Why Clayton Christensen Is Wrong About Uber And Disruptive Innovation

Silicon Valley has disrupted disruptive innovation, and Clayton Christensen isn’t happy about it.

Christensen vaulted to rock-star status in the tech world in 1995 when he introduced the theory of disruptive innovation in the Harvard Business Review (HBR). Two years later, he published his bestselling book, The Innovator’s Dilemma. His work was widely praised, including glowing endorsements from Malcolm Gladwell, Michael Bloomberg and Steve Jobs. And rightly so. The concept of disruptive innovation was a hugely important breakthrough in understanding how and why major innovations succeed.

Yet, two decades after Christensen published his original article, the idea of disruptive innovation has achieved almost meme-like status in Silicon Valley — and lost much of its original meaning in the process. Today, “disruption” is used to justify any and every innovation coming out of the tech sector.

Dismayed by this misuse of his work, Christensen recently wrote a reply to his critics, titled “What Is Disruptive Innovation?” Given the overuse that “disruption” has endured over the last few years, his article (co-authored by Michael E. Raynor and Rory McDonald) was a needed reset around how the theory of disruptive innovation should be applied — and where it shouldn’t be.

To prove his point, Christensen uses Uber as an example. He suggests that while Uber is innovative, it’s not a disruptive innovation. Instead, it’s a sustaining innovation, meaning that Uber represents only an incremental improvement on the existing taxi industry.

That’s where Christensen gets it wrong. However, he’s wrong in a way that is instructive and unfortunately common: He misunderstands platform businesses, like Uber (and Apple, which we’ll get to in a second), and how they work.

UberX disrupted the taxi market

According to Christensen’s theory, a “disruptive” business has to either originate in a low-end market and move upstream to higher value markets, or it has to create a “new market foothold,” meaning it creates a new market where none existed.

“A disruptive innovation, by definition, starts from one of those two footholds,” Christensen says. According to his HBR article, Uber doesn’t meet either of these criteria. But he’s wrong on both counts.

First, Uber clearly took off from a low-market foothold.

Uber started its platform with on-demand black car services. This was a sustaining innovation in the higher-end black cab and limousine market. Uber essentially put a new interface on top of an existing market.

In his HBR piece, Christensen places a lot of emphasis on where Uber originated. However, this emphasis isn’t consistently applied across other examples he uses in his previous work — Hitachi, Sony and Quantum Corporation, among a number of others, are companies that introduced products Christensen has cited in his work as examples of disruptive innovation, even though these products weren’t their first. Likewise, Apple, which Christensen mentions in his recent HBR piece, didn’t start with the iPhone.

In that light, it seems unfair to apply this restriction as a way to dismiss Uber, given that the startup didn’t truly take off — or start to compete with regular taxis — until it introduced UberX.

UberX, which Christensen ignores in his piece, is a classic low-end market disruption. Taxis are tightly regulated, and drivers face strict requirements. In most cities, drivers must obtain a special operator’s license and medallion in order to act as a taxi. There also are restrictions on the cars they can drive.

In contrast, UberX started down-market from traditional taxis by allowing anyone with a car to drive other people around for money. No special knowledge or certification was required.

Uber was able to move upstream to attack taxis directly.

As a result, UberX wasn’t initially very competitive with taxis for most passengers. UberX cost more than a taxi and took a long time to arrive, and drivers weren’t required to have extensive knowledge of how to navigate the city. UberX also lacked many of the safety precautions and regulations that traditional taxis used to protect both drivers and passengers. (UberX eventually added a $1 “safe ride” fee to improve its safety standards.) In short, the quality of UberX was lower than traditional taxis.

However, as Uber’s network grew in each city, ride costs fell, wait times declined and its rating system helped keep driver quality relatively consistent. With this improvement in service quality, Uber was able to move upstream to attack taxis directly with UberX — a classic disruptive move.

In New York City, this shift happened very obviously in the summer of 2014, around the same time Uber launched a nearly ubiquitous marketing campaign around the city. The ads all declared that UberX rides were now cheaper than taxis. Today, in most major cities, UberX is cheaper, faster and better quality than a taxi. But this wasn’t always true, which is why the service took a while to catch on and grow its network.

This progression is perfectly in line with Christensen’s original disruption theory. “Disruptive innovations don’t catch on with mainstream customers until quality catches up to their standards,” he says in the recent HBR article. UberX started from a low-market foothold and moved upstream to disrupt the taxi market. Only once UberX improved in quality did it catch on with mainstream consumers.

Platforms create new markets

So Uber started down-market and moved upstream, a clear example of low-end market disruption. Now let’s see whether Uber also qualifies as a new market foothold.

Christensen added the idea of new market footholds to his original theory to explain Apple’s success. Multiple times over the last decade, Christensen declared his pessimism about the prospects for Apple’s products, including the iPhone. For example, in 2007, he told Bloomberg Businessweek that “the prediction of the theory would be that Apple won’t succeed with the iPhone,” adding, “History speaks pretty loudly on that.” He was widely criticized in the tech blogosphere for getting this wrong.

Now, Apple’s iPhone was disruptive in the original sense, something Christensen still misses. When it first launched, the iPhone had shorter battery life, used way more data and was much less secure than the BlackBerry, then the leading smartphone device.

The theory of disruptive innovation needs to account for the differences between linear and platform businesses.

By all the traditional industry metrics, the iPhone was a worse product than the BlackBerry. In fact, this was the initial reaction of BlackBerry co-CEOs Jim Balsillie and Mike Lazaridis to the announcement of the iPhone: No one would want it because it was an inferior product.

The BlackBerry also was primarily an enterprise product. Apple started down-market with consumers before moving upstream to take over the enterprise market, too. The iPhone’s popularity forced employers to create a “Bring Your Own Device” (BYOD) Policy that allowed employees to use any smartphone they wanted. This is another example of classic low-end disruption.

However, in an attempt to improve disruption theory to account for Apple, Christensen added the concept of new market footholds. In the HBR piece, he uses the iPhone as an example of this type of disruption. By building an entirely new market that connected app developers with iPhone owners, Apple built a platform that disrupted the smartphone industry. Christensen is right here. But he then compares Uber to Apple as a way to demonstrate how the iPhone is disruptive while Uber is not.

 Yet, as we hinted at earlier, Uber clearly created a new market in transportation with UberX. UberX allows anyone with a car and a license to drive a car for hire. It unlocked an entirely new source of supply that created a new market within for-hire transportation. It also brought into the market many consumers who wouldn’t regularly use traditional taxis. In many cities, the market that Uber created is several times the size of the original taxi market. This is new market disruption in action.

Why Christensen got it wrong

Uber plainly seems to meet both criteria for Christensen’s disruptive innovation theory. So why does he get it wrong?

Looking at the origin of disruption theory and the companies Christensen continues to get wrong, there’s a clear pattern.

The theory applies well to old-school product and services businesses — what we call “linear” businesses because they are defined by a linear supply chain where value and information flow primarily in one direction (from the supplier to the consumer).

It isn’t surprising that the theory works well for linear businesses, as it was originally based on Christensen’s research into shifts into linear companies such as disk-drive manufacturers and steel mills. Almost all the businesses in his original HBR article and in his books are linear businesses, as well.

But when it comes to platform businesses like Uber and Apple, disruption theory breaks down.

This is because platforms operate in a different way than linear businesses. Rather than building and refining a supply chain, a platform creates and grows a network. This network is where the platform harnesses its supply — think Uber and its drivers and the iPhone and app developers. In other words, a platform doesn’t own or control its supply the way a linear business does.

Today, “disruption” is used to justify any and every innovation coming out of the tech sector.

Why does this difference matter? Christensen’s theory only looks at customers and ignores the supply side. In the words of his co-author Michael Raynor, “the theory of disruptive innovation is a demand-side theory of customer dependence and competitive reaction in product markets, not a supply-side theory…Whether or not [Uber] is following a disruptive path to success is a function of the customers it serves [emphasis added].” Christensen and company exclude Uber based on this distinction.

While this approach worked for linear businesses, applying it to Uber shows a misunderstanding of how platforms work. Why? Because linear businesses own the supply side, they typically have one distinct customer group: the people (or businesses) to whom they sell their products.

But platform businesses are different. A platform has at least two distinct customer groups: its consumers and producers.

Uber is an excellent case in point. The company expends considerable resources to market to potential drivers and retain existing ones. In this, Uber is very different from the linear businesses on which disruption theory was based. For a platform like Uber, its producers are a customer group, too.

Christensen hints at this difference in his use of Apple as an example, but doesn’t apply it equally to Uber. “By building a facilitated network connecting application developers with phone users, Apple changed the game,” Christensen says.

In other words, one of the reasons Apple was so disruptive was that it added a second customer group: app developers. The same is true with Uber and drivers. Treating these examples as equivalent to changing a traditional, linear supply chain –– as Christensen does with Uber — shows a lack of understanding of how platform businesses work.

Platform disruption

The difference between linear and platform businesses has important implications for where you should look for disruptive competitors.

Uber started in black cabs before adding UberX and disrupting the taxi market. Snapchat started in peer-to-peer messaging before adding Stories, a content platform that’s starting to compete with traditional content and advertising outlets.

There are many more examples, including Airbnb, Alibaba, Etsy, Facebook, Google, Instagram, Pinterest, WeChat and YouTube.

Once a platform has established a strong network around its original core transaction, it can easily tap into that network to unlock new customer groups and create new markets. Networks are extensible in a way that traditional supply chains are not.

In fact, most platforms create new markets. They succeed not by building sustaining innovations but by introducing disruptive innovations that build new networks, communities and marketplaces.

Going by Christensen’s theory and accounting for the nuances of how platforms work, almost all successful platforms are disruptive. That’s not surprising, given that you usually have an entirely new business model replacing the old, linear one.

But what does this mean for the theory of disruptive innovation? Well, it’s time to update it to account for platforms.

To maintain its usefulness, the theory of disruptive innovation needs to account for the differences between linear and platform businesses, especially because platforms are the dominant business model of the 21st century. We suggest using the term “platform disruption” to clarify the distinction from the original theory.

As Uber did, a platform can shift its network within an industry to introduce a new, disruptive innovation. Or a platform can disrupt even seemingly unrelated industries, as Google did with Android, by building new transactions off its existing network. This ability to shift between industries means that a platform that doesn’t seem disruptive today can suddenly become a disruptive competitor tomorrow.

And unlike disruptive linear businesses, which typically attack from a weaker competitive position, platforms can do it from a position of competitive strength. In other words, these businesses are far more dangerous for existing competitors than the original theory of disruptive innovation suggests.

Originally appeared on Techcrunch

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