Disruptive Innovation

Posted on December 4, 2016 by ATB Chartered Accountants

Disruption is a process where a small company with few resources is able to successfully challenge an industry giant. But how does this work? Big companies have a focus on sustaining innovation, where they develop upgrades and various new features, but they end up losing their core customers through focusing on the more profitable segment who want the newest and best. The disrupters are able to provide those overlooked customers the simpler products they want, usually at a lower price. These disrupters grow their business by improving their products, and gain market share fairly quickly before the larger companies even realise it is happening. When the mainstream market start adopting the smaller company’s offerings, disruption has occurred.

The theory of disruptive innovation has become a victim of its own success as many people who use the term have misunderstood and misapplied its core concepts. Too frequently, disruptive innovation is used as an umbrella term to describe any industry shakeup where previously successful players fall. This is a problem because different types of innovation need different strategies. If we continue to use disruptive innovation as an umbrella term, managers run the risk of using the wrong innovative strategy for their context and reduce their chances of success, undermining the usefulness of the theory.

Is Uber a Disrupter?

Since its foundation in 2009, Uber has experienced huge levels of growth, with an estimated total value of US$50 billion. With operations in hundreds of cities in 60 different countries, with plans of expansion, Uber is clearly transforming the taxi business. But, is it disrupting?

According to the disruptive innovation theory, the answer is no. The strategies Uber have used to increase its market share to the level it is currently at today does not qualify the company to be called disruptive, even though that is the term most commonly used to describe it.

Disruptive innovations are created in low-end or new-market footholds

Disruptive innovations are conceived in two types of markets that are overlooked by market leaders. Low-end footholds occur when market leaders abandon the mainstream market to provide for the most profitable, demanding customers. Disrupters are able to gain footing into the marketplace by providing these consumers with a product that is good enough to meet their needs. A new-market foothold occurs when disrupters are able to create a market where there was none.

Uber did not originate in either of these two markets. Taxi services did not innovate their product to reach higher-end customers, leaving the mainstream behind, and Uber did not create a new market. While they did experience a fairly quick increase in market share, this is not surprising given they developed a cheaper and better solution to meet the mainstream’s needs.

Disruptive innovations don’t catch on with mainstream customers until quality improves

Sustaining innovations are innovators that product good products that are seen to be better in the eyes of a market leaders existing customers, and enable businesses to sell more products to the most profitable consumers. On the other hand, disruptive innovations are usually considered to be inferior by most of the market leader’s customers, and so the mainstream isn’t reached until their market share is big enough to warrant switching to a new offering.

Though these definitions, Uber is a sustaining innovator, not a disruptive innovator. Uber have developed a reliable, cost effective and convenient ride sharing service. They are competitive in their pricing in comparison to taxis, and high standards are ensured by their rating system. Uber has never been rated as inferior to taxis, even in the startup phase.

Why does this matter?

Uber has shown that identifying a true disruptive innovation is difficult. It is important to consider the theory when making these calls though, because different strategies are used when your business is facing a new competitor whom is nibbling at your business, compared to a disrupter who could potentially dismantle it all.

What a disrupting view can reveal

The disruptive theory predicts that when a new market entrant tackles the market leaders head on, the leaders will accelerate their innovations to protect themselves. This allows them to beat back the new entrant by offering better products at comparable prices, or they will acquire the firm.

Given this prediction, we can further understand that Uber is not a disrupter to the taxi service industry. A potential reason for this is that in most countries, the taxi industry is regulated heavily, and so are rarely innovated. This gives Uber a unique positioning in the market as it offers high quality where the competition are struggling to respond.

While they may not be a disrupter to taxis, the limousine industry is a different story. UberBlack and UberLux provide customers with the opportunity to select more luxurious cars for their journeys, at a higher price than their standard service, however cheaper than the ‘black car’ business competitors. As you are unable to reserve a car in advance, this offering does not currently match the market leaders of limousines, however is does have a low-end foot in the market by providing a less convenient option for a lower price. If they are able to find a way to gain this convenience through pre-booking, Uber will be in a position to move into the mainstream market and become a disrupter.