be regarded as a
business model challenge since it distorts established network constellations and the
interdependent nature of business models makes it difficult to change them.

Historically, much of the work on discontinuous innovation has focused on the supply side
and the firm’s existing resources and capabilities (e.g. Tushman and Anderson, 1986;
Henderson and Clark, 1990). Work on disruptive innovation emerged forcibly in the 1990s
arguing that the previous literature had overlooked the role of the market and how customers
control the resource allocation process. The results reviewed above suggest that the theory on
disruptive innovation in its turn missed out other elements in the environment and the
interconnectedness that characterizes the relations between a focal firm and its surrounding
network.

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6. Discussion
This section synthesizes the findings reviewed above and develops the theory on disruptive
innovation. It does so first by pointing to two problems with existing theory after which it
introduces some of the literature on value and networks which contributes to the theoretical
part of this dissertation.

6.1 Problems with the existing theory on disruptive innovation
Literature on disruptive innovation states that the properties of these technologies imply that
they prosper in new value networks, which in turn make them problematic to handle for
incumbent firms. The empirical findings reviewed above suggest instead that they can also
emerge by changing established value networks and that these innovations emerge in a less
binary way than has been suggested. Why has this issue not been highlighted in the existing
literature?

One reason could be that existing theory arguably would suggest that such modifications are
not so problematic for firms and that the subject therefore is worthy of little attention. But the
empirical data in this dissertation show that they might be quite difficult to deal with due to
interdependencies and distortions in established network constellations. Another reason could
be that many definitions of disruptive innovation state that the properties of these innovations
inevitably make them prosper in new value networks.26 But the brief review of the empirical
data above indicates that this may not always the case and that disruptive technologies may
be in demand from mainstream customers at an early point, despite their lower traditional
performance.

The reason why these issues have been overlooked could also be that the existing theory was
unable to handle them properly. The fact that the introduction of a disruptive innovation does
not seem to be as binary as was previously argued may therefore be a theoretical concern,
and if so, several managerial challenges and solutions might also have been overlooked.

Moving back to the theory on disruptive innovation, it can be seen that it does not apply the
same assumptions to all the issues it seeks to describe. Previous work on the subject

26
For instance, Govindarajan and Kopalle (2006a) define a disruptive innovation as an innovation that
“introduces a different set of features, performance, and price attributes relative to the existing product, an
unattractive combination for mainstream customers at the time of product introduction because of inferior
performance on the attributes these customers value and/or a high price—although a different customer segment
may value the new attributes. Subsequent developments over time, however, raise the new product’s attributes
to a level sufficient to satisfy mainstream customers, thus attracting more of the mainstream market” (p. 15).
Christensen (2006) acknowledged that this definition is better than his original 1997 definition and hence, it is
clear that previous theory has assumed that the specific properties of a disruptive innovation makes it prosper in
a new value network. The empirical findings in this dissertation show that this is not always the case.

56

essentially links theories on resource dependence to the firm’s resource allocation process. In
doing so, it shows that firms tend to allocate resources to those initiatives responding to
customer demands. The focal firm is assumed to be constituted of a set of actors that may
have diverging opinions and incentives. Christensen (1997) illustrates how the daily
competition for resources inside the firm inevitably tends to allocate resources to those actors
whose projects will result in offers that the firm’s customers have demanded. These forces
move the incumbent firms in the wrong direction and eventually they are displaced by
entrants who were not “held captive” by an established customer base. Hence, the existing
theory assumes heterogeneity in the incentives and competencies inside the focal firm.

On the other hand, this heterogeneity is quite surprisingly not assumed to exist in the firm’s
surrounding environment or inside the customer’s organization. Instead, a diffusion-oriented
perspective on the market is maintained in which different segments of the market are
analyzed. The customers and the surrounding network are essentially operationalized as one
actor that exercises power by supplying the firm with resources. The role of different actors,
and their competencies and incentives have been largely overlooked and attention has
focused on the resources that firms obtain from their customers. This can be illustrated by the
following quote from Christensen and Bower (1996):

“Our findings support many of the conclusions of the resource dependence theorists, who
contend that a firm's scope for strategic change is strongly bounded by the interests of
external entities (customers, in this study) who provide the resources the firm needs to
survive.” (p. 212)

Within this somewhat narrow interpretation of resource dependence theory, the theory cannot
address other elements of the business model than whether existing customers initially
demanded the innovation or not. Moreover, this conceptualization of resource dependence
actually stands in contrast to the original works on the subject, which took a more nuanced
view of the surrounding environment than the current theory on disruptive innovation:

“A variety of interest groups, individuals, and organizations have contact with a given focal
organization; each of these evaluates the organization and reacts to its output and actions.
Each has a particular set of criteria of preferences that it uses in this evaluation process, and
consequently, organizational effectiveness is a multifaceted concept, where the effectiveness
of the organization depends on which group, with which criteria and preferences is doing the
assessment.” (Pfeffer and Salancik, p. 32) 27

The empirical findings reviewed above suggest that the simplified interpretation of resource
dependency may be misleading and that a network contains many different actors with
different competencies and incentives as indicated by the quote above. Going back to

27
For further illustrations of how resource dependence scholars look at the environment, see e.g. Pfeffer and
Salancik (1978), p. 26, p. 36.

57

Christensen and Rosenbloom’s (1995) definition of value networks it can be concluded that
this “context within which the firm identifies and responds to customer’s needs, procures
inputs and reacts to competitors” (p. 234) is characterized in fact by more heterogeneity than
is assumed in the literature. There are many actors that perform different activities, control
different resources and have their own subjective opinions of whether or not a disruptive
innovation is valuable. The empirical evidence suggests that these factors play an important
role in addressing how and why disruptive innovations prosper and what challenges they are
likely to imply with regard to business models.

6.2 Proposed theoretical improvements
This section seeks to develop the theory on disruptive innovation by drawing upon literature
on value and on networks. It is argued here that technological performance needs to be
translated into value creation and distribution and that a different, more nuanced
conceptualization of networks is needed in order to capture and explain the empirical
findings in this dissertation.

6.2.1 From performance to value and utility
The cases described above suggest that disruptive innovations can evolve in established value
networks, despite lower traditional performance. Rather than emerging in a completely new
value network, the disruptive technology prospered by bringing a new value proposition to
the market, which in its turn modified or distorted existing value networks. A lower
traditional performance does not necessarily imply therefore that a disruptive innovation
emerges in a new value network and later takes over the mainstream market. The description
above suggests that digital imaging created an increased total utility for studio photographers
at an early point, despite lower photo quality. The observation that disruptive innovations can
emerge in an established value network despite lower traditional performance implies that
previous research puts too much emphasis on the technology and its different performance
dimensions.

Several scholars in technology management have underlined the importance of translating
the performance and functionality of a technology into value and utility (e.g. Granstrand,
1994; Saviotti and Metcalfe, 1984). The techno-economic analysis developed and used by
Oskarsson and Sjöberg (1991) and Lindmark (2006) can be regarded as one such example.
Wunker (2005) claims that customers do not want a particular product, they want a certain
result to be accomplished in relation to a specific problem. Interestingly, Christensen and
Raynor (2003) argued that one part of the solution to the innovator’s dilemma is to focus on
the job that customers want to get done. This statement is consistent with the findings
presented in this dissertation. However, its implications go against much of Christensen’s

58

earlier work which defines and analyzes disruptive innovations along certain performance
dimensions, rather than looking at how value actually is created.

The literature review in chapter 2 shows that economists usually think about value as
inherently subjective. A good can be perceived as valuable by one individual and less
valuable by another (von Mises, 1963). Menger (1950) suggests that there is a difference
between exchange value and use value. The exchange value is the price paid for acquiring a
good whereas the use value is the utility that the buyer receives from using the product. A
positive difference between use value and exchange value can be defined as a consumer
surplus. The empirical findings in this dissertation suggest that consumer surplus can be
created in mainstream markets despite the lower traditional performance of a disruptive
innovation.

Value can be thought of as a perceived tradeoff between benefits and sacrifices (Christopher
et al., 1991). Hence, different actors obtain different benefits and make different sacrifices.
The sacrifices can include the costs related to transaction, installation and maintenance
(Walters and Lancaster, 1999). The value of a good therefore is dependent on its context. In
several of the empirical cases reviewed above, the lower traditional performance was
compensated for by ancillary performance attributes which created increased utility for the
customer, for instance by simplifying their work, removing labor and changing activities in
the specific context in which they were introduced. This context does not necessarily have to
be a low-end segment or a new market as the previous literature would suggest, disruptive
innovations can also emerge in mainstream markets. When shifting attention from
performance dimensions towards value and utility, it becomes easier to understand how and
why a disruptive innovation prospers in established networks among mainstream customers.

6.2.2 A more comprehensive view of networks
As stated earlier, the literature on disruptive innovation largely maintains a diffusion-oriented
perspective. It essentially looks at the impact of the market in terms of different segments,
but the network itself has been rather understudied. Partly as a consequence of this, the
disruptive innovation framework has maintained a somewhat binary perspective on adoption.
If an innovation is demanded by the firm’s customers it would make sense to develop it since
the customers supply the firm with important resources and such an innovation would be
referred to as sustaining. On the other hand, if there is no existing customer demand, the
forces of resource dependency will prevent the firm from launching the product and the
innovation will be classed as disruptive. This theory suffers from a somewhat simplistic
interpretation of organizations and networks.

It would be misleading to regard customers as homogenous entities in a business-to-business
setting in which several actors with sometimes diverging utility functions are involved. In

59

these circumstances the adoption of an innovation is rarely a discrete action, there may be
many different perceptions of a product both along the supply chain and inside the
customer’s organization. Different actors are likely to be affected in different ways and these
effects need to be studied in order to understand the adoption of a disruptive innovation. Ford
et al. (2002) argue that a network can be analyzed on many different levels. First, it can be
the single actor, i.e. the company, organization, team or individual. Whether it is the
individual, firms or firm unit that is considered to be the actor depends on the context and
objective of a study (Håkansson and Snehota, 1995). The next level is the relationship
between certain actors and the third level is the whole network. The authors underline the
importance of investigating changes at all these levels in order to understand how networks
evolve. Network scholars often claim that markets are characterized by interrelatedness
between firms and their surrounding environment (e.g. Håkansson, 1989). This interaction
can be studied by looking at the actors, their resources and their activities or actions. This
fractal perspective of networks, along with the empirical observations, suggest that a more
heterogeneous view of networks is needed. The empirical findings above indicate that the
interconnectedness of networks and the fact that actors exist at many different levels need to
be taken into consideration.

If actors can be found at many different levels, both in the network and inside the customer’s
organization, it is important to look at how each would be affected by the introduction of a
disruptive innovation since value is both perceived and contextual. Actors may be affected in
different ways since they may possess different resources and perform different activities.
Hence, they will arguably have different opinions and these diverging preferences may in
turn impact on the adoption or not of a disruptive innovation. Moreover, value can be
realized for an actor inside the customer’s organization other than the acquirer. The buying
organization has an aggregated utility from obtaining the good, but this is more difficult to
measure, and it may be distributed over many different functions or individuals.
Consequently, the distribution of value throughout the network requires further study than
previous literature has suggested. Though the adopting organization may benefit from the
adoption of a disruptive innovation, this value can be distributed in different ways across the
affected actors, which can create barriers to its adoption.

The literature on disruptive innovation takes a somewhat simplistic view of customers,
classifying them as either low-end, high-end or non-consumers. The main focus is on the
market and its different segments, rather than actual customers and the various actors inside
and beyond the boundaries of the customer’s organization. There may be some discrepancy
between the different perceptions of use value and actual use value for these different actors.

Developing a more nuanced perspective on customers and networks makes it possible to
explain in a more detailed manner in what ways a disruptive innovation is a business model
challenge. A disruptive innovation will sometimes not be demanded by certain actors
because of its incompatibility with their established activities. The new distribution of value

60

may create clear incentives for some actors to block the innovation. In some cases the value
proposition associated with the disruptive innovation may not fit with the firm’s relations
with its network making its introduction problematic. Resources are only valuable in certain
contexts and an innovation that is incompatible with existing resources and activities will be
inherently difficult to commercialize. Hence, disruptive innovations can be considered to be a
business model challenge since they distort the firm’s network constellation and may break
the established linkages between value creation and appropriation.

Changing the business model is difficult since the actors embedded in an industrial network
depend upon relationships with others. As stated in the literature review, business models can
be defined as “a system of interdependent activities that transcends the focal firm and spans
its boundaries” (Zott and Amit, 2009, p.1). Other scholars provide similar
conceptualizations, stating that a business model can be thought of as a set of participants,
their relationships and the flows between them (Weill and Vitale, 2001). A network involves
both actors and their relations (Dubois, 1998). Firms that try to change their network
therefore are to an extent reliant upon actors beyond the boundaries of the firm (Håkansson
and Ford, 2002; Ford et al., 2003).

A more heterogeneous conceptualization of networks makes it possible to understand in what
ways a disruptive innovation is a business model challenge. Clearly, it will be difficult to
manage under these circumstances of interdependence but the fact that firms are subject to
interdependence rather than resource dependence as Christensen and Rosenbloom (1995)
describe arguably would suggest that firms can exercise some control over their networks.
Furthermore, the key challenges will be related more to how firms handle their relationships
in the network than how the internal resource allocation process is managed. Scholars in the
field of industrial network theory have argued before that this is the key challenge
(Håkansson and Snehota, 1989) and the findings in this dissertation suggest that this is also
largely the case with disruptive innovations. The disruptive innovation can be regarded as an
actor as it impacts its surrounding network both financially and in a more sociological sense.
Changing a network to suit one’s own objectives can be thought of as an uncertain process
involving overcoming resistance. Power struggles and conflicts are likely to prevail and firms
will be forced to engage in a continuous process of negotiation (Law, 1992).

Summing up, two important changes to existing theory on disruptive innovation have been
proposed in these sub-sections. Firstly, the focus should be shifted from different
performance parameters towards how value is actually created and distributed. Secondly,
customers and the surrounding value network can be conceptualized as a set of actors that
perform activities and control resources. Hence, customers cannot be regarded as
homogenous units with one specific utility function, but rather as a collection of actors with
different capabilities sometimes governed by different incentives.

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6.2.3 Towards a more symmetric theory on disruptive innovation
It has been shown that the existing theory does not explain how a disruptive innovation
prospers in an established value network since it assumes heterogeneity within the firm, but
not in its surrounding network in terms of the diverging incentives among actors. Put
differently, the existing theory lacks symmetry. A theory can be regarded as symmetric if it
applies the same basic assumptions regardless of the domain it describes (Foss and Hallberg,
2010)28. Foss and Hallberg argue that a good theory ideally should fulfill the symmetry
criterion, for several reasons. For instance, a theory that applies different assumptions to the
subjects concerned may be concealing some important aspects of the reality. A change
towards a more symmetric theory may therefore reveal new insights and improve the
predictive power of a theory.

The proposed theoretical development along the value and network dimensions arguably
would result in a more symmetric theory on disruptive innovation as it would assume similar
degrees of heterogeneity inside the firm and in the surrounding environment. This revised
theory also is capable of describing and explaining phenomena that the previous literature
has overlooked. The two research questions investigated in this thesis have not previously
been carefully explored and one reason for this may be that existing theory was asymmetric.
Current theory assumes that the lower traditional performance of a disruptive innovation
implies that it will not emerge in the mainstream market. If we shift focus towards value and
away from technological performance, it becomes possible to explain the empirical
observations that show that disruptive innovations can emerge in the mainstream market of
an incumbent firm. The literature states that disruptive innovation is a business model
challenge but does not explain in what ways, apart from whether existing customers have
demanded the innovation or not. A more nuanced view of networks makes it clearer how a
disruptive innovation affects an established business model and why it is difficult to handle
this issue. The more symmetric theory outlined above makes it possible to investigate issues
that the previous theory has not dealt with sufficiently.

6.2.4 A symmetric theory opens up for new managerial solutions
According to Foss and Hallberg (2010), development towards more symmetric theories can
enable new insights. It was concluded above that disruptive innovations are problematic to
handle since established business models are characterized by interdependence and that this
issue is different from the original focus on the resources that customers supply to the focal
firm. This conclusion is based on the development of a more symmetric theory on disruptive

28
The development of public choice theory can be thought of as an example of a shift towards a more
symmetric theory. For a long time, economists assumed that firms and individuals on the market were rational
and sought to maximize their own utilities, and that the political sphere was protected from such behavior. In
politics, human action was regarded as altruistic. Public choice scholars (e.g. Downs, 1957; Tullock, 1989)
highlighted this asymmetry and argued that political decision-making also was governed by self-interest.

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innovation, which assumes similar degrees of heterogeneity inside the focal firm and the
surrounding network. A more symmetric theory also reveals some new managerial solutions.

Existing literature has argued that disruptive innovations need to be developed in a separate
organization that shelters them from the forces of resource dependency that would starve
them of resources (Christensen, 1997). Recommendations regarding actual
commercialization have received less attention and need to be more specific. The importance
of thoroughly understanding the customer is often pointed to as crucial (e.g. Govindarajan
and Kopalle, 2004; Christensen and Raynor, 2003; Danneels, 2004), but few guidelines are
provided regarding how firms can actually achieve this.

The key challenge in disruptive innovation has been identified as related to the firm’s
surrounding environment, but few managerial solutions have been suggested regarding how
the environment can actually be managed. This is interesting given that resource dependency
scholars (Pfeffer and Salancik, 1978) state that there are two ways to manage the external
control of organizations. One is to adapt the organization to the environment and the other
option is to try to change the environment. However, this latter alternative has received
surprisingly little attention thus far which might be one reason why practitioners have
sometimes been disappointed by the managerial prescriptions that are available.

One of the reasons why this option has been largely ignored might be down to the rather
simplistic conceptualization of the environment. It has been assumed that the lower
traditional performance of a disruptive technology renders it undesirable by mainstream
customers and that therefore incumbents will not invest in it and then will encounter
problems once the technology matures. This simplification results in a somewhat pessimistic
description of the dilemma that incumbents face. Being trapped in their established value
network where the lower performing product is not desired the main solution is to break free
from this external control by establishing an independent organization.

This rather fatalistic view of disruptive innovation originates from the assumptions that the
traditional technological performance of an innovation determines whether or not it will be
adopted, and that customers control firms by supplying them with resources. Shifting to a
more symmetric theory in line with the above arguably would result in a different, more
optimistic perspective on how firms can succeed with disruptive innovations. While it is clear
that firms are subject to influences from their networks, which in turn restrict their freedom,
it is still possible to influence these networks to an extent (Håkansson and Ford, 2002).

If we assume that the surrounding network includes a wide range of actors with different
incentives, different resources and that undertake different activities, it becomes clear that
firms can exercise some, limited, control over their networks. For instance, the firm can
decide which actors to target and how to do this. Moreover, a focus on value instead of on
performance trajectories would suggest that firms can influence whether customers demand

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an innovation or not. As already stated, value can be thought of as a subjective, perceived,
and context dependent trade-off between benefits and sacrifices. Hence, firms arguably
should be able to influence the adoption of a disruptive technology, for instance by changing
perceptions through its marketing or by influencing the context in which it is introduced.

When assuming interdependence instead of a somewhat narrow interpretation of resource
dependence, a range of managerial solutions can be developed. Clearly, trying to change the
network in one’s own favor is a non-trivial issue since firms can impose only limited control
over their surrounding networks. Acting with restricted freedom is difficult, but nevertheless,
it is possible. Some guidelines for how this can be done are provided in section 8 on
managerial implications.

6.3 Reflections on proposed changes towards symmetry
One way to frame the work described in this dissertation vis-à-vis previous work on
disruptive innovation, would be to regard theories in social science as a balance between
generality, simplicity, and accuracy (Weick, 1979). Weick argues that a theory cannot be
general, simple and accurate at the same time and that it is possible to pursue only two of
these qualities. Scholars are consequently forced to make tradeoffs between these three
factors. Previous work on disruptive innovation has generated a theoretical framework which
performs very well in terms of simplicity. It highlights a very important issue, namely the
role of a firm’s surrounding network for trying to understand the impact of discontinuities.
But this simplicity has been achieved at the expense of generality and accuracy.

The present contribution should be seen not as an attempt to dismiss earlier work on the
subject, but as an attempt to revise and extend it by increasing its symmetry. The work in this
dissertation suggests a different tradeoff among simplicity, accuracy and generality.
Consequently, its conclusions are less simple and more difficult to develop into an analytical
framework.

On the other hand, the theoretical developments above make it possible to describe and
understand several previously overlooked issues. Therefore, the findings in this dissertation
have implications for the limitations of applications of the existing theory on disruptive
innovation. Previous work focuses explicitly on how the resources provided by customers
makes it problematic to develop disruptive innovations since this flow of money imposes
great control over the firm. In linking resource dependency to the process of resource
allocation, the previous theory is limited. It cannot address how disruptive innovations
emerge by modifying or distorting existing value networks or in what ways they present a
business model challenge. Based on the modifications suggested, these issues can be
addressed and it becomes possible to develop new managerial solutions.

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Whether the theory on disruptive innovation should retain its shape or adapt to the directions
outlined in this dissertation will largely be a matter of preference. If the researcher or
practitioner is looking for a theory that is simple and deals with completely new value
networks and the power of customers, the existing theory will be preferred. However, many
disruptive innovations arguably evolve by modifying existing value networks which would
limit application of existing theory to a few empirical settings. In particular, current theory
might be more useful for studying consumer products and other innovations that have little
impact on their surrounding networks. However, the fact that current research increasingly
tries to deal with the relations between disruptive innovations and business models calls for a
more symmetric theory since this would make it possible to look beyond how existing
customers control the resource allocation process of firms.

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7. Conclusions
The purpose of the research described in this thesis was to develop the theory of disruptive
innovation with a focus on business models and value networks. The by now extant literature
on disruptive innovation has created an increased understanding of the challenges related to
discontinuities. It brought a different perspective upon the issue by shifting attention from
supply-side factors towards the environment and the role of customers. The findings in this
thesis provide further illustrations of the importance of addressing firms’ surrounding
networks. This dissertation has also pointed out and addressed a couple of issues that need to
be better understood. Two research questions have been derived and answered, both in this
covering paper and in the appended articles. The next subsections outline the answers to the
research questions and propose some directions for future research.

7.1 Disruptive innovations in established value networks
The literature review in section 2 of this covering paper suggests that disruptive innovations
in established value networks have received little attention. The first research question was
therefore formulated as follows:

1. Can a disruptive innovation emerge in an established value network and if so, how
can this be explained?
The empirical evidence presented in this dissertation suggests that disruptive innovations can
prosper in existing value networks, despite their lower traditional performance. They seem to
do so by bringing a new value proposition to the market. The ancillary performance attributes
that accompany the lower mainstream performance may create increased value for the
customer, for instance by simplifying work, removing labor and changing the activities inside
the customer’s organization. Hence, disruptive innovations may emerge by imposing changes
in established value networks rather than in completely new ones.

In order to explain this, a revised perspective on disruptive innovation has been proposed. It
has been argued that it may be better to look at how disruptive innovations create value and
utility, rather than to focus on the various performance dimensions. The empirical findings
indicate that a more nuanced conceptualization of customers and networks is required. The
focal firm has been seen as a set of actors which compete for resources – but the customers
and the surrounding network have been essentially operationalized as one distinct actor that
exercises power by supplying resources to the firm. There may be several actors in the
customer’s organization and beyond it that have direct impacts on the adoption of these
innovations.

In other words, it is argued that a more symmetric theory is needed to explain these issues
and that such a theory would assume similar degrees of heterogeneity inside the focal firm as

66

in the surrounding environment. An expanded view of disruptive innovation has been
presented. It is suggested that a disruptive innovation can be thought of as a shift along two
dimensions: actors and value.

7.2 Challenges related to disruptive innovation and business models
The literature has stated that disruptive innovation is a business model problem (Christensen,
2006), but is essentially focused on one aspect of the business model, namely whether or not
the firm’s existing customers demand it. This led to the second research question:

2. How and why is a disruptive innovation a business model challenge?
In part due to an explicit focus on customers and the resource allocation process inside firms,
the existing theory does not really address how disruptive innovation is a business model
challenge. The more symmetric theory proposed in this dissertation makes it clearer in what
ways this is the case.

It has been argued that not only customers, but also important actors in the firm’s established
business model constellation, hamper the development of disruptive innovations. These
actors are found both inside the customer’s organization and in the surrounding environment.
The established network constellation of actors, resources, and activities makes it difficult to
introduce disruptive innovations since a different creation and distribution of value may be
incompatible with existing competencies and incentives. Moreover, business models in many
ways are interdependent as they concern the relationship between the firm and its network.
The limited degree of freedom imposed by networks implies that firms can get stuck in their
existing business models since they can only exercise a limited control over their
environments. Firms seem to encounter problems when developing disruptive innovations,
even when there is customer demand. A disruptive innovation exerts force and creates
conflict in a network and therefore, incumbent firms, who are operating in an established
network, struggle to introduce them. The challenges identified are in many ways different
from those described in the literature. Rather than being controlled by the resources that
customers supply, firms seem to be controlled by the established relations and
interdependencies in their existing business model.

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7.3 Directions for future research
This dissertation has sought to expand and improve the existing theory on disruptive
innovation. From this work, a couple of directions for future research can be pointed out. One
of the limitations of the empirical evidence presented here is that it looks primarily at
relationships between the innovating firm and its customers. While this is done in a more
nuanced way than in the previous literature, a network or supply chain is still very broad and
it would be interesting to see more studies of entire networks in industries undergoing
disruptive change. Arguably, this would provide a better understanding of the challenges and
their magnitude. As supply chains extend across several firms and functions, the nature of the
aforementioned problems can be further addressed by performing such studies.

The work described in this thesis makes a systemic and interdependent interpretation of
business models. The fifth appended article combines the literature on industrial networks
with the literature on business models and suggested that the challenges related to business
model renewal are related largely to interconnectedness and the conservative nature of
networks. This same article argues also that many of the barriers to and enablers of business
model innovation are quite general and are similar to those previously described in the field
of new product development29. Given that established firms seem to be good at generating
new products but struggle to develop new business models, there are opportunities to add to
this literature. A deeper look into business models from an industrial network perspective
might reveal more about how business models can be renewed.

Empirical evidence on these issues could be obtained by studying the ongoing transition to
digital, IP-based video surveillance. It has been investigated in some detail within the scope
of this dissertation and although only some 30 percent30 of the market has adopted this
technology until now, it is becoming increasingly clear that incumbent firms have lost market
shares in the transition to IP video. Given that this technological shift seems to imply
challenges that are different from those described in the previous literature, it should provide
a fertile ground for future research. The studies in this dissertation would seem to indicate
that entrant firms will continue to dominate the transition to IP surveillance. They have
entered a positive feedback loop where growing revenues have been invested in new, more
competitive products. Conversely, analog incumbents encountered problems during the
2008-09 recession and have been forced to lay off employees. But more importantly, the
sales model and the ways to reach customers have changed with the shift to IP and incumbent
firms are struggling to change their business models. As the third appended paper shows, this
shift has several implications for the actors, resources, power structures, and activities related
to established firms. It will be very interesting to see how this industry transforms in the
coming years.

29
See e.g. Chesbrough (2009) and Teece (2009).
30
This figure was obtained in September 2010 from a firm that is operating in the IP video surveillance
industry.

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The more symmetric perspective that is proposed in this dissertation opens up new
opportunities to develop recommendations that go beyond handling the resource allocation
process. Although some implications for management are suggested in this dissertation, more
work can be done in this area. Further research is needed on how firms actually go about
when trying to change their business models and introducing disruptive innovations.

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8. Managerial implications
A more symmetric theory has some implications for why entrants under some circumstances
displace incumbent firms. It is argued in this thesis that the management of disruptive
innovation is largely about understanding value creation and distribution in a network
characterized by interdependencies. The decline of established firms and the dominance of
entrants should be related therefore to different abilities to undertake such changes. The
empirical data presented in this dissertation suggests that established firms struggle to
develop disruptive innovations even though their customers may demand them. Hasselblad’s
problems in the shift to digital imaging can be thought of as a good illustration. During the
1990s, several entrant firms started to manufacture digital backs which could be attached to
Hasselblad cameras. Developing a Hasselblad product that offered lower image quality
turned out to be very problematic. This is partly in line with Tripsas’s (1997) argument that
technological discontinuities need to be analyzed in terms of their compatibility with a firm’s
complementary assets. The Hasselblad brand can be thought of as such an asset, which in
some ways hampered its entry into digital imaging. However, this event is not only related to
complementary assets, also it illustrates that established firms struggle to change their
relations to existing customers.

Lack of a network may be advantageous for entrants, since it means they will not be subject
to the same core rigidities as established firms (Leonard-Barton, 1992). Incumbents often
develop stronger relations to their networks over time, which provides them with a
competitive advantage in the old technological paradigm, but seems to prevent them from
experimenting with new value propositions. Previous research in strategic management has
shown that start-ups are more willing to change their business models over time and that this
flexibility is a key determinant of success (Boccardelli and Magnusson, 2006). Entrant firms
by definition are more loosely coupled, therefore their business model is more adaptable
since there are fewer constraints and interdependencies (Pfeffer and Salancik, 1978).

Entrants should be more able to adopt a probe-and-learn approach and to eventually succeed
in finding the right business model. The ongoing shift from analog to IP-based video
surveillance is a good illustration of this argument. It seems that entrant firms in this industry
have done better in terms of targeting new actors inside the customer’s organization and
approaching them with a different value proposition. The opportunity cost seems to be higher
for established firms since it appears to be riskier to experiment within the scope of an
established network. How then can firms proceed when trying to renew their business models
in order to succeed with a disruptive innovation?

One advantage of a more symmetric theory on disruptive innovation is that it enables new
managerial solutions. As noted in the theoretical review, the existing theory on disruptive
innovation states that the main problem are on the demand-side, but that the managerial
solutions have up until now largely focused on the supply-side. The main reason for this

70

appears to be that the literature focused explicitly on how customers control the resource
allocation process inside firms by supplying them with resources. Within this perspective, the
focal firm can manage disruptive innovation by re-designing its way of allocating resources,
but the network cannot be addressed in more detail. Consequently, previous work looks at the
market’s impact on firms, but pays only limited attention to how firms can actually manage
their networks. When instead assuming heterogeneity inside the customer’s organization and
in the surrounding network, it becomes easier to find new managerial solutions.

As already noted, managing in a network is very different from handling issues that are
internal to the firm since no individual actor can be in complete control of a network. Firms
depend upon other actors and can impose only limited control over them. Thus, while a
firm’s relations are the basis of its current work and development, these relations may also
inhibit further development activities. Actors embedded in an industrial network have limited
freedom of action since they depend upon relationships with others. A network perspective
would suggest that it is difficult to manage under conditions of limited freedom and that the
risks are higher (Adner, 2006). Clearly, management is a different issue under these
circumstances since firms cannot exercise hierarchical power over their networks.
Nevertheless, it is possible to influence the network to ones’ own benefit (Knight and
Harland, 2005). For instance, previous research shows how firms that develop open source
software have successfully motivated user communities to take part in the development of
software by using subtler control mechanisms than executive power (Dahlander and
Magnusson, 2008).

Given that business models are interdependent and systemic, finding the right business model
for a disruptive innovation becomes a matter of altering, modifying, or aligning the existing
network to favor the innovation. This can be done by targeting new actors, helping actors to
change their activities, altering the revenue model, or changing the value proposition.
Business models transcend the boundaries of a firm (Zott and Amit, 2009) and therefore,
finding the right business model for a disruptive innovation is ultimately a process of
negotiation and alignment of the surrounding network. Below, some guidelines for how this
can be done are proposed. Some brief empirical illustrations from the appended papers are
provided, along with some references to tools and frameworks that could be useful.
Eventually, some reflections on these guidelines are given.

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8.1 Map and analyze networks and value
By mapping and analyzing the key actors in a network, potential enablers and inhibiting
actors can be identified. The empirical findings in this dissertation suggest that the attitude of
an actor towards an innovation can be regarded as a function of its incentives and its
competencies. Starting with competencies, previous research points out that an innovation
can be discontinuous for different actors and in different ways (Afuah and Bahram, 1995),
for instance, it can be competence-destroying. Some actors may be willing to support an
innovation, but lack the competencies to do so. As all actors are bound to act within their
area of competence, this criterion can be regarded as a prerequisite for adopting an
innovation.

Secondly, the incentives that govern each actor need to be understood. This includes how
economic value is created and distributed. There are several existing techniques for doing so,
for instance customer utility mapping (Kim and Mauborgne, 2000) and techno-economic
analysis (Lindmark, 2006). A techno-economic analysis essentially concerns the mapping of
how technical attributes interplay and create economic value. Different methods for assessing
the job to be done instead of looking at different performance dimensions may also be
helpful (Wunker, 2005). As an innovation may create increased economic value by
destroying value elsewhere, the distribution of value needs to be analyzed. Clearly, the
economic dimension of value is important, but the impact upon established power structures
and the surrounding context also needs to be analyzed. Some actors may have good reasons
to block an innovation if it reduces their power or creates a distribution of value that is
undesirable for them.

The motivation of an actor thus may depend upon whether it will benefit or not from it, and
whether or not it is capable of using the innovation. The empirical data in the dissertation
provide some illustrations of how firms map and understand their surrounding networks
along these two dimensions. For instance, in the case of IP video the firm managed to
identify several actors in the downstream network and inside the customer’s organization that
had diverging incentives and competencies. Integrators of traditional CCTV did not
command IP video and security managers were largely hostile towards the new technology.
One reason for this would seem to be that when security becomes more an IT issue, security
managers lose some of their status and power vis-à-vis other actors inside the customer’s
organization. Hence, some actors had an incentive to be skeptical while others were
disinterested since the innovation was incompatible with established competencies.

It should be pointed out that these actors can be found both inside the different firms in the
network and beyond them. Hence, in mapping a network, it needs to be analyzed in a
systemic way since there are many different actors that are intertwined in the exchange of
goods and services. This approach differs from those postulated previously which essentially
regard the customer as a single actor, with one specific utility function.

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As emerged from the literature review in the chapter 2 of this dissertation, it is not clear how
and why a disruptive innovation prospers in an established value network. Going back to the
case of Hasselblad and digital imaging, it can be seen that the guidelines offer some guidance
on this. When translating the different performance attributes associated with the technology
into how it actually creates value, it becomes clear why this technology prospered in
Hasselblad’s high-end segment in the 1990s, despite its lower performance and higher price.
Digital imaging removed the studio photographer’s activity of film finishing and waiting.
Additionally, an infinite number of images could be captured, sent, replicated, and
manipulated at a very low cost. In this case, the technology had little impact on the
established network constellation. Nevertheless, it created considerable difficulties for an
incumbent firm such as Hasselblad, which had a business model that was largely related to its
strong brand and superior image quality. The established relationship between the company
and its customers was deemed to be incompatible with this new way of creating value.
Consequently, it became problematic for the firm to develop the technology since the market
organization and many mechanical engineers argued that it was not worthy of Hasselblad’s
brand. A mapping of the network and a focus on value creation rather than performance
would have highlighted the main challenges and explained how and why firms encounter
difficulties when a disruptive technology is introduced in an established value network. This
is an improvement to existing theory, which does not really deal with the issue since it has
been assumed that the properties of a disruptive innovation imply that they emerge in
completely new value networks.

The case in the fifth appended paper provides another compelling illustration of the
importance of mapping and understanding the surrounding network. The studied
incontinence diaper created a new distribution of value which was incompatible with the
existing network constellation inside the customer’s organization. Some key actors such as
the caregivers did not have the competencies required to use the product. Consequently, sales
did not take off despite the fact that the product created more value than its predecessors.
When a disruptive innovation is introduced, it needs to be understood in terms of whether it
is compatible with the incentives and the competencies of each actor in the network.

8.2 Adapt and align the network and the business model
Once the surrounding value network is properly understood, firms need to adapt this
constellation, i.e. figure out which actors should be targeted and which should be avoided. As
already pointed out, some actors have a direct interest in adopting the innovation while others
may have an equally large interest in blocking it.

Actors do not differ only in terms of their incentives and competencies, they also differ in
terms of the importance for the adoption of an innovation. Some may be critical for the
adoption; others may have little impact on the success or failure of it. Reconfiguring the

73

established network constellation therefore becomes an issue of finding allies and negotiating
with or avoiding enemies.

Revisiting the incontinence diaper case, it can be seen that the firm started to target new
actors. Given that the purchasers were not able to take account of the new, more systemic
value creation, the firm turned instead to management. Additionally, it realized that the
product could not be used without involving the caregivers, even though they did not know
how to use the product correctly.

The previously described case of IP video is another example here. It is clear from this case
that the disruptive technology had different impacts on different actors. The traditional
security integrators and managers did not have the necessary knowledge and some of them
had few incentives to favor adoption, since they would lose status in relation to IT managers.
Targeting IT people more directly and others who were not threatened by the technology was
the right way forward.

Firms also need to figure out how the actors should be approached. Under conditions of
interdependence, changing the network in favor of the innovation becomes a matter of
aligning incentives and renewing competencies. As pointed out earlier, some innovations can
destroy the competence of established actors. If these actors are crucial for the adoption, the
firm needs to influence and encourage them to change their activities. In several of the cases
studied in this dissertation, firms sought to do so by providing training and educational
activities, thereby facilitating the process of creative destruction31. These activities also
contribute to changing the motivations of some actors.

Delving more deeply into the issue of incentive alignment, a couple of measures for doing so
have been identified. Several of the studied firms were engaged in a wide range of marketing
activities explicitly aimed to build networks with opinion leaders which could persuade
others of the benefits of the innovation. In the IP video case, the studied firm tried to interact
with both IT and security managers and get them to agree on the benefits of IP video.

Other cases illustrate how firms explained their value proposition in different ways in order
to reflect the new value creation and to make it more appealing to certain actors, thereby
aligning incentives. When introducing technologies that create value in new ways, this value
often needs to be communicated differently (Björkdahl, 2007). In the case of the
incontinence diaper, the value proposition was changed from the sale of incontinence
products to providing better incontinence care at lower total cost. The management of
retirement homes and hospitals were more concerned with the total cost of incontinence care

31
Several of the firms studied in the fifth and the sixth appended papers engaged in training activities and tried
to renew the competencies of key actors. In the early 1990s, Hasselblad engaged in similar efforts. The
company launched something called Hasselblad University, an initiative which aimed to educate photographers
regarding how digital imaging works.

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than were the purchasers and therefore, this type of communication turned out to be more
effective32.

Finding the right business model is ultimately about identifying which actors to target, how
incentives can be aligned, and how resources and activities can be modified in order to match
the new value created. The brief empirical illustrations provide some examples of how these
guidelines can be applied in order to map and understand the firm’s surrounding network.
This input is vital for developing a new business model that fits with the creation and
distribution of value associated with a disruptive innovation.

8.3 Reflections on the guidelines
The guidelines provided above can help firms to identify and handle challenges related to
disruptive innovation. They may initially appear rather broad and not necessarily relevant
only to disruptive innovations. It should be underlined here that the guidelines deal with how
the firm can manage its surrounding networks, not its own resources and capabilities.
Therefore, these guidelines do not address the challenges related for instance to competence
destruction, architectural innovation, or the role of complementary assets. Rather they focus
explicitly on identifying and managing the challenges that lie beyond the firm’s boundaries.
In this sense, the guidelines provide a more detailed understanding of how a business model
can be impacted by a disruptive innovation and the ways in which it needs to be changed.

These guidelines address the factors that ought to influence the design of a new business
model. As stated previously, the underlying perspective is similar to the ‘hypercube of
innovation’ (Afuah and Bahram, 1995) which points out that an innovation needs to be
mapped in terms of its impact on different firms throughout the supply chain. However, the
guidelines presented here differ in offering a more fine grained description of these actors in
terms of resources, activities, power, and incentives. They differ also in assuming that an
established network constellation is built on interdependence, which in turn suggests that
finding the right business model is ultimately an issue of understanding the incentives that
govern different actors and how these incentives can be aligned.

Although the proposed guidelines may be different from what has been suggested previously
with regard to disruptive innovation, they share some features with previous work in other
areas such as supply chain management and strategic management. Supply chain
management has for a long time dealt with how actors, resources and activities can be linked
together (Johnsen et al, 2000). It has been argued that the challenges related to
interdependencies can be managed by understanding the incentives, exchanging information,
and trying to find solutions that are mutually beneficial (e.g. Lee, 2004). When introducing

32
The firm in the IP video industry also sought to communicate its value creation differently. It focused on the
total cost of owning a surveillance system rather than the price of single products.

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disruptive innovations, firms can learn by adopting a similar way of thinking. It is important
to be aware of an innovation’s impact on the surrounding network and to find ways to
motivate actors to work in the same direction. Under conditions of interdependence, firms
that seek to maximize only their own value at the expense of their networks may be worse off
as this behavior may dissolve the networks. However, it should be noted that the introduction
of innovations differs from management of a supply network in an important way. Innovation
activities are different from more operational issues in the sense that the degree of
uncertainty is often higher and that it is initially more difficult to quantify the precise value of
adoption. To compromise and find ways to share both risk and profit may be even more
important when aligning a network in favor of an innovation33.

Scholars in strategic management have frequently pointed out that strategy is ultimately
about finding a fit between the resources and capabilities of a firm and its surrounding
environment (e.g. Grant, 2008). Earlier recommendations regarding disruptive innovation
differ in regarding the environment as something that cannot be influenced. The guidelines
proposed in this dissertation have a lot in common with for instance the work by Normann
and Ramirez (1993; 1994) who regard strategy as the management of a value-creating system
where the firm and its network work jointly towards value creation. In this perspective, the
main strategic task is reconfiguration of the roles and relationships in the value chain. In
some respects the guidelines also resemble Network Value Analysis, as developed by
Peppard and Rylander (2006). This approach aims to describe how value is created and
distributed in a network, how a firm’s activities impact on it, and how other actors will
behave. These views differ for instance from the positioning school (e.g. Porter, 1985) which
maintains a more adversarial perspective on the environment.

Having offered some guidelines and described some cases of firms that encountered
problems, it is interesting to revisit some of these cases and discuss whether things could
have turned out differently with this perspective. The guidelines provide a better
understanding of the main challenges and point to some ways to handle these issues. In this
sense, they help firms to identify appropriate measures. However, this is not to imply that
some of the firms would have survived or prospered by doing so. The challenges faced by
individual firms are often more complex and difficult to address.

To return to the Hasselblad case, it can be seen that several firm- and technology-specific
issues made it problematic for Hasselblad to handle the transition to digital imaging. For
instance, digital technology is often associated with a very fast pace of development, which
exacerbates the difficulties. When the technological shift was underway in the late 1990s,
better and cheaper cameras rapidly penetrated the market, which increased the problems for
Hasselblad. A similar pattern applies to the transition from mechanical to electronic

33
See e.g. Holmström and Stalder (2001) for an illustration of how important it is to share risks and benefits
when adoption depends upon many different actors.

76

calculators. Once the calculators were based upon integrated circuits, prices declined quickly
while computing performance continuously increased. Hence, there are several issues related
to technological improvement which are important, yet difficult to deal with theoretically.

In these cases, there were also several firm-specific factors which augmented the problems.
Hasselblad suffered from several changes in ownership which created strategic inconsistency
over time. Additionally, the short term scope of ownership which the Union Bank of
Switzerland declared in 1996, along with its intention to make leveraged buyout seems to
have increased these difficulties. Clearly, such factors are hard to incorporate into a
managerial framework but nevertheless they have a considerable impact on the eventual
performance of a firm. It should therefore be pointed out that the guidelines presented above
assume that individuals are both able and willing to handle disruptive innovation in a rational
way that maximizes the long term value of their company. Management needs to attend to
these issues, but the dominant logic of established firms may sometimes prevent this from
happening (Prahalad and Bettis, 1986). The empirical data in this dissertation would suggest
that management attention is sometimes lacking but that it is still an important prerequisite
for succeeding with disruptive innovation.

The Facit case also includes some specific factors that are hard to address managerially. For
example, in the 1950s, the firm recruited some of Sweden’s top electronics researchers and
set up the subsidiary Facit Electronics. There was little knowledge about electronics in
Sweden at the time and Facit identified and recruited the key people in the country. Hence,
both Facit and the labor market in which it was located lacked a sufficient competence base
in electronics. These macro-economic conditions are difficult to integrate into the proposed
guidelines but they do play an important role and should not be overlooked.

Having underlined the heterogeneity in the challenges faced by specific firms, the proposed
guidelines still mark an improvement to what existing theory on disruptive innovation has
offered. The aim is to propose a more detailed approach that makes it possible to understand
where and how a disruptive innovation prospers, to understand the enablers and disablers of
its growth and how firms can develop new business models when introducing these
innovations.

77

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85

Ph d dissertation christian sandström

8 CREATIVITY AND INNOVATION MANAGEMENT

Exploring Factors Influencing
Incumbents’ Response to
Disruptive Innovation
Christian Sandström, Mats Magnusson and
Jan Jörnmark

This paper explores how certain incumbent characteristics influence an established firm’s
response to disruptive innovation. More specifically, it looks at the challenges a middle size,
top segment company faced and how this affected its reaction to the disruptive threat. This is
done by conducting an in-depth case study of Hasselblad, a manufacturer of professional
cameras. It can be seen in this case study that Hasselblad’s limited resources and its niche
strategy affected how it managed the transition from analogue to digital camera technology.
These characteristics made it difficult to allow experimentation with digital imaging in the
main business since the available resources were severely limited and this initially inferior
technology could harm the brand image. Instead, Hasselblad pursued collaborations and
eventually launched a hybrid camera, which was compatible both with film and digital backs
but did not become the expected success. Being close to bankruptcy, the digital resources
needed were acquired and the company eventually survived the disruption. In conclusion, this
paper argues that the managerial challenges and solutions to the innovator’s dilemma depend
upon the particular characteristics of incumbents and that this heterogeneity has not been
sufficiently captured by previous literature. It also suggests that medium size, top segment
firms can survive disruptive innovation through collaboration and acquisitions.

Introduction and consequently that the managerial solu-
tions proposed need to take these differences
into consideration.

T he concept of disruptive innovation (Chris-
tensen, 1997) has received much attention
from both academics and practitioners. Never-
This paper investigates how certain incum-
bent characteristics influence the response to
disruptive innovation. In particular, using an
theless, there are several areas that have not so in-depth case study approach, it explores the
far received sufficient attention. One such challenges and managerial solutions for a
aspect is the heterogeneity of incumbents. medium size established firm in the high-end
While the literature on disruptive innovation segment of its industry. The firm in question is
has proved that incumbents frequently fail Hasselblad, a manufacturer of professional
in the transition from a sustaining to a disrup- cameras. Based on the observations made, it is
tive technology, it has so far shown limited argued that the managerial challenges and
interest in the differences between established solutions to the innovator’s dilemma depend
firms. In the discourse regarding disruptive upon the particular characteristics of an
innovation, incumbents are often treated as incumbent and that this term needs to be
one population vis-à-vis entrants rather than nuanced further. Moreover, the article sug-
as many populations with different resources, gests that a medium size company in a high
market positions and strategies. Contrary to market segment can survive disruptive inno-
this, it appears reasonable that the capacity to vation through collaboration and acquisitions.
respond to disruptive innovations depends This paper is organized as follows. The next
largely on the characteristics of the incumbent section reviews the literature on disruptive

Volume 18 Number 1 2009 © 2009 The Authors
doi:10.1111/j.1467-8691.2009.00507.x Journal compilation © 2009 Blackwell Publishing

INCUMBENTS’ RESPONSE TO DISRUPTIVE INNOVATION 9

innovation and entrant-incumbent dynamics. whereas entrants succeed in disruptive battles.
The subsequent section contains a description Hence, a key determinant of the probability of
of the methods used in this paper. Then the success for an innovation is the extent to which
case study about Hasselblad is presented it addresses the needs of actors in an incum-
in order to illustrate how a particular incumbent’s current value network.
bent firm encountered severe problems, Christensen also derives a number of mana-
but eventually survived the disruption. The gerial solutions which have been further
firm provides a particularly compelling developed (Christensen & Raynor, 2003). It is
example in that, despite early investment and argued that managers in incumbent firms basi-
recognition of the disruptiveness of digital cally have three options, they can change the
imaging, it encountered problems in the tran- processes and values of the current organization,
sition to the new technology. The final section create an independent organization, or acquire a
contains an analysis of the case study and a different organization.
discussion about its theoretical and manage- Firms that try to change the current organiza-
rial implications. tion in order to adapt to the disruptive innova-
tion have a weak track record (Christensen,
1997). The main reasons for this are related to
Theoretical Exposition the resource dependence that the innovator’s
dilemma originates from.
It is well documented that many established An independent organization can be regarded
firms find it hard to adapt to changes in the as a structure in which an organization devel-
technologies they employ. Frequently, incum- ops new resources that are different and sepa-
bent firms do not manage the shift to the new rate from the rest of the firm. It has objectives
technology, they lose market share and the that are largely independent from and outside
successful firms are found among the new the current operations of the firm. As the new
entrants (Cooper & Schendel, 1976; Tushman technology evolves within the organization,
& Anderson, 1986; Utterback, 1994). Chris- the required processes and values are also
tensen (1997) brought a new perspective to developed (Macher & Richman, 2004). This is
this issue by drawing upon resource depen- one of Christensen’s most influential recom-
dency theory (Pfeffer & Salancik, 1978). This mendations for how to manage disruptive
theory suggests that a firm’s freedom of action innovations.
is in fact controlled by actors outside the When firms are not able to develop disrup-
boundaries of the company, e.g., customers tive innovations, they can adapt by acquiring
and investors. Hence, resource dependency companies that possess the resources that are
theory posits that a firm’s freedom of action is needed for developing the new technology.
in fact limited to satisfying the demands of By doing so, the competencies needed for
those actors that provide the resources it needs developing disruptive innovations can be
in order to survive. incorporated into the organization rather than
By making a distinction between sustaining developed.
and disruptive technologies, Christensen Though the problems and solutions
explained the recurrent pattern of incumbent described above are well elaborated, they
failure in technological shifts. Sustaining tech- suffer from some drawbacks mainly due to a
nologies have in common that they improve lack of clarity in the terminology used. In the
the performance of established products discourse regarding disruptive innovation,
along the dimensions that mainstream cus- incumbents are treated as one population
tomers demand. Disruptive technologies, on vis-à-vis entrants, rather than as many popu-
the other hand, initially underperform along lations with different resources, market posi-
these dimensions. The lower traditional per- tions and strategies. However, the forces of
formance and the ancillary performance resource dependency should arguably vary
attributes create a large market uncertainty depending upon the specific characteristics of
around the disruptive innovation. At the same an incumbent firm. For instance, firms operat-
time established firms find it irrational to ing in a high-end segment are likely to face
abandon their current, profitable customers different challenges from those faced by a
in order to aim for a new, initially small company in the low-end of the market. This
market and an inferior technology. As the implies that there could also be a substantial
performance of the disruptive innovation amount of heterogeneity among the solutions
increases it begins to attract customers from to the innovator’s dilemma or that the most
the sustaining technology and eventually dis- suitable means of action actually depend upon
places the old technology. Through his studies the characteristics of the incumbent. Conse-
of the disk drive industry, Christensen showed quently, the managerial solutions can poten-
that incumbents usually win sustaining battles tially be improved further by exploring how

© 2009 The Authors
Journal compilation © 2009 Blackwell Publishing Volume 18 Number 1 2009


the properties of an incumbent affect its faced when shifting from analogue to digital
response to a disruptive threat. imaging. In total, more than 50 hours of inter-
Moreover, given that disruption is a process views were performed and recorded with 11
and not a discrete event (Christensen & people. Follow-up interviews were also con-
Raynor, 2003), it should strike at different ducted in order to ensure an accurate interpre-
points for different firms depending on the tation of the information. All field research
segment in which the firm is operating. Adner interviews began with general open-ended
(2002) pointed out that the structure of questions, asking managers how they per-
demand needs to be addressed in order to ceived the challenges posed by the disruptive
clarify the nature and effect of disruptive inno- technology and how they tried to deal with
vations. Using the notion of thresholds, Adner them. The same questions were asked to at
also defined critical performance levels that least two senior managers from one era. In
must be met. The functional threshold of a order to ensure the accuracy of this informa-
product is the minimum performance that the tion, it was compared with a large amount of
customer can accept whereas the net utility secondary data such as annual reports, media
threshold also takes price into consideration. articles, old mail conversations between man-
The point in time when the net utility thresh- agers and book chapters written by former
old is met by the disruptive technology should managers. In addition to this, all minutes from
arguably depend upon which customer the board meetings during the period 1989–94
segment the incumbent operates in. were accessed.
Furthermore, Danneels (2004) suggested The description of this case emerged when
that future research should investigate alterna- all these sources of data had been analysed. In
tive routes for incumbents to access disruptive those cases when the written material that was
technologies, looking into the possibilities accessed diverged from the interview data,
for using alliances, acquisitions and internal follow-up interviews were performed. The
development in more detail. This paper will gathered data has thus been triangulated by
address some of these issues by exploring how looking at several independent sources and
certain incumbent characteristics influence its making sure that these sources were mutually
response to disruptive innovation. More spe- consistent. Moreover, the most important
cifically, it will look at the particular challenges material has been read, accessed or discussed
encountered by a medium size established by several researchers in order to ensure an
firm operating in the high-end of the camera accurate interpretation.
market.

Case Description
Methods Used
Hasselblad is a small niche player in the
The case study below illustrates how Hassel- camera industry. The firm had for a long time
blad failed to develop capabilities in digital about 500 employees in total and annual rev-
imaging on its own and then survived through enues of around SEK600 million. It has for
collaborations and an acquisition. This firm decades been one of the leading camera manu-
was targeted since it does not possess the char- facturers and has sometimes been referred to
acteristics of most incumbents that are studied as the ‘Rolls Royce’ of the camera industry. The
in the field of disruptive innovation. The firm is company received global recognition in 1969
operating in the high-end segment of the when the first photos of Neil Armstrong on the
camera market, targeting professional photog- moon were taken with a Hasselblad camera.
raphers with a high demand on performance. During the following decades, a series of high-
An additional reason for studying Hasselblad performing cameras for professional photog-
is that it was possible to conduct interviews raphers were developed. This case study will
with current and former high-level managers focus on the late 1980s to 2005, which is the era
of the company. when Hasselblad’s analogue cameras were
Though the authors have no past experience disrupted by digital imaging.
of working with Hasselblad, extensive In 1981, the camera industry was shaken
amounts of information have been accessed. when Sony introduced the first camera that
Since this paper focuses on corporate strategy was not using film, the Sony Mavica. Given the
and the implementation challenges that poor picture quality of the Mavica, the CEO of
confront managers, senior managers who Hasselblad at that time, Jerry Öster, concluded
played a substantial role in forming the strat- that the firm should wait and instead learn
egy were primarily interviewed. Managers more about digital imaging by developing
of R&D have also been accessed in order to other applications. Öster thought that Hassel-
understand the specific challenges they blad was too small to make the investments in

© 2009 The Authors
Volume 18 Number 1 2009 Journal compilation © 2009 Blackwell Publishing


R&D required in order to overcome the weak- tunity to take many photos, make copies and
nesses of the new technology and that it would sending the photos in an easier way.
take time before the technology would disrupt The development of the digital camera took
Hasselblad. place both in-house and in various collabora-
tions. One of the largest projects was under-
taken together with Philips. Among other
Attempts to Develop a New Camera System things, this resulted in a sensor for digital
cameras. ‘Many large companies were willing
During the late 1980s, Hasselblad became
to co-operate with us despite the fact that we
increasingly aware of the drawbacks of its ana-
were so small, our strong brand helped us a
logue camera system. Cameras are not only
lot’, Lennart Stålfors recalls.
about electronics or precise mechanics. There
are many features which are related to optics
and Hasselblad lagged behind in those areas.
Therefore some R&D managers thought that A Change in Strategy
the company needed to develop a completely
Partly as a consequence of having focused on
new camera system with modern functions
digital imaging, Hasselblad lagged behind
such as autofocus. Some proposals were made
with its mainstream products. This was one of
to the board but the project, which was called
the reasons why the new owner, the Union
Nova, was never launched on a full scale. The
Bank of Switzerland (UBS), in 1996 decided to
main reason for this was that management
cut off digital development. Moreover, UBS
thought Hasselblad was too small to afford
had a short-term scope of ownership and did
such a project.
not want to make investments that would be
beneficial in the more distant future. An addi-
tional reason was that some managers, prima-
The Development of a Digital Studio Camera
rily in the marketing department, thought that
The firm instead moved further into digital the inferior quality of digital imaging would
imaging in the early 1990s. A new CEO was damage Hasselblad’s brand. Others argued
recruited who had a background in electrical that the firm was too small to develop a digital
engineering and believed in the potential of camera on its own. Stefan Arvidsson, member
digital imaging. In 1994, the company started of the board, says: ‘In the long run we would
the development of a digital camera. During not have been able to keep up with the others.
this time digital and analogue photography Compare us to what the huge Japanese com-
were competing for the same resources. One panies spend on development. I still think
member of the product board recalls that ‘we stopping the project was the right thing to
had one budget in the product board and do.’ However, many people thought that this
money had to go to either the digital camera decision was a disaster. For instance, the Chief
system or the mechanical camera system’. It Finance Officer (CFO) at that time, Bengt
was eventually decided to move further into Ahlgren said: ‘Hasselblad did not have to
digital imaging. develop everything on its own. Throughout
When the development of a digital camera the years our reputation had made us an
had started, it soon became apparent that this attractive partner for collaborations.’
technology had some properties that made it Instead of continuing with digital imaging,
fundamentally different from an analogue the new owner decided to develop a com-
camera. The photo quality was lower at this pletely new camera system. As was mentioned
point than with an analogue Hasselblad before, this project had been considered in the
camera. Along other performance dimensions, late 1980s but had never been realized since
digital photography had many attributes that it would have been very expensive for a small
made it attractive. Photos could be replicated, firm like Hasselblad. The new strategy was
manipulated and sent at a much lower cost to pursue some collaboration and thereby
and much more conveniently than with ana- follow the digital development, while focusing
logue imaging. Thus, the business utility of Hasselblad’s own resources on analogue
digital technology was in fact very large at this technology.
point, yet different from what Hasselblad had The development of Hasselblad’s new
offered previously. camera system, the H1, was initiated in 1998.
With these properties in mind, the manager The camera was developed in collaboration
in charge of digital development, Lennart Stål- with Fuji, who actually funded almost 50 per
fors, thought that the best thing to do was to cent of the camera. The idea was to create a
develop a camera for studio photography. This camera which was analogue but also compat-
customer segment would hopefully be willing ible with digital backs, thereby facilitating the
to trade off some photo quality for the oppor- transition from analogue to digital imaging.

© 2009 The Authors


However, this project was heavily delayed acquisition of Imacon, a Danish firm manufac-
and the product was not launched until late turing digital backs. Imacon and Hasselblad
2002, many years after what had been planned were merged together and Hasselblad could
originally. Moreover, it had run SEK150 now sell a complete digital camera system.
million over budget and did not have all the After having been close to bankruptcy in
features that were originally intended. This 2003–4, the company recovered financially and
delay turned out to be critical since the tech- since then it has been profitable in manufactur-
nological shift started to affect the company ing digital cameras for professional photo-
during those years. One member of the devel- graphers. However, Hasselblad is still paying
opment team notes that: ‘if the H1 would have back a lot of debt to the owner for whom the
been launched in 1998, we would have had acquisition of Hasselblad turned out to be far
four good years of revenue from it. When the more expensive than anticipated. A long and
H1 was finally launched it was a fantastic dramatic journey for Hasselblad had been
product, but that did not matter since most made, or as the CEO Lars Papilla expressed it
cameras were completely digital then.’ in May 2004, ‘the shift to digital technology
The H1 system was a hybrid, which could was much more dramatic than we had
use both digital backs and conventional film. expected.’
The digital backs were initially delivered by
Kodak and PhaseOne. Since Hasselblad did
not manufacture their own digital backs this
meant that they could not deliver a complete
Analysis and Discussion
digital camera themselves. At the same time, The case study of Hasselblad can indeed be
the performance of digital cameras had regarded as an illustrative example of the
increased to the extent that Hasselblad’s posi- innovator’s dilemma. It clearly shows that the
tion was threatened by actors that had not digital cameras were disruptive. While ini-
even been their competitors before. One tially having a lower performance along tradi-
of Hasselblad’s most profitable segments, tional measures such as photo quality, it had
wedding photography, had for decades been a other attributes such as the possibility to store,
market that was protected from competition. replicate, send and manipulate photos more
But within a few years, Hasselblad lost this easily and at a lower cost.
market to Canon due to the shift from ana- Despite recognizing the future importance
logue to digital technology. Digital backs of digital technology at an early point, Hassel-
are very expensive and thus, a fully digital blad encountered great difficulties in this tech-
Hasselblad camera cost SEK100,000 more nological shift. Resource dependency theory
than Canon’s similar products. The firm now seems to provide one explanation for why this
experienced a severe drop in revenues. As the happened, as suggested by Christensen (1997).
market for digital cameras expanded rapidly, The continuous demand from investors to
Hasselblad encountered further problems focus on profitability and therefore downsiz-
being caught with a technology that was essen- ing disruptive initiatives can be regarded as
tially analogue. one example of this. Moreover, the particular
In early 2003, the company was bought by characteristics of Hasselblad affected how the
the Shriro Group, a Chinese firm which had firm handled the disruptive threat from digital
been Hasselblad’s distributor for more than 40 imaging. The company was relatively small
years. The new owner sold off all subsidiaries and had a limited and demanding customer
of Hasselblad, downsized the firm and had to base. These properties imposed constraints on
bring more money into the company several how Hasselblad could handle the innovator’s
times in order to avoid bankruptcy. Hasselblad dilemma.
now had to develop a complete digital camera
system, which included digital backs. Given
that the firm was close to bankruptcy, had suf- Focus on the High-End Segment – An
fered severe layoffs and had cut off all digital
Obstacle for Experimentation?
capabilities in the mid 1990s, the situation was
desperate. It can be seen in the case study above that
Shriro thought that it would be impossible Hasselblad’s niche strategy affected how the
under these conditions to develop a digital firm managed the transition to digital imaging.
back and therefore started to look for potential Digital cameras could not initially provide the
acquisitions. Given that the new Hasselblad superior performance that was demanded in
camera was compatible with digital backs, the the high-end segment where Hasselblad had
synergies from buying a manufacturer of those established a unique position. The net utility
backs seemed obvious. In order to avoid bank- threshold (Adner, 2002) was much higher for
ruptcy, Shriro had to invest extensively in the a firm like Hasselblad than for a company

© 2009 The Authors


operating in the amateur segment. In addition of Hasselblad accentuated the difficulties
to this, Hasselblad’s customers associated the involved in meeting the disruptive innovation
brand with quality and superior performance as the company ended up in an either-or situ-
and this image could have been damaged by ation, due to its financial constraints.
experimenting with an initially inferior tech- Hence, the forces of resource dependency
nology. The strong brand was one of Hassel- were very strong for a firm like Hasselblad. It
blad’s greatest assets and this seems to have would have been expensive for the company
created a large hostility against digital technol- to pursue development in both the new and
ogy, particularly in the marketing department. the established technology fields simulta-
The protected market position and the brand neously. Hasselblad tried to keep the option of
were probably two of the main reasons why developing a digital camera open through col-
the new owner decided in 1996 to cut off laborations and instead focus on a hybrid
digital development and focus more on ana- camera, but lost valuable time and resources in
logue imaging. doing so. The fact that the new camera system
In this respect, companies in the lower seg- launched in 2002 was to a large extent financed
ments had better possibilities for early experi- by Fuji also illustrates how the size of the firm
mentation and learning since they could sell affected its way of managing the technological
digital cameras to amateurs with low demands shift. During this long and costly project, Has-
on photo quality. The values associated with selblad never had the resources or strategic
the Hasselblad brand implied that a transition focus needed to develop digital backs. When
to a lower performing technology was deemed Shriro acquired Hasselblad and the firm
to be very risky and, thus, the forces of was close to bankruptcy, it could eventually
resource dependency seem to have worked survive through an acquisition of Imacon,
strongly in favour of the sustaining technology. thereby providing a fully digital camera
Based upon a history of landmark events such system.
as the photos taken on the moon, a dominant Whether the outcome of this strategy should
logic (Prahalad & Bettis, 1986) emphasizing be regarded as a success or not is a subject that
extreme performance had emerged within the is open to interpretation. If the new owner
firm and this further implied that moving hadn’t brought additional funding to the
into digital technology was difficult. Clearly, company it would most likely not have sur-
the firm’s core capabilities in the mechanical vived, and it is still paying off debts to Shriro.
technology in this sense turned into core On the other hand, empirical evidence from
rigidities when facing the disruptive technol- both other industries and the camera industry
ogy (Leonard-Barton, 1992). (e.g., Christensen, 1997; Tripsas & Gavetti,
2000) suggest that few companies survive dis-
Firm Size Limiting the Possibilities to Keep ruptive innovation and therefore survival may
here be regarded as some form of modest
Options Open
success.
The case study also illustrates how being a An additional factor that seems to have
medium size company affected Hasselblad’s affected how Hasselblad handled the disrup-
response to the disruptive technology. When tive threat seems to be ownership and the
management decided not to develop a new willingness to make long-term investments.
camera system in the late 1980s it was largely An owner such as UBS who had a short-term
a consequence of the limited resources of scope of ownership was hostile towards
the firm. Moreover, the fact that much of investing in digital imaging and instead devel-
the digital development in the early 1990s oped a hybrid camera. The takeover by Shriro
occurred in various collaborations such as the seems to have enabled the kind of investment
one with Philips illustrates how firm size that was needed. Therefore, it appears that the
affected the way Hasselblad handled the dis- various ownership changes created a strategic
ruptive threat. inconsistency over time that augmented
During the mid 1990s the firm continuously the problems Hasselblad encountered, but the
moved away from digital imaging and instead accessed data does not enable us to draw
embraced the sustaining technology that had further conclusions about this.
proven to be successful for so many decades. Summarizing the above, it is seen that
When the new owner decided to focus solely Hasselblad’s size and strategy affected its
upon conventional camera technology and response to the disruptive technology. For a
pursue only minor collaborations in the digital firm like Hasselblad, the relative cost of pur-
technology area, another step in this direction suing digital technology was higher than for a
was taken. It appears that this decision was larger incumbent and, hence, the inertia seems
also affected by the firm’s size and its available to be very strong in this setting. It can be seen
resources. It can be argued that the limited size in the case study how this forced Hasselblad to

© 2009 The Authors


handle the disruptive innovation through lacked the resources to pursue extensive inter-
various collaborations and through an acquisi- nal development projects.
tion of digital capabilities. Moreover, the case illustrates how the
Moreover, digital cameras could initially managerial solutions to the innovator’s
not satisfy the demands that Hasselblad’s dilemma are affected by the particular charac-
high-end segment required. In contrast to this, teristics of an incumbent. A relatively small
larger camera manufacturers such as Canon niche player like Hasselblad could eventually
and Nikon could develop capabilities in survive the disruption through collaborations
digital photography while they were still pro- and an acquisition. This finding suggests that
ducing conventional cameras. These firms had the heterogeneity of incumbents has been
the sizeable resources that were needed in downplayed by the previous literature and it
order to undertake these kinds of ventures. calls for further investigations to allow for the
Furthermore, they were operating in the development of a more nuanced view of how
amateur segment for cameras, which could established firms can respond to disruptive
tolerate the lower performance that the dis- innovations.
ruptive technology initially provided.
However, it should be emphasized here that
there are several examples of large incum-
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© 2009 The Authors


Christian Sandström is a PhD student at
Chalmers University of Technology. His
main research interests are disruptive inno-
vation and innovation in supply networks.
Christian holds an MSc in Industrial Engi-
neering and an MSc in Economics.
Mats Magnusson is associate professor at
Chalmers University of Technology and
director of the Institute for Management of
Innovation and Technology. In 2008, he was
also visiting professor at Aalborg Univer-
sity and at the University of Bologna. In
addition, he is program director at Chalm-
ers Advanced Management Programs,
vice president of UNITECH International,
and chairman of the international research
network CINet. His main research interests
are innovation management, resource-
based strategy, management of knowledge
and learning, innovation networks, and
continuous improvement.
Jan Jörnmark is associate professor in eco-
nomic history at Göteborg University. He is
author of several books and a photographer.

© 2009 The Authors

Hasselblad and the shift to digital imaging

PhD Student
Email: christian.sandstrom@chalmers.se

Abstract
Hasselblad, a Swedish high-end camera manufacturer, started in the early 1980s to
explore how digital technology could be used in their industry. Throughout this decade,
the company sought to learn more about digital imaging by developing applications such
as the telephoto transmitter Dixel. However, increased competition forced Hasselblad to
leave this segment in the early 1990s. Instead the company started to work on a new
digital camera system. Among other things, this project resulted in a 6 Megapixel sensor
in 1996, but the project was eventually terminated when a new owner changed the
strategy of the firm. Being close to bankruptcy in 2003, Hasselblad was sold to a new
owner which merged it with Imacon, a Danish manufacturer of digital backs. In 2005, the
company could finally deliver a fully digital camera system on its own and survived the
shift to digital imaging.

Keywords: Hasselblad, digital imaging, photography, disruptive innovation,
microelectronics, technology, management

1

Introduction
Already in 1977, Intel’s co-founder Robert C. Noyce called attention to the rapidly
increasing use of digital technology in many industries. While he argued that this trend
would create a lot of entrepreneurial opportunities, Noyce also suggested that established
firms will encounter major difficulties once their products are replaced by the new
technology:

“Time and time again the rapid growth of the market has found existing companies too
busy expanding markets or product lines to which they were already committed to
explore some of the more speculative new markets or technologies.”1

Noyce referred to the fact that mechanical calculators and watches had been removed
from the market in the 1970s and argued that more such displacements would happen in
the future as digital technology would provide better performance at lower costs over
time.

In retrospect, it is striking how accurate Noyce’s prediction turned out to be. In industry
after industry, digital technology has disrupted the former technology and created
countless problems for established and highly profitable firms. Since Noyce’s article was
written, many products such as telephones, music players, television screens, movie
cameras and gaming machines have become digital. With few exceptions, these shifts
have implied major difficulties for incumbent firms.2 Over the last decade, the camera
industry has been subject to precisely this kind of turmoil due to the shift from silver-
halide photography to digital imaging. Several established firms have either encountered
severe problems or gone out of business completely.3

This article will describe how a small Swedish manufacturer of high-end cameras called
Hasselblad tried to nurture and develop digital photography from the early 1980s onward.
It provides a good illustration of how digital technology emerges in various high-end
niche applications and how it later enters the mainstream markets and displaces
incumbents. In doing so, the presented work contributes to the literature on disruptive
innovation and to our understanding of how industries are digitized. The rest of the article
is organized as follows. The next section provides some theoretical background regarding
technological discontinuities, which is followed by a detailed chronological description of
how Hasselblad sought to manage the shift to digital imaging. Subsequently, a more
theoretical and historical discussion is given along with some conclusions.
2

Technological discontinuities and digital technology
It is well documented today that established, successful firms often get into trouble under
conditions of discontinuous technological change. 4 Several scholars have sought to
explain what is sometimes referred to as “the incumbent’s curse” by looking at the
supply-side and firm capabilities. 5 For instance, Tushman and Anderson wrote about
competence-enhancing and competence-destroying technologies. They argued that those
technologies which render the technological skills of established firms obsolete tend to
create major difficulties.6 Drawing upon a case study of how Polaroid sought to handle
the shift to digital imaging, Tripsas and Gavetti pointed out that cognitive barriers among
managers prevented the firm from commercializing the new technology. 7 In another
article, Tripsas studied the typesetter industry and argued that not only a firm’s
technological competences matter. The impact on firm-specific complementary assets, i.e.
assets which were not directly related to the technology but helped the firm to sustain its
competitive advantage, also played a key role in a technological shift.

In a series of articles from the mid-1990s, Clayton Christensen shifted the focus away
from supply-side related factors towards looking at the impact a new technology has on
the market. Drawing upon evidence from the disk drive industry, he argued that those
technologies which were not initially demanded by a firm’s existing customers were
particularly difficult to handle.8 Each new generation of smaller disk drives offered lower
performance in terms of storage capacity and therefore started to prosper in lower
segments or in new markets. The incumbents struggled to find a financial logic in
entering an inferior technology which grew in a small, low-end niche of the market. As
the performance improved, it eventually displaced the former disk drives and the
established firms who were misled by existing customers. Christensen labeled those
technologies which were cheaper, with initially lower traditional performance and some
new attributes, as disruptive. Those technologies which kept satisfying a firm’s existing
customers were referred to as sustaining. In his book, The innovator’s dilemma, it was
shown that incumbents tend to win sustaining battles whereas entrant firms are better at
introducing disruptive technologies since they are not held captive by an established
customer base.

Digital technology has often turned out to exhibit disruptive characteristics. It has often
started off with inferior traditional performance while bringing new attributes to the
market. The rapid pace of development associated with digital technology has made it
attractive for mainstream customers later on and then displaced the former technology.
For instance, Christensen and Raynor used the transistor radio as an illustrative example
of this pattern.9 Compared to analog radios, it had a worse sound quality, but brought
3

some new attributes to the market, such as a lower price and portability. Therefore, it
prospered among teenagers who could not afford a radio previously. This customer
segment appreciated the portability and did not bother about the lower sound quality. In
the 1950s, entrant firms like Sony created a mass market for transistor radios and, as the
sound quality improved over time, this technology eventually displaced analog radios and
established firms like RCA.

Clearly, Christensen’s notions of sustaining and disruptive technologies have shed new
light on how discontinuities happen. However, it is still a bit unclear how this framework
fits with the nature of digital technology. The dynamics of digitization have often been
described in terms of a rapid increase in performance along with declining prices. For
instance, Intel’s other co-founder, Gordon Moore, predicted in 1965 that the amount of
transistors that could be crammed onto an integrated circuit would double during every
18-month period.10 This prediction has often been referred to as Moore’s law and can be
thought of as a description of the rapid development of digital technology. While it is
clear that digital technology has often brought some ancillary attributes to the market, it
has usually, as Moore’s law would suggest, started off with poor performance and a high
price. Consequently, it has in many cases initially prospered in very advanced segments
which are not sensitive to prices, e.g. in military or scientific applications.11 Therefore, it
is not obvious in what way Christensen’s framework, which focused on low-end
applications, is compatible with the economics of digital technology. Christensen showed
how the disk drive manufacturers were displaced when entrants introduced smaller drives,
targeted low-end segments, moved up market and removed incumbents. Thus, it is not
apparent whether this pattern is compatible with the growth of digital technology. By
studying how and why digital imaging emerged in Hasselblad’s segment, this article will
argue that digital technology is substantially consistent with the notion of disruptive
technology, albeit in a way that is different from what has been suggested previously.

Hasselblad and the early versions of digital cameras
Hasselblad became a dominant player in the medium-format segment of the camera
industry during the time after the Second World War. This small segment of the camera
market used larger film than the normal 24*36mm format and was aimed for professional
photographers with high demands on image quality. One reason for Hasselblad’s
dominance was that its cameras were compatible with a wide range of lenses which were
manufactured by Carl Zeiss, film magazines and other accessories that were used by
photographers. Hence, a photographer who used a Hasselblad camera had great flexibility,
but Hasselblad did not develop these products itself. The company became world-famous
in 1969 when Neil Armstrong took the first photos on the moon with a Hasselblad camera.
During the 1980s, the firm had about 500 employees in total and an annual turnover of
4

approximately 600 MSEK. The company showed relatively high profitability in these
years, delivering annual profits of 50-60 MSEK. However, the medium-format segment
decreased by about 40 percent from 1981 to 1985, mainly since small-format cameras
became better and better. 12 Despite this reduction, Hasselblad managed to sustain its
revenues and profits in these years, mainly thanks to its strong brand.

The camera industry had reached a mature phase towards the late 1970s. By that point,
Japanese firms like Canon, Nikon, Olympus and Fujifilm had entered the scene and
captured market shares primarily from European companies like Leica and Rollei.
Technologically speaking, the industry had reached a point of saturation. Rolls of silver-
halide film in various formats were used in cameras that were essentially based upon
precise mechanics. Though the first digital camera which used a Charge Coupled Device
(CCD) had been exhibited in 1975 by Kodak, it had not caused any panic among the
established firms.

The entire camera industry was instead shaken in 1981 when Sony introduced its Mavica,
the first fully electronic, non-film-based camera. The camera stored images on floppy
disks instead of on film. It was presented as a still-video camera; images were captured
by a CCD chip, transformed into electric signals which were handled by processors inside
the camera, and thereafter stored on a floppy disk. 50 photos could be taken and viewed
on a TV screen later.

Many Japanese companies became concerned that this new technology would eventually
replace their current products. A few years later, Canon, Fuji, and several other firms had
developed their own versions of the Mavica which they exhibited at the annual Photokina
fair. Photo journalists argued by that time that the camera industry would become
computerized at the same pace as the calculator and watch industries had been during the
preceding decade.

At Hasselblad, the company’s CEO Jerry Öster tried to figure out how this potential
threat should be handled:

“I met with Sony’s CEO and the person behind the Mavica project. It soon became clear
to me that the technology had so many drawbacks and limitations that it would not
become a commercial success.”

After having consulted Hasselblad’s R&D manager, Lennart Stålfors, Öster concluded
that several technological breakthroughs were needed before the Mavica concept could
threaten analog photography. Öster and Stålfors also agreed that digital imaging would
have a future and that the company ought to learn more about the new technology.13

5

Hasselblad’s attitude toward digital imaging in the early 1980s is well captured by the
following quote from Jerry Öster:

“Even though I did not believe in the Mavica concept, I was convinced that the photo
chemical film would in the future be subject to serious competition from electronic
photography and would eventually be replaced by this technology.”14

Hasselblad Electronic Imaging
Instead of trying to develop a digital camera, Hasselblad started to explore the new
technology through various applications. Lennart Stålfors had a background in electrical
engineering and had previously been working on adding electronic features to the
Hasselblad system. Among other things, he had been involved in a development project
together with SAAB and a professor at the Royal Institute of Technology in Stockholm,
which concerned a machine for image analysis. The final product was named OSIRIS,
and was primarily intended for digital analysis of images taken by aircraft and satellites.
In the end, the project became a commercial failure – the price was too high and the
image quality too low. After two years, Hasselblad therefore left the project in 1982.

The insights Stålfors gained from this project made him realize that the technology for
telephoto transmission, i.e. the sending of images over the phone line, was
underdeveloped. Images lost considerable amounts of quality when being sent over the
phone line. Consequently, photographers had to bring with them darkrooms in order to
finish photos and send them. The equipment weighed 10-12 kilos, which in combination
with the darkroom became a heavy burden for photographers. The analog technology also
implied that small amounts of noise over the phone line would generate significant
distortions of the images. Could Hasselblad perhaps use digital technology in order to
create a telephoto sender that was faster and offered superior image quality? Such a
product would clearly make the everyday life of the photographer much easier.15

Jerry Öster thought that this was a good idea and Hasselblad now started to look for a
potential partner. Lars Falén at Expressen – one of Sweden’s dominant newspapers by
that time – was contacted. Hasselblad wanted someone to start using their coming
product and thereby create attention around it. Falén thought that such a telephoto
transmitter would be interesting to use during the Olympic Games in Los Angeles 1984.
He explained that the newspaper only had 30 minutes until press stop after the last finals
and he needed a product which would enable the last photos to be included.

The development work started towards the end of 1982 and about five persons were
involved at Hasselblad. With these scarce resources and a sharp deadline 18 months away,
6

the team worked very hard and eventually two functioning prototypes of the Digiscan
joined when Expressen went to Los Angeles in July 1984. The name was an abbreviation
of the Digital Scanner which could digitize film and offer 1-megapixel resolution of the
scanned film. The images were sent via modem, directly from the Olympic stadium to
Stockholm, Sweden. By doing so, the photographer gained about 40 minutes and
obtained much better image quality.16

The Digiscan became a great success for Expressen since the newspaper could get
pictures in print faster than its competitors. The news agency Agence France Presse (AFP)
became interested in the product and offered Hasselblad a visit to Paris in order to discuss
a potential collaboration. The two parties agreed that Hasselblad would develop Digiscan
further provided that AFP bought 40 of them, for 120,000 SEK each. AFP signed and
paid one third of the sum up front, and this led to the development of the Dixel.

Hasselblad’s work had initially started off as an ambition to learn more about digital
technology and turned quickly into a business opportunity. The company now had to
decide how the digital development should be organized. Digiscan had been developed
by Hasselblad’s R&D department. It had taken some of the key staff into account and
moreover, this project had been fundamentally different from the daily development work
at Hasselblad. Jerry Öster thought that digital development should be put outside the
parent company and therefore started the subsidiary Hasselblad Electronic Imaging AB
(HEIAB) in 1985. The former R&D manager, Lennart Stålfors, became the CEO of the
new company. Jerry Öster and Hasselblad’s CFO Bengt Ahlgren were also members of
the board. In the annual report from 1985, Öster wrote: “The Dixel 2000 is a natural link
for Hasselblad between the traditional chemical photography and tomorrow’s electronic
image technology”.17

Initially three employees worked at HEIAB. The ambitions were not very high in the
beginning and the subsidiary was often regarded as an attempt to create knowledge rather
than profits. The subsidiary had only six employees in 1986, but grew rapidly over the
coming years. The Dixel was launched on a much bigger scale than the Digiscan and the
demand for it grew quickly. During 1987, it was used at many large sports events, for
instance the global athletics championships in Rome. As sales grew, HEIAB became
increasingly profitable. The subsidiary had only cost 3.5 MSEK before it reached break-
even in 1988.

Over time, several other products related to digital transmission and handling of images
were developed. By the early 1990s, HEIAB’s turnover had grown to about 50 MSEK
and showed good profitability. In 1990-91, 20-25 percent of the company’s total profits
came from an organization that had only existed for a couple of years.18

7

Turnover Profit Profit Margin
(MSEK) (MSEK) (%)
1985 0 0 0
1986 4 0 0
1987 11 0 0
1988 20 2,5 12,5
1989 30 5,6 18,7
1990 48,6 11,6 23,9
1991 60 11 18,3
1992 48 3,5 7,3
The table above contains financial data about Hasselblad’s subsidiary, Hasselblad
Electronic Imaging, during the years 1985-92.19

The work at HEIAB generated valuable knowledge and created a new source of profit for
the company.20 In the 1980s, the medium-format segment of the camera industry became
increasingly saturated and was even subject to negative growth. Hence, the profits that
came from HEIAB were needed in the mother company since it was hard to find new
sources of growth within the core business.

By the late 1980s, the uncertainty regarding digital imaging was still very high. Both
Canon and Fujifilm had tried to launch their own versions of digital cameras without any
success. Many electronic still-video cameras had been shown on camera exhibitions
during those years. They all had two things in common: poor image quality and a high
price. Since the early 1980s, photo journalists had claimed that analog photography
would become history within the coming 2-3 years. Parallels were often drawn to the
instant digitization of calculators and watches during the 1970s and early 1980s. By the
end of the 1980s it was obvious that the same thing had not happened yet in the camera
industry.

The parallel to watches and calculators was in fact not entirely accurate. The most notable
difference is that the digital technology in a calculator or a watch does not have to be
light-sensitive. In the cases of watches and calculators, electronics displaced discrete
mechanical parts inside the products. Cameras, however, were different. Both analog and
digital cameras contain large amounts of optics, chemistry, precise mechanics and
electronics. Moreover, the fact that an image sensor has to be light-sensitive implied that
the demands upon digital technology were significantly higher within the camera industry.
For instance, by the late 1980s, Nikon launched a still-video camera with 0.6 megapixels.
A photo taken with an analog Hasselblad camera would correspond to about 36
megapixels whereas a photo with small-format film would be similar to 10 megapixels.

8

Summing up, Hasselblad changed during the 1980s from having been a manufacturer of
mechanical cameras to a company that also works with various elements of imaging. The
scope of Hasselblad’s business had been extended and digital technology was the main
ingredient in this change.

“We should not become a new Facit!”
”Hasselblad’s long-term survival may depend upon how much resources we invest in the
development of a new digital camera.”
CEO Jerry Öster at a board meeting, 10 February 199421

As was concluded above, HEIAB became a great success. At its peak, the subsidiary had
43 employees in 1992, but the times were about to change. Much of HEIAB’s success
could be attributed to the telephoto transmitter Dixel. However, in 1992, Nikon launched
a telephoto scanner which revolutionized the industry. It was better than the Dixel in all
respects and consequently, sales diminished rapidly for Hasselblad. Responding to such
formidable competition was not an option for a small niche player like Hasselblad, and
therefore HEIAB instead focused on software over the coming years. Nikon’s hardware
and HEIAB’s software came to dominate the market for a few years, but nevertheless,
HEIAB had reached a dead end around 1993-94.22

Another important change was also taking place in these years. After 16 years as CEO,
Jerry Öster now left the company. Before leaving Hasselblad, he pointed out that the
long-term survival of the firm would to a large extent depend upon how much resources
the company spent on digital imaging. Incentive, the owner of Hasselblad, listened to this
advice and started to look for a CEO who could take Hasselblad into the digital era.23
Eventually they recruited Staffan Junel. He had a background as an engineer in computer
science, with many years of experience from the telecommunications company Ericsson,
and had long experience of working with digital technology. One of the first things he did
as CEO was to gather the top management and all expert engineers in order to discuss the
long-term prospects for the company. Junel recalls:

“We tried to look into the future and understand where the company would be in 2010.
This question inevitably drew us to the issue of the substitution of film by digital imaging.
We agreed that 50 percent of our market would be digital somewhere around 2005.”24

While some of the electronic engineers thought that this would happen even earlier,
others argued that it would take more time. But they all agreed that digital technology in
the long run posed a serious threat to the established camera industry. Junel thought that
it was important for Hasselblad to develop its own digital products in order to obtain
9

knowledge that would be needed in the future. The board agreed that it was time to invest
more in digital imaging. Therefore, a new division called digital photography was started
inside the parent company in autumn 1993.25 The initial purpose was not to develop a
digital camera, but rather to learn more and follow the development, especially in the area
of image sensors.

Junel recalls how top management kept repeating that “Hasselblad will not become a new
Facit”. Facit was a Swedish manufacturer of mechanical calculators that collapsed in
1971-72 due to the rapid shift to electronics. Ever since, Facit had been regarded as an
infamous example in Sweden of what happens to firms when they oversleep
technological shifts.

The new division was headed by the former CEO of HEIAB, Lennart Stålfors. Since
HEIAB was now in sharp decline, many engineers from the subsidiary moved to the
digital photography division. After some time of knowledge development, Stålfors
argued that the improvements in the area of image sensors had been so rapid that it was
now time for the company to start developing a new camera system. Junel explained this
to the owner and asked for more resources. Incentive wondered whether Junel was
willing to terminate the analog development activities at this point. Junel argued that
development of the analog system was still needed, but that it did not have to take place
with the same intensity as before. The conflict between analog and digital development
would become much stronger over the next years. However, Incentive agreed with Junel
at this point and provided some more resources. Even though the company spent about
twice as much on analog development, this should still be regarded as a major step into
digital imaging for a small company like Hasselblad. After all, digital imaging would in
many ways render the existing skills in precise mechanics obsolete. The company
therefore sought to renew its competence base at an early point. Additionally, from 1992
and on, Hasselblad sought to make their cameras compatible with digital backs. In 1994,
several cameras could use digital backs, which enabled the photographer to see the
images directly after they had been captured.26

’Crystal Ball’ – development of a digital camera
It soon became clear that digital imaging had properties which made it significantly
different from analog photography. For instance, at this point it was virtually impossible
to photograph moving objects when using a digital camera. Even though the image
quality was surprisingly good at this early point, it did not correspond to what
Hasselblad’s film-based images could offer. For decades, Hasselblad had relied upon
superior image quality in their marketing activities. Additionally, image sensors were
very expensive. However, digital imaging had other characteristics that could make it
10

attractive. For example, images could be viewed instantly, and could be copied, sent and
manipulated in a more convenient way. Moreover, an infinite amount of images could be
captured at virtually no cost. In photography segments such as photo journalism, many
images were digitized sooner or later, and digital imaging could remove one step in this
process.

These properties implied that the company had to look for niche applications where
digital imaging could create more value than analog technology, despite its lower image
quality and higher price. After having performed some market research, Stålfors and his
colleagues thought that studio photography would be such a niche.27 In this segment,
customers could be willing to trade off some image quality in order to capture, duplicate,
manipulate and send images at a much lower cost. The fact that such a camera had to be
big and stand on a tripod would not be a problem for this customer segment. The idea
was to start off with small volumes, charge a lot of money (about 50,000 USD for a
camera), then make incremental developments of the system and lower the price over
time. It would initially be targeted at large studios, catalogue and product photography,
and later on enter Hasselblad’s mainstream segment of wedding and portrait
photography.28 The project was pursued under the name ‘Crystal Ball’, for two reasons.
Firstly, the product would in the end look like a crystal, and secondly, one hoped that it
would guide the company into the future just like a crystal ball.

The engineers made sure to create a modular system in order to enable future
improvements of each component. While the ambition was to create a commercial
product, the main purpose was not to dominate the market with it. Rather it was an
attempt to establish Hasselblad as a digital actor and have a system to start with for
further development of different cameras. At its peak in 1996, the project involved more
than 20 people at the company.

As mentioned above, the image quality was relatively poor for a long time. However, in
1993-94 one could obtain up to 16 megapixels by using several sensors or letting it slide
over the object. But in order to launch a commercially viable product it was necessary to
develop a sensor that had the right size and price. Therefore Hasselblad initiated a
collaboration with Philips which resulted in a 6-megapixel sensor at a reasonable price.
By that time, most image sensors had the shape of a square and were 2000*2000 pixels
big. A 2000*3000 sensor would thus give a 50 percent better image quality, but since
most images are cropped into a rectangular shape, the difference was in reality around
100 percent, or more.29 For several years, Hasselblad was the only company that had
access to this sensor, which of course gave them a competitive advantage around 1995-97.
Several firms were interested in using the sensor – for instance, discussions were initiated
with Agfa who wanted to buy the rights to use it.30 Moreover, this sensor offered perhaps

11

the best price/performance ratio on the market in those days. 31 Philips was keen to
collaborate with Hasselblad due to its strong brand and, in total, Hasselblad only had to
spend about 2 MSEK on this project. This figure is about 60 percent lower than what
Philips would have demanded from other actors. From this work, it would also have been
possible to develop a 3*4 sensor of 12 megapixels later on. Hence, while being a
collaboration where both parties contributed to the technical development, the project
was very favorable on Hasselblad’s behalf.

In parallel with the development of a digital studio camera, some minor changes were
made to the analog system. A couple of models were developed and Hasselblad sought to
diversify its system a bit. By offering a couple of models at a lower price, more
photographers could use the Hasselblad system. But no major changes were made in the
camera system during these years. At this point, Hasselblad had essentially sustained the
same system for more than 40 years. Consequently, it had become very complex due to
all small improvements over time. Competitors like Mamiya, Pentax and Contax were
now introducing autofocus in their cameras, something that Hasselblad lacked and could
not integrate into their current system. Hence, the need for a new camera system became
more important over time and the analog development team grew increasingly frustrated
over this fact. The development of a completely new camera system was considered in
the late 1980s and early 1990s, but management hesitated and eventually decided not to
do so at this point. One reason for postponing this work was that they believed it would
become too expensive for a small player like Hasselblad.

Consequently, the company became more polarized in the mid-1990s. Digital technology
had been controversial when HEIAB was founded in the 1980s, but it became even more
sensitive when it came to developing cameras. Hasselblad had been split into two camps
– one analog and one digital. They competed for the same pool of resources within the
company and had fundamentally different ideas about what Hasselblad was, and what it
was going to be.32 Under these circumstances, the company was bound to be a place with
a lot of conflicts and fierce arguments. The project manager for Crystal Ball, Lennart
Stålfors, thought that “I had to spend a disproportional amount of time defending the
project instead of working with development activities.”33 But this was just the beginning.

The ‘Big Berta’ camera and private equity
”By the year 2000 digital cameras may replace film photography for most uses”
MacWEEK 13th of May, 199434

Towards the end of 1995, Incentive changed its scope of ownership and decided that it
was time to sell Hasselblad. During the years that the company had owned Hasselblad,
12

large amounts of resources had been spent on digital technology. In that respect Incentive
had maintained a long-term scope of ownership. However, once it had been decided that
Hasselblad should be sold, the owner made sure to get as much as possible of the cash
that had been accumulated in the company over the last decades. The firm had been very
well capitalized, partly in order to be able to pursue one analog and one digital
development project in parallel. This opportunity was lost through the dividends that
were taken by Incentive before selling the firm.35

Incentive sold its shares in Hasselblad to UBS Capital, the private equity branch of the
Union Bank of Switzerland, to the British private equity firm Cinven and to Hasselblad’s
management. Since UBS controlled 55 percent of the shares, the fate of Hasselblad was
now in the hands of a Swiss bank. At Hasselblad and in the local media, people were
concerned that the new owner lacked a long-term scope of ownership. UBS had declared
from the beginning that they did not intend to own the company for more than 3-7 years.
Moreover, UBS intended to do a leveraged buyout, i.e. to buy an asset with borrowed
money, increase its value, sell it and thereby obtain a high return on equity. Hasselblad
was therefore acquired partly by borrowed money, which was brought into the company
that now had to pay off those interest rates. Hence, within only a few years the company
went from being very well capitalized into being severely under-capitalized. Needless to
say, this had a large impact on how Hasselblad could handle the shift from analog to
digital photography.

The new owner now had to make up its mind regarding the Crystal Ball project. Towards
the end of 1995, a prototype was almost ready and the board was keen to see what
progress had been made. As mentioned earlier, the camera had been developed in order to
suit studio photographers. It was a very odd product and did not look like anything
Hasselblad had offered previously. The camera could not be carried to the boardroom;
instead, the board had to come to the room where it was standing in order to see it. The
product looked more like a computer than a camera, stood on a tripod and was connected
with wires to a computer where the images could be displayed. Afterwards, people at
Hasselblad referred to the camera as ‘Big Berta’ since it was clumsy and had the same
shape as the golf club with that name.36

The new board became skeptical when they saw the prototype. One person who attended
the meeting recalled that the product “was gigantic and did not even look like a
camera.”37 Other people had a different point of view:

“Those who understood the niche for digital technology saw its advantages and realized
that the camera had a potential. But the board related it to the analog technology and
therefore dismissed the camera.”38

13

All in all, it was not an easy task to convince a financially oriented investor that this
camera was the right way to a successful leveraged buyout. The digital development team
tried to underline that this was just a prototype and that it would only require an
additional 13 MSEK or so before it could reach the market. Moreover, they tried to
explain that a camera aimed for studio photography and catalog production did not have
to be light and portable or offer stunning image quality. It was enough that plenty of
images could be captured rapidly at a low cost and then be handled in a much more
convenient way. Furthermore, the image quality was relatively high and pictures could be
enlarged up to 0.5 square meters without any problems. Hence, the customer utility was
in fact large, yet different from what Hasselblad had offered their customers previously.
However, it should be underlined that the studio photographers at IKEA who saw the first
prototype thought that it was too big and clumsy for them. Even within this segment it
was after all important to move the camera, if only just slightly.

Despite the above-mentioned advantages, the board remained very concerned after
having seen ’Big Berta’. The new owner thought that such a product could harm
Hasselblad’s brand and its image of being a high-end camera. Another issue that was
raised at this point was the fact that digital technology had started to prosper in
Hasselblad’s market segment in the shape of digital backs. A digital back was a
component that could be added to an analog camera by removing the film magazine. The
back contained an image sensor that captured the pictures electronically. Those backs
were primarily manufactured by entrant firms such as Leaf Systems, Imacon and Phase
One, but Kodak had also developed some products in this area. UBS appointed Andersen
Consulting to perform an investigation into these issues during the end of 1996. They
concluded that the industry would be subject to fierce competition once it became digital,
and recommended Hasselblad to develop a solution based upon digital backs.39

After having received more resources for many years, Stålfors and the digital
development team were now suddenly in a lot of trouble. Questions were raised regarding
why so much money was spent on things that were outside the company’s core
competence. Moreover, the board had become increasingly frustrated over all deadlines
that had not been met. Staffan Junel was a firm believer in digital imaging and kept trying
to persuade the new owner that it was worth pursuing the initiated project. He failed, and
eventually left the company since he could not enact a strategy he did not believe in.

The division for digital photography made one last attempt. Since the board had
concluded that the digital back solution was preferable to ‘Big Berta’, the electronic
engineers sought to develop a digital back in a very short period of time. The 6-
megapixel image sensor was now built into a digital back, which had circuits pointing out

14

on both sides and was nicknamed ‘Mickey Mouse’ since it looked like the head of the
same Disney character. The digital back was brought to the board meeting where it was
going to be decided what should be done with digital photography. Stålfors and his
colleague Carl Henrikson attached ‘Mickey Mouse’ to a Hasselblad camera, took photos
of the board and showed it to them on a computer screen during the meeting. This little
prank was not appreciated by the members, who remained firm in their decision to stop
all internal development of a digital camera. The new board motivated their decision by
saying that Hasselblad’s customers did not demand a digital camera.40 These turbulent
events were very briefly summarized in Hasselblad’s annual report from 1996:

"The board also decided that the digital activities should be changed towards a focus on
marketing and sales”.41

After this decision had been made, almost the entire digital development team had to
leave the company. Only 3 persons were invited to stay in order to keep the company
updated and pursue collaborations instead of developing products and technologies.
Needless to say, the electronic engineers were very disappointed about this decision. In
one internal discussion, the following statement was made on an overhead slide:

“If the chemical waste from film processing could be turned into beer – film would have
a bright future!”42

Hasselblad had basically laid off all its digital capabilities, an asset that had been
developed for almost 15 years in different ways. The company also lost its exclusive
access to the image sensor that was co-developed with Philips. Contax tried to use the
same sensor when developing a digital single reflex camera in the early 2000s, but
eventually failed to launch a viable product. The decision to stop all digital development
was made public in early 1997. A press release to Dagens Industri contained the
following text:

“The costly development of a new digital camera has been sold…the optimal digital
camera will thereby have to be developed by someone else. By doing so, the company
saves 15-18 MSEK…that can be invested in development of conventional cameras as
well as adapting them to digital technology.”43

Göran Diedrichs, UBS’ representative, defended the decision:

“Digital technology is still in its infancy. When it has been developed further we will of
course enter and then we need to have a strong financial position.”

15

In the same article, Diedrichs stated:

“We have been a technology driven company up until now. We have to develop products
that are interesting for the market.”44

The description of the company’s history above suggests that Hasselblad had been a very
market-oriented company over a long period of time. Over decades, the firm had
succeeded in charging premium prices by relying upon clever marketing and sustaining
its legendary brand. With the exceptions of HEIAB and the digital photography division,
Hasselblad had not really pursued any development activities for many decades. Its
analog camera system was essentially the same as it was in the late 1950s. The problems
that Hasselblad would encounter over the coming years were largely related to the fact
that the company had been too “market-oriented” over a long period of time.

The shift to digital imaging
The fact that Hasselblad had postponed all analog development activities and never
created a new camera system in the early 1990s meant that the firm now started to lose
market shares to its competitors. While the brand helped the company to keep its market
in the short term, inferior products eventually resulted in lower volumes. Hasselblad
therefore lost market shares to its competitors in 1997-1999.

Consequently, it became more and more urgent to develop a new camera system.
Therefore, the H1 project was initiated in 1998 with the purpose of generating a
completely new system. The idea was to create a hybrid camera, one which would be
compatible both with film and with digital backs. Moreover, the system would
incorporate many new features such as autofocus. The company had not done anything of
this magnitude since the 1950s, and this was one of the reasons why the project was
severely delayed and in the end cost 320 MSEK. However, 50 percent of it was in fact
funded by Fujifilm who, among other things, developed the lenses that were specified by
Hasselblad and in return got the opportunity to launch the same camera in Japan under its
own brand.45 The new system was not launched at full scale until late in 2002. During the
period 2000-2003, Hasselblad suffered severely from a sharp decline in their analog sales.
Professional photographers were rapidly changing to digital camera systems, primarily
from Canon and Nikon. For decades, Hasselblad had dominated the segment of wedding
and portrait photography. This part of the market was now lost within only a few years, to
companies which had not been Hasselblad’s competitors previously.

When the H1 finally arrived, it was not really a digital camera. While compatible with
digital backs, it was delivered with a film magazine and therefore never really perceived
16

as a digital system. The freedom to shoot either analog or digital turned out to be of little
use for photographers, who were instead frustrated by the fact that they had to buy digital
backs separately. Moreover, such a system would cost about 100.000 SEK more than
Canon’s or Nikon’s high-end cameras and, in the end, many photographers were not
willing to pay that much for a Hasselblad system. Advanced Digital Single Reflex
cameras which were smaller and cheaper, and offered sufficient performance, started to
displace Hasselblad’s high-end products. Therefore, the H1 did not become the expected
success and it could not really compensate for the rapidly declining analog revenues.46

In November 2004, Hasselblad laid off 50 percent of its work force and balanced at the
brink of bankruptcy. By that time, the company had gone from having about 500
employees to around 75 in less than ten years. After having invested in digital imaging
more than two decades earlier, Hasselblad was now about to repeat the infamous “Facit
story”, even though its former managers had sworn that this would not happen.

The company eventually survived through yet another ownership change and a merger
with Imacon, a Danish manufacturer of digital backs. In 2005, Hasselblad could for the
first time deliver a complete digital camera system on its own and became even more of a
high-end company than before. The H system was very expensive and offered such
extreme performance that it is primarily used today in very special applications. In the
following years, the company made some upgrades to its new system and kept delivering
profits until the recession in 2008. Since then, a couple more layoffs have taken place.

Discussion and conclusion
The story of Hasselblad’s long and troubled journey from analog photography to digital
imaging provides some interesting evidence regarding how industries are digitized, and
what challenges companies face in such shifts. One main challenge seems to have been
that Hasselblad’s skills related to precise mechanics were to some extent rendered
obsolete. In this sense, the shift to digital imaging was competence-destroying.

Digital imaging also possessed some disruptive characteristics. It initially offered worse
image quality, as well as some new performance attributes such as the ability to take an
infinite amount of photos at a very low cost. However, it did not prosper in a low-end
segment or in a new market as Christensen’s disruptive innovation framework would
suggest. Instead, it grew in Hasselblad’s high-end segment in the shape of digital backs
from the early 1990s onward. The main reason for this seems to be that digital technology
could simplify the daily work for studio photographers. This description is partly
inconsistent with the disruptive innovation framework, which posits that technologies
with the above-mentioned attributes prosper in low-end segments or in a completely new
17

market. Hasselblad’s customers did in fact demand the new technology, and thus the
main managerial challenge was not related to a lack of financial logic as stated by
Christensen.

The main problem seems rather to have been that digital imaging started to prosper
around a new way of creating value, and Hasselblad was not used to delivering this kind
of value to its customers. The market organization and the mechanical engineers thought
that this technology was incompatible with Hasselblad’s brand, which could be regarded
as its most important complementary asset. For a financially oriented owner with a short-
term scope of ownership, it was easier to focus on the core business of Hasselblad and
develop the H1, which was a sustaining innovation in the sense that it resembled what the
company had offered its customers previously.

The typical “Christensen effect” of attack from below and a displacement of firms which
listened to customers instead happened when the company lost market shares to Canon
and Nikon. When combined with a digital back, the H1 offered superior image quality,
but most photographers still preferred a smaller, cheaper DSLR camera which offered
sufficient image quality.

This pattern of disruption from below via a continuous miniaturization and decreasing
prices can be seen in several industries which have been digitized. The first transistor
radios were primarily targeted at the military and were very expensive. When the price
levels declined and the performance improved, smaller and simpler versions of the same
technology could be sold to consumers.47 Electronic calculators followed a similar pattern.
They were first introduced in price-insensitive segments such as the military and
scientific laboratories.48 In the mid-1960s, they entered the office machine segment and
started to displace mechanical calculators. When prices had declined even further, small
and cheap pocket calculators were introduced to the consumer market, and these products
eventually turned out to be good enough for many professional applications as well. The
description of how digital imaging initially prospered in Hasselblad’s high-end segment
in the early 1990s can be regarded as another illustration of how digital technology grows
in high-end segments by bringing new performance attributes to the market. As image
sensors became smaller, cheaper and better, the dominant design for professional digital
cameras shifted from medium-format cameras with digital back to high-end Digital
Single Reflex cameras. Hasselblad chose to stay in the medium-format segment and
consequently experienced declining sales in recent years. Few photographers are willing
to pay so much more in order to get a camera which is bigger, heavier and offers a great
image quality.

18

This pattern can be regarded as an effect of Moore’s law, i.e. the rapid decline in prices
and increasing performance over time. Digital technology starts off as big, expensive and
often with poor traditional performance such as image quality. However, it often brings a
new value proposition to the market which still makes it attractive for high-end segments.
As the performance of digital technology improves, it can eventually be miniaturized and
enter lower segments, where the smaller versions eventually displace the bigger digital
calculators, radios, cameras and disk drives. The process of low-end disruption as
described by Christensen can therefore be thought of as a consequence of Moore’s law
and the continuing decline in prices and improvement in performance. While the
technology initially prospers in sophisticated segments, as was illustrated in the
Hasselblad case, the low-end disruption happens later on.

Summing up, Robert C. Noyce unintentionally managed to make a somewhat accurate
description of Hasselblad’s fate, about 25 years before the company balanced at the brink
of bankruptcy. Digital technology has created a lot of industrial turbulence, often by
displacing precise mechanics, and established firms have struggled to survive those
technological shifts. Hasselblad and the camera industry were no exception to this pattern.
In 2004, the CEO of Hasselblad, Lars Pappila, stated that “the shift to digital technology
was much more dramatic than we had expected”.49 Hasselblad was not the first, nor the
last, company to end up in this way, despite all its efforts over several decades.

Christian Sandström is a PhD Candidate at Chalmers University of Technology,
Gothenburg, Sweden. His research interests concern the digitization of industries and the
challenges this presents for established firms. Christian has among other things looked at
how electronics has emerged in cameras, calculators and video surveillance. Sandström
holds an M.Sc. in industrial engineering and an M.Sc. in economics.

Readers may contact Christian Sandström at Vera Sandbergs Allé 8, Chalmers
University of Technology, 412 96 Gothenburg, Sweden; email
christian.sandstrom@chalmers.se.

19

References

1
Noyce, Robert. "Microelectronics." Scientific American 237, No.3 (September 1977),
pp. 63-69.
2
Braun, E. and Macdonald, S. Revolution in Miniature: The History and Impact of
Semiconductor Electronics. New York: Cambridge Press, 1978.
3
Tripsas, M. and Gavetti, G. (2000), Capabilities, cognition and inertia: evidence from
digital imaging, Strategic Management Journal, 21(10-11), pp. 1147-1161.
4
Schumpeter, Joseph (1936), The Theory of Economic Development: An Inquiry into
Profits, Capital, Credit, Interest, and the Business Cycle (Cambridge, Mass.: Harvard
University Press).
5
Foster, Richard (1986), Innovation: the Attacker’s Advantage, Summit Books, New
York.
6
Tushman, M. and Anderson (1986), Technological discontinuities and organizational
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Tripsas, Mary and Gavetti, Giovanni (2001), Capabilities, Cognition, and Inertia:
Evidence from Digital Imaging, Strategic Management Journal, Vol. 21, No. 10/11,
Special Issue: The Evolution of Firm Capabilities (Oct. - Nov., 2000), pp. 1147-1161.
8
Christensen, C.M. (1997), The Innovator’s Dilemma, Harvard Business School Press,
9
Christensen, C.M., Raynor, M.E. (2003), The innovator’s solution – Creating and
sustaining successful growth, Harvard Business School Press, Cambridge, Massachusetts.
10
Moore, Gordon (1965), Cramming more components onto integrated circuits,
Electronics, April 19, pp. 114-117.
11
Lécuyer, Christophe (2006), Making Silicon Valley, Innovation and the growth of High
Tech, 1930-1970, MIT Press.
12
Hasselblad Annual Reports, 1984-1990.
13
Interview with J. Öster, conducted by C. Sandström and J. Jörnmark, 24 April 2007.
14
Öster, J. (1992), Vår fortlevnad och våra tekniska satsningar. In: Granstrand, O.,
Bohlin, H. Så leder vi, Liber Ekonomi, Malmö.
15
Interview with L. Stålfors, conducted by C. Sandström, 28 June 2007.
16
Interview with F. Bergquist, conducted by C. Sandström, 9 April 2008.
17
18
Hasselblad Electronic Imaging, Annual report 1991.
19
20
Memorandum by L. Stålfors, 10 September 1990.
21
Minutes from Hasselblad board meeting, 10 February 1994.
20

22
Report concerning Hasselblad Electronic Imaging, June 1993.
23
Minutes from board meetings, 1989-1994
24
Interview with S. Junel, conducted by C. Sandström, 6 November 2007.
25
Internal Memorandum, by L. Stålfors, June 1997.
26
Hasselblad Annual Report, 1994.
27
Interview with R. Cederberg conducted by C. Sandström, 3 March 2008.
28
Memorandum by R. Cederberg, 14 August 1995.
29
Mail Conversation between R. Cederberg and C. Declerk, 10 February 1997.
30
Mail conversation between L. Stålfors and H. Wellius, 30 August 1996.
31
Internal company presentation by L. Stålfors, 1997.
32
Mail Conversation between L. Stålfors and C. Sandström, 17 October 2007.
33
Mail from L. Stålfors to S. Junel, 8 October 1995.
34
MacWEEK 13 May, 1994.
35
36
Interview with B. Ahlgren and C. Henrikson, conducted by C. Sandström, 26 June
2007.
37
Interview with S. Arvidsson, conducted by C. Sandström and J. Jörnmark, 14 May
2007.
38
Interview with P. Mark, conducted by C. Sandström, 8 January 2008.
39
Interviews with B. Ahlgren, conducted by C. Sandström, 9 November 2007 and 9
January 2008.
40
Interview with L. Stålfors, conducted by C. Sandström, 25 February 2008.
41
Hasselblad Annual Report, 1997.
42
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43
Dagens Industri, January 1998.
44
Göteborgs-Posten, 10 April 1997.
45
Interview with G. Bernhoff, conducted by C. Sandström, 4 January 2008.
46
Interview with P. Mark, conducted by C. Sandström, 24 September 2007.
47
Jörnmark, Jan and Ramberg, Lennart (2005), Globala Förkastningar, Studentlitteratur.
48
Utterback, J. (1994), Mastering the dynamics of innovation – How companies can seize
opportunities in the face of technological change, Harvard Business School Press, Boston,
Massachusetts
49
Affärsvärlden, 8 June 2004.

21

Int. J. Technology Management, Vol. X, No. Y, xxxx 1

High-end Disruptive Technologies with an inferior
performance

Vera Sandbergs Allé 8
Technology Management and Economics
Chalmers University of Technology, SE-412 96
Göteborg, Sweden
christian.sandstrom@chalmers.se

Abstract: The literature on disruptive technologies has previously stated that
those innovations often emerge in low-end segments or in new markets and as
the performance improves it eventually displaces the old technology. This
article aims to explain how and why a technology may prosper in high-end or
mainstream markets despite its initially lower performance and does so through
three in-depth case studies. The findings suggest that those technologies may
compensate the inferior performance by simplifying and removing work for
customers. For instance, digital imaging emerged in high-end segments since
these customers were willing to trade off the initially lower image quality in
order to remove the usage of film. Based upon these results, the paper
concludes that the literature on disruptive technologies needs to maintain a
more nuanced view of value and how it is created and distributed inside the
customer’s organisation.

Keywords: Disruptive technologies, high-end, inferior, performance,
Hasselblad, high-end, Facit, digital imaging, IP video surveillance

Reference to this paper should be made as follows: Sandström, C. (2010)
‘High-end Disruptive Technologies with an inferior performance’, Int. J.
Technology Management, Vol. X, No. Y, pp.000-000.

Biographical notes: Christian Sandström is a PhD Candidate at the Center for
Business Innovation at Chalmers University of Technology, Gothenburg
Sweden. He holds an M.Sc. in industrial engineering and an M.Sc. in
economics. Christian’s research interests concern technological change and the
challenges they imply for incumbent firms.

1 Introduction
For many decades, scholars have primarily looked inside the firm (e.g. Tushman and
Anderson, 1986) in order to explain why established companies tend to encounter
difficulties in the face of technological shifts. Christensen (1997) brought a different
perspective upon this issue by looking at the firm’s external environment and argued that
those technologies which initially underperform according to the demands of mainstream
customers tend to be problematic for established firms. Christensen and Raynor (2003)

Christian Sandström 2

claimed that there are two forms of disruptive technologies, namely those which emerge
in low-end segments and in new markets.
Other scholars have stated that previous literature has largely overlooked the issue of
high-end disruptive technologies (e.g. Govindarajan and Kopalle, 2006). However, it is
not entirely clear how and why a technology with lower traditional performance would
emerge in a high-end application or in a mainstream market and more empirical evidence
on this phenomenon is needed.
This article explores how and why disruptive technologies may prosper in high-end or
mainstream applications despite their inferior performance. It is done by conducting a
detailed multiple case study of how three such technologies have emerged in high-end or
mainstream segments in different industries.
The remainder of this paper is organized as follows. The next section contains a
theoretical exposition whereas the subsequent section provides a description of the
methods used in this paper. Then the case studies are presented and analysed. The final
part contains a discussion and some managerial implications.

2 Theoretical Exposition
It is well documented today that established firms may encounter difficulties in the face
of discontinuous innovation (e.g. Utterback, 1994). A discontinuous innovation can be
defined as a major change, related to either a technology or a business model (Veryzer,
1998). Incumbent companies are usually good at innovation under steady, stable
circumstances, but when technologies shift or new business models are introduced they
can all of a sudden become vulnerable. Frequently, established firms struggle to survive
these changes; they lose market shares and are displaced by entrants.
Answers to this puzzle have often been sought by looking at supply-side factors and
the firm’s existing resource base (Cooper and Schendel 1976; Henderson and Clark,
1990). For instance, Tushman and Anderson (1986) wrote about competence-enhancing
and competence-destroying innovations. They argued that innovations which destroy the
value of a firm’s existing competencies are very difficult to manage, because established
firms are bound by traditions, sunk costs and internal political constraints.
Christensen (1997) rejected previous explanations of incumbent failure which had
primarily looked inside the firm. Instead, he drew upon resource dependence theory
(Pfeffer and Salancik, 1978) in order to explain the decline of established firms. This
theory suggests that a firm’s freedom of action is in fact controlled by actors outside the
boundaries of the company. Since customers and owners are the key stakeholders that
provide a firm with resources, they also impose a great indirect control of the decisions
that are taken and how resources are allocated. In addition to this, Christensen applied the
concept of value networks defined as “the context within which the firm identifies and
responds to customer’s needs, procures inputs and reacts to competitors” (Christensen and
Rosenbloom, 1995, p. 234) when explaining incumbent failure.
Bower and Christensen (1995) argued that a key determinant of the probability of
survival for an incumbent is whether the new technology addresses the preferences of
actors in the existing value network. From this theoretical base, they explained the pattern
of incumbent failure by making a distinction between sustaining and disruptive
technologies. Sustaining technologies have in common that they improve the performance
of established products along the dimensions that existing customers value. Disruptive

High-end Disruptive Technologies with an inferior performance 3

technologies on the other hand, initially underperform along these dimensions and at the
same time bring new, ancillary technological performance attributes to the market.
According to Christensen (1997) they are typically simpler and cheaper than the
sustaining technology. The lower traditional performance and the higher ancillary
performance create a large market uncertainty and make it difficult to find a financial
logic in entering the new technology. At the same time the established firm finds it
irrational to abandon its current, profitable customers in order to aim for a new market
and an initially inferior technology. Incumbent firms are therefore “held captive” by their
most profitable customers and as the performance of the disruptive technology increases
it begins to attract customers and eventually displaces the former technology.
Christensen and Raynor (2003) developed this theory further and suggested that there
are two forms of disruptive technologies, namely those which emerge in new markets and
those that prosper in low-end segments. The same authors also extended the theory by
introducing the concept of disruptive business models, i.e. business models that target
low-end customers or new markets, can be carried up-market and displace incumbents
later on. Ryanair and the concept of low cost airlines can be regarded as one illustration
of this notion.
While Christensen’s work has shed new light upon the issue of incumbent failure, this
theory suffers from a lack of clarity in the used terminology and several scholars have
called for a more precise definition (e.g. Danneels, 2004). Govindarajan and Kopalle
(2006) provided an expanded conceptualization of this notion when they suggested that a
disruptive technology is a novelty that introduces a different set of performance and price
attributes relative to existing products. These characteristics make it unattractive for
mainstream customers and as the technology improves along certain parameters it
eventually displaces the former product or technology. This definition is broader and
could also include disruptive technologies which initially prosper in the high-end or
mainstream segments of the market. The authors argue that there are several reasons why
high-end disruptive technologies may create a dilemma for established firms. Mainstream
customers may not value the new performance attributes, it may have an insufficient
initial traditional performance, the market niche is too small and therefore it may not
result in any significant profits. However, given its initially lower traditional performance
it is not yet entirely clear how and why such a technology would emerge in high-end or
mainstream segments (Danneels, 2004). There seems to be confusion in the literature
regarding the seemingly paradoxical issue of high-end and mainstream disruptive
technologies. The article aims to fill this gap by answering the following research
question: how and why do disruptive technologies prosper in high-end or mainstream
segments of the market, despite its lower traditional performance? Before presenting the
illustrative case studies, some literature on value and business models is presented, along
with the methodology employed in this paper.

2.1 Value Creation, appropriation and business models
Economists often refer to utility theory when trying to understand value. Total utility
refers to the satisfaction that comes from the possession of a good (Bowman and
Ambrosini, 2000). Several scholars have pointed out the subjectivity of value, i.e. a good
can be of great value for one individual or firm and be of no use for another one (e.g. von
Mises, 1963). In line with this, Menger (1950) made a distinction between use value and

Copyright © 200x Inderscience Enterprises Ltd.


exchange value. The exchange value is the paid price whereas the use value is the
economic value that the buyer obtains from using the product. A positive difference
between these two measures is regarded as a consumer surplus. Given that buyers may
use a product for different purposes their use value differs and consequently they are
willing to pay different prices.
In order to understand why disruptive technologies may prosper in high-end or
mainstream segments it becomes important to look more precisely at what use value they
create for customers. Some of the recent work in this area has focused increasingly on the
role of the market and the customer. Adner (2002) pointed out that the structure of
demand needs to be addressed in order to clarify the nature and effect of disruptive
technologies. Furthermore, Adner used the notion of thresholds, defined as critical
performance levels that must be met. The functional threshold of a product is the
minimum performance that the customer can accept whereas the net utility threshold also
takes price into consideration. Slater and Mohr (2006) identified parallels between the
work by Christensen (1997) and Moore’s book Crossing the chasm (2002) and underlined
the importance of finding a nursing market for disruptive innovation.
Though the abovementioned work has contributed to an increased understanding of
how disruptive technologies create value this issue needs to be further addressed. One
potential drawback of existing literature is that it has with few exceptions regarded
customers as single entities in the value network, with one specific interest, rather than as
organisations which comprise several actors with dispersed utility functions. Many
technologies are developed for industrial customers rather than individual consumers and
hence, innovations are often sold to organisations which can be regarded as value
networks of their own. Therefore, it may be beneficial to look further into the customer’s
organisation in order to understand how disruptive technologies create value and prosper
in high-end or mainstream segments.
Given that a disruptive technology brings new performance attributes to the market
and that value creation is distinct from value appropriation (Chesbrough and Rosenbloom,
2002), the new value may need to be appropriated in a different way. The business model
can be regarded as a construct which addresses how a firm creates and captures economic
value (Chesbrough and Rosenbloom, 2002). Hence, a better understanding of how
disruptive technologies create value is also needed in order to understand the challenges
they impose upon incumbent firms and existing business models.
Summing up, while several important contributions have been made by addressing the
impact a new technology has on the value network of a firm, more needs to be known
regarding how and why disruptive technologies may prosper in high-end or mainstream
segments. This in turn calls for a better understanding of how such technologies create
economic value. The article addresses this issue by investigating what traditional and new
performance attributes the studied disruptive technologies brought to the market and how
this new mix created value for customers.

3 Method and Research setting
This article is based upon three case studies of technological shifts that have or are
currently taking place. Given that the presented research is of an exploratory nature
seeking to understand an issue which has been insufficiently addressed by previous


literature, the method is deemed to be suitable. Moreover, the chosen method enables the
kind of detailed descriptions that are required in order to address an issue which needs to
be better understood (Yin, 1994). Case studies imply a limited generalisability from the
findings (Eisenhardt, 1989). However, the article does not attempt to provide an
exhaustive set of answers. Rather, it seeks to explain how and why disruptive
technologies with a lower traditional performance may still prosper in high-end or
mainstream market segments.
The cases come from the calculator, camera and video surveillance industries and
they are all related to a displacement of analogue or mechanical technology by
microelectronics, i.e. digital technology. The industries and corresponding companies
were targeted since they all have in common that the technology had disruptive
characteristics (see table 2 for further information), but did not prosper in low-end
segments or in new markets as predicted by the disruptive innovation framework
(Christensen and Raynor, 2002). The first electronic calculators, as well as the first
successful applications of digital imaging and IP-based, digital surveillance (IP video) all
emerged in either the mainstream market or in high-end applications. Additionally, these
technologies had an inferior performance along those dimensions that have been valued
historically by mainstream customers. Digital imaging initially offered a lower image
quality, electronic calculators started off as bigger and more expensive and IP
surveillance had a lower image resolution and a higher price in the beginning. Hence,
these shifts offer an opportunity to understand how and why disruptive technologies may
prosper in high-end or mainstream applications, despite a lower traditional performance.
Another reason for choosing these cases is that incumbent firms have struggled in these
transitions, despite the fact that their customers initially demanded the technology. Hence,
the pattern of displacement is different in these cases from the one described by
Christensen (1997). Therefore they present an interesting opportunity to address how and
why a disruptive technology does not initially prosper in low-end or new market
segments as postulated by previous theory.
In these three different industries, one corresponding company has been targeted. This
was done in order to obtain insights into how these technologies have been
commercialized in their early phases and how those firms tried to overcome the problem
of offering a product with lower traditional performance. All the targeted firms were
operating in high-end or mainstream segments. Table 1 below provides a summary of the
gathered data.



Table 1. An overview of the data used in the different cases
Company and industry Interviews Secondary data
Hasselblad and the shift to digital 30 interviews, follow-up Minutes from board and top management
imaging. questions and discussions of meetings 1989-1995. Internal PMs, strategic
in total about 100 hours. documents and mail conversations.
Facit and the displacement of Six interviews, totalling All minutes from board and top management
mechanical calculators. about 20 hours. meetings during 1964-1972. PMs, internal
investigations and reports from this period.
An entrant firm that has driven the 7 interviews of in total None.
shift to IP VIDEO. about 15 hours.

Former CEOs, R&D managers and people in charge of commercialization have been
approached with open ended and semi-structured interview questions. Since these
companies have been public, CEOs and people with strategic responsibility could be
identified. A snowballing technique was used in order to find additional respondents.
Given that two of the cases (digital imaging and electronic calculators) are historical
studies, it was possible to identify people who had experienced the entire process of
emergence and eventual dominance of the new technology. The shift to IP-based
surveillance is currently taking place and hence, the same historical perspective could not
be adopted. However, as the technology has been adopted by about 20 percent of the
market and it has been around for more than ten years, it is still possible to study how and
why it has emerged in the mainstream of the market. A large majority of the interviewees
can be said to have had direct insight into commercial, technological and strategic issues
related to the technological transition. The information retrieved from the other
respondents should rather be regarded as important background knowledge.
The questions concerned how the technology prospered and how it performed
compared to the established technology along both the traditional dimension and the new
attributes that were brought to the market. Additionally, questions were asked regarding
how these innovations created value for customers and why they adopted it, despite the
lower traditional performance. The respondents also described the challenges that were
encountered when trying to develop and launch a technology with the properties
mentioned above and how those were handled. While all of the collected secondary data
did not directly concern the disruptive technology, additional information should still be
regarded as vital since it provides important contextual information. The interviews and
the collection of data were conducted from mid 2007 until late spring 2009.
Collecting data by performing interviews may imply a biased interpretation (Yin,
1994). This potential drawback was taken care of by approaching many respondents.
Several follow-up interviews were conducted and compared with the written sources that
have been accessed. In those cases when the sources contradicted each other, further
interviews were performed. By doing so, the collected data has been triangulated.
Moreover, the Hasselblad case description has been read by many of the interviewees and
hence been further validated.


4 Results and Analysis
This section contains a presentation of the results and an analysis of how and why
disruptive technologies may prosper in high-end or mainstream markets. Table 2 on the
following page provides an overall description of the studied companies and the
disruptive technologies, their respective properties and how they created value for
customers.



Table 2 An overview of the investigated companies and how the disruptive technologies created value
Disruption Studied firm Time Traditional Price Ancillary Value Changes in the value
period Performance Performance Proposition network
The A European entrant 1996- For a long time, the Network Easier Improved video IP Video is sold to the
displacement of firm which has 2007 new technology cameras have up installation since surveillance at a same customers, but to IT
analogue video driven the shift and offered worse image until 2005 with fewer wires are lower total cost departments instead of
surveillance by grown rapidly over quality in terms of few exceptions needed. The of ownership. security departments.
digital, internet the studied time resolution and been more cameras can be Thus a change inside the
cameras (IP period. displayed images per expensive. made more customer’s organisation
video). second. intelligent. has taken place.
From film- Hasselblad, a high- 1990- Hasselblad’s Digital cameras Simpler A simplified Sold initially to
based end incumbent firm 2005 analogue photos were production of workflow Hasselblad’s traditional
photography to which is famous corresponded to significantly pictures. Images enabled an high-end segment of
digital imaging. for outstanding about 36 megapixels, more expensive could be viewed improved studio photography.
image quality. the first digital up until the late instantly and handling and
versions in the mid 1990s. captured at no images that are
1990s offered 4-6 cost. good enough.
megapixels.

The substitution Facit, a Swedish 1964- Electronic calculators In 1966, From the late Similar up until Electronic calculators
of mechanical manufacturer of 1973 offered similar electronic 1960s and on the rise of pocket were sold to the same
calculators by office furniture, computing calculators were pocket calculators. Then customers up until the rise
electronic typewriters and capabilities initially, about twice as calculators factors like of pocket calculators.
calculators. mechanical but became better expensive, but introduced simplicity, price Those were instead sold
calculators. towards the mid the price went portability and and portability via bookstores and
1970s. down rapidly simplicity as new were introduced. retailers in order to
during the attributes. generate larger volumes
studied period. and reach mass markets.


4.1 How high-end and mainstream disruptive technologies prosper
The case studies presented in this article offer some interesting evidence regarding how
disruptive technologies create value for high-end or mainstream customers, despite their
lower traditional performance. Generally speaking, it seems that they emerge in market
segments where the ancillary performance compensates the lower traditional value to
such an extent that customers are willing to buy it anyway. In two of the three cases, the
main reason for this was that the disruptive technology could remove work in the
customer’s process and thereby lower their total cost. Hence, the technology created
value on a more systemic level rather than on the level of each individual product. This is
illustrated by the cases of digital imaging and IP video below.

4.1.1 Hasselblad and digital imaging
Over the last 15 years the camera industry has undergone a shift from film-based
photography to digital imaging. The sales of digital cameras grew rapidly from the late
1990s and on when cheaper and better cameras were launched at a high pace. Prior to this
remarkable growth and the eventual displacement of film, digital imaging prospered in
Hasselblad’s medium format segment of professional photography were a digital back
could be attached to medium format cameras. These digital backs were primarily
manufactured by entrant firms such as Leaf Systems, Phase One, Imacon and Jenoptik
and were expensive complements to the dominant analogue technology. The main
customer segment for these backs was studio photographers. Digital technology enabled
these customers to view images instantly and removed the costly and time-consuming
process related to using film. Additionally, those images were often scanned and
digitized later on anyway and hence, digital imaging made the production of images
much cheaper and simpler. Studio photographers were willing to trade off some image
quality and pay a higher price since it could save days of downtime waiting for the
transparencies to be finished.
With these attributes in mind, Hasselblad sought to develop a new camera system in
the mid 1990s which was based upon a 6 megapixel sensor that had been co-developed
with Philips. The camera was intended for studio photography, a high-end niche which
would hopefully be willing to pay a high price and trade off some image quality in order
to remove film. Hasselblad was not used to offering this kind of value proposition and
thus, the project met a lot of resistance inside the firm. The person in charge of the
project, Lennart Stålfors, recalls that he “had to spend an un-proportional amount of time
defending the project instead of working with development activities.”
The project was eventually stopped in 1996 when a new owner changed strategy and
decided to develop a new camera system that was compatible with both film and digital
backs. When the shift to digital imaging came into full motion from 1999 and on,
Hasselblad’s semi-digital medium format cameras were displaced primarily by Canon
and Nikon who introduced advanced Digital SLR cameras which were simpler, lighter,
cheaper and offered an image quality that was sufficient for most applications.

4.1.2 IP-based video surveillance
IP video surveillance was introduced by the studied firm in the 1990s. CCTV had for a
long time been film-based and analogue. IP video is instead based upon digital
technology using sensors, so the material is stored as digital files and not on video tapes.



Another difference is that digital cameras have an IP-number and are connected over the
internet, instead of via cables. While the analogue technology is still dominating the
market, digital video surveillance is growing rapidly and the studied firm is an entrant
and one of the actors driving the shift from analogue to digital technology. About 20
percent of the market is now based upon IP video solutions and this figure continues to
grow.
Over the last decade, IP video has improved significantly in terms of image quality
and with the rise of megapixel cameras it has now outperformed analogue CCTV along
this dimension. However, the technology was growing rapidly before reaching these
performance levels. One of the main reasons for this is that they are much easier and
cheaper to install since the cameras are connected over the internet. This implies a lower
total cost for owning and maintaining a system. The studied firm seeks to communicate
the benefits of IP-based surveillance by focusing on the total cost of ownership rather
than the price of one single camera.
Additionally, IP video has implied that surveillance has become both an IT and a
security issue. One person in charge of technology development at the studied company
states that installations of IP cameras are mainly performed together with the IT
integrators and departments instead of with security departments. Thus, a shift has
occurred inside the customer’s organisation and the value proposition has changed with
the new technology. It has also turned out that IT departments are more easily convinced
by the total cost of ownership argument and that they are more willing to use IP cameras
since they understand the technology in a better way.
So far, the incumbent firms have failed to dominate the new technology in the same
way as they did with CCTV. Whether the established firms will survive this disruptive
technological change or not remains to be seen. According to respondents at the studied
firm, one reason why the incumbents have so far lagged behind in IP video appears to be
that they do not know how to approach customers with it. The logic of selling to IT
departments is new to the industry and the analogue players are not used to doing so.

4.1.3 The creation of new value inside the customer’s organisation
The cases of digital photography and IP video have in common that they created value in
a new way inside the customer’s organisation, primarily by simplifying the work process
and removing labour. Hence, it seems that the net utility threshold for a disruptive
technology (Adner, 2002) can be lower in high-end or mainstream segments since these
customers can use the technology in order to lower their overall expenses. While the
price was higher and the technology was inferior in many ways, its ancillary performance
attributes created a higher consumer surplus that could motivate the investment. The case
of IP video also suggests that this threshold is different depending upon which actor is
targeted inside the customer’s organisation. When selling to IT departments, the overall
cost of owning a surveillance system could be lowered and this value creation
compensated the higher price as well as the lower traditional performance in terms of
image quality.
This explanation of why a disruptive technology prospers in high-end or mainstream
markets suggests that previous literature on this topic has maintained an over-simplified
view of the customer and value creation. The framework developed by Christensen
(1997) draws upon diffusion models such as the one stipulated by Rogers (1995). Those
models assume a normal distribution of customers and an epidemic diffusion of


innovations. The case studies in this paper indicate that while such models highlight
many important aspects of innovation diffusion, they may hamper the understanding of
how and why some disruptive technologies succeed since they do not assume any
heterogeneity inside the customer’s organisation. The IP video case illustrates that the
forces of resource dependency can be imposed by different actors within the client
organisation. The dominant analogue players in the CCTV industry are used to targeting
security departments with another value proposition and they may therefore be “held
captive” by one actor inside the customer’s organisation since security departments do
not appreciate or understand IP video in the same way. This finding suggests that
previous literature on disruptive technologies has not yet addressed the subjectivity of
value (Menger, 1950) to a sufficient extent. While the use value differs between different
customers, it can also differ inside the customer’s organisation and this creates a problem
for incumbent firms. The consumer surplus is higher for clients if IT departments are
involved in the installation of IP video systems and this is one of the main reasons why
the technology could prosper in mainstream segments despite its higher price and initially
inferior traditional performance. Therefore it seems to be suitable to apply more of an
adopter perspective and look further into how disruptive technologies actually create
value inside the customer’s organisation. Consequently, the concept of value networks
needs to be nuanced within the field of disruptive innovation.

4.2 Why Technologies with lower performance emerge in high-end segments
The case studies presented above suggest there are several reasons why a disruptive
technology does not prosper in low-end segments or in new markets, but rather in
mainstream and high-end segments. As was described earlier, it seems that those
technologies may simplify and remove a lot of labour for the customer and that this can
compensate the lower traditional performance and the higher price. Customer segments
which have a more labour intensive business such as studio photographers or installers of
video surveillance benefited extensively from this. Another important reason seems to be
the high price that was associated with the technologies initially which made it
impossible for low-end customers to afford them. The price parameter seemed to be the
most important determinant of why electronic calculators initially emerged in high-end
segments and later on entered lower segments as well as created new markets.
Electronic calculators that are based upon transistors were first introduced in the early
1960s. Those were mainly used in order to perform advanced calculations in very
specific military and scientific applications. As the technology became cheaper and
smaller over time it entered Facit’s office machine segment in 1964-65. Since Facit’s
competence base was related to mechanics, the company decided to collaborate with
Sharp and thus bought their calculators and gave them a Facit design. The electronic
desktop calculators that Facit sold from 1966 and on had similar computing capacity as
the mechanical calculators. Therefore, they could simply replace the mechanical
calculators at this point since the product offered similar performance and consequently
also prospered in the same value network as the former technology. This strategy
prevented Facit from loosing market shares initially. However, when integrated circuits
were introduced in calculators from 1968 and on the pace of development was increased
to such an extent that it wasn’t possible any longer to re-badge calculators from another
company. Moreover, the rapid development of integrated circuits implied a rapid decline


in prices and a miniaturization of the products that later on made them appealing to
consumers. At this point, Facit’s business to business sales model was rendered obsolete
since calculators could be bought anywhere. Göran Arvidsson, who was a member of the
top management group by that time said that the entire office machine industry suffered
due to these changes. The established firms had built strong relations with their
customers and had their own sales offices. With the shift to electronics both the
technological competence and the sales model were rendered obsolete. Consequently,
Facit suffered from severe losses in 1971-72 and was eventually acquired by another
company in late 1972.
This case provides a compelling description of how important the price parameter is
and it suggests that the literature on disruptive technologies ought to treat this dimension
more carefully than just stating that a disruptive technology is ‘typically cheaper’
(Christensen, 1997). While the diffusion approach to disruptive technologies failed to
explain how and why digital imaging and IP Video prospered in high-end applications, it
seems to be valid in the case of electronic calculators. Electronic calculators followed a
more linear diffusion pattern since it did not create any new value inside the customer’s
organisation initially and did so in a top-down way due to the rapid decline of prices and
increased performance over time.
The case studies above give a further confirmation that disruptive technologies may
initially prosper in high-end or mainstream segments. These observations also suggest
that the extended definition provided by Govindarajan and Kopalle (2006) is therefore
more suitable since it includes events that would have been disregarded when using
Christensen’s (1997) original definition.

5 Discussion and managerial implications
While Christensen (1997) illustrated how difficult it is for incumbent firms to enter lower
segments and commercialize an initially inferior technology, it seems to be equally tricky
to approach existing customers, even though they would benefit from adopting such a
technology. The case study about Hasselblad provides evidence on how firms struggle
when bringing a new value proposition to existing customers. It indicates that companies
need to experiment with new business models in order to succeed with disruptive
technologies since they bring a new value proposition to the market. Lennart Stålfors, the
R&D manager in charge of digital imaging at Hasselblad recalls how the issue of digital
imaging tended to create tension and conflicts inside the company. The market
organisation was reluctant to bring an initially inferior image quality to their customers
since it could harm the brand of the company. Given that there was in fact a demand for
this product, the challenges were not primarily related to resource dependency as stated
by Christensen (1997). Rather, the disruptive technology was problematic since it was
not compatible with the value proposition Hasselblad had previously offered. Hence,
firms seem to struggle when developing disruptive initiatives because they break the
existing linkages between the technology and the business model.
Trying to renew an established business model is therefore not only a matter of
finding a customer which demands the technology. It is also an issue related to political
power both inside the firm and inside the customer’s organisation. If value is created on a
different level and the disruptive technology prospers in another part of the organisation,


some actors may lose influence at the expense of others. For instance, when IP video is
sold to IT departments this reduces the status of security departments and a political
barrier to adoption may occur. The disruptive innovation theory could therefore benefit
from maintaining a more nuanced conceptualization of value networks. The case of IP
video indicates that there are several different actors inside the customer’s organisation
who may block the adoption of a disruptive technology. Given the subjectivity of value
(Menger, 1950), these actors need to be mapped and understood in terms of their
incentives and activities. Finding a business model that aligns different incentives within
the customer’s organisation therefore seems to be a key success factor.
One of Christensen’s (1997) most influential recommendations is that in order to
succeed with a disruptive technology it is necessary to launch an independent
organisation which can prosper in a different value network. However, it is far from
obvious that this can be done when addressing existing customers like Hasselblad had to
do. Since the technology emerged in the same segment as analogue photography the
company became reliant upon the established market organisation and it turned out that
they were reluctant to bring a technology to the market which did not offer the superior
image quality that was associated with Hasselblad’s brand.
The case studies about Hasselblad and Facit also illustrate how the value proposition
changed over time and how this augmented the difficulties related to surviving the
technological shift. The early versions of digital imaging prospered in a high-end, niche
segment by removing work as has been described above. However, from 1999 and on,
digital Single Lens Reflex cameras started to disrupt Hasselblad’s semi-digital medium
format cameras for professional photographers. These cameras were simpler, cheaper and
offered sufficient image quality. Hence, they attacked from below and disrupted
Hasselblad in exactly the way described by Christensen (1997). The same thing happened
when the simpler, cheaper and portable pocket calculators disrupted Facit’s mechanical
and electronic calculators for office use. Thus, the classical low-end disruption occurred
after the technology had initially prospered in higher segments. This development over a
short period of time increased the difficulties related to surviving the technological shift
since the initial value proposition was different from the one that later on came to
dominate the market. Working with lead-users (von Hippel, 1988) in the early phases like
Hasselblad did with studio photographers is therefore problematic since these customers
had preferences that differed largely from the ones in the mainstream market when the
technology had matured later on.

5.1 Conclusions and future research
While previous work on disruptive technologies has contributed to an increased
understanding of how and why established firms may decline when new technologies are
introduced, this stream of literature has so far not succeeded in explaining how and why
such initiatives may prosper in high-end or mainstream markets segments.
The abovementioned issue has been addressed in this article both by providing
empirical evidence on this issue and by drawing upon literature about value and business
models. The cases in the paper suggest that disruptive technologies may prosper in high-
end or mainstream segments by introducing ancillary performance attributes that create
economic value on a more systemic level inside the customer’s organisation, for instance
by simplifying and removing time consuming work. This value creation seems to


compensate the lower traditional performance that was associated with the disruptive
technology. This finding implies that the literature on disruptive technologies has so far
suffered from an over-simplified view of customers and that the subjectivity of value
inside the customer’s organisation has not been sufficiently captured. Moreover, it has
been argued that it is more relevant to look at how value is created, rather than addressing
different performance dimensions.
Additionally, the initially higher price that was associated with the studied
technologies implied that they could only prosper in such segments and therefore it can
be concluded that the literature on disruptive technologies needs to treat the price
parameter more carefully than has been done previously.
The findings in this paper seem to suggest that the challenges related to disruptive
innovations which prosper in a firm’s existing customer segment are different from those
described by Christensen (1997). Previous theory on disruptive innovation has stated that
the main challenge is related to managing the internal resource allocation process. When
a disruptive technology prospers in a mainstream or high-end segment, firms seem to
struggle for other reasons, which are primarily related to the new value proposition and
its compatibility with the existing network structure in terms of value distribution and
systemic changes inside the customer’s organization. Therefore, a more nuanced
conceptualization of the term value network seems to be needed.
These conclusions indicate that more detailed studies of what effects disruptive
technologies have inside the customer’s organisation may be one way forward for future
research into why technological shifts tend to create such problems for incumbent firms.
Furthermore, the findings above suggest that many of the managerial solutions related to
disruptive innovation are not necessarily valid when a technology prospers in high-end or
mainstream market segments. Little is known about how firms can actually work
proactively in order to renew their business models. This article has offered some
tentative guidelines for doing so, which are related to mapping, understanding and
aligning incentives throughout the value network. More research is needed regarding how
firms can actually succeed in changing their business models to match the new value
proposition that disruptive technologies tend to create.

6 References
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Value, Actors and Networks
– a revised perspective on Disruptive Innovation

Center for Business Innovation
Department of Technology Management and Economics,
Chalmers University of Technology, SE-412 96, Göteborg, Sweden
E-mail: christian.sandstrom@chalmers.se

Mats Magnusson
Department of Machine Design
Royal Institute of Technology (KTH)
SE-100 44 Stockholm

Abstract
The concept of disruptive innovation has received increased attention over the last decade.
This stream of literature has increased our understanding of incumbent failure in the face of
technological change by looking at the control that profitable customers impose on
established firms. However, there are several issues which haven’t been sufficiently
addressed thus far. This article adds to existing theory on the subject by drawing upon
literature on networks and utility theory. Previous literature on the topic has put an emphasis
on the different performance characteristics of a disruptive innovation. We shift the focus of
attention towards the utility that it creates for customers, and how this is done. Moreover, we
adopt a different notion of networks, arguing that an over-simplified view upon customers
has been maintained previously. In doing so, we provide an extended and more nuanced
conceptualization which reveals a couple of challenges and potential managerial solutions.

1

1 Introduction
It is well known today that firms can become more innovative by interacting with their
surrounding network (Chesbrough, 2003). However, a strong network may also hamper
innovation efforts. The theory on disruptive innovation has pointed out that incumbent firms
struggle under conditions of discontinuous change since they get stuck in their established
value networks (Christensen, 1997).
While this literature has contributed to a better understanding of incumbent failure and the
role of networks, there are several elements of the theory of disruptive innovation that have
been questioned (Markides, 2006; Danneels, 2004), and these need to be addressed in order
to provide a more coherent framework that allows us to understand this phenomenon better.
This article aims to add to existing theory on disruptive innovation and does so by drawing
upon different literature streams on networks and utility theory. It starts with an exposition of
existing theory on disruptive innovation and moves on to a discussion of issues that this far
have been insufficiently attended to. The paper then describes network and utility theory,
constituting two bodies of literature that can potentially extend and refine the ideas regarding
management of disruptive innovation. This literature is in the subsequent section used in
order to address previously identified weaknesses regarding disruptive innovation. Based on
the theoretical discussion, some conclusions and managerial implications are given.

2 An exposition of disruptive innovation theory
As mentioned previously, the literature on disruptive innovation has presented new
explanations of how and why incumbent firms encounter problems under conditions of
discontinuous change. Previous literature had primarily looked at supply-side factors. A
prominent example of this literature stream is the work by Tushman and Anderson (1986),
who wrote about competence-enhancing and competence-destroying innovations. They
argued that innovations which destroy the value of a firm’s existing competencies are very
difficult to manage, as established firms are bound by traditions, sunk costs and internal
political constraints. Henderson and Clark (1990) nuanced those arguments by introducing
the concept of architectural and component level innovation. Similar explanations have been
provided by Clark (1985), Tripsas (1997) and Cooper and Schendel (1976).
In his seminal work, Christensen (1997) proposed an alternative explanation of incumbent
failure. Instead of looking inside established firms, he focused on the external environment,
drawing upon resource dependence theory (Pfeffer and Salancik, 1978) and the concept of
value networks (Christensen and Rosenbloom, 1995). Resource dependency essentially
posits that organizations are open systems which depend on resources from parties outside
the organizational boundaries. Hence, a firm’s freedom of action is in fact controlled by
actors outside the boundaries of the company, e.g. customers and investors. Since the

2

customers and owners are the key stakeholders that provide the firm with resources, they also
impose a great indirect control on what decisions are taken and how resources are allocated.
This perspective is manifested in Christensen’s research in the concept of value networks,
defined as “the context within which the firm identifies and responds to customer’s needs,
procures inputs and reacts to competitors” (Christensen and Rosenbloom, 1995, p. 234).
Based on this reasoning, Christensen explains the pattern of incumbent failure by making a
distinction between sustaining and disrupting technologies. Sustaining technologies have in
common that they improve the performance of established products along the dimensions
that existing customers value. Disruptive technologies, on the other hand, initially
underperform along these dimensions. They are described as normally being simpler and
cheaper than the established technologies. Therefore, they are not the demanded initially by
the incumbent’s customers and thus, the firm fails to invest in disruptive innovations. As the
performance of the disruptive technology increases it begins to attract customers from the
sustaining technology, eventually displaces it and puts the incumbent in trouble. Christensen
referred to this pattern as the innovator’s dilemma, arguing that the same management
technique which made a firm successful under conditions of disruptive change cause it to
fail. Christensen and Raynor (2003) further developed the ideas about disruptive innovation,
utilizing the concept of value networks. One important aspect of their framework is the
distinction between low-end and new market disruptions. Low-end disruptive innovations
evolve in the lower segments of the market, typically by having a business model which
enables the firm to offer cheaper products with a performance that initially is inferior. New-
market disruptive innovations prosper by approaching customers that have not been
addressed previously.

3 Disruptive Innovation – some areas in need of development
While the work by Christensen, and then in particular the ideas about value network lock-ins,
has contributed greatly to an increased awareness and understanding of the challenges related
to discontinuities, there are still many questions that this far have not been sufficiently dealt
with. This section will try to point out some of these outstanding issues, which are primarily
related to how such innovations create value and the impact they have on established
networks.

3.1 A diffusion approach to innovation
One potential weakness of Christensen’s framework is that the theory seems to be based
upon a diffusion perspective on innovation. The graph Christensen (1997) uses to explain the
pattern of disruption looks at different customer segments. It essentially suggests that a
disruptive technology prospers in low-end segments or in new markets and later on invade
the mainstream market. Hence, existing literature has to a large extent maintained a

3

diffusion-oriented perspective on customer attributes such as the one developed by Rogers
(1995) and later on used by Moore (2002).
Several contributions to the theory of disruptive innovation indicate that a diffusion approach
has prevailed. For instance, Slater and Mohr (2006) identified parallels between the work by
Christensen (1997) and Moore’s book Crossing the chasm (2002) and underlined the
importance of finding a nursing market for disruptive innovation. Linton (2002) built upon
diffusion forecasting techniques and integrated it with theory on disruptive innovation. Adner
(2002) pointed out that the structure of demand needs to be addressed in order to clarify the
nature and effect of disruptive innovations. Moreover, Adner used the notion of thresholds,
defined as critical performance levels that must be met. The functional threshold of a product
is the minimum performance that the customer can accept whereas the net utility threshold
also takes price into consideration.
While the diffusion approach has contributed to a better understanding of incumbent failure,
we would argue that it is overly simplistic in order to explain the specific pattern of adoption.
An over-simplified view of the customer may conceal some important challenges,
particularly in business-to-business settings, where the customer is in fact a set of different
actors who may have diverging utility functions. Seligman (2006) argues that the adopter is
often treated as a black box and that it needs to be understood in a better way. This criticism
seems to be valid in the case of the literature on disruptive innovation.

3.2 How do disruptive innovations create value?
The literature on disruptive innovation is also somewhat unclear regarding how the
innovations create value for the customer. For instance, Christensen (1997) states that
disruptive technologies are typically cheaper and bring new performance attributes to the
market, while having lower performance along the dimensions focused on for the established
products. But how exactly does a disruptive technology create value and what challenges are
related to commercializing such an innovation?
One reason why this question has not been sufficiently understood is that the disruptive
innovation theory has a strong focus on performance dimensions, rather than economic value
and total utility. An analysis of the market impact of a technology needs to look at the
performance of the technology, but should do so in order to identify the value a user obtains
from acquiring it. Several scholars have pointed out the importance of both looking at
performance attributes and how these are translated into value for the customer (Oskarsson
and Sjöberg, 1991; Saviotti and Metcalfe, 1984). Value can be created in several different
ways inside the customer’s organization. Activities may be changed or removed completely.
Moreover, the utility that a disruptive innovation creates can imply a new distribution of
value. In a business-to-business setting, these issues would most likely be overlooked when a

4

diffusion-oriented perspective focusing on performance dimensions is maintained. Hence, the
notions of value and utility need to be nuanced.

3.3 Where do disruptive innovations emerge?
Lately, the theory of disruptive innovation has been extended, both in terms of its definition
and its applications. Govindarajan and Kopalle (2006) argued that Christensen’s original
definition was too narrow since it only took cheaper, simpler and initially lower performance
products into consideration. They proposed a broader definition, which would also include
technologies that initially emerge in higher segments. Utterback and Acee (2005) also called
for an expanded view of disruptive technologies. They noted that many technologies such as
electronic calculators, fuel injectors and wafer boards were not initially cheaper or simpler
than the technologies they later on came to replace. Danneels (2004) asked whether
disruptive innovations are never valued by mainstream customers. Govindarajan and Kopalle
(2006) provided an extended conceptualization of disruptive innovation when they suggested
that a disruptive technology is a novelty that introduces a different set of performance and
price attributes relative to existing products. These characteristics tend to make it unattractive
for mainstream customers, but as the technology is improved along certain parameters it
eventually displaces the former product or technology. This definition is broader and could
also include disruptive technologies which initially prosper in the high-end or mainstream
segments of the market. The authors argue that there are several reasons why high-end
disruptive technologies may create a dilemma for established firms. Mainstream customers
may not value the new performance attributes, it may have an insufficient initial traditional
performance, the market niche is too small and therefore it may not offer any significant
profits.
One consequence of maintaining an insufficiently nuanced view upon customers and the
value proposition is that it becomes difficult to understand in what market segments a
disruptive innovation may prosper. The question of where disruptive innovations start has up
until now not really been adequately answered, and one reason for this may be that a
mainstream disruptive innovation could be thought of as a contradiction in terms. Given that
resource dependency and the concept of value networks are the main pillars of Christensen’s
theory, an innovation which prospers in a mainstream market would by definition not be
regarded as disruptive. However, given that disruption is a relative phenomenon (Christensen
and Raynor, 2003), virtually all disruptive innovations should prosper in a mainstream
market for some firm, unless it creates a completely new market. Would those firms which
are operating in a segment where the disruptive innovation emerges be better off than others?
And if not, what challenges would they encounter when trying to bring a new, potentially
beneficial value proposition to an established customer?

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3.4 How can incumbents succeed with disruptive innovation?
Christensen’s most powerful managerial recommendation regarding disruptive innovation is
that such initiatives must be put into an independent organization. By doing so, he argues that
these attempts can be protected from the forces of resource dependency, which tend to drain
those initiatives since there is no obvious financial logic in pursuing those initiatives.
While this recommendation has turned out to be useful for many companies (Christensen,
2006), more knowledge is needed regarding how incumbent firms can successfully manage
disruptive innovations. Danneels (2004) underlined the importance of developing a
“customer competence” in order to succeed with disruptive innovation, but did not specify
what constitutes such a competence or how firms can develop it.
One main difference between Christensen’s notion of disruptive innovation and previous
work on discontinuities is that he drew upon a different theory stream, highlighting the
importance of firm-external stakeholders and thereby identifying completely new
explanatory factors. Having argued that established firms are “held captive” by their most
profitable customers, the managerial solution inevitably became related to how the firm’s
resource allocation mechanisms should be changed in order to overcome this barrier. Hence,
Christensen stresses the impact that customers have on the firm’s internal organization, but
pays limited attention to how firms can actually manage their networks, to the extent that
these actually are possible to influence.

3.5 Can business models be disruptive?
Some scholars (Christensen and Raynor, 2003; Charitou, 2001) have taken this even further
by addressing the topic of disruptive business model innovation, i.e. innovations which are
not technological, but instead change the business models used by firms. Even though this
concept is still not particularly well defined, it provides a useful perspective on how firms
create and appropriate value. Markides (2006) contested this notion and argued that business
model innovation was a significantly different phenomena than the one originally described
by Christensen (1997). Christensen (2006) however provided a nuanced and extended
argument when he framed the fundamental problem of disruptive innovation as primarily a
business model problem, and not necessarily a technological problem. While such a
definition may be broader, it arguably also results in some confusion since it would require a
more thorough understanding of business models and the related bodies of literature.
Moreover, such an extension would also imply several new challenges that need to be faced
by management.
Summarizing the above, we can conclude that the by now substantial work on disruptive
innovation has shown the importance of looking at the demand side in order to understand
the competitive dynamics related to this specific type of innovation. However, we also see
that as long as the theory regarding disruptive innovation draws narrowly upon resource

6

dependency and the concept of value networks, it will most likely not be able to address
several of the important shortcomings mentioned above. Consequently, the underlying
theoretical framework needs to be modified into a more comprehensive one. It has been
argued above that the raised issues can be understood by looking more carefully at the
notions of value and networks. Below, a literature review on these topics is provided, which
will be applied later in the article in order to generate a potentially improved understanding
of disruptive innovation.

4 The network approach
Since the early 1980s, the interaction approach to understanding business-to-business
marketing (Hallén, 1982; Håkansson, 1982) has received increased attention. This
perspective materialized from a critique of those neo-classical economic models which
assumed individual action and independence. These thoughts were later on developed into
what is often referred to as the network approach (Håkansson, 1987; Håkansson and Snehota,
1989). These scholars argued that existing literature on market practices missed out on the
interdependence that characterized many relations between customers and suppliers. Instead
of looking at markets as homogeneous and without any friction, they argued that a market
consists of actors that are interrelated and depend upon each other and that this aspect was
not sufficiently captured by other theories of the firm (Håkansson, 1990). Networks can be
thought of as separated from the more traditional notions of markets and hierarchies.
In order to study how firms interact, network scholars regard companies as actors which
employ resources in order to conduct activities. Actors have different objectives, scale and
scope and are embedded in a network where they depend upon other actors. However, they
should still have some degree of autonomy in order to be regarded as actors. Activities
concern the transformation and transaction of resources into interdependent activity cycles
and webs of transactions. Resources are also thought of as heterogeneous and can be
comprised of tangible assets like capital and land, but also as intangible assets like
knowledge, competence and skills (Håkansson & Johanson, 1992; Håkansson & Snehota,
1995).
No single actor can control all the required resources or performs all the related activities
throughout the chain of transactions. Hence, resources and activities are interrelated with
other resources and activities and therefore, actors also become interdependent and are
exposed to uncertainty. These networks are held together by mutual interest, however, there
is always a mixture of intersecting and diverging interests present in these relationships
(Håkansson, 1989).

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4.1 Interdependence in industrial networks
Due to the abovementioned interdependence, network theories of the firm claim that a firm’s
behavior is largely controlled by other firms and not by internal factors. The main managerial
challenge in a network is therefore not the internal allocation of resources, but rather how
relationships with other actors can be handled (Håkanson & Snehota, 1989). Ford et al (2003)
states: “no company alone has the resources, skills or technologies that are necessary to
satisfy the requirements or solve the problems of any other”.
A network approach to innovation would shift the focus of attention from supply-side issues
towards addressing the firm’s external environment. Thus, the impact an innovation has on
relationships to customers, suppliers and other actors become more important from this
perspective (Håkansson (1990). One immediate consequence of such a perspective is that
innovations are not primarily judged by their absolute performance, but rather in a relational
way, i.e. to what extent it generates support from its surrounding network. Succeeding with
innovation therefore becomes a process of adaptation to the network rather than just a matter
of strong internal development skills.
Networks tend to be path dependent - they create opportunities but also impose constraints
upon attempts to innovate outside an existing trajectory. Therefore, the success of an
innovation ought to be regarded as dependent upon economic, social and political conditions.
Given that the value of resources exists in a particular context, innovations which are
incompatible with existing resources, processes and activities in the network will be difficult
to commercialize. The activities of one firm can be thought of as one element in a chain of
activities and its resources are elements of a greater context of resources. An innovation will
therefore not be evaluated primarily with respect to its performance, but to what extent it is
valued in its particular context. The established links between actors may create a resistance
to change since the network has evolved over time in order to fulfill certain purposes.
Innovations in an existing network will therefore be evaluated with regard to how it fits
existing structures and incentives rather than by pure performance. Moreover, due to the high
degree of interdependence in an industrial network it may suffice that one actor rejects the
innovation to block it completely, even though others demand it.
While the industrial network approach may be very useful when exploring innovation in a
better way, several scholars have pointed out that better frameworks are needed in order to
look at the dynamics of a network (e.g. Waluszewski, 2004; Dubois and Araujo, 2004).
Mattsson (2003) states that this approach could be combined with Actor Network Theory
(ANT) and thereby create a better understanding of how business networks evolve over time.
ANT will be reviewed in the following subsection.

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4.2 Actor Network Theory
Actor Network Theory (ANT) is an approach to social theory which resembles the industrial
marketing perspective in many ways. ANT has primarily been developed by Latour (1987,
1993, 1996), Callon (1986) and Law (1999). The most notable difference between ANT and
other sociological theories is its insistence upon the agency of non-humans, i.e. technologies,
products and humans are regarded as the same when performing an analysis. This idea may
seem a bit odd, especially from an ethical point of view. However, proponents of ANT often
underline that treating people and objects in a similar way is not an ethical position, only an
analytical approach. It may be useful to combine this theory with industrial networks since
ANT is explicitly concerned with how human and non-human elements interact in a network.
Latour (1993) argued that reality is often thought of and spoken of in a one-dimensional way
where nature and culture, human and non-human are considered as opposites which are never
really brought together. Hence, reality tends to be thought of either in terms of social
constructivism or realism. The essential idea of ANT is to transcend this separation and look
at how these different forces interplay in a network. This interaction is the unit of analysis
that ANT explores and by doing so, the proponents of it argue that it is possible to analyze
the parallel construction of society, culture and nature. Consequently, ANT scholars argue
that sociology’s task is to describe these networks in their heterogeneity and analyze how
these actors together result in organizations, power structures and how they evolve over time
as a consequence of changes among the underlying components.
This theory has often focused on understanding how social networks and power structures
emerge, prevail and collapse. The process is thought of as highly unstable and uncertain,
given that incentives can be changed and that each actor is subject to power from many
different actors at the same time. Actors continuously seek to mobilize the network, bring in
new actors and remove others and hence, the network is created and re-created over time.
Therefore, it is a relational and dynamic approach, which underlines that the world is under
constant change.
The ANT perspective can also explain the various challenges that an actor encounters when
trying to order reality in new ways. As an actor seeks to remove others or form new
networks, others will have incentives to block or hamper such development. ANT urges
scholars to look at controversies and conflicts since they indicate that other actors are
influencing something and that the network may change (Latour, 1987). For instance, Law
(1992) suggests that building actor networks is primarily an issue of overcoming resistance.
Summing up, ANT has a lot in common with the industrial network approach in maintaining
a more relational view upon society. Apart from the obvious difference that ANT is a
sociological theory and the network approach is more of a management approach, ANT
seems to be more concerned with power, politics and the dynamics of a network. However,
these two bodies of literature should still be thought of as similar in many ways. Together

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with the subsequent section on economic value and utility theory they will be drawn upon in
order to understand disruptive innovation in a better way later in the article.

5 Economic value and utility theory
The previous section reviewed two bodies of literature that may contribute to an increased
understanding of the phenomenon of disruptive innovation. This section describes a third
body of literature, namely the notions of utility theory and economic value. Economists have
often referred to utility theory and marginal utility when trying to understand value. Total
utility refers to the satisfaction that comes from the possession of a good (Bowman and
Ambrosini, 2000). A basic assumption is that consumers use their income in a way that
optimizes their utility. Marginal utility is usually defined as the utility someone gets from
obtaining or losing one unit.
Several scholars (e.g. von Mises, 1963) have pointed out the subjectivity of value, i.e. the
notion that a good can be of great value for one individual or firm and be of no use for
another one. In line with this, Menger (1950) made a distinction between use value and
exchange value. The exchange value is the paid price whereas the use value is the economic
value that the buyer obtains from using the product. A positive difference between these two
measures is regarded as a consumer surplus. Given that buyers may use a product for
different purposes their use values differ and consequently they are willing to pay different
prices. Moreover, while the use value is a key variable in any purchasing decision, it does not
materialize until after the transaction has taken place. Hence, in any transaction there is
always a degree of uncertainty or speculation.
Transactions become even more complex and uncertain in a business-to-business setting.
Firstly, it is more difficult to establish the use value under these conditions since the acquired
good may be used as an input in the customer’s production process along with several other
inputs. Secondly, an organization is comprised of many individuals, and these maintain their
own subjective opinion about the use value. These individuals may also have diverging
incentives which complicate matters even further. Thirdly, the use value can be realized for
another actor inside the customer’s organization. The purchasing organization has an
aggregated utility from buying a good, but it is much more difficult to measure it and it may
be distributed over many different functions or individuals. Hence, there may be a
discrepancy between the purchaser’s perception of the use vale and the actual use value.
Given the agency of humans, the situation described above can result in ‘the principal-agent
problem’ (Sappington, 1991). In economics, this notion stands for the dilemma of motivating
one actor to act on behalf of another one. It occurs when a principal assigns an agent to
perform certain tasks on behalf of the agent and it is difficult to monitor the agent. Under
conditions of risk and information asymmetry, the agent is sometimes able to act on its own

10

behalf instead of the principal’s. The solution to this problem is to make sure that the
incentives of the agent are aligned with those of the principal.
In a business-to-business setting, this and other dilemmas may arise when a purchaser is
assigned to buy goods on behalf of an organization. It is more difficult to establish the use
value, the distribution of it is hard to assess and there may be diverging interests inside an
organization. Therefore, several inefficiencies, uncertainties and power struggles are likely to
influence the transaction at stake in a way that makes it much more unpredictable and
difficult to accomplish than when a consumer buys something. It would be difficult to predict
the success or failure of a potential transaction if the interacting organizations are regarded as
rational, utility maximizing individuals.

6 Value, actors and networks – towards a revised perspective
This section contains a discussion of disruptive innovation informed by the theoretical
exposition above regarding networks and utility, in order to address the identified
shortcomings of the existing theory on disruptive innovation. We suggest that the existing
theory needs to be complemented along two dimensions, namely the ones of value and
networks.

6.1 Towards a more comprehensive view on networks
Hernes (2007) provided a summary of how ANT can be applied to the study of innovation
processes. He suggests that networks are created and re-created over time. Moreover, actors
can be thought of as outcomes of their relations, which means that this perspective would
underline the importance of looking at the dynamic changes an innovation creates in its
network. Such an approach would first of all mean that the technology, or the innovation, is
regarded as an actor (Callon, 1987). This means that it exerts force, and consequently
influences its surrounding network in various ways. Therefore, the successful
commercialization of an innovation would be thought of as a relational process, i.e. an
interplay between social and physical actors. A critical amount of actors must be mobilized
in order to succeed in this continuous process of negotiation, and aspects like power and
incentives consequently become important. Value is created in social and economic
structures through translation and framing. The introduction of an innovation can be thought
of as something that often creates a rivalry between different actor networks who try to
expand and invade the other network.
One direct consequence of applying an ANT perspective on disruptive innovation is that
focus is shifted from objective performance dimensions towards looking at the political
effects it has in an established network. An ANT approach would suggest that the perception
of a technology may actually matter more than its performance characteristics. Whether

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customers adopt an innovation or not would rather depend on the extent to which different
actors inside the customer’s organization benefit from doing so. Adoption often involves
several different actors and interests inside organizations. A large firm can be considered a
political economy where units and individuals differ in terms of power and interest (Benson,
1971). Disruptive innovations may thus create value on various levels and in different places.
Consequently, the adoption process is often much more complex than a straightforward
diffusion approach would suggest and several challenges related to changes inside the
customer’s organization need to be better understood.
While the theory of disruptive innovation certainly looks at power and the role of customers,
it essentially maintains a financial view upon power. Drawing upon resource dependency
theory, it is argued that those customers which provide a firm with profitable revenues also
impose a great indirect control over the incumbent firm. In this sense, ANT differs from
Christensen’s (1997) notion of value networks since it does not only look at power as a
financial issue and hence, the unit of analysis becomes different from the one used by
Christensen. As has been argued previously, the disruptive innovation theory has maintained
a somewhat simplified view of customers, primarily since it is concerned with flows of
money rather than power in a sociological sense. An ANT perspective would suggest that
there are several actors inside the customer’s organization which may be powerful and
control the incumbent firm. Thus, it would imply that the demand-side is conceptualized as
something more complicated and multi-dimensional than just one distinct end-user, with one
specific utility function.
One potentially fruitful way of looking at customers would be to think of them as comprised
of actors, resources and activities. Actors in an organization control resources and perform
activities. Such an approach would explain why existing structures tend to favor minor
innovations, rather than those of a more significant character (Hernes, 2007). An actor
network can only prevail by repeated activities over time and a major innovation would by
necessity have implications for the network, new actors will obtain more power, others are
removed completely and some linkages would change. In line with this reasoning, Håkansson
and Waluszewski (2001) claim that innovations must be adapted to existing networks and
activities in order to be accepted. Therefore, an innovation that calls for a major change in
these structures will be met by resistance. Disruptive innovations which distort existing
power structures in terms of resources, actors and activities may thus be blocked from
adoption even though established customers would benefit from adopting it.

6.2 From performance to value and utility
The disruptive innovation theory has put a lot of emphasis on the different performance
dimensions of a technology. Christensen (1997) made a most significant contribution when
looking at performance trajectories and ancillary attributes of a technology. Other scholars,
however, have underlined the importance of translating performance attributes into economic

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value and utility for customers (e.g. Granstrand, 1994; Granstrand, 1999). As mentioned
previously, total utility can be thought of as the satisfaction that someone obtains from
acquiring a good or service (Bowman and Ambrosini, 2000). Such a view would differ from
Christensen’s in the sense that disruptive and sustaining innovations are not compared in
terms of technological parameters, but rather in terms of the utility they create and how this
is done. A disruptive innovation, i.e. an innovation which has a lower traditional performance
while at the same time bringing new performance attributes to the market may therefore
create a higher total utility for some customers, despite its lower traditional performance.
Moreover, the total utility perspective would also suggest that disruptive innovations do not
necessarily have to prosper in low-end segments or in new markets as suggested by
Christensen and Raynor (2003). Rather, they should emerge in those segments where it
creates an increased total utility for customers and such segments might very well be in the
high-end or mainstream of the market. In his review and critique of the disruptive innovation
theory, Danneels (2004) asked whether disruptive innovations are never appreciated by
mainstream customers. Drawing upon actor network theory and utility theory, we suggest
that this might very well be the case, however, given the inertia in existing networks outlined
above, there may be good reasons why this is often not the case.
If disruptive innovations prosper in a customer segment where an established firm is present,
the challenges are also likely to be significantly different from the ones described by
Christensen (1997). Given that the most profitable customers request the innovation, the
incumbent is in this case not subject to the forces of resource dependency. However, it would
still be dependent upon decisions made by actors beyond its own boundaries, albeit in a
different way.
While an adopting organization may be considered to have one single aggregated utility
function, decisions are still made by individual actors, who perform activities and control
resources. Given the lower traditional performance and ancillary attributes of a disruptive
innovation, it may have a considerable impact upon the adopting organization’s actors,
resources and activities and these effects can result in considerable resistance. Existing
networks impose constraints since the value of any resource is defined by its context
(Håkansson and Ford, 2002). It can be competence-destroying for some actors, utility can be
created by removing activities or by changing the value of resources for actors in the
customer’s organization and thereby shifting the distribution of value and power inside the
customer’s organization. Given the subjectivity of value and the potential divergence of
incentives, political barriers to adoption are not unlikely to occur. Bearing in mind the
interdependence in industrial networks (Håkansson, 1990), incumbent firms may indeed be
“held captive” by their most profitable customers, even though these customers would
actually benefit from adopting the disruptive innovation. The reason for this paradox is that
adoption is not merely a rational decision based upon strict performance criteria, it is also a
political decision where actors maximize their own utility and power rather than the utility of

13

their organization, a dilemma similar to the principal-agent problem described above
(Sappington, 1991).
Summarizing the two sections above, we have argued that disruptive innovations can be
understood in terms of changes along two dimensions - actors and value. A disruptive
innovation creates utility in new ways and may result in a new distribution of value inside the
customer’s organization. Here, we have shifted the focus from looking at different
performance characteristics towards total utility. Secondly, we have argued that this utility
must be analyzed in terms of its impact upon the customer’s power structures, the actors,
resources and activities. In that sense, our approach differs from Christensen’s in not only
looking at new and old customers, but also at the effects inside the existing customer’s
organization.
Conceptualizing disruptive innovation along these two dimensions also makes it possible to
address some of the previously posed questions regarding whether business models can be
disruptive or not. In the same way as a technological shift may induce a change in value or in
the network, a business model change may also do so, thereby causing problems for
incumbent firms. However, the business model can on the other hand be seen as a design
parameter that can make it possible for firms to manage disruptive innovation in a fruitful
manner.

6.3 Managing disruptive innovation
In the previous section, we outlined a couple of challenges related to introducing disruptive
innovations. It was argued that barriers to adoption may occur even in situations in which
such an innovation offers an increased utility for customers. When actors, resources or
activities inside the customer’s organization are changed or even removed by an innovation,
it may in fact be rational for certain individuals to oppose the adoption of a disruptive
innovation. How then, can these challenges be managed?
Many authors have pointed out the importance of a customer competence in order to succeed
with a disruptive innovation (e.g. Danneels, 2004), but little is known regarding what such a
competence looks like. Managing disruptive innovations that distort existing customer
structures may be particularly difficult since an innovating firm can only impose a limited,
indirect control over matters that take place inside the customer’s organization.
Veryzer (1998) argued that the evaluation criteria needed for discontinuous innovation
should be less customer driven and more experimental rather than analytical. Callahan and
Lasry (2004) found that regarding market newness, customer input was important for new
products up to a point and then drops off for very new products, whereas customer input was
becoming increasingly important without any drop for products of technological newness.
These managerial prescriptions have in common that they essentially underline the
importance of not regarding the established actor network as constant but rather try to modify

14

it in different ways, in that sense contrasting the view of Håkansson and Waluszewski
(2001). We therefore argue that a customer competence related to disruptive innovation is
based upon an ability to identify critical actors and their incentives, as well as finding new
ways to align them in favor of the disruptive innovation.
Any existing network constellation contains skeptical actors, which need to be mapped and
understood in terms of their incentives. Therefore, the ANT approach would suggest that all
affected actors need to be identified, as well as how they are affected by the innovation and
which ones that could be brought into the network. Hence, the innovation must have
stabilized slightly before involving users and other downstream actors, otherwise, those
actors would resist. Since ANT suggests that a network has to be re-created continuously,
actors need to be connected and kept loyal to an innovation over time.
The emergence of an actor network around a new idea therefore becomes a matter of
connecting actors and aligning incentives. A disruptive innovation would then sometimes
require the mobilization of other actor networks and the design of a new business model
which fits this specific network. Firstly, the innovator needs to assess the different incentives
that govern the different actors. Secondly, the customer utilities should be investigated, both
on an aggregated level and for each of the affected actors. This can for instance be done with
existing techniques such as customer utility mapping (Kim and Mauborgne, 2000) and
looking at the job to be done, rather than the performance attributes (Wunker, 2005). Thirdly,
based upon this knowledge, firms need to find a business model which aligns the different
actors’ incentives so that they are in favor of the innovation. This once again underscores the
necessity to have an adequate understanding of the value created for different actors in the
network with the existing solution as well as how it will be influenced by the innovation.
With this insight, changes to different business model parameters, such as e.g. revenue
model, value chain and value network can be explored.
If the management of disruptive innovation is a matter of identifying value for different
actors and aligning incentives throughout a network, then the survival and eventual
dominance of entrant firms must also be related to having a better capability to do so. The
lack of an established network may in this sense actually be an advantage for entrants, since
they would not be subject to the same rigidities as established firms (Leonard-Barton, 1992;
Dougherty, 1996). Hence, there seems to be a paradox here in that well established
relationships with customers create a competitive advantage in the established operations,
while they at the same time hamper experimentation with new value propositions. Given that
entrant firms are not to the same extent locked into an established actor network, they should
be more able to allow the kind of trial and error approach and technology drift (Burgelman,
1983; Ciborra, 1997) that are needed for succeeding with disruptive innovation.

15

7 Conclusion
This paper has attempted to add to the existing theory on disruptive innovation, and in
particular propose a few developments of key concepts in order to address some present
shortcomings and thereby render the theory more comprehensive and useful. Drawing upon
literature on value and utility theory as well as two different literature streams focusing on
networks, we argued that a disruptive innovation is an innovation that creates utility in new
ways and distorts existing networks.
Our conceptualization of disruptive innovation differs from Christensen’s in two important
ways. Instead of looking at different performance dimensions we have argued that
innovations should rather be assessed in terms of the utility that they bring to the customer.
By doing so, we have been able to explain how innovations with disruptive characteristics
may prosper in mainstream or high-end segments, despite their lower traditional
performance.
Secondly, this utility needs to be analyzed in terms of its impact upon the customer’s power
structures, the actors, resources and activities. In that sense, our approach differs from
Christensen’s in not only looking at new and old customers, but also at systemic changes
inside the customer’s organization. Drawing upon literature on industrial networks and ANT,
it has been argued that customers do not only control firms by supplying them with
resources, but that this control can include other types of power as well. Furthermore, while
there is such a thing as a total utility for an adopting organization, the interpretation of it
differs among individuals who are in turn governed by different incentives. Based on this, we
see that adoption is not merely a financial decision, but also a result of political arguments
and power.
Even though established customers benefit from adopting a disruptive innovation, they may
not request it due to the changes that it may imply along the value- and network dimensions.
Our final contribution is that we have pointed out some ways forward for how incumbents
firm can attempt to handle disruptive innovations. We claim that the management of
disruptive innovation concerns how actor networks change over time and how companies can
find ways of introducing something that is significantly new for several actors. Hence, such
notions as incentive alignment, power and uncertainty become crucial for the innovating
entity. Firms that aim to succeed at disruptive innovation need to 1) identify all actors in the
network 2) map their interests and power and 3) find ways to analyze changes in utility and
in the network induced by the innovation, and change business models so that all actors’
incentives are aligned. How this can be performed on an operative level has until now only
been partially investigated, and this area consequently calls for further research. There is also
a need to extend the focus of research on disruptive innovations from a mainly descriptive
and problem-oriented stance to also include more proactive work. A first logical step in such
a development would be to pay more attention to how firms actually can manage to introduce
disruptive innovations successfully, possibly also studying more entrant firms.

16

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20

Int. Journal of Business and Systems Research 1

Managing Business Model Renewal

Vera Sandbergs Allé 8
Technology Management and Economics
Chalmers University of Technology, SE-412 96
Göteborg, Sweden
E-mail: christian.sandstrom@chalmers.se

Ralf-Geert Osborne
Department of Technology Policy Analysis and Management,
Section of Technology Strategy and Entrepreneurship
Delft University of Technology, Jaffalaan 5, 2628 BX Delft, the Netherlands
E-mail: ralf.osborne@gmail.com

Abstract: It is well documented that firms often need to change their business
model when introducing a new product, but more knowledge is needed
regarding why they struggle when trying to do so. This paper explores the
challenges related to renewing an established business model. Drawing upon a
case study and industrial network theory, we argue that business models are
difficult to change because they are based upon interdependence throughout a
system of interrelated actors. Firms are interconnected with actors beyond its
boundaries and thus, only a limited control can be imposed. Our findings also
suggest that firms can change their business models by identifying critical
actors and by aligning incentives throughout their network.

Keywords: Innovation, Discontinuous, Systems, Business Model,
Interdependence, Disruptive

Reference to this paper should be made as follows: Sandström, C., Osborne, R.
(2010) ‘Managing Business Model Renewal’, Int. J. Business and Systems
Research, Vol. X, No. Y, pp.000-000.

Biographical notes: Christian Sandström is a PhD Candidate at the Center for
Business Innovation at Chalmers University of Technology, Gothenburg
Sweden. He holds an M.Sc. in industrial engineering and an M.Sc. in
economics. Christian’s research interests concern technological change and the
challenges they imply for incumbent firms.

Ralf-Geert Osborne works as a technical assistant at Schindler in Luzern and
works with organizational change and data management throughout the product
lifecycle. He holds a MSc in Management of Technology, from Delft
University of Technology in the Netherlands.


C. Sandström and R. Osborne 2

1 Introduction
For many decades, scholars have primarily looked inside the firm (e.g. Tushman and
Anderson, 1986) in order to explain why established companies tend to encounter
difficulties in the face of technological shifts. Christensen (1997) brought a different
perspective upon this issue by looking at the firm’s external environment and argued that
those technologies which initially underperform according to the demands of mainstream
customers tend to be problematic for established firms. Christensen and Raynor (2003)
claimed that there are two forms of disruptive technologies, namely those which emerge
in low-end segments and in new markets.
Over the last decade, business models have received increased attention, both by
scholars and practitioners. This construct focuses more explicitly on value creation and
appropriation than other frameworks in strategic management (Teece, 2009). It is often
argued that innovations of a more radical or discontinuous nature need a new business
model in order to succeed in the market (Christensen, 2006). New business models can
also help firms to appropriate the returns from a new product and to compete in mature
industries.
While the concept is clearly of great importance, more work is needed regarding the
challenges related to business model renewal. Many authors have pointed out that firms
often fail to change their business models (Chesbrough and Rosenbloom, 2002), but these
difficulties need to be better understood, both theoretically and empirically.
This paper explores the challenges related to business model innovation. It seeks to
create a better understanding of why firms struggle to renew their business models,
despite the increased awareness of the imperative to do so. The article also aims to point
out some guidelines for how firms can go about when trying to change their business
models. This is done by drawing upon literature on industrial networks and by presenting
an illustrative case study. The case is particularly interesting since it shows both what the
challenges are and how they can be handled.
The rest of the paper is organized as follows. The next section provides a critical
review of existing literature on business models. The subsequent section introduces
industrial network theory in order to create a better understanding of the challenges
related to changing existing business models. The following part presents the methods
used in the paper and then the case description is provided. The next section contains a
theoretical and managerial discussion and eventually some conclusions are provided.

2 An exposition of the business model literature
As stated previously, business models have received more attention over the last decade.
The concept emerged during the dotcom-bubble and consequently lost a lot of credibility
when the bubble burst (Magretta, 2002). Ever since, business models have become more
important and last year, Long Range Planning devoted a special issue to the topic.
There are several definitions of the business model which are similar, albeit not
identical. It has been described as a concept which focuses on “the architecture of
revenue” and the notions of value creation and appropriation (Chesbrough and
Rosenbloom, 2002). Business models have also been depicted as the value a firm offers

Managing Business Model Renewal 3

to customers, the architecture of the firm, its network of partners, and its way of creating,
marketing and delivering this value (Osterwalder and Pigneur, 2003). Zott and Amit
(2008) define the business model as “a structural template that describes the organization
of a focal firm’s transactions with all of its external constituents in factor and product
markets” (p.1).
Amit and Zott (2001) explored the theoretical foundations of the business model
construct by studying value creation in e-businesses. They argued that none of the
established frameworks in strategic management and entrepreneurship could fully explain
this phenomenon. The concepts of value chains, Schumpeterian innovation, the resource-
based view of the firm, interfirm strategic networks and transaction cost economics could
only address different parts of how value is created in e-businesses. Amit and Zott
therefore claimed that the business model can be regarded as a more holistic perspective
on strategy and value creation which draws upon these bodies of literature.
A growing body of literature has explored the area of business model innovation in
detail (e.g. Markides, 1997, 1998; Charitou, 2001). A business model innovation can be
defined as a reformulation of what an existing product or service is and how it is
provided to the customer (Markides, 2006). Several scholars have pointed out the
importance of renewing the business model, both in order to compete in mature industries
and to appropriate the returns from a product innovation (e.g. Chesbrough and
Rosenbloom, 2002; Magretta, 2002; Zott and Amit, 2008). Others have suggested that
changing the business model is particularly important when launching an innovation of a
more discontinuous nature. For instance, both Christensen (2006) and Doz and Kosonen
(2009) argued that succeeding with disruptive innovation is a business model challenge
rather than a technological problem.

2.1 Enablers and disablers of business model renewal
While the importance of renewing existing business models seems to have become
increasingly clear to both practitioners and scholars, firms still struggle when trying to do
so (Chesbrough, 2009). The literature on business models provides some explanations to
why this is the case. Christensen (2006) stated that the conflict between the established
business model and new initiatives tend to impede business model innovation. Amit and
Zott (2001) offered a similar explanation when arguing that several of the key
components of a business model such as novelty, lock-in and complementarities tend to
be incompatible with a firm’s existing resources and capabilities. Attempts to reconfigure
an established business model would therefore be met with a lot of resistance in a firm.
Other scholars have pointed out cognitive delimitations among senior managers as a
source of inertia (Chesbrough and Rosenbloom, 2002; Tripsas and Gavetti, 2001).
For sure, the abovementioned work has contributed to an increased understanding of
the challenges related to changing established business models. However, none of the
explanations put forward are specific for business models. In fact, similar arguments have
been put forward in the product innovation and technology management literature for a
long time. The explanations which focused on incompatibility and tension between old
and new business models are analogous with for instance the argument that new
technologies may render existing competencies and organizational structures obsolete
and therefore cause problems for incumbent firms (Tushman and Anderson, 1986;
Henderson and Clark, 1990). Moreover, cognitive barriers are not specific for business


models. Rather, they may impede any kind of organizational renewal or product
development efforts (Prahalad and Bettis, 1995). Hence, existing literature has not really
identified the specific challenges related to business model renewal. Given that firms
seem to succeed with product innovation more often than with business model renewal,
these challenges must either be similar, albeit of a different magnitude, or fundamentally
different in some way. Such different explanations haven’t really been identified by
previous literature.
Partly as a consequence of a lack of identified unique business model challenges, the
literature on how business models can be renewed is also similar to the solutions offered
in other fields of management theory. For instance, Chesbrough (2009) suggested that
experimentation, effectuation and organizational leadership may help firms to change
their business models. These managerial prescriptions are not specific for business
models. Veryzer (1998) claimed that the new product development process is more
experimental and open-ended for initiatives of a more discontinuous or radical nature.
Effectuation, as opposed to causation, refers to the process of changing the environment
by taking action without knowing the outcome, instead of analyzing and trying to control
the future (Sarasvathy, 2001). Sarasvathy argued that a key characteristic of
entrepreneurial behavior is to pursue effectuation rather than causation. This notion may
offer some guidelines for how to go about when renewing a business model, but it is not
specific for business models. The same holds for organizational leadership which has
been identified previously as crucial in order to succeed with major changes (e.g.
Rosenbloom, 2001). Doz and Kosenen (2009) provided further insight into how firms can
change their business models when underlining the importance of strategic agility in
terms of adapting to the environment and being able to allocate resources to new models.
Again, these prescriptions are well elaborated and relevant to managers, but not unique
for business models.
Summing up, there seems to be a gap in the business model literature. Several
scholars have pointed out that firms often succeed with product innovations but fail to
change their business models accordingly. However, the theoretical review above
suggests that the literature both on barriers and enablers of business model renewal
resembles previous literature on new product development and organizational change in
general. Given that it seems to be more difficult to change a business model, we should
expect the challenges and managerial solutions to be unique in some way. The article
seeks to identify these business model specific challenges and managerial solutions. The
next section provides some further elaboration on the business model notion and
introduces industrial network theory as a way to approach these issues.

2.2 Business models and industrial networks
Zott and Amit (2009) provide a conceptualization of business models as “a system of
interdependent activities that transcends the focal firm and spans its boundaries”. This
definition is particularly interesting because unlike other depictions, it underlines the
interconnected nature of business models. In this sense, business model initiatives are
different from the development of new products, which is more of an internal, firm-
specific challenge. For sure, product innovation efforts also depend upon linkages with
the external environment, for instance when it comes to purchasing critical components.
But business models are explicitly concerned with how value is created and captured
from actors beyond the boundaries of the firm. The notion of interdependence has up


until now been mentioned in the literature on business models, but not addressed in
further detail. Pynnonen et al (2008) presents an exception to this pattern by drawing
upon theory on value networks when analyzing business models. We adopt a similar
approach but focus more explicitly on the interdependent nature of business models. In
order to understand this issue, a more detailed description of industrial networks is
provided below.
Since the 1980s, the industrial network approach to business-to-business relationships
has received increased interest (Håkansson, 1982). Proponents of this perspective
claimed that previous literature missed out on the interdependence that characterizes
relations between suppliers and customers. This perspective originated from a criticism
of neo-classical economic theory and the notion of homogeneous customers. These
scholars argued that a market consists of actors that are interrelated and depend upon
each other. Therefore, the term ‘network’ is often used instead of ‘markets’, thus
underlining the mutual dependence among suppliers and customers (Håkansson, 1989).
In this sense, the network concept differs from the traditional dichotomy of markets and
hierarchies.
When studying the interaction between firms, network scholars regard companies as
actors which employ resources in order to perform certain activities. Firms can be
regarded as actors, but individuals and groups can also be thought of as actors. They have
different aims, scale and scope and are embedded in a network. Actors perform activities
by transforming resources and making transactions with other constituents (Håkansson
and Snehota, 1995). It is assumed that no single actor can command all resources or
perform all activities throughout a network and therefore, they are interrelated with other
resources and activities. Actors therefore depend upon the environment, which is in turn
regarded as unreliable. In order to remove this uncertainty, they tend to build
relationships with other actors (Dubois, 1998) and thus become interdependent. Networks
are held together by mutual benefits, but there’s always a mixture of intersecting and
diverging interests in these relationships (Håkansson, 1989). Industrial networks are
therefore based upon restricted freedom (Ford et al, 2003). This approach has a lot in
common with resource dependency theory (Pfeffer and Salancik, 1978), which states that
organizations are to a large extent controlled by others since they obtain resources from
their environment.
The abovementioned interdependence implies that a firm’s behavior is largely
governed by actors beyond its own boundaries. This observation has several implications
for attempts to change existing business models. Given that firms are interdependent the
main managerial challenge is not a matter of resource allocation, but rather how relations
with other actors can be handled. In this respect business model renewal is something
fundamentally different from product innovation since firms depend upon actors that they
cannot control to the same extent. While a firm’s relations are the basis of its current
success, these relations may at the same time impede attempts to change its business
model since networks are conservative to their nature (Håkansson and Ford, 2002).
Moreover, the industrial network approach suggests that a network needs to be mapped
and analyzed in order to understand barriers and enablers of business model renewal. We
discuss how this can be done in the analysis section of the article.


3 Method and Research setting
Along with a more theoretical discussion, this paper is based upon an exploratory single
case study, which examines how the studied firm developed, launched and eventually
succeeded with a product innovation that required a new business model.
According to Eisenhardt (1989) a case study is the appropriate research strategy when
little is known about a phenomenon and current perspectives seem inadequate. As stated
previously, the business model concept is still relatively new. Furthermore, the
theoretical review above identified a couple of issues that have not been sufficiently
understood yet. Therefore, we believe that an exploratory case study is a suitable method
for addressing specific challenges and managerial solutions related to business model
renewal. This method generates the kind of detailed description that is needed in order to
explore an issue that needs to be further addressed (Yin, 1994).

Single case studies imply a limited generalisability of the findings (Eisenhardt, 1989).
However, as the work presented aims to develop new theory rather than testing existing
theory, the method is deemed to be suitable. Thus, the article does not attempt to provide
an exhaustive set of answers, but rather to identify some specific challenges and how they
can be handled. Moreover, the case study approach enables a rich and nuanced
description which is often required in order to understand the abovementioned topic. The
authors decided to base the case study upon interview data since this source of evidence
generates a nuanced and insightful depiction. According to Yin (1994), interviews may
result in a biased description and interpretation of events. This potential weakness was
handled by targeting many interviewees and by performing the interviews by a duo of
researchers. All interviews were recorded, transcribed and listened to afterwards.
In total, nine employees were interviewed two times, which may seem to be a low
number. However, according to Yin (1994) interviews can be quite focused and directly
address the topic, hence enabling a rich understanding quite rapidly. Moreover, the
interviewees had different roles and insights into the project - six of them worked in the
R&D department, either as directors or senior engineers with plenty of experience. The
other three persons had been in charge of business development activities related to the
studied innovation. Hence, a relatively small sample of interviews could still cover
several different aspects of the project. They were targeted with semi-structured
questionnaires, asking the respondents to describe the development of the product, what
the main difficulties were, and how the product could eventually be turned into a
commercial success by renewing the business model. Several interviews were conducted
with the person who was in charge of changing the business model. Follow-up interviews
were also performed in order to ensure an accurate interpretation of the gathered
information. The case study description below emerged from similarities in the responses
from the interviewees. It was also read and validated by the innovation manager and the
person who had been in charge of the main business model changes that this product had
implied. After the termination of the project, a final presentation was given to the
company where the main findings and conclusions were communicated. During this
session, the general interpretation of the collected data could be validated one more time.
Hence, the empirical description in this paper emerged from an iterative approach where
the findings have been validated at several points in time.


The present authors maintained a formal research partnership with the studied firm
throughout the study and were interacting with it continuously during 2007-2008. This
relationship enabled extensive access both to databases and to key employees. Within the
scope of this partnership, scorecards have also been sent out regarding the creative
climate at the company and the innovative capabilities of the firm. In total, more than 150
people answered these scorecards, giving a total response rate of more than 70 percent.
This was done as part of an innovation audit that was performed at the firm. During the
audit, interviews were conducted with top and middle management. Moreover, detailed
case studies of nine discontinuous innovation projects at the firm have been done within
the scope of the research which this paper is based upon. These data should be regarded
as important background knowledge for the study described in this paper.

4 Results
The studied product innovation is a diaper for adults, intended to take care of heavy
incontinence among elderly people. The product was launched by a company which has
been a global player in the personal care industry for several decades, manufacturing
diapers, feminine pads and incontinence products. The firm pioneered the incontinence
market in the 1970s and is a dominant actor in this business today. Over the years, the
company has sought to sustain its leading position by launching innovative incontinence
products, whereas it has remained a follower in the diaper and feminine pad markets.
Incontinence products are both sold to end-consumers and to retirement homes. The
studied product is only sold to retirement homes.
The incontinence diaper was first launched in 2001 and then re-launched in 2002. The
technical development started ten years earlier within a concept development project.
Initially, the scope was more open, with the purpose of generating new knowledge rather
than aiming for a new product. This development eventually resulted in an ambition to
launch a new incontinence product, which would be based upon a belt, instead of having
a pant diaper or using tape when attaching it. There were several technological challenges
in the project. A belt had to be developed, and by that time belts were rarely used in
incontinence products. Moreover, both the absorption core and the shell of the diaper had
to be improved.
The first attempt to commercialize the innovation took place in 1994. New machines
were built and this was done at the same time as the product was developed due to strong
pressure from management. Eventually this development turned out to be very expensive
and it increased the complexity of the project significantly. Therefore the project was put
on hold for some years, but since the firm’s products for heavy incontinence became
increasingly subject to price competition, the firm decided to re-start the development
activities in the late 1990s and thereby replace the ‘all-in-one’ diaper the firm had been
selling previously. “There was a strong commitment from an early point; management
really believed that new products had to be developed in order to survive in the long
term”, one project manager recalls. This time the technological ambitions were lowered.
Instead of using a belt, it was decided that the product should be attached with tape, since
this would be cheaper. When the product was launched in 2001 it turned out that this tape


made the diaper too stiff and very uncomfortable to wear. Therefore it had to be
withdrawn from the market and the brand was severely damaged.

4.1 Barriers to adoption
Despite this failure, management still believed in the product and therefore decided to
improve the belt and re-launch it in 2002. Once the diaper had been put on the market
again, the sales did not take off, for several reasons. The new design made the product
appear inferior, though it was in fact much better, both in terms of absorption capacity
and in terms of convenience for the users. More importantly, the price was higher, and
thus it was difficult for the sales organisation to justify to the purchasers at retirement
homes why they should buy the it. Previously, the firm had mainly offered products
which could last longer, thereby lowering the customer’s expenses. Though the new
product resulted in an improvement along this performance dimension, the main
difference was that it enabled cost reductions by decreasing the total cost of incontinence
care. The “consequence costs” in terms of unnecessary product consumption, extra work,
laundry and skin treatments could be reduced significantly. Up to 10 percent of the total
cost could be removed, and since the cost of incontinence products only summed to 1
percent of the total incontinence care cost, this reduction was indeed remarkable and
would easily justify a higher price. The main reason for this reduced incontinence care
cost was that problems with skin irritation and leakages could be decreased. This
improvement was primarily related to the breathable back sheet which enabled air to
circulate instead of having the fluid circulating. The back sheet thus helped to maintain a
healthier skin while at the same time increasing the comfort.
Hence, the new product resulted in fewer pad changes, less leakage and skin
breakdowns, and this lead to a significant reduction of the total incontinence care cost.
But since the purchasers at retirement homes were not assigned to handle the total cost of
incontinence care but only the costs of incontinence products, they had in fact low
incentives to buy this innovation, despite its superior performance. Moreover, the sales
organisation preferred to sell the old products since they did not know how to justify the
higher price. Thus, the incentives both to buy and to sell the product were initially very
low. It also proved difficult for the caregivers to understand how the product should be
used. The innovation was easier and more convenient to put on, but how to do so was not
obvious, and therefore the product was not really appreciated by the caregivers either,
despite being more ergonomic when used correctly.
To sum up, even though the innovation offered increased convenience both for users
of the product and for the caregivers, while at the same time creating significant cost
reductions for retirement homes, the product was about to become a failure. “We
underestimated the barriers to success and therefore the product was initially a
commercial failure”, one engineer recalls.

4.2 Business model renewal


Despite all the difficulties related to this product, the firm still believed in it since the
diaper clearly created an increased economic value for the customer. Therefore the
company started to look for new ways of selling it, by focusing on different attributes and
sales channels. One major step in this direction was the launch of a service organisation
which aimed to take a broader perspective on sales, focusing on total incontinence care
rather than just selling products. This can be illustrated by the motto of the organisation,
which is “better care at a lower total cost”. The new unit sought to communicate these
values by performing studies together with customers, which showed the superior
performance of the innovation. In one study together with six Danish municipalities it
was proven that the customer’s total cost for products could be reduced by 22 percent and
that leakages could be reduced from 25 percent to 10.6 percent. In another study, they
focused on the total cost of incontinence management, illustrating that it could be
reduced by 13 percent. Moreover, by using simulations, the service organisation showed
to the customers how the “hidden” costs of incontinence in terms of leakages, the
required time for pad changes, and skin breakdowns could be reduced significantly.
Apart from focusing on new performance attributes and changing the value
proposition, the firm started to work actively with educating caregivers regarding how to
use the product. The innovation manager said that “it was not really intuitive how the
product should be put on, but once we showed the caregivers how it is done they found it
to be much more convenient than to use the old products”.
The service organisation also performed a study together with Linköping University,
where they could show that the innovation was in fact much more ergonomic for the
caregivers. This was an entirely new performance dimension for an incontinence product
that the firm was scarcely aware of when the product was first launched, even though this
had been a focus area in the development ten years earlier. This attribute implied that the
costs related to employee absence due to illness could be reduced, thus lowering the total
cost of incontinence care even further. Once these studies had been performed, the sales
force felt more confident selling the product. Furthermore, the incentives of the sales
organisation were changed so that the employees received their annual bonus based upon
how much they sold of the new product.
The sales channel was also shifted towards the management of retirement homes,
since they could focus on total incontinence care costs rather than solely the costs for the
products. By using advanced statistics and computer simulations, and extending the value
proposition, it was proven that the innovation decreased the total cost of incontinence
care significantly, and this argument turned out to be more appealing to the managers
than to the purchasers.
After having taken these measures, sales eventually started to take off and have been
growing in recent years. The innovation manager summarized the story by saying that
“the product would not have become a commercial success if a service organisation had
not been created and the sales approach had not been changed.” Moreover, top
management had been firmly committed and was not reluctant to cannibalize upon
previous products, primarily because the profitability was much higher on the new
product.


5 Analysis and discussion
The case description above provides further evidence on the necessity of changing a
business model when introducing a product that brings new performance attributes to the
market (Christensen, 2006). The studied incontinence diaper created an increased utility
for the customer, but did not succeed until the business model was changed. This section
provides a theoretical and managerial discussion of business model renewal and
synthesizes the case with the previously described literature on business models and
industrial networks.

5.1 Challenges related to business model renewal
The literature review in this paper suggested that while several challenges related to
changing a business model have been identified, they are not really specific for business
models. Indeed, many of them were of a rather general nature and are familiar to scholars
in strategic management, entrepreneurship and new product development. The
development and eventual success of the studied incontinence diaper sheds some new
light on how the business model innovation challenges differ from those related to
product innovation.
Starting with the actual product development, it can be seen in the case study that the
main challenges were related to patience and being determined to allocate resources to a
project that turned out to be very problematic. Hence, the issue was a matter of execution
where top management continued to believe in the project, despite the difficulties. As
was stated in the case description, this commitment was a key success factor.
Once the product was launched, the firm faced the challenge of appropriating the
returns from the created value and changing the business model in order to do so. These
challenges were of a fundamentally different nature than those related to developing the
product. The product’s success in the marketplace could not be controlled in the same
way as the development activities. Zott and Amit (2009) suggested that the business
model can be regarded as a construct which is based upon interdependence. This
definition helps us to understand why business model renewal seems to be so difficult.
The case illustrates how several barriers to adoption occurred due to this
interconnectedness since the product was incompatible with the existing network
constellation of actors, resources and activities. The product required a shift in the
activity of changing the diapers. Moreover, the increased value that the product generated
was distributed differently. It was spread over the end-users in terms of convenience and
reduced skin irritation, the caregivers because the product was much more ergonomic,
and the retirement homes by offering a significant cost reduction for total incontinence
care. However, the individual purchaser was not assigned to take this value creation into
consideration, and this in combination with the higher price per unit created an adoption
barrier.
Clearly, these challenges are different from the ones related to developing the
product, which were primarily related to top management commitment and
experimentation. Drawing upon the industrial network theory outlined previously, we
therefore suggest that the challenges which are unique to renewing a business model are


related to interdependence and systemic changes in the way that value is created and
distributed among the key actors. A firm’s existing business model is not only controlled
by the firm itself, but also by the incentive structure of its surrounding stakeholders,
which are beyond direct managerial control. A product which requires a change in the
activities, relationships or implies a new distribution of value will meet resistance. As
stated before, firms build networks and relationships in order to reduce uncertainty, but as
a consequence, they also become subject to limited freedom (Ford et al, 2002) which
hampers its attempts to change established business models.
It should be underlined that the case study above concerned a relatively minor shift in
a dyadic relationship between a supplier and a customer. A product innovation with some
new performance attributes was enough to create systemic changes and resistance inside
the customer’s organisation. Changing a business model which affects several actors
throughout an entire supply chain is therefore likely to be even more difficult. In such a
context, an attempt to reconfigure a business model may affect several functions in many
firms and due to the aforementioned interdependence, it is enough that one actor blocks
the initiative for it to fail (Adner, 2006). As firms are to a larger extent drawing upon
external sources in order to innovate and become more interconnected (Chesbrough,
2003), these difficulties will probably increase over time. Bearing this in mind, it
becomes easier to understand why many firms struggle to renew their business models.

5.2 Managing business model renewal
The notion that business models are built upon interdependence also reveals how
firms can succeed when trying to change their business models. First of all, we observe
that the managerial prescriptions related to business model renewal seem to be more
applicable to the product development phase in the case description above. Chesbrough
(2009) suggested that experimentation, organizational leadership and effectuation were
some of the determinants in succeeding with changing a business model. When
developing the product, the firm experimented extensively with new concepts and
technologies. Moreover, the engineers tried to use their skills in order to reach a goal
which was not known beforehand as suggested by Sarasvathy’s (2010) notion of
effectuation. It is also clear that top management demonstrated organizational leadership
in being committed to a project that turned out to be problematic.
These three factors seem to have been less important in succeeding with the actual
reconfiguration of the established business model. Given that the success of the
incontinence diaper depended upon changes which were beyond the direct control of the
firm it had to find ways to align incentives in favour of the innovation. Under conditions
of interdependence, leadership, experimentation and effectuation are important, albeit not
sufficient criteria for success since the outcome is in fact governed by actors which
cannot be managed by using executive power.
The case study provides some evidence regarding how firms can renew their business
models. When sales did not take off, the firm sought to understand how all the relevant
actors and activities were affected by the new product. A couple of barriers were found,
such as the discrepancy between the purchaser’s incentives and the overall utility of the


retirement homes and the caregiver’s lack of knowledge regarding how the product
should be used.
Once these actors and their incentives had been identified, the firm sought to develop
a business model that was compatible with this structure. Under conditions of restricted
freedom (Ford et al, 2002), firms depend upon its surrounding environment and therefore
need to map and align incentives in order to succeed. The studied firm did so by
undertaking a couple of measures. Given that the new incontinence diaper created value
on a more systemic level for the customer by reducing the total cost, the firm targeted the
management of retirement homes rather than the individual purchaser. When doing so,
the value proposition was also changed from selling incontinence products towards
offering “better care at a lower total cost”. Moreover, given that the activity of changing
diapers had to be altered, the firm started to educate caregivers regarding how the product
should be used.

Table 1. Some managerial guidelines for how firms can renew their business
models. The middle column is on a generic level and the right hand
column describes how it was accomplished in the studied case.
Managerial action What was done in the studied case
Step 1 Map all relevant actors in terms of their The incentives of purchasers were not compatible with the new
incentives, resources and activities. diaper. The product required that the caregivers changed their
activity of changing diapers.
Step 2 Find out how value is created and The product created value for the organization on a more systemic
distributed among these actors. level – the total cost was lowered while the unit price was higher.
Step 3 Identify actors which are critical for the Management of retirement homes needed to be convinced since
adoption of the product innovation. purchasers rarely took the total cost into consideration. Caregivers
had to be re-educated.
Step 4 Design a business model which aligns The value proposition was changed to “better incontinence care at a
incentives throughout the established lower total cost” and management was targeted instead of individual
actor network. purchasers. Caregivers were re-educated and a closer relation to
customers was developed.

Summing up the above, our findings provide some tentative guidelines for how firms can
go about when trying to renew their business models. As stated in the theoretical review,
some authors have pointed out the interdependent nature of business models, but little is
known about how firms can change their business models under conditions of restricted
freedom. From this theoretical standpoint we have contributed to existing literature by
pointing out some guidelines as to how firms can renew their business models.
Companies need first of all to identify all actors, resources and activities which are
affected or can influence the adoption of a product. It should be pointed out here that
those actors can be found inside the customer’s organisation as well as in other parts of
the firm’s network. Secondly, the incentives that govern these actors must be mapped and
understood. These conditions are more or less fixed and finding the right business model


is a matter of figuring out how these incentives can be aligned in favour of the product,
for instance by helping actors to change their activities or by targeting new actors with a
new value proposition.

6 Conclusion and future research
We started this article by observing that while many firms are good at introducing new
products, they often fail to renew their business models. Several scholars have pointed
out the importance of changing existing business models in order to succeed with product
innovations, especially those of a more discontinuous nature (Christensen, 2006).
However, more knowledge is needed regarding why this seems to be so difficult and how
firms can go about when changing their business models. We have tried to address these
two issues by drawing upon industrial network theory and by using an illustrative case
study. Our literature review suggested that most of the literature about business model
renewal is of a general nature and does not really make a difference between business
models and new products. Given that it seems to be more difficult to change a business
model than a product, we have tried to identify in what ways these challenges are
different, and how they can be handled.
Having paid special attention to Zott and Amit’s (2009) definition of business models
as being based upon interdependence we went into further detail using industrial network
theory. Based upon our case study and theoretical review we conclude that business
models are difficult to reconfigure since such a change depends upon actors outside the
firm’s boundaries and thus, only a limited control can be imposed. One reason why it
seems to be easier to introduce new products than new business models would therefore
be that a firm has much more control over new product development efforts than business
models, which to some extent transcend the boundaries of the firm.
A couple of guidelines regarding how the dilemma of interdependence can be
handled have also been presented. In order to renew a business model, firms need to
identify all affected actors and activities as well as their incentives. Based upon this
input, firms can develop new business models by targeting new actors, encouraging
changes in existing activities and aligning incentives throughout the network.
Having drawn upon one single case study and some theory on industrial networks,
our conclusions need to be further validated. We therefore encourage other scholars to
explore and test our findings, particularly by looking at business model changes
throughout entire supply chains. These challenges are likely to be even more complex
and difficult to handle since more actors are affected in such a setting.


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Disruptive Innovation as a business model challenge

Mats Magnusson and Christian Sandström

Abstract
It has often been stated in previous literature that disruptive innovation is a business model
problem, but few studies have attempted to explain what this problem actually consists of.
We address this issue through a multiple case study of how firms have tried to introduce
disruptive innovations and sought to renew their business models. Conceptualizing business
models as boundary-spanning activity systems, three key challenges are identified. A first
challenge concerns how the new value creation associated with the innovation is sometimes
incompatible with the existing competences and activities of key actors. Furthermore,
disruptive innovations can create a new distribution of value, which in turn may imply that
some actors lose their power or status. The third key challenge concerns the fact that firms
can only impose a limited control over their business model as it transcends the boundaries of
the firm. Subsequently, managerial implications related to disruptive innovation and business
models are elaborated.

1 Introduction
Innovation is a fundamental dynamic capability, allowing firms to renew their product and
service offerings in order to match, and sometimes even create, market changes. In the field
of innovation management, particular emphasis has lately been put on changes of a
discontinuous or disruptive nature, as these have been found to generate substantial problems
for incumbent firms (Christensen, 1997). Existing literature on the subject has underlined the
importance of finding new business models in order to survive and prosper under conditions
of disruptive change. Christensen (2006) explicitly pointed out that handling innovations
which have disruptive characteristics is essentially a business model problem. However,
more knowledge is needed regarding the way in which a disruptive innovation actually
constitutes a business model problem.

We address this matter by exploring what business model challenges a firm encounters when
trying to introduce disruptive innovations. Five illustrative cases are presented in order to
show how and why firms struggle with disruptive innovations and how they can succeed by
attending to a number of business model issues. These ideas are based upon both direct
empirical observations from case studies and drawing upon an elaboration of complementary
theory that can inform and improve the ongoing development of management theory and
practice related to the disruptive innovation and business model change.

The paper is organized as follows. The following sections provide a theoretical exposition of
literature on disruptive innovation and business models. Next, the methods used and
empirical data are presented. Thereafter, a discussion and analysis follow, in which we
identify key challenges and provide some managerial implications regarding how business
models can be renewed in a way that enables disruptive innovations.

2 Disruptive innovation
It has long been known that established firms seem to encounter difficulties under conditions
of discontinuous change (see e.g. Cooper and Schendel, 1976; Utterback, 1994). A
discontinuous innovation can be regarded as a step-wise distortion of an established industry
or market structure (Hamilton and Singh, 1992). Initially, academic work in this area focused
largely on difficulties related to changing firms’ resources and capabilities when confronted
with discontinuous innovations. Previous work in this area has for instance pointed out that
technological shifts which render existing skills obsolete tend to be problematic (Tushman
and Anderson, 1986). It has also been argued that changes in the product architecture are
difficult to handle due to organizational inertia (Henderson and Clark, 1990).

Christensen (1997) developed a significantly different perspective upon why established
firms fail when facing discontinuous changes. Instead of looking at the resource and
competence base of incumbents, Christensen explored the role of the market and firms’ value
networks1. He observed that those innovations which are not initially demanded by the
existing customers of a company tend to be particularly problematic to handle since the
financial incentives to invest in such initiatives are normally absent in the early phases.

Based on these observations, Christensen made a distinction between disruptive and
sustaining innovations. Disruptive innovations have in common that they underperform along
dimensions which customers have historically valued, while at the same time bringing new
performance attributes to the market. Sustaining innovations, on the other hand, are those
which a firm’s established customers demand, and primarily improve performance along the
dimensions already valued by existing customers. Many disruptive innovations tend to
prosper in low-end segments or in new markets (Christensen and Raynor, 2003), and as
performance of the new technology improves it eventually displaces the former technology.
Disruptive innovations tend to be developed by entrant firms, since these companies can
more easily create a new value network and grow even in small market segments offering
lower profit levels.

1
A value network can be defined as the “context within which the firm identifies and responds to customers’
needs, procures inputs and reacts to competitors” (Christensen and Rosenbloom’s, 1995, p. 234)

The theory on disruptive innovation was developed by drawing upon resource dependence
theory (Pfeffer and Salancik, 1978). This perspective on organizations contends that the
environment imposes a great indirect control over the focal firm since it depends upon
resources from the environment in order to survive. Incumbent firms are in this way “held
captive” by their most profitable customers and fail to invest in initiatives which are not
initially demanded by them.

A key managerial recommendation related to disruptive innovation has been that those
initiatives need to be developed in an independent organization. By doing so, these potential
products can be protected from the competition for resources inside the firm, which tends to
drain the disruptive innovation of funds.

Clearly, the above-mentioned work has put an increased emphasis on the importance of the
surrounding network when trying to understand and manage discontinuities. Indeed,
Christensen (2006) reformulated his earlier work by stating that disruptive innovation is
fundamentally a business model problem. Nevertheless, the bulk of the existing literature has
until now largely focused on the focal firm and its internal resource allocation processes. By
viewing disruptive innovation as a business model problem, a new research area is opened
up, in terms of identifying both challenges and managerial solutions. A first step in this
direction would be to clarify the problems. We therefore address the following research
question in this paper:

How and why is a disruptive innovation a business model challenge?

Before addressing this question in further detail, a brief exposition of literature on business
models is given in the following section.

2.1 Business models
Generally speaking, business models are concerned with how firms create and capture value
(Chesbrough and Rosenbloom, 2002). The concept initially became popular during the
dotcom-bubble. Companies could find new ways to make profit by using the Internet, and
business models thus became increasingly relevant to scholars and practitioners (Magretta,
2002). Some researchers consider the business model to be the mechanism by which firms
create and capture value (Shafer et al., 2005), whereas others think of it as a set of business
components or answers to certain questions (e.g. Yip, 2004; Osterwalder and Pigneur, 2005).
The latter definitions are problematic for a couple of reasons. First of all, it becomes difficult
to assess the underlying theoretical concepts. These definitions also seem to be somewhat
arbitrary as different scholars use a range of different components. Indeed, Shafer et al.
(2005) found 12 different definitions in 1998-2002, which together contained 42 different
elements. Clearly, the important concept of business models becomes hard to understand

when there is such a variety in the way that the term is defined. Another consequence of
regarding the business model as a broad set of components or answers is that it becomes
difficult to develop managerial solutions which are specific for business models.

Some more theoretically grounded works on business models have stated that business
models deal with how a firm interacts with its surrounding network. Itami and Nishino
(2009) argued that business models can be thought of as two basic elements, a business
system and a profit model. They also pointed out that such a system is essentially an
interplay between the firm and its surrounding network. A similar conceptualization was
provided by Weill and Vitale (2001), who stated that a business model is comprised of
participants, relationships and the flows between them. Zott and Amit (2009) developed these
ideas further, defining a business model as “a system of interdependent activities that
transcends the focal firm and spans its boundaries”. In their article, the importance of
regarding business models as activity systems, i.e. interdependent organizational activities
which are related to the firm as well as its surrounding network, is underlined. Embracing
such a perspective, it becomes clear that a fundamental part of the business model is the
design of an activity system that captures which activities should be performed, by whom,
and how activities and actors are linked together. One advantage of this conceptualization is
that it clarifies that business models need to be thought of as systemic and holistic (Zott and
Amit, 2009). In addition to this, an activity system perspective allows us to consider not only
financial, but also social aspects of a business model. In this article, we will apply the
outlined interactive perspective to business models.

3 Methods used
In order to explore the topic explicated above, a multiple case study approach was chosen.
This method is often used when looking at a phenomenon that has been insufficiently dealt
with in previous literature. When trying to build new theory rather than testing established
theory, case studies are often used, since they enable a detailed description which makes it
possible to comprehend an issue that has only partly been addressed before (Eisenhardt,
1989). A multiple case study approach was used since the addressed topic can include a wide
range of different managerial solutions, given that business models are holistic and cover a
wide range of different business functions and means. By looking at how several firms in
different industries, both entrants and incumbents, have tried to renew their business models,
a broad range of insights could be obtained regarding this phenomenon. The companies
approached all had experience of launching products that required changes along one or
several dimensions of their business model. Additionally, these companies and their
corresponding products were targeted since they had developed products which had some
disruptive characteristics, e.g. new performance attributes or a new way of creating value. By
necessity, this larger sample implies that the descriptions become more limited in terms of

detail and richness. The advantages of using interview data in terms of obtaining a nuanced
account for the different cases are still present, since quotations and illustrative examples are
highlighted.

The article presents five illustrative case studies, all of which concern how firms have
launched a product or technology with disruptive characteristics and sought to refine their
business model to fit with the new value creation and appropriation in the activity system. In
order to gather this information, semi-structured interviews were conducted at the different
firms. The questions concerned how and why a certain discontinuous innovation imposed a
demand for business model renewal, and how the firms proceeded in order to fulfill it. The
number of interviews in each firm ranged between two and nine. In the cases where fewer
interviewees were involved, those interviews were specifically targeting persons who had
key roles in developing the new product and/or the business model. By doing so, key
information could be obtained despite a relatively small amount of interviews (Yin, 1994).
Each interview lasted for about 90 minutes. Notes were taken by the researcher and the
interviews were also recorded in order to allow for subsequent validation of the notes.
Several interviewees have read the interview documentation and been asked to confirm the
interpretation of the data. Table 1 contains further information about the performed
interviews.

Firm Number of Interviewees
interviews
Video surveillance firm 8 Managers of R&D and people who have been in
charge of business development for a long time.
Floor coatings firm 4 Manager of one division, the former director of
sales and marketing, the manager of R&D, and
one engineer.
Health care firm 2 Director of marketing, and the engineer who was
the champion behind the studied product.
Incontinence diaper 9 The person in charge of renewing the business
firm model with regard to the studied product, the
innovation manager, and 7 other persons
involved, primarily engineers.
Table 1 Information regarding the respondents that have been interviewed in the study.

4 Results
This section contains a presentation of the results. A brief summary of the cases is provided
in Table 2, and the following sub-sections give a more detailed description of relevant
aspects of each single case, with an emphasis on how the business model was changed and
the critical activities related to this shift.

Product / Studied firm Key product Main business model Overcoming the challenges
Technology characteristics challenges

Digital, A European entrant More scalability and A lack of IT competence The firm has sought to communicate the
Internet-based firm which has integration with other among key stakeholders in the new value proposition that is brought to
video driven the shift systems such as the intranet. value network related to the market. It provides training to
surveillance. towards digitalization Easier installation and security. customers and system integrators, and has
and grown rapidly increased intelligence. tried to target new actors inside the
over time. customer’s organization.

Water-based A firm which Waterborne coatings are Convincing the craftsmen of Training activities like seminars and
coatings for pioneered the use of more environmentally the importance to stop using training centers launched in many
wooden water-based coatings friendly, it took less time to solvent-based products and countries. The firm offered good margins
floors. back in the early finish a floor for the shift to waterborne coatings to its distributors in order to make them
1980s and has grown craftsmen who used them, which were installed in a promote the products.segment
a lot over these years. and they did not contain different way.
carcinogens like the former
products.
UV-based The same firm as in An initially lower durability, While the manufacturers of UV finishes were initially sold as a
coatings, for the previous case. but also a significant wooden floor benefited from complement and a waterborne coating was
manufacturing simplification of the using the product, the end user also used once the floor had been installed.
wooden customer’s manufacturing did not do so due to a lower
floors. process. durability.
The first A European firm Enabled patients to use a The product required a Informed physicians sought to identify key
hydrophilic which has grown catheter on their own, different form of treatment of ‘opinion leaders’, performing clinical
catheter, significantly over the without help from patients. trials and influencing the public
launched in last decades thanks to healthcare staff. reimbursement system.
1983. this product.
The first A large European Reduced leakages, less skin Higher price per piece, but The firm started to work more proactively
incontinence manufacturer of irritation and a more reduced overall costs for with its customers, informing and training
diaper that diapers, incontinence ergonomic product to use incontinence care. The them. The value proposition was changed
used a belt, products and for caregivers. Decreased economic value was created and new actors were targeted inside the
launched in feminine pads. the total cost of on a new level and caregivers customer’s organization.
2002. incontinence for the did not know how to use the
customer’s organization. product.
Table 2: An overview of the investigated product innovations, the main business model challenges and how the firms handled them.

Case 1 – IP-based video surveillance
The video surveillance industry is currently experiencing a shift from analogue to digital, IP-
based cameras. For a long time, IP video offered a lower image quality, but lately it has
surpassed analogue technology along this dimension with the rise of megapixel cameras and
HDTV quality. At the same time, the technology has brought several new performance
dimensions to the market. For instance, IP video is easier to integrate with other information
systems, it is much easier to expand the system, and images can be viewed from any place
that has access to an Internet connection. This technology has grown rapidly in recent years
and the analogue incumbents have so far failed to dominate the technology.

While entrant firms like the one studied in this paper have grown significantly, they have
encountered several challenges over this time. When installing an IP-based system,
surveillance becomes more of an IT issue than a traditional security matter. Historically, the
security industry has been characterized by a business logic that is very different from the
logic in the IT industry. The security industry used to have limited price transparency
throughout the supply chain and people who worked in the industry often had a background
in the military or in the police. These actors have been used to doing business based upon
strong relations. Integrators and distributors of IT products, on the other hand, are used to
higher price transparency and weaker ties between the actors. Additionally, security people
do not command the new technology since the competence related to installing and
maintaining an IP system is significantly different. Another problematic issue has been the
fact that security managers lose power vis-à-vis IT managers inside the customer
organizations and therefore they have been reluctant to adopt the new technology.

Initially, the studied firm sought to handle this conflict between IT and traditional security by
building separate channels according to the logic described above. They even sought to
communicate the different logic by selling black products in the security channel and white
or light grey products in the IT channel, as these colors are usually associated with the
different industries. But at that point (1999-2001) the technology was still inferior in many
respects, and hence the security industry saw little benefit in adopting the new technology.
The IT industry, on the other hand, had been hit by the dotcom-bubble in 2001-2002 and
there were plenty of skilled persons who looked for jobs. The studied firm has therefore
chosen to focus on an IT channel approach, and has grown significantly by doing so. As the
technology has evolved, the traditional security industry has become more interested in IP
video and come back to the firm. But when doing so, they had to follow the IT logic, based
upon weak ties and price transparency.

The power and knowledge of security managers has continued to be a challenge for the
studied firm. The firm has undertaken a couple of measures in order to deal with this issue.
For instance, it has to a large extent targeted IT managers. One company representative said:
“It was easier to find an IT manager with an increased need of security than a security

manager with an increasing need of IT”. Additionally, the firm has sought to create a broader
interest for IP video inside the customers’ organizations by being involved in many different
marketing activities. It has put advertisements in the security industry press, released white
papers and approached the managers of the security managers. The studied firm does not
normally know exactly how and where decisions are taken inside the customer organizations,
and has therefore chosen to target a wider set of actors, thereby hopefully creating an internal
pressure to go for an IP-based system. It often tries to get the IT and security managers to
attend the same meeting and reach an agreement between themselves. Additionally, the firm
educates installers and customers in how IP video is used, by offering training sessions.
“They won’t know everything about IP surveillance from a one-day session, but they know
much more and can learn more”, a company representative recalls.

The firm’s business model is based upon a couple of common denominators. It doesn’t sell
directly to end users and works together with many different partners, who integrate systems,
act as distributors, develop software and sell various services. The business model seems to
be very flexible – the firm makes money primarily on hardware but also to some extent on
video management systems. The partners in its network are free to develop their own ways of
making money using both the company’s products and its competitors’.

Case 2 – Waterborne coatings for wooden floors
Until the late 1970s, coatings for wooden floors were based upon chemical solvents. These
smelled substantially, and later on it was also proven that many of the solvents in the
coatings were carcinogenic. Additionally, it took a long time to coat a floor using this
technology. The studied firm launched the first waterborne floor coating in the late 1970s. It
offered several advantages – no smell, no carcinogens and it enabled the craftsman to finish a
floor in one day instead of three.

Nevertheless, the firm encountered several problems when trying to commercialize the
technology. Even though the benefit of shifting to water-based coatings was significant for
the craftsmen who used them, many craftsmen had used solvent-based coatings for several
decades and were used to working with these products. Furthermore, putting on a waterborne
coating was a slightly different activity from using solvent-based products and the users did
not really know how to use the waterborne finishes. Since the firm sold its products via
distributors, it had to convince both the end users and the distributors about the benefits of
using this product. The company sought to do so by offering better margins to its distributors,
who thereafter started to promote the product more. Additionally, the firm started to inform
and educate the market about the advantages of its product. The former director of the market
organization remembers how the firm on average arranged one seminar per day somewhere
in the world during the 1980s. He wanted people to get to know the company and its products
by demonstrating and training them regarding how the coating should be used. The company

had training centers throughout the world. These seminars and trainings were often arranged
together with a distributor, and the firm regarded this as an activity that was needed in order
to make profits on its products, even if the seminars and training sessions barely covered
their costs.

Case 3 – Industrial coatings for wooden floors
In the late 1960s, industrially produced wooden floors started to enter the market. These
products were both industrially produced and coated with a solvent-based coating. The
industrially produced wooden floors were often installed in newly built apartments and
houses. The process of manufacturing these floors was very sensitive and risky. The
chemical compounds implied a great risk of fire which in turn resulted in high insurance
premiums. The production sites smelled, were harmful and dangerous for people working
there, and generated high levels of pollution. A manufacturing line for industrial coating and
production was about 100 meters long. The floors needed to be dried in large ovens which
consumed a lot of energy.

Since the studied firm was primarily selling floor finishes to craftsmen, its directors realized
that industrially coated floors could have an impact on the core business. The firm therefore
sought to develop products which could be sold to these manufacturers. Instead of focusing
on solvent-based products, the engineers developed a UV-based coating. This product was
radically better for the manufacturers of wooden floors. The production line did not need to
be longer than 10 meters, no ovens were needed, and consequently the energy savings were
huge. The customers could now manufacture 20-25 meters of floor per minute instead of 2-3
meters. Additionally, all the smell, the great risk of fire and the toxicity were removed.

The producers benefited extensively from adopting this technology and did not hesitate to do
so, despite the fact that they had to exchange a large part of their installed machinery. The
final outcome, however, was in many respects quite poor. UV coating initially offered a
significantly lower durability, and could even be scratched away from the surface. In many
cases, it was therefore used as a complement to traditional coatings. The performance of the
products was increased over time and UV coating now has performance similar to more
traditional coatings.

Case 4 – A hydrophilic catheter
In the early 1980s, the studied firm launched a catheter which had a hydrophilic surface. The
hydrophilic surface enabled people to use these products on their own, without needing any
help from a nurse or a doctor. The product was safer and easier to use than previous
catheters, which had high friction.

The engineer who developed the concept and has worked with the product for the last 25
years stated that the main challenge associated with commercialization was that another kind
of treatment was required. The firm basically had to educate the entire market for the first
decade. It sought to do so by interacting extensively with physicians and nurses who were
specialized in urology. Seminars were arranged, demonstrations were given and several
clinical trials were conducted in order to prove the benefits of the product. Since doctors and
nurses are the ones who teach a patient how a certain treatment should be undertaken, they
had to be convinced and trained. The firm tried to make explicit the increased value of the
new product, by estimating to what extent the quality of life was improved for the end user as
well as pointing out the reduced costs associated with the fact that people did not need a
nurse to help them when going to the toilet.

Today, hydrophilic catheter treatment is considered to be the European standard in the
industry. However, while the firm has enjoyed considerable growth in Europe, it has been
more difficult to succeed on the American market. The main reason for this appears to be that
the public reimbursement system for these products has not been as generous. An additional
reason seems to be that the system is much more complex in the United States where there
are more different actors, such as insurance companies, hospitals, government programs,
state and federal governments. It has also turned out to be more difficult to align the many
different actors in the United States, arguably blocking the adoption of the innovation there.

Case 5 – An incontinence diaper with a belt
This case concerns an incontinence diaper for adults, which is primarily sold to elderly
homes and hospitals. Unlike its predecessors, this product used a belt-like solution for
fastening the diaper, an innovation which had many implications. It resulted in fewer
leakages and problems for patients, while at the same time being more ergonomic to put on
for caregivers, resulting in decreased sick-leaves. Hence, the total cost for incontinence was
reduced significantly with this product. Despite this, sales of the product did not take off
when it was launched in 2002. First of all, customer purchasers found it hard to justify the
higher price associated with the product. Secondly, the caregivers did not really know how to
put on a diaper that had a belt. Thirdly, while the created value by far motivated the increased
price, it was not very visible, since costs were reduced in a more systemic way.

The studied firm sought to overcome the mentioned barriers by undertaking a couple of
measures. It started to train the caregivers in how the product should be used. Moreover, the
firm performed a couple of studies in which it was shown how much the total cost of
incontinence was actually reduced when using this product. After having done so, the value
proposition was changed from selling incontinence products to selling better incontinence
care at a lower total cost. Since the purchasers were not assigned to take these factors into
account, the firm started to target the management of hospitals and elderly homes instead. It

turned out that they were more easily persuaded by this argument. After having made these
changes, sales eventually started to take off.

5 Analysis and Discussion
In the literature review above, it was stated that business models concern how a firm creates
and captures value from its surrounding network. In this section, we will try to explain in
what way a disruptive innovation is a business model challenge by pointing out a couple of
key obstacles. After doing so, we discuss how these findings differ from previous literature.
Subsequently, some managerial implications are offered.

5.1 From performance to value
Our empirical observations suggest that one key business model challenge with regard to
disruptive innovation concerns how the innovation creates value. While previous literature on
the subject has focused largely on how different performance trajectories match the demands
of existing customers or not, it is perhaps more important to translate this performance into
value and utility for customers (Lindmark, 2006; Oskarsson and Sjöberg, 1991). Several of
the case illustrations show that the disruptive innovation could prosper among established
customers despite a lower traditional performance. The key obstacle was rather related to the
way that this value was created.

Economists often consider value to be subjective (Bowman and Ambrosini, 2000), i.e. some
actors may regard specific goods or services as valuable and others may have a different
opinion. This subjectivity can be explained by the fact that actors have diverse perceptions of
an offering. Moreover, value can be thought of as a positive difference between the obtained
benefits and the required sacrifices related to adopting an innovation (Monroe, 1991).
Whether value is created or not therefore depends upon the context of the concerned actor,
the sacrifices it has to make and the benefits that it obtains.

As different actors perform different activities and control different resources (Håkansson,
1989), they are also subject to different tradeoffs. The empirical data provide some
illustrations of this issue. In the case of IP video, the studied firm faced several actors with
diverging incentives, both in the downstream network and inside the customers’
organizations. Integrators of traditional CCTV did not command IP video, and security
managers were largely hostile towards the new technology. While the new technology
offered an increased performance in many respects, several actors were still hostile towards it
since they perceived the sacrifices to be bigger than the benefits due to a lack of competence
related to the technology. Similar issues could be identified in the incontinence diaper case,
the hydrophilic catheter case and in the case of waterborne floor finishes above. Critical

actors lacked the competences required for the realization of the potential value associated
with the innovation.

5.2 The distribution of value
Another key issue related to business model renewal seems to be how the created value is
distributed across the actors in the network. As an innovation may generate an increased
economic value by destroying value elsewhere, the distribution of value needs to be
analyzed. Actors who are subject to such changes which reduce their importance may have
clear incentives to block an innovation. On the contrary, others may be in the opposite
situation and gain from the adoption.

In some of the cases reviewed above, critical actors felt threatened by the disruptive
innovation since their power or status could potentially be reduced by the innovation. The
case of IP video presents an illustrative example here. When security becomes more of an IT
issue, security managers lose some of their status and power vis-à-vis other actors inside the
customer organization, and they therefore had clear incentives to block the adoption. Hence,
a disruptive innovation became problematic to introduce when it had a negative impact upon
actors with the possibility to influence whether it should be adopted or not.

In the incontinence diaper case, the product’s ancillary performance characteristics created
value which was more widely distributed inside the customer’s organization. This in turn
resulted in a barrier to adoption, as the purchaser was not assigned to take this more systemic
value creation into account.

In other cases, adoption was rather quick despite the initially poor performance of the
innovation, mainly since the key actors benefited extensively from adopting it. In the UV-
based coatings case, manufacturers of wooden floors were willing to trade off some
performance for the end customer in order to save money in the production process. Hence,
they were affected positively by the innovation, partly at the expense of the end customer,
making it possible for the technology to reach the market despite its inferior performance.
While end customers and users in other cases could influence the network, this was not the
case in the specific situation. Clearly, this underscores that the relative power of different
categories varies between different industries and innovations, and that these power
structures need to be understood to avoid unexpected resistance to change. The case of
industrially coated wooden floors therefore suggests that one main determinant of success is
how critical actors are affected by an innovation.

5.3 Interdependences leading to restricted freedom
While the key adoption barriers seem to be related to how value is created and distributed,
our observations also suggest that trying to change a business model is difficult since firms
can only impose a limited control over it. If a business model is something that transcends
firm boundaries and concerns the established network constellation (Zott and Amit, 2009),
the concept is fundamentally about interdependences between actors. This would arguably
imply that firms are only to a limited extent able to change their own business model, since it
by definition involves other actors, their activities, and preferences. Put briefly, firms which
operate in a network are bound to act under conditions of restricted freedom (Håkansson and
Ford, 2002).

Several of the described cases illustrate the problematic issue of trying to change a network
constellation. In the IP video case, the studied firm became reliant upon issues beyond its
direct control, such as the conflict of interest between the IT and security functions inside the
customer organizations. The incontinence diaper could not be adopted until different actors
such as the purchasers, caregivers and managers had coordinated themselves differently and
developed new skills. Similar challenges could be identified with the hydrophilic catheter,
which could not be realized until several key actors had changed their opinion and altered
their activities. Whether these required changes will be made or not is an issue that the focal
firm can only influence to a limited extent. Put differently, firms struggle to renew their
business models with regard to disruptive innovations since business models span the
boundaries of the firm and are therefore based upon interdependence, which can be defined
as follows:

“Any event that depends on more than a single causal agent is an outcome based on
interdependent agents. (…) Interdependence exists whenever one actor does not entirely
control all of the conditions necessary for the achievement of an action or for obtaining the
outcome desired from the action” (Pfeffer and Salancik, 1978. p. 40).

The empirical illustrations suggest that this interdependence exists between the firm and the
concerned actors as well as between different actors in the network. A disruptive innovation
seems to distort or modify the network, and some actors may have incentives to block it due
to the new distribution of economic value, while others may be incapable of realizing this
potential value due to a lack of relevant competences.

5.4 Disruptive innovation as a business model challenge
The key obstacles identified above stand in contrast to those that have been identified by
previous literature on disruptive innovation. This stream of literature argued that the main
difficulty was related to how existing customers control the resource allocation process of
firms, by rejecting innovations that did not meet certain performance requirements

(Christensen, 1997). Our observations rather indicate that different performance levels need
to be translated into how value is actually created and distributed throughout the network. By
doing so, a more nuanced view of the incentives of different actors emerges, and thereby also
a clearer picture of the potential obstacles to adoption.

Our findings also suggest that it is important to look at the impact an innovation has on
different actors. It has been shown how actors both inside the customers’ organizations and
throughout the network may have diverging incentives since they control different resources
and perform different activities. Instead of arguing that a disruptive innovation is problematic
since established customers do not demand it, we would claim that these innovations are
problematic because they are sometimes not demanded by certain actors in the firm’s
established business model. The main reasons for this appear to be that the creation and
distribution of value are sometimes incompatible with the incentives and competences of
certain actors. The interdependences among these actors and the focal firm in turn make it
difficult to change the network.

5.5 Managerial implications
While previous work on disruptive innovation has argued that the key challenge is related to
the environment and how it controls the focal firm, surprisingly little attention has been given
to how firms can actually manage the environment. Previous work has instead focused
largely on how firms can manage their own resource allocation process. One reason for this
could be that existing theory on the subject has conceptualized the environment in a rather
simplistic way. It has been assumed that customers do not demand an innovation unless it
offers a certain performance. Our findings rather suggest that disruptive innovations
sometimes cannot be realized since actors lack the required competences, and that they at
times may block an innovation as it would bring about a new distribution of value that would
not be positive for them.

Having developed this more nuanced conceptualization of value and networks, it also
becomes possible to identify how firms can actually renew their business models. While it is
clear that the aforementioned interdependences impose constraints on managerial action,
several scholars have argued that it is still possible to influence a network in one’s own favor
(e.g. Knight and Harland, 2005) and our empirical evidence points to some ways of handling
this dilemma. Doing so seems to be largely related to the alignment of incentives, a matter
that lately has been emphasized in the abundant literature on supply chain management (Lee,
2004). As a disruptive innovation changes the way value is distributed throughout an activity
system, modifying the business model so that it aligns the different actors’ incentives with
the new value distribution constitutes a significant challenge.

A resulting key issue concerns which actors the firm should try to target and which ones to
avoid. As illustrated above, some actors have a direct interest in adopting the innovation
whereas others may have an interest in blocking it. For instance, IT companies and IT
managers had incentives and competences which were aligned with IP video, whereas the
traditional security industry initially had little interest in adopting it. The studied firm
therefore chose to approach actors who commanded the technology, i.e. developed a sales
channel based upon IT integrators and IT managers. In the incontinence diaper case, it turned
out that individual purchasers had no incentives to buy the product, since they were not
assigned to take the more systemic value creation of it into consideration, but merely the
purchasing cost of the products. This company therefore decided to shift the target to the
management of retirement homes, who could easily grasp the benefits in terms of improved
healthcare quality.

Given that value is something context-dependent and largely a matter of perception, firms
can try to influence these factors in order to facilitate the realization of value. This was the
case with healthcare staff and hydrophilic catheters, caregivers and the incontinence diapers,
integrators and IP video surveillance, and with craftsmen and waterborne floor finishes.
These actors were critical for the adoption of the product since they were either the ones
using it or were influencing the decision to adopt it. The studied firms therefore decided to
target these actors, and took explicit actions to influence their viewpoints, for instance
through marketing and training.

Several of the studied firms engaged in more general, broader marketing activity in order to
influence and put indirect pressure on the more skeptical actors. This was the case with both
the hydrophilic catheter and IP video. In the first case, the firm actively sought to influence
key opinion leaders such as physicians and scientists, who in turn could speak favorably
about the product and treatment. In the IP video case, the studied company engaged in a
wider range of different measures, which would make different actors more receptive to the
technology, thereby putting indirect pressure on more skeptical actors like security managers.
For instance, they did so by publishing white papers on the technology and by pointing to the
advantages of IP vis-à-vis traditional CCTV.

As pointed out previously, some innovations may also destroy the competence of established
actors. If these actors are anyhow crucial for adoption, the innovating firm needs to influence
and encourage them to change their activities. Several of the studied firms have undertaken
such efforts. Training sessions were arranged where these actors were informed about how
the product or technology should be used and the benefits of it. In many cases, this was not a
profitable activity, but something seen as necessary in order to build relations and help others
to renew their competences. These activities could also have a positive effect on the
incentives of the involved actors, since the value of the innovation could be communicated
more clearly in these sessions.

Other cases illustrate how firms explicated their value proposition differently in order to
mirror the new value creation and distribution, making it more appealing for certain actors
and thereby reducing resistance to adoption. In the incontinence diaper case, the value
proposition was changed from selling incontinence products to providing better incontinence
care at a lower total cost. The managers of retirement homes and hospitals were more
concerned with the total cost of incontinence care than the purchasers were, and as a result
this communication turned out to be more effective.

Summing up, when redesigning a business model with regard to a disruptive innovation,
firms need to analyze their surrounding network of actors and the innovation’s impact on
each one of them, in particular in terms of changes to value creation and appropriation of
value, and the resulting incentive structures. It should here be pointed out that these actors
should be looked for both inside different firms in the network and in other parts of the value
network. Of great importance throughout this work is the application of a clear systems
perspective, since there are many different actors which are intertwined in exchanges of
goods and services.

6 Conclusions
More recent literature on disruptive innovation has increasingly argued that this issue is
fundamentally a business model problem (Christensen, 2006). Our literature review
suggested that more knowledge is needed concerning in what way this is actually the case.

We have addressed this topic by drawing upon evidence from several case studies. Our
findings suggest that disruptive innovations may distort established business models by
creating and distributing value in new ways. The different creation of value may not be
compatible with established competences and activities, and thus a barrier to adoption occurs.
Moreover, a different distribution of value may result in hostility towards the innovation, as
some actors would lose their power or status.

With special attention to Zott and Amit’s (2009) definition of business models as
interdependent and boundary-spanning activity systems, we would like to stress that it is
sometimes difficult to change a business model as such a change tends to involve actors
beyond the boundaries of the firm. Attempts at business model renewal therefore often take
place under conditions of restricted freedom, where solutions based on having direct control
are simply not feasible.

Clearly, the interdependences in question impose constraints upon efforts to change the
business model. Our empirical illustrations nevertheless show that networks can be changed,
by attending to a few critical tasks. The different actors involved need to work in the same
direction for the innovation to succeed, but they may be unwilling to do so for several

reasons. They may simply have no real incentives to do so, or may lack the required
competences. When analyzing the network it is particularly important to look at the changes
implied for value creation and distribution by the innovation, as well as capturing the impact
on existing knowledge and power structures throughout the network. Moreover, as a network
is comprised of many different and interconnected actors, it is important to maintain a
systemic view of the network. In those cases when the innovation required a change in the
established competences of important actors, several firms tried to help these actors to
change by offering training sessions and information. In other cases, firms have changed
their value proposition, engaged in broader marketing activities and aligned incentives by
offering good margins to key actors.

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