Confronting a new-market disruption Part 3 — Car2Go

written by Thomas Bartman, Senior Researcher, Forum for Growth & Innovation

In my first post in this 3-part series, I presented an overview of New-Market Disruption. In my second post, I explained the mistakes managers make and what they should do instead. In this post, I’m going to share a successful example with you, Daimler’s Car2Go car sharing business.

Most of you are familiar with Zipcar, the industry leader in car sharing that was founded in 2000 to offer an alternative to car ownership for urban residents. Zipcar didn’t directly compete with either car manufacturers or traditional car rental companies but it grew quickly thanks to its convenience and affordability.

Zipcar offers hourly rentals that are reserved in advance on the company’s website or mobile app. Zipcars are parked at fixed locations throughout urban areas, and at high population density locations like corporate offices and college campus. Users drive the vehicle for as long as they have reserved and return it to its assigned parking space for the next user. Users pay an annual membership fee and an hourly rental fee that includes all potential costs including gas and insurance.

Witnessing Zipcar’s expansion, the traditional car rental companies all launched competing offerings. In 2008, Hertz launched Hertz Connect and Enterprise launched WeCar. Both companies took very similar approaches to Zipcar, essentially copying its model and leveraging their existing brands, fleets and technology systems. The results have been disappointing. According to market research firm IBIS, as of March 2015, Zipcar controlled almost 30% of the US market while Hertz controlled 9.5% and Enterprise just 5.4%. Similarly indicative, both Hertz and Enterprise have re-branded and re-launched their car sharing businesses at least once. Avis may have taken the best approach, acquiring Zipcar in 2013 for $500 million in cash.

While the traditional companies copied Zipcar without seeing many positive results, German automotive giant Daimler witnessed the rise of car sharing and the threat it poses to traditional car ownership and developed a truly unique response. In 2008, Daimler began developing a unique car sharing alternative called Car2Go, in Ulm, Germany.

Car2Go operates a very different model than Zipcar. It initially offered only Smart Fortwo vehicles (although it added Mercedes B Class cars to its fleet as part of a new, premium service called Car2Go Black in 2014). Daimler owns Smart, so it’s unsurprising that they would select vehicles from the corporate parent but Smart cars also offer unique benefits themselves. They are developed for urban environments with small formats that are easy to park and offer good fuel economy.

Easy parking is important because Car2Go operates a “roving” model where its cars have no fixed spaces but can be parked anywhere in their home territory at the end of a trip.

This means that every rental is one-way and users don’t book in advance but instead locate available vehicles on their smartphones and have no claim to a vehicle until they drive off in it. Also unlike Zipcar, Car2Go charges users by the minute (although it allows for hourly or daily rentals, too).

Car2Go didn’t attempt to fight Zipcar head-to-head. Geographically, it focused on Europe, where Zipcar is not strong, first and in expanding to the US and markets where Zipcar is present, initially targeted smaller cities with lower population densities that were less attractive to Zipcar because of its need for high densities. Car2Go was also unapologetic about its model; it purposely chose not to offer services for consumers that require advance registration or more than 2 seats per vehicle. Doing this meant that Car2Go avoided direct competition with Zipcar and the traditional rental car companies and created a completely new market.

So, what’s become of Car2Go? It’s still small in the United States (less than 5% market share according to IBIS) but it’s growing rapidly and its strength in Europe has made it the world’s largest car sharing company.

Conclusion

The most important thing to take away from the example of Car2Go is the importance of creating a new, disruptive business to disrupt the disruptor. Daimler recognized that car sharing could have significant negative impacts for its business and it used that understanding to create a business that leveraged corporate strengths where appropriate but created a fundamentally new business model that is disruptive to all competitors in addition to itself.

If you face competition from a Disruptive entrant in a new market, remember that they are the incumbent in their market and you will be the entrant if you choose to enter their market. Attempting to copy their model and out-compete them with your larger size, greater experience and significant resources will predictably lead to failure.

Buying the entrant is one option, if it’s available, but will be very expensive, if you can afford it all. The best option is to develop your own disruptive business.

Now I ask for your help: have you seen other examples of this?

Do you know if examples where this isn’t the case?

If so, please leave them in the comments so we can study them to learn more!