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1After a long quiet period, the structure of the satellite industry is currently undergoing many changes. The past ten years have been marked by the arrival of numerous new entrants in the satellite industry. New producers have begun launching small, relatively inexpensive satellites into space that can yet deliver some technological achievements that were once implemented by the existing large satellite manufacturers. We also observe the interest and the entry of new customers who regard small satellites as an opportunity. For instance, companies such as Google and Facebook plan to purchase hundreds of small satellites to provide Internet access to people from emerging and developing countries. The main technological shift that these new entrants wish to exploit is the miniaturization of satellites. This trend, which started in the early 1990s, provides a number of new opportunities in the use of satellites. Within this context, the research question of this paper is to investigate whether this new technology is a potential threat for existing firms.

2We address this question by using the theory of disruptive innovation proposed by Christensen (1997). A disruptive innovation is introduced by new entrants and offers performance criteria not valued by mainstream customers. In the short term it is only valued by a small group of customers with a low willingness to pay. As it is not purchased by mainstream customers, the disruptive innovation is ignored by existing firms. In the long term, the performance criteria of the disruptive innovation improve and it may attract mainstream customers. Christensen (1997) argues that at that time it is usually too late for existing firms to engage in the disruptive innovation. New entrants will progressively dominate the market previously controlled by incumbents. When new entrants introduce the innovation, existing firms face a dilemma named the innovator’s dilemma by Christensen (1997). Should existing firms cannibalize their existing product to invest in an innovation that does not ensure short term survival?

3While the theory of disruptive innovation is very useful for scholars to understand the influence of innovations in an industry structure, it raises several issues. First, there is considerable confusion regarding what a disruptive innovation actually is (Schmidt, Druehl, 2008). Second, the concept of disruptive innovation cannot be used by managers to make ex-ante predictions regarding a future threat (Danneels, 2004). This is a major issue for existing firms, which need to know, when they face the dilemma, whether or not the innovation they observe is really a threat.

4In this paper, we propose to address these issues by developing the concept of potential disruptive innovation suggested by Danneels (2004). This concept allows a more precise definition of what a disruptive innovation is and, above all, it is a key concept for proposing an ex-ante analysis of the threat.

5This work adopts a descriptive methodology and is based on primary and secondary sources. Our empirical framework is the satellite industry, because it fits both with our research objective and our theoretical framework.

6In the second section we perform a literature review on the theory of disruptive innovation. We identify three types of disruptive innovations and we propose a clear definition for the concept of potential disruptive innovation. The third section describes the methodology. In the fourth section we present our results. The study of the structure of the satellite industry leads us to consider that existing satellite manufacturers currently face an innovator’s dilemma. We show that small satellites constitute potential disruptive innovation of two different types. From this we argue that small satellites represent a low threat for existing firms if they diffuse in the industry. Our main arguments are that performance criteria and the markets for these new products are too different for small satellites to be regarded as a substitute for existing satellites. In the fifth section we put forward the theoretical and managerial contributions of this paper. We also discuss the influence of small satellites on the industry structure if they successfully diffuse. In the last section we present the conclusions of our study.

Literature review

The framework of the innovator’s dilemma

7New entrants may use a new technology to enter an industry. There is a particular dynamic of entry where new entrants use a new technology to create a small new market segment, where cost structure and margins are low. Within this new market segment, new entrants serve new customers with needs that were not previously addressed by existing firms in the existing market segment.

8The existing firms often fail to evaluate this new technology and new market segment correctly. The small new market segment is not regarded as an opportunity because it does not meet the volume or margin requirements dictated by the larger size of existing firms. In the same way, the new technology is not regarded as an opportunity because it does not meet the needs of mainstream customers.

9Although it remains small, the new market segment allows technological improvements until the new technology meets the performance requirements of mainstream customers. At that time the existing companies come under very strong competitive pressure. Mainstream customers now regard the new technology as a substitute for their traditional services, with the result that the existing market segment shrinks and the new market segment expands. Existing companies usually scramble to put together a response and fail in the new market. The incumbents cannot catch up because new entrants are ahead in the learning curve. Newcomers are more familiar with the features of the new technology and why customers purchase it. Existing firms finally retreat to their initial high-margin market segment, which is now a niche market and even sometimes a dying market.

10When they observe a new technology proposed by new entrants, existing firms must carefully evaluate whether this immature technology may become a substitute for the existing technology. If so, the existing firms should invest today in the new technology and cannibalize their existing technology to ensure their survival in the long term. This difficult choice was named the innovator’s dilemma by Christensen (1997) in a breakthrough book entitled “The innovator’s dilemma: When new technologies cause great firms to fail”. Christensen’s study stimulated many works by scholars and practitioners who helped refine and extend the innovator’s dilemma framework (Bower, Christensen, 1996; Danneels, 2004; Paap, Katz, 2004; Christensen, 2006; Markides, 2006; Govindarajan, Kopalle, 2006a; 2006b; Schmidt, Druehl, 2008). All these works are referred to as the disruptive innovation theory (Yu, Hang, 2010).

Limitations of disruptive innovation theory

11The terms disruptive technology and, subsequently, disruptive innovation were coined by Christensen (1997). Disruptive innovations destroy existing markets and create their own markets; they can be envisaged as a part of the destructive creation process that underpins the global economic cycles according to Schumpeter’s theory.

12Disruptive innovation has become a very popular concept because it takes into account many dimensions of industry structure such as demand, technology (existing products and substitutes) and new entrants. While disruptive innovation is a heavily researched innovation-management concept, we observe that it is frequently misunderstood. Many works of practitioners and scholars consider that they are dealing with a disruptive innovation when this is not in fact the case. There is considerable confusion regarding what disruptive innovation actually is (Schmidt, Druehl, 2008; Yu, Hang, 2010). Our paper aims to offer a clearer definition of the concept of disruptive innovation.

13Practitioners and scholars are sometimes confused by the word disruption because they tend to assimilate all radical innovations with disruptive innovations. To make things clearer it is important to distinguish disruptive innovations from sustaining innovations. Sustaining innovations are innovations that improve product performance. These are innovations that existing companies are familiar with, involving improvements to a product that has an established role in the market. Sustaining innovations may be radical innovations when they induce a rapid and dramatic improvement in one or more existing performance criteria (Govindarajan, Kopalle, 2006b). In this case, sustaining innovations significantly and promptly disrupt the industry structure. The immediate and radical influence of sustaining innovations is the main source of confusion in the use of the concept of disruptive innovations (Schmidt, Druehl, 2008; Yu, Hang, 2010).

14Disruptive innovations do not disrupt the industry structure when they are introduced on the market but only in the long run (Schmidt, Druehl, 2008). In the short term, it is very difficult to differentiate underperforming innovations that will fail, from innovations introducing new performance criteria not valued by mainstream customers but finally revealing themselves to be disruptive innovations (Tellis, 2006). In both cases, what existing firms observe are innovations that do not create a sufficient competitive advantage for them in the short term.

15The very different nature of disruptive innovations in the short and long terms is a major obstacle to using this concept to make ex-ante predictions (Danneels, 2004). This is a paramount issue for existing firms that need to know as early as possible, to avoid being replaced by new entrants, whether or not the innovation they observe is a disruptive innovation. This managerial objective is for the moment unreachable because scholars have only proposed ex-post identifications of disruptive innovation building on its long-term improvements and its diffusion (Danneels, 2004). To address this issue, Danneels (2004) suggests that researchers develop the concept of potential disruptive innovation. In this paper we propose to identify a potential disruptive innovation through the initial characteristics of a disruptive innovation. By initial characteristics we mean the characteristics of the disruptive innovation when it is introduced on the market and before it diffuses.

Several types of disruptive innovations

16We define a disruptive innovation as a specific type of radical innovation that has a particular dynamic influence on the industry structure and may induce the replacement of existing firms by new entrants.

17Beyond this generic definition, major scholars of disruptive innovation theory recognize that there are several types of disruptive innovations that result from two approaches (Christensen, Raynor, 2003; Govindarajan, Kopalle, 2006b; Schmidt, Druehl, 2008; Yu, Hang, 2010).

18In the first approach, scholars identify two types of disruptive innovations by looking at the performance criteria and also the willingness to pay of first customers (Govindarajan, Kopalle, 2006b). The most studied type are the low-end disruptive innovations that diffuse first through low-end customers because these innovations offer lower performance compared to existing products on the performance criteria valued by mainstream customers. See for instance the launch of personal computers, regional jets, unmanned aircraft and low-cost flights (Schmidt, Druehl, 2008). Here, existing firms tend not to invest promptly because the disruptive innovation leads to low margins and low volumes. A less studied type concerns high-end disruptive innovations that diffuse first through high-end customers because these innovations offer high performance on performance criteria not valued by mainstream customers (e.g. introduction of cell phones). Here, existing firms tend not to invest promptly because low volumes do not give them a sufficient competitive advantage.

19In the second approach, scholars identify three types of disruptive innovations by focusing on the market novelty and diffusion process (Christensen, Raynor, 2003; Schmidt, Druehl, 2008). Type 1 prevails when the first customers are part of the existing market segment with similar performance criteria to mainstream customers but with lower purchasing power. Here the diffusion of the disruptive innovation will not produce a significant increase in the number of customers. In the two other types the first customers are new customers in a new fringe of the existing market (Type 2) or in a new detached market (Type 3). Type 2 disruptive innovation appeals to new customers with performance criteria similar to mainstream customers but a lower willingness to pay for the innovation. Type 3 disruptive innovation appeals to new customers with performance criteria different from mainstream customers and a higher willingness to pay.

20The different types of disruptive innovations put forward by the two approaches have several similarities but they remain insufficiently connected. This generates confusion for anyone attempting to analyze the precise nature of disruptive innovations (Schmidt, Druehl, 2008). In this paper we propose to study the threat of disruptive innovations by merging the first approach into the second approach and in particular the work of Schmidt and Druehl (2008).

Assessing the threat of disruptive innovations

21The threat created by disruptive innovations from Types 1 to 3 is different because the changes observed in price, product performance criteria and market are different.

22A Type 1 disruptive innovation displays a very low price compared to the existing product, achieved thanks to a lowering of some existing performance criteria. In this type we observe minor changes in the set of performance criteria because only few performance criteria are introduced and removed. These characteristics allow producers to introduce the innovation on the existing market, appealing first to low-end customers with similar performance criteria to mainstream customers. These low-end customers regard the disruptive innovation as a second-best choice but they purchase it because they cannot afford the existing product. If technological improvements are possible, the new technology will eventually meet the performance criteria of mainstream customers and will thus appeal to mainstream customers. As the set of performance criteria are quite similar in the existing and the new product, a Type 1 disruptive innovation can be a substitute for the existing product. In case of diffusion, in this pattern the mainstream customers of the existing firms will move from the existing product to the new one and the threat is high for existing firms. The introduction of Dell personal computers when Compaq and Hewlett-Packard products dominated the market is an illustration of Type 1 disruptive innovation.

23Disruptive innovations of Types 2 and 3 display respectively very low price and a higher price compared to the existing product. This is achieved thanks to a lowering of some performance criteria and also thanks to significant changes in the overall set of performance criteria. Producers both introduce major new performance criteria and remove old ones. Type 2 disruptive innovation appeals first to low-end new customers in a new fringe market with similar performance criteria to those valued by mainstream customers. As for Type 1, first customers regard the new product as a second choice and they purchase it because they cannot afford the existing product. Type 3 disruptive innovation appeals first to high-end new customers in a new detached market with different performance criteria to those valued by mainstream customers. In this case, the new product is the first choice because customers are in a new detached market.

24If technological improvements are possible in Type 2 and Type 3 disruptive innovations, the new technology will partly meet the performance criteria of mainstream customers. This because Type 2 and Type 3 cases involve sets of performance significantly different from the set of performance criteria the existing product. In both cases, the new product is a partial substitute for the existing product and only some existing customers will move to the new product. In patterns displayed by Type 2 and Type 3 disruptive innovations the threat is lower.

25The air-transport sector is a good illustration of Type 2 disruptive innovations since low-cost flights are only a partial substitute for mainline fights. Both markets survive, even if some mainstream customers move from the existing market dominated by the mainline carriers to the new market. This Type 2 pattern is also observed for the producers of midrange minicomputers that survived in their historical market because personal computers are not a good substitute (Schmidt, Druehl, 2008; Yu, Hang, 2010). An example of Type 3 disruptive innovations is the introduction of cell phones. They were more expensive than landlines, for which they are in any case an imperfect substitute. Both products survive in their respective markets because only a marginal group of customers left the landline market to adopt only mobile phones (Schmidt, Druehl, 2008; Yu, Hang, 2010).

26When the existing and the new product have very different performance criteria, the threat is low because only a marginal group of mainstream customers will adopt the new product. However, for the general case we prefer to consider only that the threat is lower because of several exceptions. For instance, digital cameras and bell telephones replaced film cameras and the telegraph respectively. More generally, exceptions are usually found in a very long-term perspective. This leads us to consider that our study does not fit with this type of time horizon.

Three types of disruptive innovations

27By using the suggestion of Danneels (2004) about potential disruptive innovation, we propose to study the initial characteristics of these three types of disruptive innovations to determine ex-ante whether an innovation is a threat for existing firms. When the innovation is introduced, if firms identify it as Type 1, the threat may be high if the innovation diffuses. Conversely, Type 2 or Type 3 innovations represent a lower threat if the innovation diffuses.

28When they are introduced on the market, disruptive innovations of Types 1, 2 and 3 have lower performance compared to existing products on the performance criteria valued by mainstream customers (1). The three types of disruptive innovation introduce new performance criteria that are not valued by mainstream customers (2) and are simpler (3). Types 1 and 2 are less expensive to produce and offered at a lower price than existing products (4), while Type 3 is offered at a higher price than existing products (5). When they are introduced, none of these three types of disruptive innovations appeal to existing mainstream customers (6). Type 1 appeals to a particular group of existing customers (7). Disruptive innovations of Types 2 and 3 appeal to new customers in a new market (8). In Types 1 and 2, customers are price-sensitive (9) but in Type 3 customers are not (10). These ten initial characteristics define what we mean by a potential disruptive innovation of Types 1, 2, and 3.

29If in the long term the potential disruptive innovations diffuse, their characteristics change thanks to improvements in their performance criteria. Two main trends are possible. The first trend relates to Type 1, where the existing market will progressively disappear because the improvements made in the potential disruptive innovation will attract the majority of mainstream customers. The second trend relates to Types 2 and 3, where new customers will enter the new market and the performance criteria valued by mainstream customers will not increase sufficiently to attract all mainstream customers. The new market and existing market will both survive.

30In the table below, we sum up the characteristics of the 3 types of potential disruptive innovations through technology and demand perspectives, and the threat they represent for existing firms if they diffuse. We also propose a name for each type based on the work of Schmidt and Druehl (2008).

Table 1

Characteristics of potential disruptive innovations

Table 1
Potential disruptive innovations Characteristics Type 1 Type 2 Type 3 Name Existing market (low-end) New fringe market (low-end) New detached market (high-end) Techno. Lower performance compared to the performance criteria valued by mainstream customers (1) X X X Introduction of new performance criteria not valued by mainstream customers (2) X X X Simpler (3) X X X Less expensive to produce and offered at a lower price (4) X X Offered at a higher price (5) X Demand No appeal for existing mainstream customers (6) X X X Appeal for existing customers (7) X Appeal for new customers in new market (8) X X Appeal for price-sensitive customers (9) X X Appeal for non-price-sensitive customers (10) X Threat For existing firms High Lower Lower

Characteristics of potential disruptive innovations

31We propose to study the above ten characteristics to evaluate the threat created by a particular innovation for existing firms.

Methodology

32In this paper we apply a descriptive methodology to the satellite industry. We chose this industry because its current situation fits with our research questions and our theoretical framework. In particular, it allows us to conduct an ex-ante analysis of the threat induced by potential disruptive innovations and it fits the framework of the innovator’s dilemma. At the moment new types of satellites displaying several of the characteristics of disruptive innovations appear and new customers enter. This leads existing satellite manufacturers to ask themselves if they need to pay attention to these changes.

33We also selected the satellite industry because it has attracted little academic research despite providing critical infrastructures for postindustrial economies: “telephone, radio and television transmissions; banking and stock market operations; weather reporting systems; aircraft and maritime global navigation systems […] are critically dependent on the operation of space satellites” (Shove, 2005, p. 191).

34We assess the threat for existing firms by using diverse secondary sources such as: (1) open-access databases (Encyclopedia Astronautica), (2) press releases (Space Review, Spaceflight and other specialized news sources), and (3) the websites of space companies (e.g. SEI, Futron Corporation).

35We also use primary sources to build an original quantitative database presenting selected features of all 2870 satellites launched between 1990 and 2014 with a focus on the period 2000 and 2014. We selected this period because in the early 1990s NASA and other space agencies demanded “faster, better, and cheaper” missions that led to the construction of small satellites. This new strategic direction becomes visible in the launches after 2000.

36More precisely, we built this database by merging several quantitative open-access databases available on the Internet (Claude Lafleur, Gunter Krebs, Findthedata and EO Portal). These databases are reliable information sources used by both practitioners to conduct business intelligence and scholars to conduct research (Zelnio, 2007). The primary keys used to merge these different quantitative databases are the spacecraft name and its launch date. These quantitative data are used to draw figures and compute the average values [2] of characteristics describing small and typical large satellites.

37We propose a method involving several steps to assess the threat induced by small satellites for existing satellite manufacturers. First, we study the market structure of the satellite industry thanks the innovator’s dilemma framework. We then analyze whether the current features of small satellites fit with the characteristics of potential disruptive innovations. This analysis enables us to identify which type of potential disruptive innovations small satellites belong to. In the last step, we use this identification to assess and detail the threat induced by small satellites.

Results

Industry structure and the innovator’s dilemma

38Satellites are capital goods sold on a bilateral oligopoly market characterized by a few large customers and a few large producers. Customers are grouped in three main market segments: institutional customers (e.g. ministries of defense and space agencies), commercial customers (satellite operators) and mixed customers (e.g. public-private partnerships and several customers from communist countries) (see Figure 1).

Figure 1

Evolution of orders from main customers

Figure 1

Evolution of orders from main customers

39The satellite market typically displays very high barriers to entry due to high requirements in capital, knowledge, and a particular regulatory context. Satellite manufacturers need expensive installations (e.g. cleanrooms and testing facilities) and payments are often made by customers throughout the lifespan of satellites. Satellites are high tech products requiring intensive R&D. As satellites cannot be fixed once in operation, reliability is a major performance criterion and firms need many years of continuous investment to meet reliability requirements. Because satellite activities are connected to defense, there are complex regulations that also increase barriers to entry (e.g. export controls, domestic preference policies).

40The production of satellites significantly differs from that of mass production products because they are a subcategory of capital goods named complex products and systems (CoPS) (Hobday, 1998; Dedehayir et al., 2014). Satellites are typically produced in very small batches where low economies of scale contribute to high unit production costs. Satellites display low levels of standardization and modularity because they are built from a significant number of customized components. There is a continuous dialog between the producer and the customer where the customer often redefines product requirements throughout the project. The satellite industry is demand-oriented in both the production and the innovation processes. Five to ten years are required to design and manufacture a satellite, and a complex value chain is necessary because a single firm does not have all the competencies to deliver the full value of satellites to its customers.

41The customized nature of satellites and their various purposes imply wide variability in their main characteristics. Typical satellites cost between $100 million and $400 million without the launch price, which is close to the price of the satellite itself. Typical satellites weigh several tons, have a life span of more than a decade and their electrical power need is around 4000 Watts. The main applications of satellites are remote sensing and telecommunications, where the specific performance criteria are respectively image resolution, visibility and data flow.

42In 2013, we observed a major change in the satellite industry structure because 214 spacecraft and in particular 194 satellites were launched, while the previous record was 180 spacecraft launched in 1965. The figure below, focusing on the period 1990 to 2014, shows that this major shift is due to the launch of smaller satellites.

Figure 2

Satellite launches and weight

Figure 2

Satellite launches and weight

43We observe that the number of satellites below 500 kg increased significantly in 2013. We observe in particular that the number of satellites below 100 kg exceeded the number of typical satellites above 500 kg. There is no clear consensus among practitioners on what precisely defines a “small” satellite. On the basis of the above figure we propose that a small satellite has a mass below 500 kg.

44Although the satellite market is a bilateral oligopoly with high barriers to entry, twelve new satellite manufactures arrived after 1990 (Table 2) and ten of these only after 2005.

Table 2

The new entrants

Table 2
Period Number New entrant name Average size 1990-2014 12 Satrec Initiative, Deimos Space, Geo-optics, Gomspace, Clyde Space, Skybox Imaging, NovaNano, Planet Labs, Dauria Aerospace, Tyvak-Nano Satellite Systems, PlanetiQ, OmniEarth Employees: 84.1 Revenue: € 33.21 million

The new entrants

45Although the large majority of new competitors are SMEs, their entry and the development of a small satellites market led existing large satellite manufacturers to ask themselves whether they needed to engage significantly in this new market segment. We relate this strategic questioning to the innovator’s dilemma.

The characteristics of small satellites

46In order to assess the threat to existing satellite manufacturers induced by small satellites, we need to analyze whether small satellites are a potential disruptive innovation and their type. Potential disruptive innovations are defined by the ten initial characteristics of disruptive innovations displayed in Table 1.

Technology analysis

47A potential disruptive innovation has lower performance compared to existing products, on the performance criteria valued by mainstream customers (1). As shown in the table below, small satellites have an expected average lifespan 2.6 times shorter than typical satellites. Once in operation, small satellites are also less reliable than typical satellites.

48Electric power is another indicator of performance since the higher the power the greater the capacities of the satellite. Small satellites require electric power 14 times lower than typical large satellites (Table 3). When we look at the specific performance criterion of Earth observation satellites, we notice that for satellites of more than 500 kg, resolution may be lower than 30 cm, while small satellites are barely capable of sub-meter resolution (Purll et al., 2006). Regarding small communication satellites, as these are placed in low Earth orbits they are not permanently visible, as are typical communication satellites placed in geostationary orbits. This is a major decline in performance for providing typical telecommunication services (e.g. TV broadcasting, phone) where service continuity is essential.

49A potential disruptive innovation is (3) simpler than existing products, and this is also the case for small satellites. The indicator we use is the average mass of small satellites, which is 15.5 times less than the average mass of typical satellites (Table 3).

Table 3

Selection of performance criteria of small and large satellites

Table 3
Performance criteria (Mean) Small satellites [0 kg, 500 kg[Typical satellites [500 kg, ∞[Ratio (small vs typical satellites) Lifetime (Years) 3.7 9.9 2.6 Electric power (Watts) 288.1 4039.4 14.0 Mass (kg) 151.0 2346.3 15.5

Selection of performance criteria of small and large satellites

50A potential disruptive innovation is also less expensive to produce and offered at a lower price than existing products (4). Once again, mass is a good indicator since the price of satellites is a function of their mass (Beaudry, 2006). In particular, small satellites of less than 10 kg may cost only a few hundred thousand dollars, while typical satellites cost between $100 million and $400 million (The Economist, 2014; Globalcom, 2015). This lower price is possible on the one hand because of the decrease of performance and on the other hand because small satellites are usually simpler and faster to design and construct. They can be designed, manufactured and launched within less than two years, compared to five to ten years for typical satellites. Small satellites are more modular and more standardized than typical satellites. This implies for example that they integrate many low price electronic components used in consumer electronics such as smartphones. These electronic components are forbidden for typical satellites because of their lower reliability.

51In our data we observe that customers sometimes do not purchase a single small satellite, as they do for typical satellites, but a constellation of small satellites. A constellation is a group of satellites that have to be operated together to serve one mission. The Iridium constellation of 72 telecommunication satellites ordered by Motorola in the late 1990s is an example. With a price frequently above one billion dollars, large constellations of satellites are more expensive than typical satellites. As constellations of small satellites are offered at a higher price than existing products (5) we may argue that small satellites appeal to both low-end and high-end customers. This observation also helps explain why there is no consensus among practitioners as to the extent to which small satellites are cheaper.

52Another technological feature of potential disruptive innovation is that it introduces new performance criteria that are not valued by mainstream customers (2). Analyzing this feature is the hardest part of the study. We know that in the short term it is very difficult to differentiate underperforming innovations that will be failures from innovations introducing new performance criteria not valued by mainstream customers but finally ending up being disruptive innovations (Tellis, 2006). Also, until a standard emerges there is no consensus about what the new performance criteria might be. In spite of these difficulties, the possibility to design, manufacture and launch a small satellite within less than two years appears like a major new performance criterion for customers. The low orbits used by small satellites allow lower latency [3] and constellations provide global coverage. These are other significant improvements for Earth observation missions and new communication services such as Internet access.

53The analysis of the initial technological characteristics of small satellites seems to indicate that small satellites can be potential disruptive innovations belonging to several types.

Demand analysis

54The study of the demand is the second step we propose for identifying the threat induced by potential disruptive innovations. From the literature analysis we learnt that the three types of potential disruptive innovations do not appeal to mainstream customers (6). We also know that existing market low-end potential disruptive innovations appeal to existing customers (7) while low-end potential disruptive innovations in new fringe markets and high-end potential disruptive innovations in new detached markets appeal to new customers in new markets (8).

55From 1990 to 2014, we observe that new customers who entered the satellite sector after 1990 purchased 3.9 times more small satellites than customers who entered before 1990. The entry of new customers in the small satellites market is noteworthy after 2012 as we see in the figure below.

Figure 3

Evolution of purchases of small satellites (2001-2014)

Figure 3

Evolution of purchases of small satellites (2001-2014)

56The study of the entry of new customers leads us to argue that small satellites are not a low-end potential disruptive innovation in an existing market (Type 1). This result is also confirmed by a detailed analysis of the new customers.

57As we may see in the figure below we observe two main groups among the new customers who entered after 1990: institutional customers and commercial customers.

Figure 4

Purchases of small satellites by new customers (2001-2014)

Figure 4

Purchases of small satellites by new customers (2001-2014)

58Among the new customers we observe price-sensitive customers (9). The typical price-sensitive customer is a new institutional customer (space agencies and ministries of defense) from a low and intermediate-income country [4]. Such customers purchased on average 6.4 small satellites between 1990 and 2011 with a majority of communication, R&D and remote-sensing small satellites for civil and military purposes. Based on Schmidt and Druehl’s (2008) analysis, we consider that these new customers are in a new fringe market because they would purchase typical satellites if they had the same budget as mainstream institutional customers (i.e. space agencies and ministries of defense from high-income countries). Another reason why small satellites are a new fringe low-end potential disruptive innovation is the fact that the price difference between small satellites and typical satellites is so large that we have two different products in the same product class. This argument is reinforced by the major differences observed in the average mass, power and lifetime between small satellites and typical satellites (see Table 3).

59Among the new customers entering after 1990, we also observe non-price-sensitive customers (10). The typical customer here is a new commercial customer (i.e. satellite operators such as Iridium, Globalstar, Obcomm and Planet Labs) that purchases a constellation of dozens of small satellites for communication or remote-sensing purposes. These customers are non-price-sensitive because the price of satellite constellations is above the price of a typical satellite when purchased singly. Based on the Schmidt and Druehl (2008) analysis, we consider that these new customers are in a new detached market because their needs are not addressed by typical satellites. These customers purchase a constellation of low-orbit satellites because they particularly need low latency and global coverage. Typical satellites display low performance on these criteria because of their high orbits and because they are operated singly. Put differently, small satellites used in constellations have to be regarded as a new detached-market high-end potential disruptive innovation. This result is in line with Danneels’s (2004) analysis, who also regards the Iridium constellation as a potential disruptive innovation.

The threat of small satellites

60In the table below we summarize the characteristics of small satellites presented in the previous sections by using the Table 1 layout.

61The study of the characteristics of small satellites leads us to consider that these potential disruptive innovations create a low threat for existing firms if small satellites should diffuse. Our first argument is that small satellites are an imperfect substitute for typical satellites. These two products display major differences in their performance criteria. We observe paramount changes in the ranking of existing criteria (e.g. life time, power and price), the removal of major criteria (e.g. high orbits) and the introduction of major new criteria (e.g. lower latency, global coverage, time to market).

Table 4

Characteristics of small satellites

Table 4
Small satellites Characteristics Type 1 Type 2 Type 3 Name Existing market (low-end) New fringe market (low-end) New detached market (high-end) Techno. Lower performance compared to the performance criteria valued by mainstream customers (1) Accepted Accepted Accepted Introduction of new performance criteria not valued by mainstream customers (2) Accepted Accepted Accepted Simpler (3) Accepted Accepted Accepted Less expensive to produce and offered at a lower price (4) Accepted Accepted Offered at a higher price (5) Accepted Demand No appeal for existing mainstream customers (6) Accepted Accepted Accepted Appeal for existing customers (7) Rejected Appeal for new customers in new market (8) Accepted Accepted Appeal for price-sensitive customers (9) Accepted Accepted Appeal for non-price-sensitive customers (10) Accepted Nature Rejected Accepted Accepted Threat For existing firms Low Low

Characteristics of small satellites

62The very different performance criteria offered by small satellites lead us to argue that they are not really either CoPS or capital goods. Small satellites are 15.5 times smaller than typical satellite; they have an electric power 14 times lower and a lifetime 2.6 times shorter. Small satellites can be designed, manufactured and launched within less than two years and they are more modular and more standardized than typical satellites. As small satellites are potential disruptive innovations of Types 2 and 3, if they diffuse, we consider that each type is sufficiently different to induce the emergence of two new standards in the use of satellites. The first new standard would be available in the new fringe market where producers propose single small satellites. The second new standard would be available in the detached market where producers propose constellations of small satellites.

63We also observed that small satellites are not sold in a segment of the existing market but in new markets that are very different in terms of actors’ motivations. The main difference relates to the rise of the profit-seeking and the economic benefits motivations that drive the new customers (e.g. entrepreneurs, institutional customers). They regard satellites mainly as opportunities for business and economic development. Political prestige, national security and basic science motivations are secondary and even sometimes simply ignored by these new entrants, while they are of major importance for mainstream customers. These differences in motivations induce new market rules with a lower influence of regulation and more free-market-based competition. For instance, the selection of producers via tenders is less guided by political and military constraints. This whole new set of rules is referred to as “New Space” by practitioners and they are barriers to entry that mainstream customers must overcome if they want to move from the existing market to the new markets.

64If small satellites successfully diffuse, we expect to observe a pattern similar to the one observed with the introduction of personal computers and mobile phones. As shown in the literature, the successful introduction of these disruptive innovations did not induce the disappearance of the existing products, i.e. respectively mini-computers and landlines (Schmidt, Druehl, 2008). Put differently, the new standards did not replace the existing ones. We may assume that purchases of small satellites made by customers entering the market before 1990 will remain low, as they did between 2001 and 2014 (Figure 3). If existing firms remain in their current market we consider that they will keep the majority of their mainstream customers because only a marginal proportion of mainstream customers will move from the market of typical satellites to the two new markets. Regarding in particular the new fringe market, scholars consider that a marginal group of the most price-sensitive mainstream customers will move. Regarding the new detached market, scholars recognize that disruptive innovation theory proposes a counterintuitive argument about the first mainstream customers that will move. Schmidt and Druehl (2004) argue that low-end mainstream customers will move first into this new market. We consider that this argument is very difficult to admit. On the contrary, our observations lead us consider that only a marginal portion of high-end mainstream customers will move. For instance, the US Department of Defense purchased the Iridium constellation of small satellites when the commercial venture conducted by Motorola failed.

Discussion

Theoretical and managerial contributions

65Although the concept of disruptive innovation is a very popular concept, it is also frequently not used properly (Schmidt, Druehl, 2008; Yu, Hang, 2010). By detailing the initial characteristics of three types of disruptive innovations, we help reduce the confusion about what a disruptive innovation actually is. Our results also demonstrate that several types of potential disruptive innovations may exist at the same time in the same industry. We observed simultaneously new fringe-market (low-end) and new detached-market (high-end) potential disruptive innovations. Thanks to the technology life-cycle theory, we consider that each potential disruptive innovation is a potential new standard (Anderson, Tushman, 1990).

66By using the disruptive innovation theory with the satellite industry we propose a new application of this theory in the capital goods and CoPS contexts. Thanks to the case of small-satellite constellations, we show that a potential disruptive innovation offered to high-end customers can also relate to higher volumes. As currently applied, the disruptive innovation theory only evokes the case of lower volumes.

Industry evolution if small satellites diffuse

67In this paper we did not examine whether the two potential disruptive innovations observed would diffuse and become successful disruptive innovations. If they diffuse we should observe a major change among the actors driving technological evolution. Demand forces, and in particular institutional customers, have shaped this evolution since the late 1950s (Barbaroux, Dos Santos Paulino, 2013). For instance, in the early 1990s, space agencies demanded “faster, better, and cheaper” missions that led to the construction of small satellites. As small satellites are not CoPS, customers should have a lower influence on the definition of standards and the diffusion process for these products. On the one hand, existing institutional customers have no wish to influence the evolution of technologies that do not address their performance criteria. On the other hand, new commercial and institutional customers are unlikely to assume this role. Small satellites are close to conventional industrial products and for these types of products customers do not fund the R&D, producers do.

68The increased influence of producers on technological evolution could occur according to two main patterns; (1) if existing satellite manufacturers regard small satellites as an opportunity then they could significantly influence the new standards because they are large organizations; (2) if on the contrary incumbents regard small satellites as a waste of resources then only new producers will influence the new standards. In this case, as the majority of new producers are SMEs (see Table 2), the influence would be shaped by a more entrepreneurial dynamic.

69Disruptive innovations do not succeed in isolation; their diffusion requires complementary products which increase the value of the potential disruptive innovation for customers (Danneels, 2004; Adner, 2006). These complementary products can be both existing products and innovations and they are usually proposed by third parties. Launchers are of major importance for the success of small satellites. However, there are currently no reliable small launchers to place small satellites in orbit and traditional large launchers are not really suitable (e.g. Ariane, Soyuz). The use of large launchers is very expensive and customers may need to sacrifice their selected orbit and launch date because these launchers launch tens of small satellites at a time.

70This situation increases the adoption costs for potential new customers. Even if small satellites have significant advantages, many potential customers will be reluctant to purchase small satellites until more suitable launchers become available. To our knowledge, ministries of defense and space agencies do not plan to fund the development of launchers suitable for small satellites. This situation is very new in the space industry where historically these customers fund all the major R&D projects. The producers of launchers will have to support the development costs themselves. These costs are a major obstacle to diffusion, because on the one hand the firms producing the launchers frequently manufacture the satellites, and on the other hand the producers of small satellites are often SMEs.

71While launchers are essential, we may say that most complementary innovations will emerge in the space economy rather than in the space industry. The space economy encompasses all the sectors that benefit from space technologies such as telecommunications (e.g. Internet, telephone and television transmissions), finance (e.g. banking and stock market operations), transportation (e. g. air and terrestrial), meteorology (e.g. weather forecasting and reporting systems) and land monitoring (e.g. cartography and natural resources management). Small satellites can create many new markets in the space economy that in return would foster their own diffusion.

Conclusion

72The objective of this paper was to contribute to the assessment of the threat induced by disruptive innovation for existing firms. Danneels (2004) put forward the idea that the concept of disruptive innovation cannot yet be used to assess ex-ante the threat induced by the introduction of new products. Indeed, the characteristics put forward by scholars to demonstrate that a new product is a disruptive innovation are based on long-term characteristics. Put differently, these characteristics will only be observed after the existing products and existing firms have been replaced by new products and new entrants. This is an unsatisfactory situation for managers of existing firms. In this paper, we proposed to deal with this limitation by studying in detail the initial characteristics of disruptive innovations. We regard the new product as a potential substitute and we use the concept of potential disruptive innovation to assess its threat. We applied our analysis to the case of the satellite industry because existing firms currently face the innovator’s dilemma.

73We show that small satellites are potential disruptive innovations belonging to two types and that they will induce a low threat for existing satellite manufacturers if these innovations diffuse. The initial characteristics of small satellites allow us to argue that they are an imperfect substitute for typical satellites that weigh several tons. The changes in the industry structure (performance criteria and markets) due to the introduction of small satellites are significant. The new products and the new markets are different, preventing to observe major movements of existing customers entering the new markets to adopt the new product.

74In this paper we did not investigate whether small satellites will become a successful disruptive innovation or a failure. The failure of the Iridium constellation in the early 2000s shows that this question is also of importance. In future research, we propose to study whether small satellites can be an opportunity for supply and demand.

Notes

  • [1]
    Acknowledgements: This work benefited from the support of the SIRIUS Chair. The authors would like to thanks the anonymous reviewers that helped to improve this work.
  • [2]
    The means are computed thanks to a sample sized with a confidence interval at 95% and a confidence level at 95%. When the time period is not mentioned, the means are computed with the launches made between 1990 and 2014.
  • [3]
    How much time it takes for data to get from the point A to the point B.
  • [4]
    Countries with a GDP per capita between $1800 and $27000 in 2014 (CIA, 2014).
English

In this paper we investigate whether technologies recently introduced on the market can be a threat for existing firms. We use the theory of disruptive innovation and we propose the concept of potential disruptive innovation to assess this threat. Our empirical framework is the satellite industry. We show that the new types of satellites arriving in the industry are potential disruptive innovations. These new technologies represent a low potential threat for existing producers because new types of satellites are an imperfect substitute for existing satellites. In this study, we show that several types of potential disruptive innovations may exist at the same time. By detailing the characteristics of three types of potential disruptive innovations, we attempt to reduce the confusion about what disruptive innovation actually is. This paper also provides some insights for managers to help them assess the threat of new technologies that are potential disruptive innovations.
JEL Codes: L1, L6, O33, M

Keywords

  • potential disruptive innovations
  • innovator’s dilemma
  • substitute
  • threat
  • industry structure
  • satellite industry

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Victor Dos Santos Paulino
Toulouse University, Toulouse Business School, France
Gaël Le Hir
Toulouse University, Toulouse Business School, France
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Cette publication est la plus récente de l'auteur sur Cairn.info.
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