uber-vs-taxi-title-cardIt 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.

4 Responses to Is Uber disruptive?

  1. […] Is Uber disruptive? – Digitopoly […]

  2. Hubert Horan says:

    The arcane, academic distinctions made here (putting disruptive and sustaining innovations in separate categories given the different nature of the threat to incumbents; noting that Uber has not created a new product or market but has merely entered an existing one) is fine, but both Gans and the HBR fundamentally misrepresent Uber economics. Both say that Uber’s success to date results from developing “a better, less expensive solution to a widespread customer need”. But they ignore the fact the Uber’s lower prices and improved service are entirely due to massive subsidies (with revenues covering less than half of actual costs); Yellow Cab could provide cleaner cabs with more courteous drivers and have more vehicles available on Saturday night if fares only had to cover half of actual costs. Uber has not introduced any innovations that (even assuming future growth) would allow Uber and its “independent” drivers to sustainably underprice and out serve existing operators and earn a return on capital. And more critically, there is no basis for believing that the Uber+driver model is so overwhelmingly, staggeringly more efficient than existing incumbents that Uber will inevitably drive them all out of business, and achieve the industry dominance, the industry outcome that is implicitly built into Uber’s $50 billion valuation. Total Uber costs are actually higher than traditional providers as it has significantly higher vehicle ownership, financing, licensing and maintenance costs, disadvantages that could not possibly be offset by the value of its app. Taxi/limo scale economies have always been very limited (and Uber eschews the fleet economies that Yellow Cab enjoys) so there is no reason to believe that growth will convert this cost disadvantage into a huge, sustainable advantage.
    Uber is not an inexplicable outlier. If you enter the core of an existing market, and haven’t developed a totally new product or market (as this post and the HBR article acknowledge) you can only overwhelm existing providers if you have overwhelming product/efficiency advantages. Uber does not have these, and will never have these. Smartphone ordering is not a sustainable, overwhelming advantage. Surge Pricing is not a sustainable, overwhelming advantage (peak-off-peak pricing is used in many urban transport contexts but has little impact on poor asset utilization that results from extreme demand peaking). Because these pieces (like most of the nonsense written about Uber) completely ignores competitive taxi economics, they wander off in search of some magical explanation for Uber’s growth. No, it can’t be explained by their driver rating system. No it can’t be explained by the regulation of traditional operators—aside from smartphone apps, what major innovations have cab companies missed? Given razor thin margins and bare minimum expenditures on drivers and cleanliness, where is the waste and inefficiency that new entrants like Uber can take advantage of?
    Efforts to dissect and categorize different offensive/defensive market strategies are fine, but they are totally useless unless you start with a solid analysis of competitive industry economics. How many posts and articles have you seen about Uber? Thousands at this point? How many started by comparing the actual production costs or Uber versus Yellow Cab? How many laid out actual evidence of industry economic drivers (scale economies, network effects, demand peaking, market segmentation)? How many were written by anyone who had actually looked at the economics of urban transport?

  3. I see a misconception: systematic combination of 2 words, ‘disruptive’ and ‘innovation’. We also, often unconsciously, associate ‘innovation’ with ‘technology’, or with something engineers do. It is simplistic and reductive.

    Is it a bit of cognitive dissonance, because ‘hard sciences’ are more comforting ? Because they seem easier to research, they eventually follow rules, principles and theorems, so we get the false idea that at some stage, we will control the disruption ?

    Anyway, such misconception narrows the thinking. It is a trap even for some of our academics and thought leaders.

    In the case of Uber, ‘disruptive’ would rather be associated with ‘business model’, as the client becomes an actor (he rates), and Uber is a new comer in the original taxi-customer relationship & money flow. The small (yet brilliant) piece of technology that allows mobile booking-rating-paying does not explain it all, it is just an appetizer. Meal is beyond.

    Good luck with your book.

  4. rick gann says:

    Interesting article

    What I cannot reconcile is that there is a huge issue everyone ignores – the taxi license

    Similar to the electric vehicle myth which says that because electricity is much cheaper than petrol EVs will end up disrupting the market. The reality is that cars, whether they are petrol or electric, run on roads and the bulk of the petrol pump price goes into paying for them. Therefore if market penetration ever became significant for EVs the advantage would be have to be taxed away, you can’t use the road for free.

    The taxi industry pays hundreds of thousands of dollars per license which is the only competitive advantage Uber has. That revenue has to be recovered somehow – maybe we are all happy to pay tax dollars to subsidise Uber? I suspect the government will work out a way of recovering the license fee from Uber drivers over time and people would be happy to dob in an Uber driver if it saves them taxes.

    In addition – Uber is just like Airbnb couch renting both for the user and provider. Uber is just an ordinary entrant in a very unattractive market like nearly all entrants into online person to person trades whether for hire or sale. Uber is a bit like cornering the street theatre market – no cigar chomping there.

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