TETA-5516 Technology StrategyREPORT10.12.2012GROUP:DUC HAI NGUYENSAAD JAMILSEYFI BABACANANAND RANGANATHAN
1CONTENTS1. Introduction .......................................................................................................... 22. Background and Historical Analysis...................................................................... 32.1. UPM – The Biofore Company .................................................................... 32.2. Biofuel Technology .................................................................................... 53. Industry and market analysis ................................................................................. 64. Value Networks and Technology Diffusion........................................................... 84.1. Mainstream and Disruptive Value Networks............................................... 84.2. Bibliometric Analysis ............................................................................... 104.3. Technology Diffusion............................................................................... 114.4. Data used in Study.................................................................................... 125. Disruptive Change and Strategy Analysis............................................................ 145.1. Pattern in Evolutionof Biofuels................................................................. 145.2. Framework for Disruptive Change............................................................ 155.3. Combined effect of Market and Technology Change................................. 165.4. Strategic Choice for UPM......................................................................... 186. Business Ecosystem Analysis.............................................................................. 206.1. Defining Business Ecosystem................................................................... 206.2. Evolution of Business Ecosystems............................................................ 216.3. Defining the Business Ecosystem of UPM................................................ 216.4. Analysis of Bottlenecks ............................................................................ 247. Discussion and conclusion .................................................................................. 25References.................................................................................................................. 27Appendix.................................................................................................................... 29
21. INTRODUCTIONDisruptive changes are essential parts of technological evolution. Throughout the yearsnewer technologies mostly wiped out and replaced their older ancestors. In this paperthe concept of disruptive change is explained with a real life analysis of a Finnishcompany UPM and their newest innovation “biofuel”.UPM was founded in 1 May 1996 as a merger of Kymmene Corp. and Repola Ltd. andits subsidiary United Paper Mills Ltd. The company operates in various industries,however they can basically define their work area as fiber and biomass based business.According to their website they summarize it in 6 key areas. These are:• Energy• Pulp• Forest and Timber• Paper• Label• PlywoodIn terms of their newest innovation biofuel (or biodiesel), aims to be a renewable energysource, which the company aims to conquer road transportation market. The first biofuelrefinery is expected to be ready in 2014. In this paper this innovation and its possibleeffects are analyzed.The paper is structured the following way. In the next chapter some backgroundinformation and the historical analysis of UPM will be done. Then, the industry andmarket analysis will be done with including both the incumbent technology and themarkets and the disruptive technology and its market. After this we are going to look atthe disruptiveness of the biofuel and the possible scenarios justifying the disruptivenessas well as the value networks. Finally, before going into the conclusion, the businessecosystem will be inspected for the possible changes and the bottlenecks.
32. BACKGROUND AND HISTORICALANALYSIS2.1. UPM – The Biofore CompanyAccording to company’s profile (www.upm.com), UPM-Kymmene Corporation wasfounded in fall 1995 when three Finnish firms: Kymmene Corporation, Repola Ltd andits subsidiary United Paper Mills Ltd were merged. UPM group started working inFinnish forest industry from early 1870s with mechanical pulp mills, paper mills andsawmills. In 1880s, company began their pulp production and 1920s, plywood produc-tion lines was involved in UPM operation. UPM today has more than 100 subsidiariesoperate as independent companies in 17 countries in America, Europe, Australia andAsian.As refer to company’s name, “The Biofore Company” show the goal that company wantto follow in their business; it has created the new industry category: Biofore industrywhich is the combination of “Bio” – the environmental friendly business and Forest –company’s tradition industry in Finland. Therefore, company’s products are focusing onthis particular, new industry including: paper, biofuels, forest services, labels, compo-sites, energy, pulp, timber, plywood, biobased chemicals & additives. The objective ofthis paper is to study one of the most interesting and leading technology of UPM – Bio-fuel technology.UPM’s strategy is focusing on recyle business and renewable energy such as biofueltechnology, base on its’ technical and engineering competence in material science relat-ed to long historical operation in forest industry. It relies on the innovation and research& development process to push its business forward. Company has around 300 R&Dprofessionals with a budget of 45 million EUR per year (www.upm.com). The drivenfactor of technology to the firm also illustrated through the broad research center net-work and connections with research institutes and universities worldwide.To identify UPM stragic decision, this paper choose the framework which is presentedby A.D. Little, “The Strategic Management of Technology”, at the 1981 EuropeanManagement Forum in Davos (Figure 1).
4Figure 1. Technology Strategy Types (Narayanan, 2001).In this framework, Narayanan (2001) and Dedehayir (2012) discussed more detail aboutspecific type of strategy based on its’ scope and leadership style.• Full line technology leader is the firm which relies on technology to take leaderrole in the market but usually the second player to use the technology to guaran-ty the success and reduce the cost.• Niche player is the first implementer of innovation with focusing on selectivetype of technology. They often take risk of testing and launching new productsor services but they have the advantage of gaining reputation• Technology followers are the companies using technology which is already test-ed to maintain market share and avoid risk. They do not rely on technology buton the broad set of technology implemented to run their business• Technology rationalizers are the firms using selective technology and do not seeit as their competence.In the case of UPM, company’s strategy of change readiness and innovation focusingwith broad set of products but surrounding mostly on renewable and recycle technology.Their clear vision of “The Biofore Company” which created a brand new industry,where they are leading showing their Niche Player role with very high level of leader-ship.
52.2. Biofuel TechnologyAccording to RP Siegel (www.triplepundit.com), the history of biofuels can be summa-rised as follow:Biofuels were considered the fuel of future for hundredyears ago. But it continuously keeps fighting with fossilfuels in the market. This back and forth trend also made thetechnology discontinuity in the development of biofuel.In 1820s in US, “a blend of camphene and alcohol was thedominant fuel for lamps” (www.triplepundit.com). Farmersuse their own oil made from crop wastes. However, after theintroducing of kerosene with much lower tax, biofuels loseits’ role in the market in around 1870.German inventor Nicolaus August Otto is known withdicosvering the first automobile engine, in 1876 he usedalcolhol as the fuel for his internal combustion engine. Fol-lowing by Ford T-model which is also created to use etha-nol, but the power of gasoline industry made the influenceon auto industry lead to the fact that gasoline took the roleof main fuel for automobiles.Figure 2. Poster of Agrol Alco-hol Power Company in 1930s(www.triplepundit.com).After WWII, gasoline became so cheap that people forget about biofuel for decadesuntil the oil crisis in 1970s, the awareness of alternative energies came back. Recently,due to the requirement of Kyoto Protocol and the rising price of crude oil, more andmore countries are developing their own strategy to use biofuels as renewable energy,especially in Europe with the aim of 10% share of biofuel in petrol and diesel in EUmembers by 2020 (European Union, 2009 in Walter, 2012).More related to UPM, according to Walter (2012), Sweden and Finland are more ad-vancing in biofuel industry; Finland committed for 20% of biofuel share in conventionalenergy by 2020. Thus, biofuel offers very interesting and promissing opportunities forcompanies in these regions.
63. INDUSTRY AND MARKET ANALYSISUPM’s aim is to develop advanced biofuels for transport and their main target market isEurope, thus, company’s competitors come from various level of industry. Firstly, its’main competitors are obviously traditional gasoline company with the big players in-cluding Shell, BP, Mobil, Aral, Texaco, Total, Esso Caltex and huge number of otheroil and gasoline companies operating in Europe such as Castrol, Gulf, Eurooil, Teboil,(European Oil Company Roadmaps –www.ianbyrne.free-online.co.uk). These compa-nies working in the same fuel industry which competes to supply to transportation in-dustry. At this scope, electric car manufactures and other renewable energy companiesare also bring out the threat of rivalry.However, if company considers competitors in biofuels industry only, there are twosectors of the industry refer to two generation of technology (www.biofuelstp.eu): First generation products consist of: Biodiesel (RME) Bioethanol ETBE Biogas/Landfill Gas Straight Vegetable Oils (SVO).These products mainly produced from cereal and food crop such as sugar cane, corn,sugar beet, rape, palm oil, wheet, with many players in European countries i.e ADMÖlmühle Hamburg, Germany or Diester Industrie, France.However, this first generation biofuel is receiving obstacles from the society due to thefood security related issues and European countries are moving toward the new technol-ogies for large scale production of advanced biofuels from non-food feedstocks. There-fore, company can focus on their main competitors from the second sector using thesecond generation technology Second generation products includes (www.biofuelstp.eu) Biomass to Liquid (BtL) Cellulosic ethanol BioDME/Methanol BioSynthetic Natural Gas (BioSNG)
7 Bio-oil/Bio-crude Algal biofuels Hydrocarbons from catalysis of plant sugars and via synthetic biology Biohydrogen Bioelectricity/CHP BiobutanolUPM are using this advanced biofuel technology to produce renewable energy fromnon-food based raw materials and as part of company’s competence, it uses wood as theinput for biofuel production. In this sector, based on Advanced Biofuels Market Report2012 (Solecki et. al, 2012), UPM belong to group of more than 100 companies provid-ing solution for second generation biofuels product with the list of main competitors canbe easily found there. Most of them participate in global market of 70 billion euro andthe market is estimated to grow by 8-18% annually by 2020 (www.upm.com). There-fore, it can be seen that the pace of market growing is moderate but in case of technolo-gy development, since this is new and promising technology, it would have fast pace ofchanging which company should aware of when they building their strategy.
84. VALUE NETWORKS AND TECHNOLOGYDIFFUSION4.1. Mainstream and Disruptive Value NetworksAccording to Dedehayir 2012 “a value network describes the industry as a hierarchicalstructure of manufacturers and markets, which produce as well as purchase the corre-sponding nested hierarchy of components, products, and holistic systems”. Value net-work basically consists of different interlinked value chains which have more than oneentry and exit points (Li & Whalley 2002). The case company UPM’s main target mar-ket is transport systems for which they are using innovative technologies.So, the mainstream value network for UPM is illustrated in Figure 3. On top of thepyramid is the holistic system which in this case is road transport. At the next leveldown are different subsystems of the road transport systems. In this case it comprises ofdifferent types of vehicles, traditional petroleum based fuels to run the vehicles and thegas or fuels stations where the vehicles can access the fuels to utilize the transport sys-tems. At the lowest level are the refineries and petroleum extractors which are requiredto provide the fuels to the stations which in turn are used by vehicles.Figure 3. Mainstream value network.Traditional petroleum based fuels have been selected as incumbent technology for theanalysis. UPM is continuously aiming to be the major player in advanced biofuels, byutilizing wood based biofuels for transportation which will result in considerable de-crease in the greenhouse emissions (www.upm.com 2012). So, bio fuels have been iden-tified has a potential disruptive technology to the traditional fuels in this report. Accord-
9ing to Christensen & Rosenbloom (1995), disruptive technology is always nurtured in adifferent value network as compared to the incumbent technology because its perform-ance level is lower as compared to incumbent technology in certain dimensions whichare considered important by customers. This disruptive value network is illustrated inFigure 4. The top most holistic system is replaced by environment friendly road trans-port systems. At the next level down are the biofuels and bio fuels stations which arepotential disruptive technology. At the lowest level are the the components such aswood chips and livestock feed which UPM is utilizing to make biofuels.Figure 4. Disruptive value network.Disruptive technology changes the ranking order of attributes which results in the basisof competition (Christensen & Bower 1995). This is illustrated in Table 1. As observedfrom the table that for the disruptive technology customers are more concerned aboutthe environmental aspects as compared to the price. This has caused a shift in the rank-ing order of attributes of both technologies.Table 1. Attributes ranking order of both value networks.Attributes RankingTraditional Petroleum Fuels (IncumbentTechnology)Bio Fuels ( Disruptive Technology)• Price• Availability• Convenience• Power• Environmental• Environmental• Availability• Price• Power• ConvenienceIn this section both the mainstream and disruptive value network were defined for UPM.In the next sections justifications will be provided for bio fuels as a potential disruptivetechnology by using bibliometric analysis and technology diffusion concepts.
104.2. Bibliometric AnalysisNorton, (2001) defines bibliometrics as the measurement of texts and information. It isbasically a tool to analyze publication data by its attributes such as authors, article titles,citations, associated keywords, originating country or date. Bibliometric aids in examin-ing huge amounts of data to explore the hidden patterns which helps in the decisionmaking process (Daim et al 2006). According to Martino, (2003) it is easier to anticipateabout the future development of a technology once it is observed at an initial stage. Sobibliometric analysis helps to anticipate the future by determining a particular positionof a certain technology in its life cycle. Bibilometric analyses for estimating the innova-tion stage of a certain technology is done by analyzing the number of hits on that partic-ular technology with respect to time (Martino, 2003). A typical pattern is explained inFigure 5. The number of hits increases and reaches a peak for basic research. After thatit starts to decrease and simultaneously applied research begins to increase. This patternfollows in the same sequence for the next research items as well.Figure 5. Selecting the data source in a bibliometric study according to the stage ofinnovation (adopted from Martino 2003, p. 720-721).As observed from the Figure when the technology is in the initial research phase it startsto appear in scientific articles. When the technology is developed further it is document-ed in patent databases. Finally when the technology becomes mature and evolves intoapplication level then it is analyzed by newspapers and press articles because it starts tocause social impacts. So, when making a bibliometric analysis, selection of an appropri-ate data source depends upon the innovation stage of a particular technology (Pelkonen,2011). For the purpose of this report newspapers and press articles have been consideredas a data source because Bio fuels have been developed into applications.
114.3. Technology DiffusionDiffusion is a process through which an innovation is spread through certain channelsover time among the units of systems (Narayanan 2000). According to Rogers (2003),diffusion is a specific type of communication in which the message that is concernedwith a new idea is exchanged through a communication channel. There are differenttypes of communication channels. Mass media channels such as newspapers are an effi-cient means to create awareness about the potential adopters of an innovation. On theother hand interpersonal channels involve face to face exchange of information betweentwo or more individuals. Similarly interactive communication channel such as internethas become quite popular during the last decade for the diffusion of certain innovations.Individual’s decision about an innovation is a process rather than instantaneous act.New innovation always creates certain uncertainties among the potential adopters. In-novation decision making process is an information gathering activity where an individ-ual is motivated to reduce the uncertainties regarding certain innovation (Rogers 2003).Various scholars have proposed different models for technology diffusion. According toGeroski (2000), technology diffusion models can be categorized into four categoriesepidemic, probit, density dependent growth and information cascades. Epidemic modelis the most commonly used model in research which proposes that lack of available in-formation about a certain new technology limits the growth of that particular technology(Chang et al, 2009). Diffusion S-curve (epidemic model) has been used in this report toexamine the diffusion of the biofuel technology.Figure 6. Technology Diffusion S-Curve (adapted from Narayanan 2000 p.99).As illustrated in Figure 6 the adaption of an innovation usually follows a bell shapedpattern when it is plotted with respect to time whereas if cumulative number of adoptersare plotted then it results in S-curve. According to Rogers (2003), S curve rises slowlyduring the initial stages as there are less number of adopters in that time period. Afterthat curve gradually increases until it has been adopted by half of the individuals in thesystem. Then the acceleration happens at a very low pace as few remaining individualsadopt that particular innovation. Rogers (2003) proposed a categorization of the tech-nology adoption process based on the criteria of innovativeness as illustrated in Figure7. Innovators are technology enthusiasts while early adopters unlike innovators are nottechnologists even though they buy products in the early life cycle period. Early majori-
12ty wait for a certain technology to get established before adopting it whereas late ma-jority almost share the same features except that they are not as comfortable with han-dling the technology and they required a lot of support for before adopting (Moore2002). Both early and late majority together form the major part of technology adoptionprocess. Finally, the laggards are simply not interested in new technologies at all.Figure 7. Technology adoption categories (Rogers 2003).Different authors have discovered that bibliometrics analysis can be used as a tool toanalyze diffusion of innovations, as patent citation activity of a technology generallyfollows S shape pattern (Chang et al. 2009; Daim et al. 2006). Newspapers are also con-sidered a reliable data source in technology diffusion research field (Okubo, 1997) but ithas not been used as effectively as compared to patents and scientific publications.4.4. Data used in StudyData used in this report is about media coverage which basically consists of numbers ofnews or articles published for a certain technology. Media coverage data has been col-lected from LexisNexis UK which is a web based database portal owned by Reed Else-vier. It serves various customers in more than 100 countries by providing access tosearchable documents and records from numerous legal, news and business sources(LexisNexis 2012). Three term biofuels* was used as search word. Data was gatheredfrom time period of 2000 till 2008. This time period was chosen because the amounts ofnews hits were rather negligible before that period to draw any solid conclusion. NexisUK uses smart indexing technology which is a rule based classification system that tagsonline documents according to its content. Each index term is analyzed thoroughly byNexis experts before it can be put in the relevant category according to its content so,when a user searches for a term the Nexis service identifies the documents that matchesthose terms only. Below paragraphs explain the population and sample for this study forbiofuels.The term ‘Bio Fuels’ was searched ‘anywhere’ and in the ‘headlines’. For anywhere itresulted in population of more than 3000 news. Due to the limitation of the LexisNexisdata processing it cannot show the exact amount the search query was refined and thetime period was specified from 2000 till 2008. Still it gave more than 3000 results so the
13next step was to get the data by analyzing it year by year. So the sample for this studywas 34603 news anywhere and 2171 news in the headlines. ResultsBiofuels are basically type of fuel which is produced from biomass. Bio fuels includebio alcohols, biodiesel, vegetable oil, bioethanol and biohydrogen. Importance of biofu-els has grown over the years because it can replace petroleum fuels and it offers manyadvantages such as sustainability, reduction in greenhouse emissions, regional infra-structure development and agriculture security (Demirbas, 2011). That is the primaryreason why the biofuels received a greater number of media coverage. Number of newshits for biofuels is illustrated in Figure 8.Figure 8. Media coverage of Biofuels (LexisNexis 2012).As observed in the trend global biofuel news has increased considerably from 2000 till2009. According to Gelder and German, (2011) this increase was due to the concernsabout fossil fuels prices and availability, awareness among different countries to be-come independent in energy and to reduce greenhouse gas emissions (UNCTAD 2009).Biofuels can be placed in early adopters phase in technology diffusion S-curve. Thisassumption is made according to the trend in Figure 8 and according to InternationalEnergy Association. According to IEA by year 2025 ethanol could cover 10% ofworld’s usable gasoline. Similarly as the transport sector is growing rapidly so there is arequirement for biofuels. IEA roadmap report for 2011 states that by 2050 biofuels canprovide 27% of world’s transportation fuel. The current percentage is only 2% whichshows that biofuels have a lot of potential to gain market in future and it is still in theearly stages. Currently Brazil and the US are among the top countries in terms of biofu-els production (Howard, 2012). EU member states are required to sell a minimumthreshold level of biofuels in their national markets according to the EU directive in2003. Member states are free to choose any strategy to achieve this target (Thuijl &Deurwaarder, 2006). So, the above mentioned analysis and data justifies the claim madein this report that bio fuels as a technology has the potential to be disruptive in future.Next section will look into some theoretical frameworks to analyze the disruptivechange with emphasis on UPM.2000 2001 2002 2003 2004 2005 2006 2007 2008News in Anywhere 90 225 341 465 442 1278 3633 5333 5884News in Headlines 3 25 33 55 47 98 320 370 37102000400060008000NewsBio Fuels
145. DISRUPTIVE CHANGE AND STRATEGYANALYSIS5.1. Pattern in Evolutionof BiofuelsAccording to Pienkos (2012), algal bio-fuels, such as the UPM’s, have a greater energydensity than their petroleum-based counterparts. He claims that algae have the ability toaccumulate triacylglycerols (TAGs) much like the vegetable oils. Further, it is foundthat the energy density for petroleum diesel to be around 130,000 British thermal units(BTU) per gallon while it is about 118,000 BTU per gallon for bio-diesel. This lessdensity is because bio-fuels contain oxygen, which contributes to the molecular weightinstead of the heating value. However, TAGs could also be converted to alkanes byhydro-treating. The result is that the bio-fuel actually has a heating value around 2percent greater than that of the petroleum diesel. (Pienkos, 2012).Figure 9. Bases of competition (Christensen, 1997).Bio-fuel is a disruptive technology because it disrupts, rather than sustain theestablished trajectory of performance improvement (see Figure 9) as advocated byChristensen (1997). Here the bases for competition are chosen to be energy density andavailability. Thus in Figure 9 (left), we see that the performance criterion (energydensity per gallon) of the bio-fuel has actually crossed the existing market demand.However, Christensen insists that disruptive products provide lower performance tocustomers along the value attributes of the mainstream value network. This is shown inFigure 9 (right), availability of bio-fuels has not yet reached the levels of the customerexpectations.
15Furthermore, Christensen (1997) states that the ranking of attributes (as shown in Table1), which are the bases for competition for road transportation, tends to get changedover a period of time in favor of the disruptive technology (UPM’s bio-fuels).Therefore, in future, if availability of bio-fuels is just sufficient to meet the marketdemands, then consumers would no longer value availability of fuels higher in prioritythan other attributes. As a matter of fact, the customers would now value environmentalfriendliness (like reduction in greenhouse gas emissions) as their priority. Thus therewould be a shift in the basis of competition and UPM’s bio-fuels would disrupt theincumbent fuels for road transportation.5.2. Framework for Disruptive ChangeAccording to the framework developed by Dedehayir and Nokelainen (2012), adisruptive technology could result in any one of the four quadrants shown in Figure 10.SubstitutabilityComplementarityInitialstateoffunctionalrelatednessFigure 10. A framework for disruptive change (Dedehayir and Nokelainen, 2012).Antagonism results if the new technology is nurtured in a value network that is separatefrom the mainstream value network. Fraternity results if the new technology isdeveloped in the same value network as that of the mainstream value network. Further,if the emerging technology has similar functionalities and applications as the dominanttechnology, hence the potential to disrupt the existing technology capturing a largemarket share by revolutionizing the market, then the new technology could serve as asubstitute to the existing technology. Correspondingly, if the emergent technology hasdissimilar functionality and application as that of dominant technology so that itcomplements it, then the new technology is said be highly complementing.
16If the new technology complements existing technology in the same value networkalways, then it is said to be in “fraternal cooperation”. Likewise, if the emergingtechnology has similar application and functionality initially as the existing technologyin a separate value network, but finally there are number of differences in theirfunctionalities such that the emergent technology complements the existing technologyin the same value network, then it is said to be “antagonistic cooperation”.Furthermore, if in the same value network, the emergent technology which was initiallycomplementing the dominant technology eventually ends up in a competition havingincreasingly similar applications as the existing one, then it is said to be “fraternalrivalry”.However, if the emerging technology that is nurtured in a separate value network hashigh levels of functional similarity making it suitable for similar application as that ofthe existing technology and this rivalry continues such that the new technologydisplaces the dominant one in the mainstream value network, then it is said to be“antagonistic rivalry”.As previously discussed, UPM’s bio-fuels is nurtured in a separate value networkcatering to customers who are conscious about the environmental pollution and itsreduction. In addition, this new technology of UPM has a similar functionality andapplication as the existing fuels like gasoline and diesel, which is to enable vehiculartransportation on roads. Hence, it is only a matter of time when UPM’s bio-fuels takeover the existing fuels on a large scale and thus capturing a larger market share.Therefore, this new technology is presently substitutable and in future will besubstitutable to the dominant/mainstream technology for road transport. Therefore, theemerging UPM’s technology is in antagonistic rivalry with the dominant fueltechnology.5.3. Combined effect of Market and Technology ChangeAs previously discussed, with reference to IEA roadmap report, currently only 2% ofworld’s transportation fuel utilizes bio-fuel and it is predicted that by 2050 this figurerises to 27%. Hence, the pace of market adoption of bio-fuels is a bit slow and thereason for this could be the other complementing technologies that have to be developedand the other regulations. These factors/stakeholders that supports the market adoptionof bio-fuel technology would have to be developed in parallel to the UPM’s bio-fuelsitself. This will be further discussed in the UPM’s ecosystem analysis in the followingsection.As regards to the bio-fuel technological improvements, according to the IEA roadmapreport, the development of conventional and advanced bio-fuel technology is currently
17underway and promises to boost up the sustainable bio-fuel production while reducingcosts. Furthermore, there are few milestones for technological improvements like:demonstrating robust and reliable processes in the next five years, achievingcommercial level production by the next ten years, improving in general theenvironmental performance of bio-fuels and exhibiting algae-based fuels and othernovel conversion routes. This is shown in the table 2.Table 2. Milestones for technological improvements (IEA report, 2011).Although these technological improvements seem promising, these are just predictionsthat are highly ambitious and delays are always inherent in any new technologicaldevelopments, which can arise, for instance, due to the restrictions from the regulatoryauthorities. Further, this industry has still not figured out the right conversion route toproduce the bio-fuels. So, it is considered that the stage of technological developmentfor bio-fuels is still nascent, at least today. However, as per the statistics, there is a lot ofpotential for rapid technological developments.According to Suarez and Lanzolla (2005), there could be four options for a newtechnology to fall into which is shaped by the pace of both technology and marketevolution. This is shown in Figure 11. Since, both the market and technologicalevolution of bio-fuels are still in their budding stages, their growth is slow. Hence,UPM’s bio-fuels fall into the category of “calm-waters”. A firm falling in this quadrantcould enjoy first-mover advantage and establish long lasting dominance, since it hastime to adapt to the market demand (Suarez and Lanzolla, 2005).Milestones for technology improve-mentsDatesDemonstrate reliable, commercial-scaleproduction of cellulosic-ethanol, BtL-diesel, HVO and bio-SG.2010-2015All bio-fuels to reach >50% life-cycleGHG-emission reductions.2015-2020Demonstrate economically feasible produc-tion of algae-derived bio-fuel and othernovel bio-fuel routes.2020-2030Integrate bio-fuel production in innovativebio-refinery concepts.2015-2025
18Figure 11. The combined effect of market and technological change (Suarez and Lan-zolla, 2005).However, the predictions of industry experts show that bio-fuels have lot of potential tomake rapid technological developments. Hence, there is a strong possibility that in thenear future, the position may shift towards “technology leads” quadrant. In this position,a firm needs to have plenty of resources (R&D, capital and complementary assets) inorder to establish itself as the industry leader and capturing large market share (Suarezand Lanzolla, 2005), since there would be a number of competitors arising. UPM is in agood position to face this transition since it is a big company and is financially verystable.5.4. Strategic Choice for UPMBased on the previous framework, there could be four possible strategic choices for afirm to be positioned in. This framework hypothesized by Berthon, P. et al (1999) isshown in Figure 12. If the pace of both technology and market evolution is slow, thenthe firm may choose to isolate. Likewise, if the pace of both technology and marketevolution is fast, then the firm may have to take a proactive approach and be interactive.However, the firm may have to choose to follow or shape the market if market leads ortechnology leads respectively.
19FollowIsolateInteractShapeLowHighHighLowMarketorientationInnovation orientationUPM’s bio-fuelsFigure 12. Strategic orientation archetypes (Berthon, et al. 1999).Since the evolution of bio-fuel technology is at the moment slow (as discussed with theprevious framework), it is logical that UPM choose to isolate which corresponds to lowmarket and innovation orientation. However, since rapid technological advancementsare predicted, UPM should be ready to position itself towards high innovation orienta-tion and shape the market for bio-fuels powered transportation, after all the customersmay be unaware of what they need until the product become available in the market(Berthon, P. et al, 1999).
206. BUSINESS ECOSYSTEM ANALYSIS6.1. Defining Business EcosystemAn ecosystem in biology can be defined as a system of harmony, where thecommunities formed by living organisms interact with each other and the environmentthat they live in. In a balanced ecosystem, species have a perfect competition againsteach other and existences of all the species are preserved throughout the time. Inbusiness terms however, a business ecosystem has a quite similar meaningmetaphorically. In a business ecosystem, firms (species) interact with each other and theenvironment (market) and form a system together.According to Kandiah & Gossein (1998), James Moore first introduces the term“business ecosystem”, and it is defined as a system, which involves the followingelements:• Customers• Market intermediaries (i.e. agents)• Suppliers• The firm itself (Kandiah & Gossain, 1998).First, in an ecosystem there are always the customers who are willing to pay for thegoods and services that are offered to them. This is provided throughout a full valuechain in which each firm contributes to the final value that is delivered to the customer.Second, there may be some instances where the firm is utilizing so called marketintermediaries meaning some sales agents and other sales channels. Firms which areoffering the complementary products and services that are related to the main firm’sproduct are also considered as market intermediaries in this sense (Kandiah & Gossain,1998).Third, suppliers are also a part of the ecosystem. Considering from the perspective ofthe focal firm, the suppliers, which are providing raw materials or components to themain firm, certainly belong to that firm’s ecosystem and affects the system in differentaspects.
21Finally, the firm itself is standing on the main point of an ecosystem sometimes called“keystone” player. The whole ecosystem revolves around this firm and it can beconsidered as the biggest influencer of the whole ecosystem.6.2. Evolution of Business EcosystemsAccording to Moore (1993), there are four different stages in a development of abusiness ecosystem. These are very similar to biological ecosystem and namely are:• Birth• Expansion• Leadership• Self-renewal or deathMoore (1993) explains these stages very theoretically and states that they are often blurto distinguish in real life. First, during the birth stage; the new firms or entrepreneursoften focus to reveal what the current customer needs are and how can they deliver thevalue to them in a best way. How well firm can define and deliver the value to thetargeted customers defines the success of the firm.Second, during the expansion stage, the firm expands into different regions (markets)and reaches out to more customers. External resistance is often observed in this stageand competitive battling happens in most instances. The victory may be possible by thefirm, which takes it to the leadership phase in short time, or the co-existence can be theeventual result for a long period of time.Third, the leader of the ecosystem is defined and for that the ecosystem’s growth mustbe enough and profitable to worth battling over. After this stage the ecosystem becomesstable and lives on self-renewably.Finally, if the ecosystem fails to expand or take the leadership; it will be conquered bythe stronger firms in the other ecosystem and that will lead to the death of the enterpriseand an eventual wipe out from the market (Moore, 1993).6.3. Defining the Business Ecosystem of UPMUPM’s newest technology that is under development biofuel is expected to be arevolution in the road transportation industry primarily. The innovation will probablyaffect the sea transportation and industry eventually where diesel fuel is used.According to their website, the research is complete now and the company is building abio refinery in Kaukas which is expected to be functional at 2014.
22Their biodiesel technology is considered as a renewable energy source and matchespretty well to the European Union’s Renewable Energy Directive (RED) standards.Although UPM says their technology is well suited for the current diesel technology andinfrastructure, we should also consider vehicle and diesel engine manufacturers for anypossible modification related with the technology. Figure 13 below shows theecosystem of UPM regarding their newest advanced biofuel technology.Figure 13- Business Ecosystem for Biofuel.In Figure 13, we have different types of elements as we discussed while defining abusiness ecosystem. There are suppliers, customers, the firm itself and the othercomplementary players. It would be beneficial to define these firms and their roles inthe ecosystem.First, the suppliers of the UPM are playing a vital part in the survivability of theecosystem. They are basically the suppliers of raw materials that are required to producebiodiesel. According to UPM website, wood pulp waste has a big portion of thishowever there are some side raw materials such as livestock feed and other rawmaterials as well. Depending on the technology and the efficiency analysis, it seemscompany chooses to use wood waste as the most suitable raw material.Second, we have UPM in the middle, meaning the firm; which is taking these rawmaterials and converting them into the biodiesel and supplying it to the end users as avalue offered. The drivers in this case will be considered as end users however;depending on the contracts, agreements and production of other companies UPM maybe an intermediary company who supplies to major gas companies instead of end usersdirectly. In this scenario, gas companies will be a customer, rather than a complementor.It is a matter of viewpoint and we will be analyzing the network with this configuration.
23Third, there are complementing firms that are helping UPM to deliver value to finalcustomers better. These can be various firms or parties, but to keep it simple this paperwill only be focusing on three complementors which are:• Governments• Gas Companies• Vehicle ManufacturersGovernments, play a big role in the regulation of sales of fuel products. Their taxationand pricing policies have been affecting the market of diesel and gasoline heavily inalmost every country. When the biodiesel is commercialized as a fuel product ready tobe used in vehicles, governments will be approving and regulating the financial terms ofthe sales of the product.Gas companies are also a crucial item in this business ecosystem. They are mainlyresponsible for providing the distribution infrastructure such as gas stations and theyhave their own suppliers. When traditional fuels are considered, a gas company mayextract the crude oil and refine it itself or they may outsource the product directly fromthe refining companies. In the case of biofuel, gas companies will probably interact withthe market and some of them will choose to outsource the product however; some ofthem may invest in biofuel refineries to manufacture it themselves. The main focus herewill be the distribution infrastructure. The most likely scenario will be that; biofuel willbe sold at the ordinary gas stations, if it achieves to penetrate widely in the market.Therefore, gas stations and the infrastructure of the gas companies will play animportant role in the value delivering process of biofuel.Vehicle manufacturers are the least important complementor in the biofuel innovation.As stated by UPM, the biodiesel will be working in current diesel engines, but we areconsidering it in detail that biodiesel may require an optimized engine; which isdifferent from most of the engines today. In this case, vehicle manufacturers must bemodifying their cars and they probably will have to arrange some changes with theirengine manufacturers. Companies such as Honda, which is known to be building theirown engines will probably adopt faster to this change but the car manufacturers whichare outsourcing their engines may have some issues during the new design processes.In terms of alteration of the blueprint, the overall figure will not change drastically.There will be additions of newer suppliers, but the right end of the figure will remainthe same in terms of external environment. It is no doubt that UPM will enter newermarkets with their newest innovation, therefore we may consider it as a whole newvalue blueprint from the perspective of UPM.
246.4. Analysis of BottlenecksBottlenecks are defined as the items that a firm is likely to have a shortage and thuscausing disturbance in delivering value. In the case of biofuel, there can be thought ofthree significant bottlenecks that are:• Raw material suppliers• UPM• Gas stationsFirst raw material suppliers are always considered as a bottleneck because theproduction of the biofuel is dependent on the amount of raw materials that are suppliedto UPM. If there is a shortage in the wood pulp and wood chips for instance, UPM willbe looking for other suppliers to provide themselves with the raw material. Therefore, itis certain that raw materials are first ranking bottlenecks in this sense.Secondly, UPM themselves may cause a bottleneck in the form of processing the rawmaterial and refining biofuel. Their pilot plant will be ready in 2014, but after thediffusion of technology gains acceleration, the capacity of the plants will always belimited and therefore they may need to consider their processing speed and capacity as abottleneck all the time.Finally, gas station and gas companies can cause a bottleneck in the business ecosystem.This is something directly related with the gas companies and their deliveryinfrastructure. The more stations that have biofuel, the widely available the technologywill be and hence the disruptiveness. If all the gas stations in the world had biofueltomorrow, there would definitely be people permanently switching from normal fuel tobiofuel.
257. DISCUSSION AND CONCLUSIONDisruptive changes are an integral part of technological evolution as previous technolo-gies are replaced by new technologies once they start to meet the market demand. In thispaper the concept of disruptive change was explained with a real life analysis of a Finn-ish company UPM and their newest innovation “biofuel” which is a renewable energysource and through which the company aims to conquer road transportation market.UPM’s strategy is focusing on recycle business and renewable energy such as biofueltechnology, base on its’ technical and engineering competence in material science relat-ed to long historical operation in forest industry. UPM’s strategy of innovation focuseson a broad set of products, but surrounding mostly on renewable and recycles technolo-gy. Their clear vision of “The Biofore Company” which created a brand new industry,where they are showing their Niche Player role with very high level of leadership.UPM’s aim is to develop advanced biofuels for transport and their main target market isEurope. UPM is using advanced biofuel technology to produce renewable energy fromnon-food based raw materials and as part of company’s competence; it uses wood as theinput for biofuel production. Thus, company’s competitors come from various level ofindustry. Therefore, it can be seen that the pace of market growing is moderate but incase of technology development, since this is new and promising technology, it wouldhave fast pace of changing which company should be aware of when they are buildingtheir strategy.For the value network analysis traditional petroleum based fuels were selected as anincumbent technology. Since disruptive technology is always nurtured in separate valuenetwork so it was observed that biofuels have the potential to disrupt the traditional fueltechnology. Therefore, in future, if availability of bio-fuels is just sufficient to meet themarket demands, then consumers would no longer value availability of fuels higher inpriority than other attributes. As a matter of fact, the customers would now value envi-ronmental friendliness (like reduction in greenhouse gas emissions) as their priority.Thus there would be a shift in the basis of competition and UPM’s bio-fuels would dis-rupt the incumbent fuels for road transportation. In order to justify this claimbibliometric analysis was performed to analyze the diffusion of biofuel technology ingeneral. Bibliometric analysis means to analyze publications such as patents, newspaperarticles, and scientific discoveries by their characteristics. It allows to determine thetechnology position in its lifecycle and to describe the technology diffusion. Newspa-pers are considered a reliable source during the application phase of a technology to
26analyze the diffusion of technology but its use has been limited so far. So, in this reportnewspaper hits were considered major data source to observe and analyze the trends ofbiofuel technology. Quantitative data related to news was collected from database portalcalled Nexis UK. Time span of the study was chosen from 2000 till 2008. Some quali-tative data was also collected on renewable energy policies from different independentonline portals. It was required to make an analysis of the connection between the trendsobserved from news with the technology diffusion. Based on the media coverage newsresults biofuels received certain level of diffusion. And it can be categorized in thetechnology diffusion S-curve in early adopters phase.Strategic analysis for disruptive change was performed with the help of Dedehayir andNokelainen framework. UPM’s Biofuel has a similar functionality and application asthe existing fuels like gasoline and diesel, which is to enable vehicular transportation onroads. Hence, it is only a matter of time when UPM’s bio-fuels take over the existingfuels on a large scale and thus capturing a larger market share. Therefore, this newtechnology is presently substitutable and in future will be substitutable to thedominant/mainstream technology for road transport. Therefore, the emerging UPM’stechnology is in antagonistic rivalry with the dominant fuel technology. Since the evolu-tion of bio-fuel technology is at the moment slow, it is logical that UPM choose to iso-late which corresponds to low market and innovation orientation. However, since rapidtechnological advancements are predicted, UPM should be ready to position itself to-wards high innovation orientation and shape the market for bio-fuels powered transpor-tation.Business ecosystem analyses were performed for UPM in the end. Major suppliers thatwere identified were basically the suppliers of raw materials like wood chips andlivestock feed analyses that are required to produce biodiesel. Governments, gascompanies and vehicle manufacturers were identified as major complimentors that arehelping UPM to deliver value to final customers better. Major bottlenecks were theavailability of raw materials from suppliers in adequete amount and their pilot plant thatwill be ready in 2014, but after the diffusion of technology gains acceleration, thecapacity of the plants will always be limited and therefore they may need to considertheir processing speed and capacity as a bottleneck all the time.In terms of future UPM should first already start planning about the capacity expansionin order to be ready once the technology is diffused on a larger extent. Second, it shouldlook to exapnd its supplier base so that they have some leverage in case if some majorsupplier cannot deliver. Third, it should make some awereness of this green technologyamong normal consumers by using effective marketing campaigns. Lastly, properinfrastructure should be developed before this technology is commercialized so that it isavailable readily for consumers. In this case some commitment should be made with thegas stations to ensure the proper availablity of biofuels.
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