Is Uber disruptive?

It is almost strange to be asking the question. Ask any cab driver and they will equate Uber to any disruptive child you care to present. But, of course, it is precisely because the term ‘disruption’ has multiple connotations that this question can be asked. Indeed, for Clay Christensen, Michael Raynor and Rory McDonald in the latest Harvard Business Review, the question is relevant to the theory of disruptive innovation and so they use it to anchor a discussion of that. And their answer to whether Uber is disruptive is no.

So why do they say this? The theory of disruption — or what I term in my forthcoming book, demand-side disruption — is that successful incumbents can get into trouble when innovations come along that have two characteristics. First, they under-perform (initially at least) on key dimensions that the incumbents’ customers care about. Second, they have a trajectory of improvement that reduces that under-performance and leads them to be directly competitive for the incumbents’ core customers. After that point, disruption depends on whether the incumbents can react and meet the competition or not. However, for the question of Uber that is a moot point because Christensen, Raynor and McDonald claim that it doesn’t satisfy the first criterion of a disruptive innovation.

Uber has quite arguably been increasing total demand — that’s what happens when you develop a better, less-expensive solution to a widespread customer need. But disrupters start by appealing to low-end or unserved consumers and then migrate to the mainstream market. Uber has gone in exactly the opposite direction: building a position in the mainstream market first and subsequently appealing to historically overlooked segments. …

Most of the elements of Uber’s strategy seem to be sustaining innovations. Uber’s service has rarely been described as inferior to existing taxis; in fact, many would say it is better. Booking a ride requires just a few taps on a smartphone; payment is cashless and convenient; and passengers can rate their rides afterward, which helps ensure high standards. Furthermore, Uber delivers service reliably and punctually, and its pricing is usually competitive with (or lower than) that of established taxi services.

In other words, Uber isn’t an example of disruptive entry at all but, instead, it is just … entry.

Well, isn’t that interesting? One of the issues with the exposition of disruption theory is that its proponents seemed to be saying that the only way to successfully enter against stronger established firm was to enter with a disruptive rather than a sustaining innovation. Indeed, in The Innovator’s Dilemma, Christensen argued that entrant success in the hard disk drive industry was driven by precisely that. The alternative was to be crushed by the larger firms. But here we have Uber engaging in tremendously successful entry supposedly without following the usual disruptive prescription.

Christensen, Raynor and McDonald are aware of this and they point to the fact that the taxi industry, while an incumbent, wasn’t exactly a good incumbent.

Uber’s strong performance therefore warrants explanation. According to disruption theory, Uber is an outlier, and we do not have a universal way to account for such atypical outcomes. In Uber’s case, we believe that the regulated nature of the taxi business is a large part of the answer. Market entry and prices are closely controlled in many jurisdictions. Consequently, taxi companies have rarely innovated. Individual drivers have few ways to innovate, except to defect to Uber. So Uber is in a unique situation relative to taxis: It can offer better quality and the competition will find it hard to respond, at least in the short term.

The subtext here is perhaps that Uber are not set yet but they, sensibly, offer no clear opinion on that.

There is, of course, deep truth to the notion that regulated companies are not really good companies and so the usual fear of a market response to competition isn’t likely to arise. A regulatory or political response is another matter and Uber are definitely fighting that battle.

However, to see if we can unpack this, let’s imagine a situation where the taxi companies were good and were good for the reasons they believe they are good: they are safer — offering background checks, driver training and a brand to go with it. These are currently supposedly mandated by regulation but this could easily have been a successful franchise model.

So what does Uber do to the hypothetical franchise model? Well, the mobile app is one thing but it is hard to think of that as anything but a blanket improvement. But what Christensen, Raynor and McDonald do not talk about is the rating system and the wealth of information Uber collects regarding driver performance. What technology has allowed is for Uber to recruit drivers without a ‘franchise fee’ and bet on ex post and on-going ratings to take care of safety.

But Uber doesn’t have an easy time of this, especially with core taxi and limo customers. Even without the franchise model, I have heard many people claim that they won’t use UberX precisely because they can’t trust the drivers. Add to that press that can sometimes find examples to back it up and you have a situation where characteristic (1) of a disruptive innovation, especially initially, was satisfied: customers did not consider UberX as safe as traditional forms of transportation. But critically, for younger people, taxis were expensive and so UberX (and Lyft) came in at the low-end and served the under-served. Just ask my teenage kids who believe they will never have a reason to drive. Uber, to them, is freedom.

Now Uber may not be done disrupting yet. Many speculate that they could up-end models of car ownership which will lead them to disrupt traditional car businesses. But even aside from that, there is a case to be made that taxi companies, for many, many years, dismissed the notion that someone could enter and earn customer trust easily and so lagged on general innovations that may have closed that entry point: in this case, mobile apps. But they did not and, for that reason, I am comfortable in adding them to the disruption bin. Yes, Uber is now great but, initially, and maybe for a surprisingly short period of time, it wasn’t. We should not lose sight of that in understanding how all this came to be.

Nonetheless, for those interested, I do recommend the Christensen, Raynor and McDonald piece as it does reflect their current state of thinking and is far more nuanced than other treatments I have read.

Originally published on Wordpress