UPM's Biofuel Technology Strategy

TETA-5516 Technology Strategy
REPORT
10.12.2012
GROUP:
DUC HAI NGUYEN
SAAD JAMIL
SEYFI BABACAN
ANAND RANGANATHAN

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CONTENTS
1. Introduction .......................................................................................................... 2
2. Background and Historical Analysis...................................................................... 3
2.1. UPM – The Biofore Company .................................................................... 3
2.2. Biofuel Technology .................................................................................... 5
3. Industry and market analysis ................................................................................. 6
4. Value Networks and Technology Diffusion........................................................... 8
4.1. Mainstream and Disruptive Value Networks............................................... 8
4.2. Bibliometric Analysis ............................................................................... 10
4.3. Technology Diffusion............................................................................... 11
4.4. Data used in Study.................................................................................... 12
5. Disruptive Change and Strategy Analysis............................................................ 14
5.1. Pattern in Evolutionof Biofuels................................................................. 14
5.2. Framework for Disruptive Change............................................................ 15
5.3. Combined effect of Market and Technology Change................................. 16
5.4. Strategic Choice for UPM......................................................................... 18
6. Business Ecosystem Analysis.............................................................................. 20
6.1. Defining Business Ecosystem................................................................... 20
6.2. Evolution of Business Ecosystems............................................................ 21
6.3. Defining the Business Ecosystem of UPM................................................ 21
6.4. Analysis of Bottlenecks ............................................................................ 24
7. Discussion and conclusion .................................................................................. 25
References.................................................................................................................. 27
Appendix.................................................................................................................... 29

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1. INTRODUCTION
Disruptive changes are essential parts of technological evolution. Throughout the years
newer technologies mostly wiped out and replaced their older ancestors. In this paper
the concept of disruptive change is explained with a real life analysis of a Finnish
company UPM and their newest innovation “biofuel”.
UPM was founded in 1 May 1996 as a merger of Kymmene Corp. and Repola Ltd. and
its 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
• Plywood
In terms of their newest innovation biofuel (or biodiesel), aims to be a renewable energy
source, which the company aims to conquer road transportation market. The first biofuel
refinery is expected to be ready in 2014. In this paper this innovation and its possible
effects are analyzed.
The paper is structured the following way. In the next chapter some background
information and the historical analysis of UPM will be done. Then, the industry and
market analysis will be done with including both the incumbent technology and the
markets and the disruptive technology and its market. After this we are going to look at
the disruptiveness of the biofuel and the possible scenarios justifying the disruptiveness
as well as the value networks. Finally, before going into the conclusion, the business
ecosystem will be inspected for the possible changes and the bottlenecks.

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2. BACKGROUND AND HISTORICAL
ANALYSIS
2.1. UPM – The Biofore Company
According to company’s profile (www.upm.com), UPM-Kymmene Corporation was
founded in fall 1995 when three Finnish firms: Kymmene Corporation, Repola Ltd and
its subsidiary United Paper Mills Ltd were merged. UPM group started working in
Finnish forest industry from early 1870s with mechanical pulp mills, paper mills and
sawmills. In 1880s, company began their pulp production and 1920s, plywood produc-
tion lines was involved in UPM operation. UPM today has more than 100 subsidiaries
operate as independent companies in 17 countries in America, Europe, Australia and
Asian.
As refer to company’s name, “The Biofore Company” show the goal that company want
to follow in their business; it has created the new industry category: Biofore industry
which is the combination of “Bio” – the environmental friendly business and Forest –
company’s tradition industry in Finland. Therefore, company’s products are focusing on
this particular, new industry including: paper, biofuels, forest services, labels, compo-
sites, energy, pulp, timber, plywood, biobased chemicals & additives. The objective of
this 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 biofuel
technology, 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&D
professionals with a budget of 45 million EUR per year (www.upm.com). The driven
factor 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 presented
by A.D. Little, “The Strategic Management of Technology”, at the 1981 European
Management Forum in Davos (Figure 1).

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Figure 1. Technology Strategy Types (Narayanan, 2001).
In this framework, Narayanan (2001) and Dedehayir (2012) discussed more detail about
specific type of strategy based on its’ scope and leadership style.
• Full line technology leader is the firm which relies on technology to take leader
role 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 selective
type of technology. They often take risk of testing and launching new products
or 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 but
on the broad set of technology implemented to run their business
• Technology rationalizers are the firms using selective technology and do not see
it as their competence.
In the case of UPM, company’s strategy of change readiness and innovation focusing
with 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.

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2.2. Biofuel Technology
According to RP Siegel (www.triplepundit.com), the history of biofuels can be summa-
rised as follow:
Biofuels were considered the fuel of future for hundred
years ago. But it continuously keeps fighting with fossil
fuels in the market. This back and forth trend also made the
technology discontinuity in the development of biofuel.
In 1820s in US, “a blend of camphene and alcohol was the
dominant fuel for lamps” (www.triplepundit.com). Farmers
use their own oil made from crop wastes. However, after the
introducing of kerosene with much lower tax, biofuels lose
its’ role in the market in around 1870.
German inventor Nicolaus August Otto is known with
dicosvering the first automobile engine, in 1876 he used
alcolhol 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 influence
on auto industry lead to the fact that gasoline took the role
of 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 decades
until 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 and
more 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 EU
members 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 conventional
energy by 2020. Thus, biofuel offers very interesting and promissing opportunities for
companies in these regions.

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3. INDUSTRY AND MARKET ANALYSIS
UPM’s aim is to develop advanced biofuels for transport and their main target market is
Europe, 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 other
oil 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 companies
are also bring out the threat of rivalry.
However, if company considers competitors in biofuels industry only, there are two
sectors 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 ADM
Ölmühle Hamburg, Germany or Diester Industrie, France.
However, this first generation biofuel is receiving obstacles from the society due to the
food 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 the
second generation technology
 Second generation products includes (www.biofuelstp.eu)
 Biomass to Liquid (BtL)
 Cellulosic ethanol
 BioDME/Methanol
 BioSynthetic Natural Gas (BioSNG)

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 Bio-oil/Bio-crude
 Algal biofuels
 Hydrocarbons from catalysis of plant sugars and via synthetic biology
 Biohydrogen
 Bioelectricity/CHP
 Biobutanol
UPM are using this advanced biofuel technology to produce renewable energy from
non-food based raw materials and as part of company’s competence, it uses wood as the
input for biofuel production. In this sector, based on Advanced Biofuels Market Report
2012 (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 can
be easily found there. Most of them participate in global market of 70 billion euro and
the 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 of
changing which company should aware of when they building their strategy.

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4. VALUE NETWORKS AND TECHNOLOGY
DIFFUSION
4.1. Mainstream and Disruptive Value Networks
According to Dedehayir 2012 “a value network describes the industry as a hierarchical
structure 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 one
entry 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 the
pyramid is the holistic system which in this case is road transport. At the next level
down are different subsystems of the road transport systems. In this case it comprises of
different types of vehicles, traditional petroleum based fuels to run the vehicles and the
gas 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 required
to 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 the
analysis. UPM is continuously aiming to be the major player in advanced biofuels, by
utilizing 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-

9
ing to Christensen & Rosenbloom (1995), disruptive technology is always nurtured in a
different value network as compared to the incumbent technology because its perform-
ance level is lower as compared to incumbent technology in certain dimensions which
are considered important by customers. This disruptive value network is illustrated in
Figure 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 are
potential disruptive technology. At the lowest level are the the components such as
wood 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 basis
of competition (Christensen & Bower 1995). This is illustrated in Table 1. As observed
from the table that for the disruptive technology customers are more concerned about
the 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 Ranking
Traditional Petroleum Fuels (Incumbent
Technology)
Bio Fuels ( Disruptive Technology)
• Price
• Availability
• Convenience
• Power
• Environmental
• Environmental
• Availability
• Price
• Power
• Convenience
In 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 disruptive
technology by using bibliometric analysis and technology diffusion concepts.

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4.2. Bibliometric Analysis
Norton, (2001) defines bibliometrics as the measurement of texts and information. It is
basically 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 decision
making process (Daim et al 2006). According to Martino, (2003) it is easier to anticipate
about the future development of a technology once it is observed at an initial stage. So
bibliometric analysis helps to anticipate the future by determining a particular position
of 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 in
Figure 5. The number of hits increases and reaches a peak for basic research. After that
it starts to decrease and simultaneously applied research begins to increase. This pattern
follows 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 of
innovation (adopted from Martino 2003, p. 720-721).
As observed from the Figure when the technology is in the initial research phase it starts
to 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 into
application level then it is analyzed by newspapers and press articles because it starts to
cause 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 considered
as a data source because Bio fuels have been developed into applications.

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4.3. Technology Diffusion
Diffusion is a process through which an innovation is spread through certain channels
over 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 concerned
with a new idea is exchanged through a communication channel. There are different
types 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 the
other hand interpersonal channels involve face to face exchange of information between
two or more individuals. Similarly interactive communication channel such as internet
has 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 to
Geroski (2000), technology diffusion models can be categorized into four categories
epidemic, probit, density dependent growth and information cascades. Epidemic model
is 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 to
examine 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 shaped
pattern when it is plotted with respect to time whereas if cumulative number of adopters
are plotted then it results in S-curve. According to Rogers (2003), S curve rises slowly
during the initial stages as there are less number of adopters in that time period. After
that curve gradually increases until it has been adopted by half of the individuals in the
system. Then the acceleration happens at a very low pace as few remaining individuals
adopt that particular innovation. Rogers (2003) proposed a categorization of the tech-
nology adoption process based on the criteria of innovativeness as illustrated in Figure
7. Innovators are technology enthusiasts while early adopters unlike innovators are not
technologists even though they buy products in the early life cycle period. Early majori-

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ty 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 (Moore
2002). Both early and late majority together form the major part of technology adoption
process. 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 to
analyze diffusion of innovations, as patent citation activity of a technology generally
follows 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 it
has not been used as effectively as compared to patents and scientific publications.
4.4. Data used in Study
Data used in this report is about media coverage which basically consists of numbers of
news 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 to
searchable documents and records from numerous legal, news and business sources
(LexisNexis 2012). Three term biofuels* was used as search word. Data was gathered
from time period of 2000 till 2008. This time period was chosen because the amounts of
news hits were rather negligible before that period to draw any solid conclusion. Nexis
UK uses smart indexing technology which is a rule based classification system that tags
online documents according to its content. Each index term is analyzed thoroughly by
Nexis 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 matches
those terms only. Below paragraphs explain the population and sample for this study for
biofuels.
The term ‘Bio Fuels’ was searched ‘anywhere’ and in the ‘headlines’. For anywhere it
resulted in population of more than 3000 news. Due to the limitation of the LexisNexis
data processing it cannot show the exact amount the search query was refined and the
time period was specified from 2000 till 2008. Still it gave more than 3000 results so the

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next step was to get the data by analyzing it year by year. So the sample for this study
was 34603 news anywhere and 2171 news in the headlines. Results
Biofuels are basically type of fuel which is produced from biomass. Bio fuels include
bio 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 many
advantages such as sustainability, reduction in greenhouse emissions, regional infra-
structure development and agriculture security (Demirbas, 2011). That is the primary
reason why the biofuels received a greater number of media coverage. Number of news
hits 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 till
2009. According to Gelder and German, (2011) this increase was due to the concerns
about 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. This
assumption is made according to the trend in Figure 8 and according to International
Energy Association. According to IEA by year 2025 ethanol could cover 10% of
world’s usable gasoline. Similarly as the transport sector is growing rapidly so there is a
requirement for biofuels. IEA roadmap report for 2011 states that by 2050 biofuels can
provide 27% of world’s transportation fuel. The current percentage is only 2% which
shows that biofuels have a lot of potential to gain market in future and it is still in the
early 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 minimum
threshold level of biofuels in their national markets according to the EU directive in
2003. 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 made
in 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 disruptive
change with emphasis on UPM.
2000 2001 2002 2003 2004 2005 2006 2007 2008
News in Anywhere 90 225 341 465 442 1278 3633 5333 5884
News in Headlines 3 25 33 55 47 98 320 370 371
0
2000
4000
6000
8000
News
Bio Fuels

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5. DISRUPTIVE CHANGE AND STRATEGY
ANALYSIS
5.1. Pattern in Evolutionof Biofuels
According to Pienkos (2012), algal bio-fuels, such as the UPM’s, have a greater energy
density than their petroleum-based counterparts. He claims that algae have the ability to
accumulate triacylglycerols (TAGs) much like the vegetable oils. Further, it is found
that 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 less
density is because bio-fuels contain oxygen, which contributes to the molecular weight
instead of the heating value. However, TAGs could also be converted to alkanes by
hydro-treating. The result is that the bio-fuel actually has a heating value around 2
percent 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 the
established trajectory of performance improvement (see Figure 9) as advocated by
Christensen (1997). Here the bases for competition are chosen to be energy density and
availability. Thus in Figure 9 (left), we see that the performance criterion (energy
density per gallon) of the bio-fuel has actually crossed the existing market demand.
However, Christensen insists that disruptive products provide lower performance to
customers along the value attributes of the mainstream value network. This is shown in
Figure 9 (right), availability of bio-fuels has not yet reached the levels of the customer
expectations.

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Furthermore, Christensen (1997) states that the ranking of attributes (as shown in Table
1), which are the bases for competition for road transportation, tends to get changed
over 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 market
demands, then consumers would no longer value availability of fuels higher in priority
than other attributes. As a matter of fact, the customers would now value environmental
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 disrupt the
incumbent fuels for road transportation.
5.2. Framework for Disruptive Change
According to the framework developed by Dedehayir and Nokelainen (2012), a
disruptive technology could result in any one of the four quadrants shown in Figure 10.
SubstitutabilityComplementarity
Initialstateoffunctionalrelatedness
Figure 10. A framework for disruptive change (Dedehayir and Nokelainen, 2012).
Antagonism results if the new technology is nurtured in a value network that is separate
from the mainstream value network. Fraternity results if the new technology is
developed in the same value network as that of the mainstream value network. Further,
if the emerging technology has similar functionalities and applications as the dominant
technology, hence the potential to disrupt the existing technology capturing a large
market share by revolutionizing the market, then the new technology could serve as a
substitute to the existing technology. Correspondingly, if the emergent technology has
dissimilar functionality and application as that of dominant technology so that it
complements it, then the new technology is said be highly complementing.

16
If the new technology complements existing technology in the same value network
always, then it is said to be in “fraternal cooperation”. Likewise, if the emerging
technology has similar application and functionality initially as the existing technology
in a separate value network, but finally there are number of differences in their
functionalities such that the emergent technology complements the existing technology
in the same value network, then it is said to be “antagonistic cooperation”.
Furthermore, if in the same value network, the emergent technology which was initially
complementing the dominant technology eventually ends up in a competition having
increasingly similar applications as the existing one, then it is said to be “fraternal
rivalry”.
However, if the emerging technology that is nurtured in a separate value network has
high levels of functional similarity making it suitable for similar application as that of
the existing technology and this rivalry continues such that the new technology
displaces 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 network
catering to customers who are conscious about the environmental pollution and its
reduction. In addition, this new technology of UPM has a similar functionality and
application as the existing fuels like gasoline and diesel, which is to enable vehicular
transportation on roads. Hence, it is only a matter of time when UPM’s bio-fuels take
over 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 be
substitutable to the dominant/mainstream technology for road transport. Therefore, the
emerging UPM’s technology is in antagonistic rivalry with the dominant fuel
technology.
5.3. Combined effect of Market and Technology Change
As previously discussed, with reference to IEA roadmap report, currently only 2% of
world’s transportation fuel utilizes bio-fuel and it is predicted that by 2050 this figure
rises to 27%. Hence, the pace of market adoption of bio-fuels is a bit slow and the
reason for this could be the other complementing technologies that have to be developed
and the other regulations. These factors/stakeholders that supports the market adoption
of bio-fuel technology would have to be developed in parallel to the UPM’s bio-fuels
itself. This will be further discussed in the UPM’s ecosystem analysis in the following
section.
As regards to the bio-fuel technological improvements, according to the IEA roadmap
report, the development of conventional and advanced bio-fuel technology is currently

17
underway and promises to boost up the sustainable bio-fuel production while reducing
costs. Furthermore, there are few milestones for technological improvements like:
demonstrating robust and reliable processes in the next five years, achieving
commercial level production by the next ten years, improving in general the
environmental performance of bio-fuels and exhibiting algae-based fuels and other
novel 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 predictions
that are highly ambitious and delays are always inherent in any new technological
developments, which can arise, for instance, due to the restrictions from the regulatory
authorities. Further, this industry has still not figured out the right conversion route to
produce the bio-fuels. So, it is considered that the stage of technological development
for bio-fuels is still nascent, at least today. However, as per the statistics, there is a lot of
potential for rapid technological developments.
According to Suarez and Lanzolla (2005), there could be four options for a new
technology to fall into which is shaped by the pace of both technology and market
evolution. This is shown in Figure 11. Since, both the market and technological
evolution 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 quadrant
could enjoy first-mover advantage and establish long lasting dominance, since it has
time to adapt to the market demand (Suarez and Lanzolla, 2005).
Milestones for technology improve-
ments
Dates
Demonstrate reliable, commercial-scale
production of cellulosic-ethanol, BtL-
diesel, HVO and bio-SG.
2010-2015
All bio-fuels to reach >50% life-cycle
GHG-emission reductions.
2015-2020
Demonstrate economically feasible produc-
tion of algae-derived bio-fuel and other
novel bio-fuel routes.
2020-2030
Integrate bio-fuel production in innovative
bio-refinery concepts.
2015-2025

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Figure 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 to
make rapid technological developments. Hence, there is a strong possibility that in the
near 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) in
order to establish itself as the industry leader and capturing large market share (Suarez
and Lanzolla, 2005), since there would be a number of competitors arising. UPM is in a
good position to face this transition since it is a big company and is financially very
stable.
5.4. Strategic Choice for UPM
Based on the previous framework, there could be four possible strategic choices for a
firm to be positioned in. This framework hypothesized by Berthon, P. et al (1999) is
shown in Figure 12. If the pace of both technology and market evolution is slow, then
the firm may choose to isolate. Likewise, if the pace of both technology and market
evolution 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 or
technology leads respectively.

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Follow
Isolate
Interact
Shape
Low
High
High
Low
Marketorientation
Innovation orientation
UPM’s bio-fuels
Figure 12. Strategic orientation archetypes (Berthon, et al. 1999).
Since the evolution of bio-fuel technology is at the moment slow (as discussed with the
previous framework), it is logical that UPM choose to isolate which corresponds to low
market and innovation orientation. However, since rapid technological advancements
are 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 customers
may be unaware of what they need until the product become available in the market
(Berthon, P. et al, 1999).

20
6. BUSINESS ECOSYSTEM ANALYSIS
6.1. Defining Business Ecosystem
An ecosystem in biology can be defined as a system of harmony, where the
communities formed by living organisms interact with each other and the environment
that they live in. In a balanced ecosystem, species have a perfect competition against
each other and existences of all the species are preserved throughout the time. In
business terms however, a business ecosystem has a quite similar meaning
metaphorically. In a business ecosystem, firms (species) interact with each other and the
environment (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 following
elements:
• 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 the
goods and services that are offered to them. This is provided throughout a full value
chain 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 market
intermediaries meaning some sales agents and other sales channels. Firms which are
offering the complementary products and services that are related to the main firm’s
product 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 of
the focal firm, the suppliers, which are providing raw materials or components to the
main firm, certainly belong to that firm’s ecosystem and affects the system in different
aspects.

21
Finally, 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 be
considered as the biggest influencer of the whole ecosystem.
6.2. Evolution of Business Ecosystems
According to Moore (1993), there are four different stages in a development of a
business ecosystem. These are very similar to biological ecosystem and namely are:
• Birth
• Expansion
• Leadership
• Self-renewal or death
Moore (1993) explains these stages very theoretically and states that they are often blur
to distinguish in real life. First, during the birth stage; the new firms or entrepreneurs
often focus to reveal what the current customer needs are and how can they deliver the
value to them in a best way. How well firm can define and deliver the value to the
targeted 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 stage
and competitive battling happens in most instances. The victory may be possible by the
firm, which takes it to the leadership phase in short time, or the co-existence can be the
eventual result for a long period of time.
Third, the leader of the ecosystem is defined and for that the ecosystem’s growth must
be enough and profitable to worth battling over. After this stage the ecosystem becomes
stable and lives on self-renewably.
Finally, if the ecosystem fails to expand or take the leadership; it will be conquered by
the stronger firms in the other ecosystem and that will lead to the death of the enterprise
and an eventual wipe out from the market (Moore, 1993).
6.3. Defining the Business Ecosystem of UPM
UPM’s newest technology that is under development biofuel is expected to be a
revolution in the road transportation industry primarily. The innovation will probably
affect 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 a
bio refinery in Kaukas which is expected to be functional at 2014.

22
Their biodiesel technology is considered as a renewable energy source and matches
pretty well to the European Union’s Renewable Energy Directive (RED) standards.
Although UPM says their technology is well suited for the current diesel technology and
infrastructure, we should also consider vehicle and diesel engine manufacturers for any
possible modification related with the technology. Figure 13 below shows the
ecosystem 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 a
business ecosystem. There are suppliers, customers, the firm itself and the other
complementary players. It would be beneficial to define these firms and their roles in
the ecosystem.
First, the suppliers of the UPM are playing a vital part in the survivability of the
ecosystem. They are basically the suppliers of raw materials that are required to produce
biodiesel. According to UPM website, wood pulp waste has a big portion of this
however there are some side raw materials such as livestock feed and other raw
materials as well. Depending on the technology and the efficiency analysis, it seems
company 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 raw
materials and converting them into the biodiesel and supplying it to the end users as a
value offered. The drivers in this case will be considered as end users however;
depending on the contracts, agreements and production of other companies UPM may
be an intermediary company who supplies to major gas companies instead of end users
directly. 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.

23
Third, there are complementing firms that are helping UPM to deliver value to final
customers better. These can be various firms or parties, but to keep it simple this paper
will only be focusing on three complementors which are:
• Governments
• Gas Companies
• Vehicle Manufacturers
Governments, play a big role in the regulation of sales of fuel products. Their taxation
and pricing policies have been affecting the market of diesel and gasoline heavily in
almost every country. When the biodiesel is commercialized as a fuel product ready to
be used in vehicles, governments will be approving and regulating the financial terms of
the sales of the product.
Gas companies are also a crucial item in this business ecosystem. They are mainly
responsible for providing the distribution infrastructure such as gas stations and they
have their own suppliers. When traditional fuels are considered, a gas company may
extract the crude oil and refine it itself or they may outsource the product directly from
the refining companies. In the case of biofuel, gas companies will probably interact with
the market and some of them will choose to outsource the product however; some of
them may invest in biofuel refineries to manufacture it themselves. The main focus here
will be the distribution infrastructure. The most likely scenario will be that; biofuel will
be 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 an
important 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 are
considering it in detail that biodiesel may require an optimized engine; which is
different from most of the engines today. In this case, vehicle manufacturers must be
modifying their cars and they probably will have to arrange some changes with their
engine manufacturers. Companies such as Honda, which is known to be building their
own engines will probably adopt faster to this change but the car manufacturers which
are 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 remain
the same in terms of external environment. It is no doubt that UPM will enter newer
markets with their newest innovation, therefore we may consider it as a whole new
value blueprint from the perspective of UPM.

24
6.4. Analysis of Bottlenecks
Bottlenecks are defined as the items that a firm is likely to have a shortage and thus
causing disturbance in delivering value. In the case of biofuel, there can be thought of
three significant bottlenecks that are:
• Raw material suppliers
• UPM
• Gas stations
First raw material suppliers are always considered as a bottleneck because the
production of the biofuel is dependent on the amount of raw materials that are supplied
to UPM. If there is a shortage in the wood pulp and wood chips for instance, UPM will
be looking for other suppliers to provide themselves with the raw material. Therefore, it
is certain that raw materials are first ranking bottlenecks in this sense.
Secondly, UPM themselves may cause a bottleneck in the form of processing the raw
material and refining biofuel. Their pilot plant will be ready in 2014, but after the
diffusion of technology gains acceleration, the capacity of the plants will always be
limited and therefore they may need to consider their processing speed and capacity as a
bottleneck 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 delivery
infrastructure. The more stations that have biofuel, the widely available the technology
will be and hence the disruptiveness. If all the gas stations in the world had biofuel
tomorrow, there would definitely be people permanently switching from normal fuel to
biofuel.

25
7. DISCUSSION AND CONCLUSION
Disruptive 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 this
paper 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 energy
source and through which the company aims to conquer road transportation market.
UPM’s strategy is focusing on recycle business and renewable energy such as biofuel
technology, base on its’ technical and engineering competence in material science relat-
ed to long historical operation in forest industry. UPM’s strategy of innovation focuses
on 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 is
Europe. UPM is using advanced biofuel technology to produce renewable energy from
non-food based raw materials and as part of company’s competence; it uses wood as the
input for biofuel production. Thus, company’s competitors come from various level of
industry. Therefore, it can be seen that the pace of market growing is moderate but in
case of technology development, since this is new and promising technology, it would
have fast pace of changing which company should be aware of when they are building
their strategy.
For the value network analysis traditional petroleum based fuels were selected as an
incumbent technology. Since disruptive technology is always nurtured in separate value
network so it was observed that biofuels have the potential to disrupt the traditional fuel
technology. Therefore, in future, if availability of bio-fuels is just sufficient to meet the
market demands, then consumers would no longer value availability of fuels higher in
priority 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 claim
bibliometric analysis was performed to analyze the diffusion of biofuel technology in
general. Bibliometric analysis means to analyze publications such as patents, newspaper
articles, and scientific discoveries by their characteristics. It allows to determine the
technology 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

26
analyze the diffusion of technology but its use has been limited so far. So, in this report
newspaper hits were considered major data source to observe and analyze the trends of
biofuel technology. Quantitative data related to news was collected from database portal
called 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 independent
online portals. It was required to make an analysis of the connection between the trends
observed from news with the technology diffusion. Based on the media coverage news
results biofuels received certain level of diffusion. And it can be categorized in the
technology diffusion S-curve in early adopters phase.
Strategic analysis for disruptive change was performed with the help of Dedehayir and
Nokelainen framework. UPM’s Biofuel has a similar functionality and application as
the existing fuels like gasoline and diesel, which is to enable vehicular transportation on
roads. Hence, it is only a matter of time when UPM’s bio-fuels take over 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 be substitutable to the
dominant/mainstream technology for road transport. Therefore, the emerging UPM’s
technology 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 rapid
technological 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 that
were identified were basically the suppliers of raw materials like wood chips and
livestock feed analyses that are required to produce biodiesel. Governments, gas
companies and vehicle manufacturers were identified as major complimentors that are
helping UPM to deliver value to final customers better. Major bottlenecks were the
availability of raw materials from suppliers in adequete amount and their pilot plant that
will be ready in 2014, but after the diffusion of technology gains acceleration, the
capacity of the plants will always be limited and therefore they may need to consider
their processing speed and capacity as a bottleneck all the time.
In terms of future UPM should first already start planning about the capacity expansion
in order to be ready once the technology is diffused on a larger extent. Second, it should
look to exapnd its supplier base so that they have some leverage in case if some major
supplier cannot deliver. Third, it should make some awereness of this green technology
among normal consumers by using effective marketing campaigns. Lastly, proper
infrastructure should be developed before this technology is commercialized so that it is
available readily for consumers. In this case some commitment should be made with the
gas stations to ensure the proper availablity of biofuels.

27
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29
APPENDIX
Year News in Anywhere News in Headlines
Search Term: (((bio fuels) AND
(DATE(>=YYYY-MM-DD) AND
DATE(<=YYYY-MM-DD))))
Search Term: ((HEADLINE(bio fuels)
AND (DATE(>=YYYY-MM-DD) AND
DATE(<=YYYY-MM-DD))))
2000 90 3
2001 225 25
2002 341 33
2003 465 55
2004 442 47
2005 1278 98
2006 3633 320
2007 5333 370
2008 5884 371

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