Is Uber An Example Of Disruptive Innovation?
Disruptive innovation has been a hot topic of discussion in the last few years with the rise of technology companies who have reshaped long established industries. Is every example of a successful billion dollar startup in the tech space considered “disruptive” in the business sense of that term? Michael Raynor, who co-wrote a book on disruptive innovation with Clayton Christensen, shed some light on this basic question in a short conversation on the a16z.com podcast.
The term “disruption” has been used far too frequently and with little precision, as far as the original disruption theory is concerned. Disruption, as defined in the dictionary, describes a negative event that slows down and impedes progress or success. Contrary to this basic definition, the term has been used in relation to companies who have succeeded, and in the process brought tremendous value to the markets in which they operate, albeit to the detriment of some of their competitors. But not all success in an established market through technology falls in this category.
Disruption theory was first defined by Clayton Christensen in his “Innovator’s Dilemma” book, published in 1997. It describes the phenomenon where small, under-resourced start-ups are able to successfully enter markets that are dominated by established and well managed incumbents. Disruptors start in niche segments of the market that incumbents are not motivated to serve, either in the low end or in a completely new segment, bringing goods or services to people who have had no access to them up to that point. In order to be able to serve these niche markets profitably, a disruptor must have a fundamentally new business model; the existing models employed by the incumbents obviously leave part of the market underserved. A critical piece to this process is an enabling technology, which allows the new company to enter the established markets dominated by strong incumbents. By the time a disruptive startup enters the mainstream market their business model, enabled by technology, has allowed them to break the trade-offs that the incumbents depend upon, the ones that have prevented them from serving this new market to start with.
The speed with which disruptive innovation happens in a market depends on the technology employed. In the example of steel production, it may take decades for a company to achieve success through disruptive innovation. In the modern tech space however, the rate of innovation, punctuated by Moore’s law, is much higher. The personal computer, which was a disruptor to the mainframes before it, achieved success quickly because its enabling technology, the microprocessor, saw speeds double roughly every two years.
So is Uber an example of disruptive innovation? Looking at its market, Uber has not been serving new customers who had no access to car rides before. On the contrary, a study by FiveThirtyEight of Uber v.s. taxi cab pickups in NYC showed that the number of Uber rides were offset almost perfectly by the number of taxi rides lost. Uber is thus not selling to a niche market, which the incumbent taxi cab companies just can’t be bothered to serve. They are not providing a service to people who find a cab ride hard to get, or prohibitively expensive. Uber has been able to deliver a slightly cheaper, more convenient, cleaner ride to the same person who would otherwise get a taxi. So while the impact of Uber on the market has certainly been disruptive for the taxi companies in large cities, it falls clearly outside of the disruptive innovation category. Its impact on the industry may be revolutionary, but it cannot be considered “disruptive innovation”. And the reason that this matters is that following Uber’s example would be significantly different (and much harder) than using the prescriptive power of disruption theory.
What Uber actually accomplished is to “build a better mouse trap.” A more fitting description for them would be “a full-stack startup”, a term coined by Chris Dixon, to describe a company that builds a better end-to-end solution for a specific market. Instead of just building a cab hailing smartphone app and trying to sell it to the incumbent companies, their vertically integrated solution allows them to control customer experience, and makes it very hard for the taxi companies to replicate so many interlocking pieces.
