What is Disruptive Innovation?

The term ‘disruptive innovation’ has been around for more than two decades, and the best known example of this term is Uber. An app called HWY Pro has recently been launched for trucking companies to save owner-operators time and make the scheduling process more efficient. Bill Busbice, one of the founders of HWY Pro describes the app as “similar to, but very different from Uber.”

Disruptive innovation was initially introduced as a powerful way of thinking about innovation-driven growth. Many leaders of small, entrepreneurial companies, as well as executives at large, well-established organizations, including Intel, Southern New Hampshire University, and Salesforce.com, use disruptive innovation as a guide to improve their company’s operations.

The term is however often used to describe any situation in which an industry is shaken up. That usage is unfortunately extensive and ultimately undermines the theory’s usefulness.

This post explores the basic tenets of disruptive innovation and examines whether they apply to Uber. In its original form, ‘Disruption’ is used to describe a process that is used by a small company with fewer resources to challenge established businesses successfully. Big companies often focus on improving their products and services for the most demanding and most profitable customers. During this process, they exceed the needs of some segments and ignore the needs of others.

Entrants into the market disrupt it by successfully targeting those segments that are overlooked, thus gaining a foothold by delivering functionality that is more suitable, often at a lower price. As the market leaders chase higher profitability in more demanding segments, they tend not to respond vigorously. Entrants then move upmarket, delivering the improved performance that incumbents’ mainstream customers require, at the same time preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.

Is Uber a Disruptive Innovation?

Although Uber is clearly transforming the taxi business across the world, the question is whether it is disrupting the taxi business. Although Uber is almost always described as disruptive, based on the definition given above, it is not.

There are two reasons why the label doesn’t fit.

Disruptive innovations start in new or low end market footholds.

Disruptive innovations are possible because they begin in two types of markets that big companies overlook:

1. New-market footholds. This happens when disrupters create a market where one didn’t exist before. One example of this would be when photocopying technology started. Xerox targeted large corporations and charged high prices to provide those customers with the performance they needed. This priced small customers out of the market and they had to use mimeograph machines or carbon paper. New challengers then introduced personal copiers at affordable prices and a new market was created. Personal photocopier companies then gradually built up a major position in the mainstream photocopier market, eventually taking business away from Xerox.
2. Low-end footholds. These exist because incumbents focus on providing their most profitable and demanding customers with better products and services, and pay less attention to less-demanding customers. This creates an opportunity for a disrupter to focus on providing those low-end customers with products that fulfill their “lesser” needs.

Disruptive innovation always starts from one of those two footholds, and Uber did not start in either one.

Uber did not target non-consumers – people who found the existing alternatives so inconvenient or expensive that they took public transit or drove themselves. Uber was launched in a well-served taxi market (San Francisco), and their customers were people already hiring rides.

The company also did not find a low-end opportunity: That would imply that taxi service providers had overshot the needs of a material number of customers by making cabs too plentiful, too easy to use, and too clean.

Uber has however increased total demand by developing a better, less-expensive solution to a widespread customer need. Disrupters do however start by appealing to low-end or unserved consumers and then taking on the mainstream market. Uber has gone the opposite route by first building a position in the mainstream market and then appealing to overlooked segments.

Disruptive innovations only attract mainstream customers when quality meets their standards

Disruption theory distinguishes between disruptive innovations and sustaining innovations that make good products better in the eyes of an incumbent’s existing customers. The improvements all enable firms to sell more products to their most profitable customers.

On the other hand, disruptive innovations are initially seen as inferior by many of an incumbent’s customers. Customers are typically not willing to try the new offering simply because it is less expensive. They would rather wait until its quality rises enough to satisfy them and then adopt the new product and at its lower price.

Uber’s strategy is clearly sustaining innovations, which means it can’t be defined as disruptive innovations. Uber’s service has never been inferior to existing taxis – many would in fact say it is better.

Why Worry about Getting It Right?

You might be wondering why it matters which words are used to describe Uber. Applying the disruptive theory correctly is essential to realizing its benefits. Small competitors nibbling away at the edges of your business may well be ignored, unless they are on a disruptive path. If this is the case they are a potentially mortal threat that should be recognized and acted on.