Posted: August 5, 2014 |  AUTHOR: KEN FOX | CONTACT ME

 

The theory of disruptive innovation was first coined by Harvard University professor Clayton M. Christensen. This stemmed from research on the disk-drive industry, and was later popularized by his book The Innovator’s Dilemma, published in 1997. The term is used to describe an innovation which helps create a new market or value network. The theory explains the phenomenon by which an innovation transforms an existing market or sector by introducing simplicity, convenience, accessibility and affordability where complication, high cost, and inconvenience are the status quo. Initially, a disruptive innovation is formed in a niche market that may appear unattractive or inconsequential to industry experts but eventually the new product or service completely redefines the industry.

This post cites two U.S. companies which have “disrupted” the “for-hire” consumer auto transportation sector. One is Zipcar, a car sharing service, the other is Uber, an on-demand car service.

Zipcar
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Zipcar legitimized the car-sharing concept in the U.S. by providing convenience, security and simple billing. It targeted people who did not want to own a car or only needed a car for a short amount of time.

Zipcar was started by Ms. Robin Chase in Boston. Robin had lived in France and Switzerland as a youth because her father was an American diplomat. She graduated from Wellesley College with a liberal arts degree and received an MBA from the Massachusetts Institute of Technology (MIT) in Boston. As a busy housewife with three children, her family shared one car. She did not want to buy or own another car. One of her good friends in Boston, Antje, who was from Germany, had seen car sharing in Berlin. Robin wanted to start a ride sharing business and recognized how the increasing use of cell phones, internet access and wireless devices could help her new business.

A professor at MIT confirmed their ride sharing business idea was a good one. Robin and Antje started the Boston based company in 2000 with four cars and $75,000. This is the basic concept:
“A person makes a car reservation online or by phone for a specific car at a specific time. The information is sent wirelessly to the car. The user is directed to a convenient location for pick up. The Zipcar “member” uses his card to open the car. After driving it, he or she returns it, locks it and the billing is done. The car only opens to the renter. It’s self-service, autonomous and takes only a few seconds.” (Source: Growth Hacker Case Study)

Zipcar raised $4.7 million dollars in December 2002 and expanded to Washington, DC followed by New York City. The company also opened in a number of university towns. Zipcar was targeted to people who did not need a car to get to work, did not want to own a car, or may only need a car for a short time. Robin Chase voluntarily stepped down as CEO in February 2003 to spend more time with her family, however remains on Zipcar’s Board of Directors. Zipcar opened a London office in November 2006, and continued its European expansion with the acquisition of Streetcar, the largest British car sharing company (in April 2010) and Austrian company CarSharing.at in July 2012.

Zipcar merged with competitor, Seattle based Flexcar in October 2007. The company went public in April 2011, earning a valuation of over $1 billion U.S. dollars. Its stock reached a high of $31 per share. Zipcar’s sales generated double-digit percentage gains in each quarter since it went public, as membership and usage increased, and it entered new markets in the U.S. and Europe. By November 2012, Zipcar had 767,000 members, more than 700 employees and 11,000 cars in the U.S., Canada and Europe.

Although the company grew in size and sales, profitability was elusive. Its stock price sank to $8.24 by December 31, 2012. Zipcar was acquired by the Avis Budget Group, Inc. for about $500 million in January of 2013 (at $12.25 a share). The deal would allow Avis to offer the niche hourly rental market, which had been growing. The Zipcar acquisition was also viewed as complimentary to the standard Avis business. It would help Zipcar achieve better profitability by leveraging Avis’ fleet and infrastructure, as well as offering more cars during peak rental periods. For example, Zipcar could utilize Avis’ excess inventory on weekends when Zipcar could use them.

Uber

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Uber has disrupted the taxi cab business and has reinvented the experience from top to bottom.

Uber is a great success story. It’s an app based car service which only accepts real-time requests. A user is typically greeted by name by the driver, who arrives in minutes. The driver will call or text to let one know he is on the way, where he is and expected arrival time. One can also track the Uber car that will be picking you up. There is no need to pay the driver for the fare or tip when you arrive at your destination. It is automatically charged to your credit card. Uber has removed the potential friction from the typical taxi cab transaction. You simply exit the car and leave after reaching your destination.

Uber has set high standards and neutralized most of the negative experiences one has in using a taxi. The company doesn’t employ drivers but claims to screen them carefully. Some of the things Uber has addressed include.
-The time and effort it takes to hail a taxi (if one stops for you)
-Finding yourself in a dirty car
-Finding the taxi meter is broken
-Having an unfriendly cab driver
-When the cab driver does not have a credit card device
-When you have to find the amount of cash and calculate a tip

Privately held Uber launched in San Francisco in June 2010. San Francisco is known as a tough town to find a cab when you need one. Six months after the launch, Uber had between 3,000-6000 users and completed between 10,000-20,000 rides. It started as a black car (limo) service in 2009, but now offers cheaper options, like Sedans (Uber X). According to an interview in Fortune Magazine, Travis Kakanick, CEO of Uber, wants Uber to be an “instant gratification” service that gives people what they want, when they need it.” The company has a valuation of $3.4 billion dollars but estimated annual revenue of about $125 million.

The San Francisco start-up location was intentional. Locating there can indirectly target the Silicon Valley work force, which is tech savvy and receptive to new products that save time and improve their quality of life. Uber doesn’t advertise much but participates in promotions for hi tech companies and events for venture capital firms. The Uber Smartphone app is integrated with Google maps so a user can see how far away the nearest cars are.

Uber wants to generate a” wow experience” for customers. In doing so, they generated strong word of mouth promotion for their service. The company uses social media to promote Uber, and routinely hands out $20 first ride credits to let new users take a free Uber ride to try them out.

uberbanner
New child care seats being offered by Uber

Uber has had to face some challenges as any start-up company would. Uber has to adapt to each city its service is offered. This includes meeting regulatory requirements and dealing with driver complaints. Uber has also received complaints for using “surge pricing, when demand is great, prices increase. In light of some driver complaints, Uber has recently hired Rudy Giuliani’s company (Giuliani Partners) to conduct an audit of its driver background check process.

Uber now has about 300 employees and operates in more than 35 cities worldwide.

Commentary
Zipcar and Uber are great examples of fulfilling needs and satisfying customers, especially in busy urban areas. Uber and Zipcar also provide part-time jobs for people and may alleviate the need to own a car.

Uber’s main challenge is regulatory. Taxi and limo associations obviously don’t like Uber. Various city and state commissions have cited Uber for a range of potential violations, such as not being a licensed taxi or limo service. More specifically, Massachusetts issued a cease & desist order on the grounds that Uber’s GPS-based smart phone app did not meet certain standards, which was later rescinded by the governor.

There should be room for companies like Uber and Zipcar. Cities and states need to create a new designation to avoid some of the regulations needed to operate as these companies do. On a positive note, Uber and Zipcar may be providing a wake up call to taxi companies in urban areas to enhance their services, such as: providing more taxis, cleaner cars, more responsive drivers and more readily accepting credit cards.

Resources:
Clayton Christensn Institute for Disruptive Innovation
Robin Chase: Zipcar’s Founder Finds a new Gear, Fortune, December 4, 2012
Zipcar Timeline: From Business Idea to IPO to $500 million Buyout, www.entrepreneur.com, January 2, 2013
Avis to Buy Car-Sharing Service Zipcar, The Wall Street Journal, January 2, 2013
What’s Fueling Uber’s Growth Engine? Growth Hackers (Case Study)
Wolff: The tech company of the year is Uber, USA Toady, December 22, 2013
The Vision for $3.4 billion Uber is Much More than Just a Car Service, and it Could Vastly Improve Our Lives, Business Outsider, August 23, 2013
Uber is Being Audited by Rudy Giuliani’s Team About its Driver Background Check Process, Business Insider, July 15, 2014.

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©2017, The Global Galaxy blog is produced by The Soundings Group, LLC, Charleston, South Carolina, USA, www.thesoundingsgroup.com. The company is an international business consulting firm, specializing in new market assessments, market entry strategies and marketing guidance. The scope of Global Galaxy is to cover timely international trends, issues and business building ideas. Its purpose is to educate, inform and stimulate thinking for business opportunity analyses.

 

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