Case Study: Vectors of Disruption – the Uber story

Case Study: Vectors of Disruption – the Uber story

by Marc Dowd, May 27, 2015

I recently listened to/read this article about how the value of taxi driver medallions is falling away to nothing from all-time highs of $1m in 2014. Essentially the medallions that once symbolized the right to be an accredited taxi driver are becoming worthless because there is no longer a value in being accredited.

When I was training to be a Psychotherapist I remember the dean of the school saying that the reasons that there are degree courses for therapists is not in order to teach people how to be empathetic: either you have what it takes (pdf doc) or you don’t. The goal of approved accreditation, she claimed, was to be able to weed out and “fail” those people who would not be good therapists. The same used to be true of taxi drivers – at least in places like London where the training was intense and “the knowledge” hard won (two years or more travelling around learning the topology of the city).

So what is it that has disrupted being a taxi driver to the point where it is no longer seen as a good idea to become accredited and earn your medallion? The obvious answer to anyone who watches the news is the rise of Uber but actually it is more than that, and I believe that there are a number of factors that come together to create disruption. I call these the “vectors of disruption”, and I have identified 38 of them so far.

Adopting one or two vectors of disruption is what I would call organic change. A few more and you have innovation.

The taxi industry has been disrupted by 11 vectors of disruption.

The first vector of disruption; in-car GPS became available quite a few years ago – I remember sitting in a taxi in Germany and seeing the first time that the driver was using a GPS system in order to find his way to my hotel. At that point it struck me that the taxi driver’s “job to be done” had just been de-skilled. Anybody could do it with a relatively small investment in technology. So how come thatthat was not the point of disruption for taxi drivers?

Well, getting there is only part of the problem, albeit a very important part.

Another part of being a taxi driver is connecting with potential clients. This has traditionally been done at accredited taxi ranks (where one has to be accredited to pick up a client) or via a taxi company, which act as a dispatchers and aggregators of demand. That is the way it has been done ever since telecommunications enabled taxis to be “called” to a client.

Uber of course bases its disruptive business model on being the dispatcher, and on performing all the other functions of taxi companies, such as being the provider of trust, provider of payment mechanism etc. The difference is that Uber uses the disruptive effects of the network that we call the mobile internet to become the dispatcher for all vehicles for hire for all customers while reducing the overhead for both via economies of scale. There is the second vector of disruption – the network effect which potentially removes all other taxi companies from the equation by making Uber available to everyone. With this accessibility in place Uber can leverage other benefits for the clients and the drivers and reap the rewards.

The pricing model used by Uber is the so called surge pricing model which varies the cost of the journey dynamically, so that the cost reflects the true supply and demand situation in real time – more expensive if there are fewer taxis than clients and cheaper if the balance swings the other way – and this is the third vector of disruption. It is pricing based on real time data, enacted in real time. Without surge pricing one wonders if so many drivers would have abandoned the taxi companies they had always used – it seems, they don’t gain much economically. Quite possibly one of the other vectors; the access to more clients or the fact that barriers to entry are lower.

Interestingly, it is not that taxi companies are blind to innovation. I was stunned when I went to the taxi rank in Schiphol airport last year:  it seemed that there were no taxis but just limos which I was not familiar with and they seemed to be everywhere. It turned out that they were Tesla Model S sedans being used as taxis.

The range of travel of electric cars at the time was so limited that the taxi driver had to check where I was going in order to ensure he could get there, and he told me he returned to base at lunch time to “top up” his charge; nevertheless it was economic for the taxi company to get behind electric cars in a big way. A very big way, in fact: he claimed they ran 100 Teslas with 10 in reserve in case they ran out of juice. That represents commitment to innovation and a business model in which the economics of charging have been worked out very carefully.

OK, so if taxi companies were innovative enough and willing to back electric cars with relatively poor refuelling times, how did they miss the disruption of Uber? I believe that they were not looking for disruption, and when they saw it they did not manage it. And why not? Well, they were not looking for an accumulation of vectors of disruption which culminated in what will undoubtedly be their demise.

The vectors in play are:

  • GPS navigation which de-skills the driver to the point that anyone who can drive can do as well as a trained taxi driver (as close as matters).
  • huge reduction in business friction enabled by mobile phones + mobile internet + free easily distributed phone application which ensures the connectivity from clients to their goal in their moment of need.

Specifically in this case the vectors of disruption enabled

  • the ability to seamlessly tell the system who and where the client is (GPS in client mobile phone, app, fast data to back end systems at Uber),
  • the ability to offer a deal to the client giving reliable cost and waiting time information (GPS in driver mobile phone, app, fast data to back-end systems at Uber, and big data backed algorithms),
  • the ability to connect the client to stored payment method, for one-click payment.

All of the above enabled the creation of a business model with the following attributes:

  • reduced capital expenditure – no ownership of taxis by Uber,
  • reduced employment costs – no direct Uber employment of drivers,
  • aggregation of clients and drivers with a network effect.

This vector (the business model) has also enabled the disruption of the last bastion of the taxi business, viz. regulation.

So, the end of taxi companies and the taxi business as we knew them is being achieved by the bringing together of known vectors: 5 technological (GPS, Mobile internet, apps, real time data), and 6 business-model related (frictionless, moment of need, ownership free, aggregated need, aggregated supply, real time pricing).

And as I thought about it I realised that all of the so-called “digital disruption” is the same. It is always based on a re-combination of vectors of disruption into new combinations and business models. Without all these vectors we have innovation (as GPS was for the taxi industry before the other vectors were combined). Innovation makes things better but is not disruptive.   Combining enough vectors causes disruption.

What is really interesting is that there are a limited number of vectors of disruption.   

I mean, there are a limited number of technological advances that are ready from mass deployment at the right price; a limited number of new business models enabled by technology; a limited number of ways of reaching the players in business, and of transacting value.

As we will see in future articles, these vectors can be “played forward” to develop new business models and capture what is increasingly difficult to sustain, namely competitive advantage.

This realisation is why I set up Manage Disruption: I realised that spotting disruption is not a black art and that creating the capability to become an Uber in your market is within the grasp of many organizations. I am sure I would rather be the Uber in your industry than the equivalent of the taxi company which adopted only enough vectors to build a business model that finished up being disrupted.

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