Uber and Disruptive Innovation

(This post was originally posted in Portuguese, at 21212 Academy.)

I recently stumbled upon a link to a Harvard Business Review (@harvardbiz) article that discussed Uber’s recent $ 1.2 bn on $ 40 bn fundraising. Apart from being highly skeptical about such a valuation level (but I’ll leave that to a future post,) I was impressed by the misuse of the disruptive innovation term by such a famous magazine. In the article, the author says

“Uber represents a true disruptive innovation. A model of delivering a service where the market entrant is making a previously inaccessible service cheaper and more accessible.”

Curiously, the term disruptive innovation was coined by Clayton Christensen, himself a Harvard Business School professor.

The fact is that the HBR author is not alone: VCs, entrepreneurs, and the ever-growing startup media all use the term incorrectly in their buzz word repertoire. It’s probably the most misused concept in all startup world. And I ‘ll show you why.

The term disruptive innovation was created by the aforementioned Clayton Christensen, and shown to the world in a book called The Innovator’s Dilemma. He was concerned with a specific type of innovation that could threaten large, Fortune 500 companies (so think more Michael Porter - and less Peter Thiel - kind of strategy) because it tricked managers into the wrong decisions (therefore the Dilemma, which is a key part of the concept.) In disruptive innovation situations, companies - their managers - rationally and consciously ignore disruptive innovations that sound very silly, because the customers they cater to would never consider buying such products with their limited functionalities. But in the process, these sub-markets turn into much greater markets, larger than the original ones, and the disrupters in turn trump the incumbents in size, profitability, and technology.

So bear with me: disruptive innovations insert simplified versions of products that have less functionality and that don’t appeal to the current users of the products.

Let’s think hypothetically: Imagine a hardware company was to create a smartphone that only works with WhatsApp and Facebook. Let’s call it dumbphone among ourselves. Now imagine what Apple and Samsung executives would think when they read it on TechCrunch: “Wtf? These guys are craaazzzyyy. Our customers would NEVER want such a piece of crap. They want more, not less! We are working on smartphones that project 4D experiences directly into the human brain. And what are the margins on these pieces of crap? Not even close to our 300% markup, I bet!” All that is true. But somewhere in the depths of India, or Brazil (did you know that Telecom Italia has WhatsApp-centric carrier plans in Brazil? Baam!), the phone catches on fire with the poor, eager-to-communicate-cheaply population. Now imagine the dumbphone company, Grape, starts selling tens of billions of dollars in devices a year, and pouring it all on R&D, until it has a smartphone that beats Apple’s and Samsung’s. Got the picture?

Apple was kind of a disruptive innovation. When it created its first Macs, there was no market for such a device. They were expensive, almost useless calculators, which no one could operate, or even assemble, for that matter. Hobbyist material. So IBM just laughed about it. They could never imagine its application for the rich enterprise market to which IBM sold its huge, profitable, multi-million dollar behemoths of mainframes. So IBM’s rational decision was to step away, and leave Apple alone selling their crappy toys. But in the process, Apple got better and better at it, until it had a useful device that could be sold to each and every household in the USA. By then, IBM had lost the wave, and had to hustle to catch-up, almost going bankrupt in the process. IBM’s executives did what seemed like the right thing for rational adults back then: refrain from entering a small, niche market, with limited profitability, that would consume tons of Capex and yield no relevant sales. But it all changed in their faces, and that’s why Christensen called the book The Innovator’s Dilemma. Because it’s actually a dilemma for large companies.

That said, please stop saying out loud that Oculus Rift may be the next disruptive innovation. Or Uber, for that matter. Uber may offer a cheaper service for its customers, but it’s not a cheaper service of limited functionality, that poses a decision dilemma to incumbents. It offers a more complete functionality set (faster, on demand, and more transparent transport services) for a cheaper price tag, because it bypasses a monopoly of state-regulated services called taxis and integrates these new suppliers into a high-tech, sophisticated geolocation-based platform that connects them to customers.

There is no dilemma. There is no disruptive innovation.

—Kiko
@Franciscohmello
www.kikomello.com
Author of Hacking the Startup Investor Pitch and Startupedia

 
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