Disruptive Technology and the Push For Innovation

Andrew Coatsworth
Emaan Jaberi
Executive Summary
Innovation and disruption has become a widely studied field in the world of business.
With the integration of technology in to everyday life, the level of competition between

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businesses is incredibly high. In order to help guarantee long-term success, managers must
considers factors such as changes trends, applicable biases and the resulting mindsets that they
develop. Additionally, as a result of technology, managers must create environments to foster
innovation. Beyond the product improvements, these managers must also consider how
modernized and technologically enables business models can lead to disruption.
In order to best analyze these practices, the following cases are considered: the rise of
Netflix and the fall of Blockbuster, the impact of Uber on the traditional taxi industry, the
potential for the widespread implementation of alternative energy to replace fossil fuels, and the
technologically enabled credit platform of peer to peer lending. The case studies go in depth to
analyze these situations. SWOT analysis is utilized to then provide strategic recommendations
for the companies to improve their current business models.
The cases attempt to depict the widespread impact of disruption and the diverse set of
circumstances under which it occurs. Through this analysis, sets of recommendations were
prescribed including: cleaning up the companys public image, pursing strategic partnerships,
implementing alternative analysis to confront biases, and hiring millennials to address market
trends. Through these endeavors, companies should begin to move towards the cusp of
innovation or maintain their market position.
All in all, from this analysis and the resulting recommendations, the necessity to address
trends, biases and mindsets, along with the increasing competition in the marketplace are
depicted. Ultimately, if a firms desire to remain relevant and as significant actors in the pursuit of
innovation, they should remain ever vigilant of their competitors and the environment in which
they operate.
Finally, a key takeaway from this paper is the evolved state of disruption. This is best
depicted by Clayton Christensens model for disruption. Christensen theorized that disruptors
must start from the bottom of an existing market in order to disrupt and incumbent firm.
However, as the case of Uber shows, this is no longer holds true. As a result of the trends and
changes discussed, new firms now have the ability to disrupt an industry seemingly overnight.

I. Introduction

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Inventions such as the printing press and the steam engine forever changed the world.
However, despite the widespread impact of these advancements, it took significant periods of
time to fully integrate them into society and offer improved iterations. Today, technology has
accelerated in scope, scale, and economic impact. It has been argued that technology is one of
four global forces breaking all of the trends (Dobbs et al.). Modern technology is fully
engrained in the lives of people across the globe and is constantly evolving. For example, it took
38 years for the radio to draw the first 50 million listeners. Facebook, on the other hand, drew in
6 million users in its first year of existence. The user base then grew by 100 times over the
following five years (Dobbs et al.). In the 1990s, less than 3 percent of the worlds population
owned a cellphone. Today, roughly two-thirds of the population owns a cellphone. This constant
state of advancement has forever changed the way that business and consumers interact.
Additionally, technological advancement has raised the stakes for companies. Competition has
increased on a global scale. As a result of the increased competition there has been a strong push
for innovation across industries. Companies are finding that their old products and business
models are incompatible or inefficient in a technologically driven economy. However, in many
cases, these companies are unable to respond through innovation to meet the new demands. By
failing to innovate, these companies are upended by a forward thinking, faster moving, and more
efficient competitors.
II. A Model For Disruption
Clayton Christensen, a Harvard Business School professor known for his research in the
field of disruptive innovation, describes disruption as a process whereby a smaller company
with fewer resources is able to successfully challenge established incumbent businesses
(Christensen et al.). Disruption begins as incumbents attempt to improve their products and

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services for the customer base that they believe is most important. Often times, this body of
customers is the firms most profitable. As a result of their focus on this segment, the firm fails
to address the needs of other customers. Entrants looking to compete with the incumbent firm
are provided with the opportunity to address this overlooked body of customers. Christensen
argues that successful disruptors gain a foothold by delivering more-suitable functionalityfrequently at a lower price (Christensen et al.). The incumbent firm, failing to address the new
competition, attempts to capitalize on more demanding customer segments in order to achieve
higher profitability. However, these more demanding segments often disappoint. This allows the
entrant to gain market share and begin to offer their products or services that the incumbents
core customer base requires. In addition to stealing market share, the entrant is able to maintain
the advantages that allowed for early stage success. The incumbent continues to lose core
customers leading to disruption. This model is outlined in the diagram below.
Figure I.

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Christensen further breaks down his model for disruption with two options for market
entrants to gain footholds. These include low-end footholds and new-market footholds
(Christensen et al.). Low-end footholds exist because incumbents typically try to provide their
most profitable and demanding customer with ever-improving products and services, and they
pay less attention to the less-demanding customers (Christensen et al.). New-market footholds
exist when disruptors create a market where none existed. Put simply, they find a way to turn
non-consumers into consumers. (Christensen et al.). Additionally, Christensen discusses a type
of innovation that is often confused as disruptive innovation. Sustaining innovations are
advancements that make good products better in the eyes of an incumbents existing customers
(Christensen et al.). Examples of sustaining innovations include: adding a fifth blade to razors,
higher definition TV screens, and improving mobile phone reception. Although these
improvements can range from incremental to major breakthroughs, they allow firms to increase
sales. Sustaining innovations differ from disruptive innovations because they are initially
considered inferior by most of an incumbents customers (Christensen et al.). Since these
products are perceived as inferior, the market entrant fails to attract the business of the
incumbents customers. In order to steal market share and offer disruptive innovation, the
entrant must improve their product or service offering to satisfy the needs of the incumbents
customer (Christensen et al.). Although this model offers insight to the path that market entrants
may follow on their path to disruption, it is not a formula for success. True disruption requires
many other elements to fall into place.
III. Innovators Curve
The way in which innovative ideas and products diffuse within a population is key to the
process of disruption. In 1962, Everett Rogers developed the Diffusion of Innovation Theory

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revolving around how ideas gain momentum and spread through populations (Boston
University). This is significant because, particular groups within a social system act as the
triggers to gain subsequent groups, and influence their perception and behavior revolving around
new innovations. But what are the driving forces behind what determines if an innovation will
be adopted? While there are multiple factors that will determine whether or not an innovation
will effectively diffuse into the market place, two important points are the innovation itself, and
the specific groups that facilitate the diffusion.
Beginning with innovation, there are considered to be five major characteristics that
determine an innovations rate of adoption: relative advantage, compatibility, complexity,
trialability, and observability (Indiana University 1). Relative advantage can be interpreted as
how an adopter view this concept as superior to those before it. More so, relative advantage can
be achieved through a multitude of facets such as economic value social prestige, convenience,
satisfaction, or just about any reason that could conceivably justify a transition from old to new
(Indiana University 3). However, the most applicable relative advantage for a new form of ride
sharing, may be different than the relative advantages needed to get a new clothing service to
diffuse. More explicitly, a new form of ride sharing may be most successful if their relative
advantage focused around being more economically affordable, or focused around carpooling
and being more environmentally friendly. A new clothing service concept could be most affected
by a relative advantage revolving around social prestige, and be perceived as being trendy
enough to be on the forefront of fashion. To simply have one of these relative advantages is not
enough, because there some untapped areas that could prove to be more effective in facilitating
the diffusion of innovation.

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The next facet of innovation is compatibility, or the degree to which an innovation is
perceived as being consistent with the existing values, past experiences, and needs of potential
adopters (Indiana University 3). Innovation is contingent on how easily it can be integrated into
the existing relevant pattern of social norms and values of the target population. If a business has
the intention of expanding a mobile phone driven taxi service, there would be a necessity to
determine whether or not the target market of taxi patrons have access to cell phones and the
internet. The success of this integration is dependent on this switch being compatible with their
lifestyle. If these were both out of the norm for this target market, this innovation would struggle
to diffuse. Regardless of the fact that there may be other large populations that hold cell phones
and the internet valuable to them. This is because they would not necessarily be interested in the
innovation.
The third factor of innovation is complexity or the degree to which an innovation is
perceived as difficult to understand and use (Indiana University 3). Simply put, if the adopters
do not understand how the innovation works, or why it works, they will be more reluctant to try
it. New ideas that are more easily understood have the capability of being more rapidly adopted
because of their lower barrier in terms of new skills and comprehension needed.
The fourth aspect to successful innovation is trialability; the degree to which an
innovation may be experimented with on a limited basis (Indiana University 3). The issue of
trialability impacts the level of certainty an innovator has with adopting a new innovation. If
new innovations do not require significant commitments, individuals will be more receptive to
experimenting with them, and see if they appeal to them. For example, an adopter would be
more skeptical of investing in a new innovative heating system for their house that costs $3000,
versus purchasing a new app on their cellphone. One requires less commitment, and more

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importantly, it allows adopters to confirm or deny any hesitations they have about the new
innovation.
The final factor to innovation is observability, or the degree to [which] the results of an
innovation are visible to others (Indiana University 3). A great example of this is the creation of
the iPod. The iPod allowed users to immediately see the increase in music that is at their finger
tips, along with the ability to hold more music without carrying around CDs and tapes. Not only
were these two significant selling points of the iPod, but the white earbuds that came along with
each iPod acted as a visible sign to other potential adopters. Essentially, when an individual
would see someone walking with white earbuds in, and a white cord going into their pocket,
there is an instant association between that individual, the white earbuds, and the iPod itself.
With the five key factors to innovation aside, an important part of the actual diffusion of
innovation revolves around the members of a social system, and the five adopter categories:
innovators, early adopters, early majority, late majority, and laggards.

As depicted by the graph above, each of these five groups represent a varying percentage of the
overall social system in which they holistically represent.
The first group, innovators, consist of 2.5% of the population. They are categorized as
venturesome and interested in new ideas, making them the group most likely to take risks and
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to develop new ideas (Boston University). Often times, very little, if anything needs to be done
to appeal to this group (Boston University). After the innovators comes the first crucial jump in
groups, the early adopters, who make up 13.5% of the population. With the early adopters, they
typically are aware of the need to change and are also comfortable with new ideas (Boston
University). They do not typically need information, but more so the opportunity to be able to be
exposed to the new innovation. The second crucial jump in groups is to the early majority, which
makes up 34% of the population, more than both previous groups combined. This is essentially
where the innovation either takes off or fails. Crucial to the early majority is the necessity to
see evidence that the innovation works, which makes them more reluctant than the previous
two groups (Boston University). Following the early majority, are two other groups; the late
majority and laggards. Both of these groups are skeptical to change, but information from the
previous three population groups regarding the success of the innovation, along with pressure
from these adopters typically results in their adoption as well. Once an innovation creates a
substantial presence in the early majority, they have in effect reached a trigger point, and are
capable of capturing the remaining population.
IV. Innovators and Technology
The presence and the fast paced prioritization that innovative technology has taken in the
world, is necessary to understanding the rate that innovation occurs. A study out of the Martin
Prosperity Institute from the Rotman School of Management at the University of Toronto,
examined three key factors in determining the worlds leading nations for innovation and
technology. Immediately, the presence of the United States as the de facto leader in innovation is
rejected, but not because the United State is slowing down, but because other countries are rising
up (Florida).

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The first factor analyzed was the percentages of economic output countries devoted to
research and development investment.

The U.S. ranks in sixth place, with Israel, Sweden, Finland, Japan and Switzerland being the top
five (Florida 5). This demonstrates that although the U.S. may have a significant budget by
measurement of pure value invested in research and development, these other countries are
placing a larger percentage of their nations wealth to help push themselves on to the cutting
edge of new technologies. Without high levels of investments and motivation to be innovative,
these nations economies and industries risk being disrupted by a foreign country.

The next unit analyzed is the amount of scientific and engineering researchers per capita.

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Here the

United

States ranks seventh, with Finland, Sweden, Japan, Singapore, and Denmark as the top five
(Florida 5). The amount of researchers per capita is a significant factor in regards to innovation,
because they are typically the technical individuals making the innovation possible. Furthermore,
having a greater percentage of scientific and engineering researchers in relation to other
disciplines, allows for their opinions to be more vocalized, also allowing for a greater diversity
of opinion within their own group.
The third unit measured was the total number of patents per capita, which was utilized to
plot the amount of innovations per country.

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The rationale behind this measurement is that if a country is being issued a significant amount of
patents to recognize new and novel inventions and concepts, then they are being innovative.
Furthermore, if a country is able to be the possessor of more patents than another country, it
helps limit the other countries capability to compete in the areas that the patents are held. This
presents its self as a key edge in which the United State takes first, followed by Japan,
Switzerland, Finland and then Israel (Florida 5-6)
When these three measures are pulled together, the Global Technology index is created,
which is a broad assessment of the technological and innovative capabilities of the worlds
nations (Florida). As a whole, the United States ranks third, with Finland and Japan as first and
second. However, the margin between all the top ten nations is incredibly tight, with Israel
placing fourth despite their small size (Florida 6). Previously, most discussion about innovation
was limited to the context of domestic markets, but in reality, the close fought battle and the lack
of the United States as the de facto leader demonstrates the heighten competition.
V. A Sense of Urgency

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The diffusion of innovation theory demonstrates a rather steep curve, as innovations
make the leap between social groups. Making the change from innovators to early adopters is an
increase from 2.5% to 13.5%, with the early majority netting an additionally 34%. With each
move, a significantly faster accumulation of market share is acquired. Meanwhile, there is a
heightened sense of global urgency to churn out patents, and new innovations daily. This
increased competition, and the large inflow of potential innovations, will increase the occurrence
of disruption as countries and companies send more concepts into the market with the hopes of
either swiftly moving social groups or failing out fast. Ultimately, the global economy has
become increasingly competitive, with the rate in which innovative designs are churned out and
pushed through the social groups.
VI. Generational Market Trends and the Importance of the Millennials
With each passing year, every generation becomes older. Additionally, the generational
gap, or the differences found between members of different generations becomes more visible
(Investopedia). The generation gaps plays a pivotal role as companies attempt to find new ways
to appeal to the preferences, views, and needs of the different generational age groups
(Investopedia). There are four major generations that are present within todays market place,
those are the Baby Boomers, Generation X, Millennials/Generation Y, and Generation Z.
The Baby Boomers were born between 1946 and 1964 as a result of a dramatic increase
of births right after World War II (Williams 4). This generation is marked by the desire for little
change and instant improvement, while also willing to give their all and fight for a cause
(Williams 5). This generation is known for having a major concern for their health, and are
essentially looking for the fountain of youth (Williams 5). As a result, much of the marketing
towards Baby Boomers aims to illicit stronger health, while attempting to downplay the

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significance of their age. Additionally, this generation is very family oriented, and hold their
family values very close to themselves (Williams 5).
Generation X was born from 1965 to roughly 1980, and reached their adulthood during
difficult economic times (Council of Economic Advisors 5). Although they value family first,
this generation has taken a greater responsibility for raising themselves and tend to be less
traditional than any other generation (Williams 6). As a result, they are less of team players,
and do not fall into the similar workaholic mold that describes Baby Boomers (Williams 7).
Their exposure to difficult economic times upon reaching adulthood, Generation X is more value
oriented, and desire more practicality and usefulness (Williams 7).
Generation Y or the Millennials are born roughly around 1980 to 2004 (Council of
Economic Advisors 5). They are the children of the Baby Boomers, and grew up in a time of
immense and face-paced change (Williams 8). This is significant because it denotes the
impatience of Millennials, as they are expect not only rewards faster, but to be able to
accomplish goals and tasks faster. This generation was born into a time when technological and
electronic advancement essentially made global boundaries transparent (Williams 8). As a result,
they are much most self-reliant and autonomous than other generations. Additionally,
Generation Y is most commonly associated with being open-minded, goal oriented, highly
motivated, and valuing speed, entertainment and innovation (Williams 8). Furthermore, they are
more concerned with issues of the global community and look at their decisions as having wider
impacts.
The youngest generation is Generation Z, or the Homeland Generation, being born after
2005. This generation is most shaped by the aftermath of 9/11, along with the rise in global
terror, violence and uncertainty (Williams 10). While this generation is much younger, and has

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yet to fully form, they are seen as valuing authenticity and security in a world that they have
mostly seen as dangerous (Williams 10).
Until recently Baby Boomers were seen as the dominant generation within the
marketplace, but as of 2013 Millennials are the largest generation, representing one third of the
U.S. population (Council of Economic Advisors 3). This is incredibly significant, because as the
Baby Boomers had previously played the role of market shaper, now the Millennials, a
generation with much different preferences, are now dominant. Millennials desire for fast
paced, and efficient technology demonstrates how the marketplace will need to change to
successfully appeal to them. Additionally, as Millennials become more important within
businesses as not only consumers but as decision makers, there will be a shift away from simply
bottom line economics. These trends are important because Millennials are expected to be half
of the global workforce by 2020 (Catalyst). This means that Millennials will be the largest
proportion of wage earners, and consumers. Essentially, companies that desire to remain
relevant need to begin making the necessary changes, if they have not already, to accommodate
and lay claim to the millennial market segment.
VII. The influence of Biases and Mindsets
Often unnoticed, managers can become susceptible to a plethora of biases that not only
affect their decision making processes, but help develop a stubborn mindset, entrenched in a
battle against themselves. A significant bias is overconfidence, which is when executives
misjudge their own skills, as well as the competencies of their business (Meissner). As is the
same with all biases, overconfidence can lead decision makers astray, without them being warry
of the actual implications of their decision. This creates a potential for not only overestimating
an individuals skill, but also the propensity to misjudge the environment in which they compete.

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If managers become susceptible to overconfidence bias, they run the risk of underestimating the
potential for their competition to disrupt their perceived market dominance, making it less likely
they will intervene successfully to regain course.
Another bias that can significantly disrupt a manager is confirmation bias. This bias acts
as a stimulator to the overconfidence bias, in that an individual may only look for information
that will support their current beliefs, instead of looking at any potential downsides (Meissner).
As a result, confirmation bias has the ability to narrow an individuals field of vision, blocking a
decision makers capability to notice adversity lurking on their flanks. When managers are fed
information that is consistent with their beliefs, this will not only boost their confidence but lead
them down a path where they will be more likely to discount any information that may contradict
them (Meissner).
Additionally, another type of bias that can occur is sunflower management. Sunflower
management acts as a distortion that feeds into creating an overall mindset that can become
increasingly susceptible to more biases. In essence, sunflower management is the inclination of
people in an organization to align themselves with the leaders real or assumed viewpoint
(Lovallo). This can prove to be dangerous, because if individuals are less likely to offer a
dissenting opinion to their managers, they will increase their susceptibility to overconfidence,
because everyone is immediately inclined to agree with their manager. This has the capability of
causing individuals within an organization more inclined to simply confirm, or support a
managers decision without regard to what may be legitimate concerns. As a result, these three
biases feed off one another, and can be hard to notice unless brought forward. If companies
continue to perpetuate these biases, they run the risk of become vulnerable to competitors who
have the ability to look further and question their decisions.

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These biases are incredibly dangerous because they help build a mindset that is resistant
to change as a result of being habitually reinforced. These mindsets have a tendency to focus on
past performance, instead of potential growth that can come from diverging from their standard
plans (Gino). Managers tend to believe that because something has worked in the past, it will
continue to work in the future. Therefore they will only look to evidence that corroborates their
beliefs instead challenging the status quo for the potential to grow. Much of the reason managers
are vulnerable to this type of mindset is their fear of failing (Gino). This drives managers to be
less willing to attempt a new endeavors, because of the possibility that it is not as time tested as
their current model.
VIII. Eight Essentials of Innovation
According to Marc de Jong, Nathan Marston, and Erik Roth of McKinsey, there are eight
essential factors that companies must integrate into their offices in order to successfully innovate.
To successfully innovate, companies must: aspire, choose, discover, evolve, accelerate, scale,
extend and mobilize. These factors are especially important for established firms because while
they may excel through the optimization of their current business model, many struggle to
achieve true innovation. As a result of the complexities of innovation, achieving this creativity
requires a company-wide endeavor, [that] requires a set of crosscutting practices and processes
to structure, organize, and encourage [innovation] (de Jong et al.). The eight factors can be
divided into two groups. Aspiration, choice, discovery, and evolution are categorized as
strategic and creative in nature, [to] help set and prioritize the terms and conditions under which
innovation is more likely to thrive (de Jong et al.). These next four factors help firms deliver
and organize for innovation repeatedly over time and with enough value to contribute
meaningfully to overall performance (de Jong et al.).

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According to the authors, in the digital age, the pace of change has gone into
hyperspeed, so companies must get these strategic, creative, executional, and organizational
factors right to innovate successfully (de Jong et al.). This is especially important for
incumbent firms. In most cases, these established companies have firmly entrenched values and
corporate cultures making it difficult to change. Additionally, the incumbent firms face increased
competition from young companies that can more easily adapt or initially establish these eight
values. The eight values are summarized below.
i. Aspire
The authors cite President John F. Kennedys aspiration to go to the moon in this
decade as an example of how to engender innovation. JFKs goal led to an incredible level of
creativity and production during the 1960s. However, the authors caution that while stating a
lofty goal can help set a company or body of people into action, it must be realistic. These goals
must be quantifiable and need to come with estimates of the value that innovation should
generate to meet financial-growth objectives (de Jong et al.). This provides managers and
employees with a framework to achieve the desired innovation. Additionally, these aspirations
require company wide buy in. This requires a cascading effect starting with the executive level
flowing down through the organization.
ii. Choose
Innovation requires brainstorming to help develop new ideas. However, this early stage
of innovation can make it difficult to choose which ideas to focus on. Certain ideas may be
highly appealing, yet difficult to support and scale. In order to successfully innovate, it is vital to
choose projects or ideas that help mitigate the inherent risks associated with innovation. This
requires executives to create boundary conditions for areas that the company should experiment

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with (de Jong et al.). After setting the boundary conditions, there must be company wide
communication to further mitigate the risks associated with change. This involves understanding
what employees are working on as well as a governance process that constantly assesses not
only the expected value, timing, and risk of the initiative in the portfolio but also its overall
composition (de Jong et al.).
iii. Discover
In order to maximize the benefits of innovation, companies must capitalize on actionable
and differentiated insights. These insights will allow a firm to excite customers and develop new
markets. The discovery process involves methodically and systematically scrutinizing three
areas: a valuable problem to solve, a technology that enables a solution, and a business model
that generates money from it (de Jong et al.). While some innovations result from a stroke of
genius, the majority stem from this discovery process.
iv. Evolve
Although most companies are resistant to change, firms that are likely to achieve long
term success evolve. This evolution process includes forward thinking and adaptive market
analysis to better separate signals from noise, integrating new business practices into their
existing model, understanding how adapting their current business model could add value for
their customer base, experiment with new projects, and quickly respond to new competition.
Striving for company evolution provides firms with a key tool to combat disruption. (de Jong et
al.)

v. Accelerate

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As previously noted by the authors, the current state of technology has moved into
hyperspeed. Adaptive firms cannot allow themselves to be slowed by cautious governance such
as bureaucracies, legal systems, and slow IT. In order to maintain success, these firms must
employ fast moving high level thinking. Additionally, as ideas for new products and services
arise, companies should test new concepts with their customer base early in the innovation
process. This will enable firms to receive important feedback from their end users to ensure that
the final product will succeed. Also, this will prevent internal forces [from imposing]
modifications that blur the original value proposition (de Jong et al.).
vi. Scale
As previously mentioned, innovation is inherently risky. Even after narrowing down
ideas for product or service innovation, management must carefully consider how to properly
scale. The will help properly allocate resources and mitigate potential risks. Firms must also
ensure that manufacturing facilities, suppliers, distributors, and other parties are prepared to scale
a product or service to their desired level. If a company decides to execute a major release of a
product at a rapid pace, these partners must be fully prepared for the heightened demands and
increased pressure (de Jong et al.).
vii. Extend
Although it is necessary for firms to value their employees ideas, innovations can
become more successful with external collaborators. These external partnerships allow for
different ideas and insights as well as other benefits such as cost sharing and new channels to
bring a product to market. Many firms have found it useful to utilize a broad spectrum of
strategic partners early in the innovation process and then move to a narrow set of specialized

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partners as the product or service is near release. The development of strategic partners not only
allows for an influx of new ideas, but also for competitive advantage (de Jong et al.).
viii. Mobilize
The final essential for innovation requires companies to embed the previous seven values
into their corporate culture. By forging tight connections among innovation, strategy, and
performance companies are able to mobilize and replicate this process to help future proof the
firm. Executives, managers, and employees will become forward thinkers and understand the
necessary steps to compete with new and potentially disruptive firms. Additionally, new market
entrants will have a framework to gain market share and potentially disrupt incumbent firms (de
Jong et al.).
IX. Business-Model Innovation
In the past, companies attempted to compete with one another through better execution of
similar business models. Better execution allowed for more creation and capturing of economic
value. However, with the rapid advancement and integration of technology, businesses can no
longer differentiate themselves in these ways. Business models today are subject to rapid
displacement, disruption and, in extreme cases, outright destruction (de Jong and Van Dijk).
However, as previously discussed, many incumbent firms find it difficult to adapt to or even
recognize the changing business environments. The firms that do attempt to adapt, often run the
risk of cannibalizing existing profit streams or make small changes that fail to lead to true
innovation.
In order to remain competitive with new market entrants, existing firms must initiate a
process of reframing their beliefs. They must [identify] an industrys foremost belief about
value creation and then [articulate] the notions that support this belief (de Jong and Van Dijk).

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Through examination of these beliefs, firms can begin to understand how adaptation creates new
value for customers. This process can be broken down into five steps:
1. Outline the dominant business model in the industry (de Jong and Van Dijk).
Firms must understand what aspects of their business model has driven success and
profitability in the past. This will enable them to challenge this long-held belief.
2. Dissect the most important long-held belief into it supporting notions (de Jong and
Van Dijk). The second step enables the firm to break down the core beliefs of the
industry into smaller parts. Breaking the belief down will allow the firm to see where
potential changes can be made.
3. Turn an underlying belief on its head (de Jong and Van Dijk). During the third
step, the firm will ask difficult questions in an attempt to find areas for potential
change. Although the firm may not be able to answer these questions, this
introspection could help spark innovation and reframe beliefs.
4. Sanity-test your reframe (de Jong and Van Dijk). As mentioned in step three, the
firms will be forced to ask difficult questions. The answers that they arrive at will
often times be impractical. However, by thinking critically and evaluating these new
ideas, firms will be able to narrow down their potential solutions and eventually
arrive at a conclusion for change.
5. Translate the reframed belief into the industrys new business model (de Jong and
Van Dijk). The final step puts the firms idea into action. After testing the reframed
belief and arriving at a final conclusion, the company will implement the change into
their business structure. If the process is successful, the firm will ideally be able to
combat potential disruption.

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This process is outlined in the graphic below:

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(de Jong and Van Dijk)
X. Innovation in the Real World
Innovation and disruption have become hot topics in the world of business. As the
previous pages suggest, many scholars have attempted to understand how innovation occurs and
the factors that make for successful disruption. In order to understand how these ideas play out
in the real world, the following cases have been examined: Ubers impact on the taxi industry,
the rise of peer to peer lenders, an alternative to traditional banking institutions, the rise of
Netflix and destruction of Blockbuster, and the development of green energy to end the long
standing reliance on fossil fuels. As the case studies will show, disruption occurs across a
diverse set of industries and to varying levels of success.

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Works Cited
De Jong, Marc, and Menno Van Dijk. "Disrupting Beliefs: A New Approach to Business-model
Innovation." McKinsey & Company. N.p., July 2015. Web. 04 Mar. 2016
Boston University. "Diffusion of Innovation Theory." Diffusion of Innovation Theory. Boston
University, n.d. Web. 04 Mar. 2016. <http://sphweb.bumc.bu.edu/otlt/MPHModules/SB/SB721-Models/SB721-Models4.html>.
Catalyst. "Generations: Demographic Trends in Population and Workforce." Catalyst. Catalyst,
11 Oct. 2012. Web. 04 Mar. 2016. <http://www.catalyst.org/knowledge/generationsdemographic-trends-population-and-workforce#footnote3_yojkr0m>.
Christensen, Clayton M., Michael E. Raynor, and Rory McDonald. "What Is Disruptive
Innovation?" Harvard Business Review. N.p., 01 Dec. 2015. Web. 04 Mar. 2016.
Council of Economic Advisors. 15 ECONOMIC FACTS ABOUT MILLENNIALS (n.d.): n.
pag. Whitehouse.gov. Executive Office of the President of the White House. Web.
<https://www.whitehouse.gov/sites/default/files/docs/millennials_report.pdf>.
Dobbs, Richard, James Manyika, and Jonathan Woetzel. "The Four Global Forces Breaking All

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the Trends." McKinsey & Company. N.p., Apr. 2015. Web. 04 Mar. 2016.
De Jong, Marc, Nathan Marston, and Erik Roth. "The Eight Essentials of Innovation." McKinsey
& Company. N.p., Apr. 2015. Web. 04 Mar. 2016.
Florida, Richard, Charlotta Mellander, Kevin Stolarick, Kimberly Silk, Zara Matheson, and
Michelle Hopgood. Creativity and Prosperity: The Global Creativity Index The Martin
Prosperity Institute (MPI) Is the Worlds Leading Think-tank (n.d.): n. pag. Martin
Prosperity. Martin Prosperity Index. Web. <http://martinprosperity.org/media/GCI
%20Report%20Sep%202011.pdf>.
Florida, Richard. "The World's Leading Nations for Innovation and Technology." CityLab. City
Lab, n.d. Web. 04 Mar. 2016. <http://www.citylab.com/tech/2011/10/worlds-leadingnations-innovation-and-technology/224/>.
Gino, Francesca, and Bradley Staats. "Why Organizations Don't Learn." Harvard Business
Review. Harvard Business Review, 01 Nov. 2015. Web. 05 Mar. 2016.
<https://hbr.org/2015/11/why-organizations-dont-learn>.
Indiana University. "Diffusion of Innovations Model." Encyclopedia of Health
Communication (n.d.): n. pag. Indiana University. Indiana University. Web.
<http://www.indiana.edu/~t581qual/Assignments/Diffusion_of_Innovations.pdf>.
Investopedia. "Generation Gap Definition | Investopedia." Investopedia. Investopedia, 28 Sept.
2010. Web. 04 Mar. 2016. <http://www.investopedia.com/terms/g/generation-gap.asp?
layout=infini&v=4A&adtest=4A>.
Lovallo, Dan P., and Olivier Sibony. "Distortions and Deceptions in Strategic
Decisions." McKinsey & Company. Mckinsey & Company, n.d. Web. 05 Mar. 2016.

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<http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/ourinsights/distortions-and-deceptions-in-strategic-decisions>.
Meissner, Phillip, Olivier Sibony, and Torsten Wulf. "Are You Ready to Decide?" McKinsey &
Company. McKinsey & Company, n.d. Web. 05 Mar. 2016.
<http://www.mckinsey.com/business-functions/strategy-and-corporate-finance/ourinsights/are-you-ready-to-decide>.
Williams, Kaylene C., and Robert A. Page. "Marketing to the Generations." Journal of
Behavioral Studies in Business (n.d.): n. pag. Aabri. Journal of Behavioral Studies in
Business. Web. <http://www.aabri.com/manuscripts/10575.pdf>.

Case Study I
Netflix vs. Blockbuster: A Failure to Recognize Biases

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Emaan Jaberi

I. The Birth of Blockbuster

For a company that is now viewed as a hallmark victim of disruptive technology,
Blockbuster was ironically born as a result of technological innovation. David Cook, a selftaught computer programmer and founder of Blockbuster, had made a name for himself
harnessing the power of computers to solve business issues within the oil industry (Bloomberg).
As a founder of Amtech, Cook understood the potential of applying bar code tag management
systems to a variety of industries, such as railroad cars and toll roads. Ultimately, he believed he
needed the right business concept to apply this strategy to, which is when video rental stores
came into the picture (Bloomberg).
Inventory management for video rental stores at this point were essentially a quagmire.
Customers would pick up an empty title case and bring it to a store employee, who would
hopelessly search the backrooms to track down any remaining copies of the customers film
(Gandel/Dallas). Often times, the employee would be unaware if the film was actually in stock,
because they had no effective system to track inventory and demand. Cook was able to
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revolutionize the inventory system of movie rental stores by programming the computers to keep
track of films and give him a daily report of what customers were renting, by utilizing bar code
tag technology (Gandel/Dallas). As a result, he now had a wealth of customer information at his
fingertips: what movies were in stock, which were in high demands, which customers were
renting which films.
Cook essentially had an inventory management system that doubled as a customer
relationship management system, which allowed him to optimize his stores inventory, knowing
which older films to keep, and which to cycle out. Furthermore, it allowed him to better optimize
his movie selections to the specific demographics of the area in which the retail store was
located. Additionally, he removed the empty cases, and implemented the live display, where
the movies were actually on the shelf, which was something Blockbuster could do with their
improved inventory tracking system.
David Cooks time with Blockbuster was rather limited though, from the opening of its
first store in 1985 to his exit in 1987. With Davids exit came Wayne Huizenga, an early investor
who would play a dominant role as chairman. Huizenga pushed to build Blockbuster as a growth
company, through a series of buyouts that lead Blockbuster to its first profitable quarter in April,
1987 (Bloomberg). Huizenga continued to grow the company, but he knew that technology
would at some point disrupt brick-and-mortar businesses, and decided to sell Blockbuster to
Viacom in 1997 (Gandel/Dallas). With Viacom as the new owner of Blockbuster, came the
emergence of John Antioco as CEO.
II. Blockbusters turnaround and fall
John Antioco was an individual whose career was built on fixing troubled businesses, and
helping them turnaround (Harvard Business Review). Having spent time helping revive chains

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such as Circle K, and Taco Bell, Antioco was viewed as a manager capable of making the right
decisions to bring a company away from the brink of bankruptcy. When Antioco joined
Blockbuster, he saw a lot of problems that he believed he could fix quickly, but he also didnt
believe that technology would threaten the company as fast as critics thought (Harvard
Business Review). Yet it was the rapid change in technology that had specifically brought down
Blockbuster.
The advent of the DVD played a significant role in the disruption of Blockbuster. Prior
to the DVD, the VHS played a dominant role in the movie rental business, and the VHSs
bulkiness played a significantly role in Blockbusters dominance in the industry. Unlike the
VHS, the DVD was far slimmer and compact, allowing it to be easily sent through the mail.
Previously, the video business had been about spur of the moment decisions to stay in and rent a
movie (Harvard Business Review). With the emergence of Netflix, customers were able to have
movies sent to them, where they could view them on their own schedule, without the worry of
late fees or having to travel to a store. Despite this advance in technology, which allowed Netflix
to test their business model, Antioco was not sure if Netflixs model would be successful
(Harvard Business Review).
III. But management and vision are two separate things
In 2000 Reed Hastings, the founder of Netflix, approached Antioco to sell his company
for $50 million (Variety). With the benefit of hindsight, this was a mistake by Antioco, but
hindsight is not 20/20. Yet, to what extent can a managers lack of vision be excusable when
making decisions regarding potentially disruptive companies? A former high-ranking
Blockbuster executive at the time noted how Antioco was a tough negotiator, and manager, but
management and vision are two separate things (Variety). While management is the capability

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to run a business efficiently with the required personnel, vision is something completely
different. Vision is the ability to look beyond bias, and to look into a world of future problems.
As previously noted, hindsight is not 20/20, therefore it is necessary to look through
Blockbusters eyes at the time of this offer to simulate their frame of mind. A key bias that could
have been clouding the vision of Blockbuster is overconfidence (Meissner). Antioco and the rest
of Blockbuster were most likely looking down on Netflix, as they were the dominant force in the
video rental world, while also feeling overconfident with their ability to combat disruption.
Additionally, the economy had just experienced the dot-com bubble bursts, leaving Blockbuster a
victim of confirmation bias, believing that internet based business would flop as many did
(Meissner). From a managerial perspective, he believed he had justifications for making the
decisions to turn down Netflix, but if he were to look at it through a separate lens, that of a
visionary looking forward, he may have seen differently.
These biases reiterate the idea that management and vision are two separate things, and
that they are both necessary for the future of a company like Blockbuster. In 2004, Carl Icahn
the notably activist investor became involved with Blockbuster, creating an environment of
contentious directors (Harvard Business Review). Antioco had begun to visualize the threat of
Netflix, and was attempting to change Blockbusters policies regarding late fees, to better reflect
the video rental marketplace that Netflix was beginning to shape. This was something that Icahn
and his directors were staunchly against (Harvard Business Review). Through a turn of events
and other disagreements, Antioco eventually agreed to leave the company in July 2007. After
Antioco left, Blockbuster reinstated late fees, with disastrous effects (Harvard Business Review).
While Antioco was late to visualizing the future of the video rental industry, this time
around, management was the issue for Blockbuster. Essentially organizations lose their

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relevance when the rate of internal change lags the pace of external change and when they
become a slave to precedent (Hamel 95). Blockbuster believed that because late fees had played
a significant role in the success of their company in the past, they could rely on this precedent
and reinstitute this policy. The external environment at this time was moving towards a
subscription base, without penalizing late fees. Blockbuster began to make this internal change,
although slower than the external environment, but eventually failed to follow through, proving
to be devastating to their business.
In the end, Blockbuster went bankrupt, and became the storybook example of how a
dominant force in an industry can become disrupted and demolished. Blockbusters vision was
clouded with bias, and their management failed to realize when change was necessary. While
vision and management are not the same concepts, they are two aspects of leadership that are
necessary to insure a company remains on the cutting edge of innovation. Before divulging
deeper into what this necessarily means, an examination of Netflix is necessary.
IV. Netflix Business Model
As mentioned earlier, the emergence of the DVD and its quick adoption rate allowed
Netflix to create a foot hold in the video rental market. The original Netflix business model
revolved around an internet based subscription that allowed consumers to have DVDs mailed to
their house. When the consumer had finished watching the film as many times as they wanted,
they would mail it back and the next one on their queue would be mailed. The use of the internet
to facilitate this process greatly increased the convenience of Netflix versus Blockbuster, while
also eliminating late fees by paying a subscription (Forbes).
Utilizing the internet as a potent tool for innovation, Netflix made serious investments in
their streaming service, revolutionizing the traditional video-rental business, making it more

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convenient than ever before (Forbes). While Blockbuster was shifting back and forth with their
same business strategy, Netflix was looking forward to see how they could continue to add to the
experience of the customers.
Looking to Everett Rogers Diffusion of Innovation Theory model, Netflix was able to
get the early innovators and early adopters to utilize the internet as their source of video rentals
(Satell). Netflix relied on these customers to tell their friends how unique their service was,
helping them fight resistance against their original mail driven DVD service. Once they had the
trust of this Early Majority, it would be easier for them to get individuals to join their online
streaming service, furthering the growth of Netflixs market share (Boston University). Again,
this is significantly different from Blockbuster, a company that failed to realize Netflixs
momentum in the market. Netflix was acknowledging the rapid pace of their external
environment and the increased acceptance of the internet. Their vision of the internet being a
prominent force allowed them to have their management work, and continue to innovate,
maintaining their relevance and dominance in their industry.
V. Netflixs Future, A SWOT Analysis
i. Strengths
As of 2014, Netflix boasted a 57.5% market share in the video streaming market (Nath).
This majority share plays a significant role in preventing competitors from taking hold, as long
as they can continue to maintain this dominance. Another strength that Netflix has is their
increased amount of licensing and original content that they are now producing (Value Line).
With the introduction of exclusive and original content, Netflix is transforming from simply a
platform for consumers to view movies and TV shows, to an entertainment studio. As this
production based portion of Netflix continues to grow, it will continue to increase customer

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reliance on Netflix not only for its convenience, but for its exclusive and wide selection of
entertainment.
ii. Weakness
Netflixs DVD delivery service has been on the downfall since the emergence of their
online streaming. Revenue from Netflixs online service comprised 86% of the total for the
third quarter of 2014 (Value Line). If the DVD subscribers continue to drop at a faster rate than
Netflix anticipated, it could make this portion of their business model no longer viable. This
begs the question, should they discontinue it now, or look at a way to revamp this portion of this
business? Although they abandoned dividing the company publicly in to two separate
subscriptions, much of how these two business models operate, is separated behind the scenes
(Steel). While the streaming division continues to strive ahead, continuously looking to move
forward, the DVD division looks to refine their potentially outdated model.
iii. Opportunities
Netflixs internet based model allows its streaming service to be easily expandable to
foreign markets. Once the necessary legal hurdles are completed, Netflix is able to institute its
model into many markets internationally, having already done so in Latin America, the
Caribbean and part of Europe (Value Line). As they continue to be a driving force
internationally, they have the potential to grab more international market share than some of their
competitors, such as Amazon Prime. Additionally, they have the potential to build on their
strength of having exclusive and original content. By purchasing the rights to canceled shows
and continuing their productions, they also have the opportunity to bring in new customers, those
who were loyal to these canceled shows (CBS).

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Additionally, Netflix has the opportunity to capitalize on a portion of the market called
Cord Cutters individuals who opt out of traditional television, in favor of ad-free services such
as Netflix (Levy). If Netflix was capable of further influencing this trend, it could help make
them a threat to traditional cable companies.
iv. Threats
A major threat to Netflix is Hulu, another online streaming service. Hulu has been
amassing new content over the past year, including Seinfeld for $160 million (Levy). While
Netflix has original content, Hulu is relying on content that individuals are familiar with, to
hopefully spur new customers. If Hulu is capable of building momentum by capitalizing on
shows that individuals are familiar with, it could allow them to steal a portion of Netflixs
market, making them a larger threat.
Another major threat to Netflix is Amazon Prime Instant Video. Amazon Prime has a
unique foothold in this market, because a majority of individuals that purchase Amazon Prime do
it for the free two-day shipping (Bernstein). The video streaming services is an added bonus that
comes with a Prime subscription. Additionally, Amazon Prime Instant Video also has original
content, like Netflix, along with having what is considered as more selective content.
VI. The Takeaway
The necessary takeaway from the Netflix disruption of Blockbuster is the realization that
management and vision are two separate things that need to be utilized in tandem to maintain
relevance. Management alone should effectively negotiate, organize business plans, and maintain
efficiency within a company. Vision, on the other hand, would be the ability to anticipate
potential biases, change perspectives on an issue, and ask the tough what if questions that may
make an executive feel vulnerable.

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While Blockbusters CEO Antioco was no doubt a capable manager, having helped
Blockbuster run efficiently, he failed to be a visionary. Antioco failed to understand that
technology was changing faster than he anticipated, and that its change could prove to be
devastating for their business model. Netflix was capable of seeing the rising prominence of the
internet, and was able to capitalize on this idea by moving to subscriptions and internet ordering.
Netflix continued their use of the internet when they heavily invested in their online streaming
service.
Although Netflix has become a dominant force in their marketplace, they should not feel
safe. Instead, Netflix should be asking themselves; what could happen in the marketplace that
would allow Amazon or Hulu to steal their market share, or where is the next start-up that could
disrupt them? While a SWOT analysis is effective in bringing attention to some of the more
visible threats and opportunities, there is a potentially more effective tool called the Red Cell.
VII. Actionable Recommendation: Implementation of a Red Cell
On September 12th 2001, the CIA decided to create a group of contrarian thinkers to
challenge conventional wisdom in the intelligence community (Zenko). The main idea behind
this was alternative-analysis with the simple instruction to report things others dont and
make [senior officials] feel uncomfortable (Zenko). What formed was a diverse group of
individuals with creative and unique mindsets, who would use their analytical capabilities to look
at scenarios in a completely different light. This team went beyond being a fresh set of eyes, to a
group that was insulated from the mainline of thinking, and would brainstorm how the world
could unexpectedly change. A majority of these analysts would pursue self-tasked projects that
were the results of brainstorming topics. On occasion, the Red Cell would take formally
requested tasks from their superiors or the White House (Zenko). This team is routinely rotated

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to keep the members fresh, and to immerse as many analysts as possible to alternative-analysis
techniques (Zenko).
The Red Cell already has a similar parallel within the business world through consulting
groups, yet these consulting groups do not do much beyond bringing a fresh set of eyes in that
follow the same mainline form of business thought. A successful alternative is if individuals
from within the company are cycled in to create a Red Cell that would sit as an advisory to
executives of the company. These individuals would come from all departments, Information
Technology, Human Resources, Accounting, Engineering, etc. to help create a wide variety of
views, with emphasis on individuals that arent necessarily in upper management. These
employees would be cycled through in a similar fashion as the CIA Red Cell, while continuously
releasing reports of technologies that they believe could be disruptive, rising competitors that
could threaten their position, or even new innovations they should pursue.
While most companies have effective managers at their head, they may lack vision like
Blockbusters Antioco. The Red Cell would be effective in stimulating the executives to take a
second look at issues or prospects, and make them consider the alternative perspective. Imagine
if Blockbuster had a Red Cell prior to 2000, and they began to question whether or not DVDs
would become a significant force in the video rental business. Although management may not
agree with the Red Cell, it would still shape their opinion going forward when DVDs did
eventually take hold. Now, imagine that Blockbuster asked their Red Cell about Netflixs
proposal when they came to Blockbuster in 2000. The Red Cell could have provided alternativeanalysis to Antioco, potentially piercing through his confirmation and over-confidence bias that
had blinded him regarding the state of Blockbuster. Although these are both hypotheticals, it is
necessary to acknowledge how a Red Cell could cause management to reconsider their position,

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and prevent them from falling victim to their own biases. Moving forward, Netflix could also
benefit from a Red Cell. The Red Cell could be utilized to ask the hard questions about Netflixs
future in regards to their competitors; Amazon and Hulu.
Although the Red Cell could be incredibly beneficial, there are some potential
drawbacks. An issue that arose in the intelligence community is that Red Cell reports gained too
much attention and weight simply because they came from the Red Cell, not necessarily
because it is valued added (Zenko). Additionally, some of the work became a little too much
like science fiction at times and relied on flashy titles to garner attention (Zenko). This could
prove to be problematic if this team fails to remain thought provoking. One Red Cell member
went as far as saying if [policymakers] like us too much, were failing at our mission (Zenko).
This highlights the necessity of the Red Cell to be provocative. Red Cell ideas should not
necessarily be focused on being implemented, instead they should be focused on providing their
decision makers a unique perspective, a forward vision that they would not necessarily receive
otherwise.
The ultimate goal of granting a unique perspective, is to bring management and vision
together. Through the implementation of a Red Cell within Blockbuster, Antioco could have
helped anticipated the disruption that was going to occur. A Red Cell could also help a company
such as Netflix know where to look next for growth, or new technology. A Red Cell could also
fail to do both. Nonetheless, the diversity of opinion and the capability to look forward and
consider new concepts that could be groundbreaking within an industry could be the missing tool
that helps companies remain dominant and on the cusp of innovation.

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Works Cited
Antioco, John. "How I Did It: Blockbuster's Former CEO on Sparring with an Activist
Shareholder." Harvard Business Review. Harvard Business Review, 01 Apr. 2011. Web.
15 Feb. 2016. <https://hbr.org/2011/04/how-i-did-it-blockbusters-former-ceo-onsparring-with-an-activist-shareholder/ar/1>.
Bernstein, Bobby. "Netflix vs. Amazon Prime vs. Hulu Plus." Gadget Review. Gadget Review,
07 Feb. 2015. Web. 15 Feb. 2016. <http://www.gadgetreview.com/netflix-vs-amazonprime-vs-hulu-plus>.
Bloomberg. "Video Venture: Taking Charge of Blockbuster." Bloomberg Business Week.
Bloomberg, n.d. Web. 15 Feb. 2016.
<http://www.businessweek.com/chapter/chap0009.htm>.
Boston University. "Diffusion of Innovation Theory." Diffusion of Innovation Theory. Boston
University, n.d. Web. 15 Feb. 2016. <http://sphweb.bumc.bu.edu/otlt/MPHModules/SB/SB721-Models/SB721-Models4.html>.

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Gandel/Dallas, Stephen. How Blockbuster Failed at Failing. Time. Time Inc., 17 Oct. 2010.
Web. 15 Feb. 2016. <http://content.time.com/time/magazine/article/0,9171,20226242,00.html>.
Graser, Marc. "Epic Fail: How Blockbuster Could Have Owned Netflix." Variety. Variety
Magazine, 12 Nov. 2013. Web. 15 Feb. 2016. <http://variety.com/2013/biz/news/epicfail-how-blockbuster-could-have-owned-netflix-1200823443/>.
Hamel, Gary. What Matters Now: How to Win in a World of Relentless Change, Ferocious
Competition, and Unstoppable Innovation. San Francisco, CA: Jossey-Bass, 2012. Print.
Jong, Marc De, Nathan Marston, and Erik Roth. "The Eight Essentials of Innovation." McKinsey
& Company. McKinsey & Company, n.d. Web. 15 Feb. 2016.
<http://www.mckinsey.com/insights/innovation/the_eight_essentials_of_innovation?cid=
other-eml-ttn-mip-mck-oth-1601>.
Levy, Adam. "Is Hulu Becoming a Threat to Netflix? -- The Motley Fool." The Motley Fool. The
Motley Fool, n.d. Web. 15 Feb. 2016.
<http://www.fool.com/investing/general/2015/09/09/is-hulu-becoming-a-threat-tonetflix.aspx>.
Lombardi, Ken. ""Arrested Development" Will Be Back for Season 5, Netflix Says." CBSNews.
CBS Interactive, n.d. Web. 15 Feb. 2016. <http://www.cbsnews.com/news/arresteddevelopment-will-be-back-for-season-5-netflix-says/>.
Meissner, Philip, Olivier Sibony, and Torsten Wulf. "Are You Ready to Decide?" McKinsey &
Company. McKinsey & Company, n.d. Web. 15 Feb. 2016.
<http://www.mckinsey.com/insights/strategy/are_you_ready_to_decide>.

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Nath, Trevir. "Hulu, Netflix, And Amazon Instant Video Comparison | Investopedia."
Investopedia. Investopedia, 17 Dec. 2014. Web. 15 Feb. 2016.
<http://www.investopedia.com/articles/personal-finance/121714/hulu-netflix-andamazon-instant-video-comparison.asp>.
Satell, Greg. "A Look Back At Why Blockbuster Really Failed And Why It Didn't Have To."
Digital Tonto RSS. Digital Tonto, n.d. Web. 15 Feb. 2016.
<http://www.digitaltonto.com/2014/a-look-back-at-why-blockbuster-really-failed-and
-why-it-didnt-have-to/>.
Steel, Emily. "Netflix Refines Its DVD Business, Even as Streaming Unit Booms." The New
York Times. The New York Times, 26 July 2015. Web. 15 Feb. 2016.
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Trefis Team. "Where Is Netflix's DVD Business Headed?" Forbes. Forbes Magazine, n.d. Web.
15 Feb. 2016. <http://www.forbes.com/sites/greatspeculations/2013/04/16/where-isnetflixs-dvd-business-headed/#3330cba3f0d6>.
Value Line. "Netflix: A Short SWOT Analysis." Netflix: A Short SWOT Analysis. Value Line,
n.d. Web. 15 Feb. 2016.
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Zenko, Micah. Inside the CIA Red Cell. Foreign Policy Inside the CIA Red Cell Comments.
Foreign Policy, n.d. Web. 15 Feb. 2016. <http://foreignpolicy.com/2015/10/30/insidethe-cia-red-cell-micah-zenko-red-team-intelligence/>.

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Case Study II
Uber
Revolutionizing the Taxi Industry

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Andrew Coatsworth
I. Understanding the Taxi Industry
Although the taxi industry dates back to the 1600s when horse drawn carriages became
available for hire in Paris, taxis did not catch on in the United States until late in the 19th century.
By 1890, as automobiles took hold as a popular mode of transportation, entrepreneurs saw an
opportunity for a new business model. Automobiles became available for hire and began to
compete with traditional horse drawn carriages. Despite technological limitations including
batteries weighing as much as 800 pounds, by 1899 there were roughly 100 operating taxis in
New York City. In response to growing demand for taxis, the city of New York purchased 600
gasoline powered cars from France. Additionally, the implementation of the taxi meter allowed
for similar prices among taxi companies and major expansion of the industry.
Following the success of the taxi industry in New York City, by the 1920s, taxi cabs
began to expand nationally. During this time period, car companies such as General Motors and
Ford ran some of the largest taxi operations. However, smaller players such as Checker Cab
Company posed major threats to the automobile giants. Although the industry had experienced
major growth, taxi companies were marred by corruption during the Great Depression. These

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issues culminated in 1934 when more than 2,000 taxi drivers protested in Time Square. This
strike led to the implementation of a medallion system. The medallion system forced taxi
companies to purchase a small plate to place on the hood of their taxis. Purchasing a medallion
proved that a driver was certified to operate the taxi. This system allowed government officials
to control the quantity and quality of taxis and gave drivers a better opportunity to earn a living
wage. After the success of the medallion system, regulation of the taxi industry continued when
cabs were ordered to be standardized and painted yellow. The standardization of taxis attempted
to distinguish registered medallion cabs from unlicensed cabs.
During the 1980s and 1990s, in response to changing immigration patterns in the United
States, a shift occurred in the nationality of taxi drivers. Many immigrants viewed the taxi
industry as a great opportunity for employment (The History of the Taxi Industry). Although not
a direct consequence of the immigration changes, taxicabs began to develop a poor reputation.
Cars smelled bad, seats were ripped, and operators drove erratically (Frizzle). These changes
forced the government to intervene, strengthen regulations against the industry, and monitor the
conduct of drivers. Recently, taxicabs have become more technologically advanced with new
features such as televisions, credit card payment options, and interactive maps for passengers
(The History of the Taxi Industry). However, despite the historical success and recent
improvements to the taxis, many feel that the industry has become monopolistic and
overregulated. These individuals believe that it is time to provide consumers with more
alternatives to traditional taxis, better prices, and more modern technology (Frizzle). As a result
of these beliefs, taxis are currently in danger of losing control of the market.
II. The Modern TaxiRidesharing
i. What is Uber?

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Uber allows customers to hire a driver via a smartphone application. The premise of the
application is to pair a driver with a customer. Additionally, Uber users enter their credit card
information into the application for seamless payments and GPS technology allows for easy
pick-ups and drop-offs. The application has a built in rating system for both drivers and
passengers to hold both parties accountable and help provide an overall positive experience.
Unlike taxi services, Uber does not own the cars or hire drivers to be employees. Rather, the
drivers supply the cars, cover operating expenses such as gas and maintenance, and serve as
private contractors. Based on the current revenue model, drivers earn 80% of the fairs while
Uber takes the remaining 20%.
ii. Origins of Uber
Travis Kalanick, the founder and current CEO of Uber, developed his company in
response to limited transportation options in San Francisco prior to 2010. According to
Kalanick, The problem we were solving was a very San Francisco problem, on the ground and
in the streets of San Francisco, because if youre here and its before 2010, you drive
everywhere, even if its 10 minutes away. Its a city, and you have to drive everywhere. New
York has 13,200 cabs or thereabouts, and S.F. has 1,500. If you were here before 2010, you
could not get a cab. Kind of weird (Cushing). Beyond the issue of supply and demand,
consumers were highly dissatisfied with the taxi service in San Francisco. Although Uber had
already been launched during this period, between July 2011 and June 2012, taxicab passengers
filed over 1,700 complaints (Cushing). Kalanick, along with a team of deep pocketed investors,
launched the company in 2010 as a luxury shuttle service called UberCab. In the early stages of
the company, Kalanick boasted that, You get that experience like I pushed a button, and a car
showed up, and now Im a pimp (Cushing).

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Uber launched in the luxury transportation market for two main reasons: Kalanicks
champagne tastes and the relatively relaxed regulation of the town car industry when compared
to the taxi industry. However, soon after UberCab began to offer the town car service, a
competitor, Lyft, entered the market providing inexpensive rides in non-luxury vehicles. Yet
Kalanick decided at first not to compete with Lyft in fear of increased regulation. Despite the
perceived lax regulation in the luxury transportation industry, UberCab was served with cease
and desist orders from both the San Francisco Municipal Transportation Agency and the Public
Utilities Commission. The cease and desist orders were mainly a result of the companys use of
the word cab in their name. After dropping cab from the name, Uber continued to face
regulatory obstacles. Uber drivers were frequently ticketed by San Francisco authorities. In
response to these obstacles, Uber shifted from a company highly concerned with following
regulations and remaining completely legal to a company that developed an antiregulatory
philosophy (Cushing). According to one of Kalanicks acquaintances, Even the most
progressive among us were so deeply offended by the way these dirty regulators would operate.
Youve got this company that was playing entirely by the rules and getting punished nonetheless.
That sets up a company where the CEO feels emboldened to say, Why the [expletive] should I
pay attention to any of these rules, then? Thats what created the beast (Cushing).
The unjust regulation forced Uber to alter its business model. Rather than strictly
offering luxury cars for transportation, Uber began to compete with Lyft and a second
competitor, Sidecar, with UberX. UberX provided users with a cheaper transportation option.
While the luxury car service targeted roughly 5% of the population, UberX made the service
affordable and accessible to a much wider population. Although UberX made the service more
affordable, the company utilizes a dynamic pricing model. Under this model, Uber attempts to

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match the supply of cars with the demand of riders. If demand for cars increases, the prices will
increase in a proportionate way in hopes of incentivizing more drivers to go online. Uber riders
are forced to pay a fare multiplier as a result of the demand surge (Diakopoulos). On New Years
Eve of 2016, some cities had multipliers as high as 9.9 meaning that users were forced to pay
prices 9.9 times higher than the normal fare. One user paid over $1,100 for an hour long ride
(Epstein).
With the expanded business model, Uber received roughly $50 million in 2011 from
multiple venture capital firms allowing the company to expand to New York and Chicago
(Cushing). It is difficult to fully understand Ubers growth as it is a privately held company.
However, in 2014, one of the companies slide decks was leaked. The slide deck provided the
public with insight to the success of the company. Included are some of the following figures:
Figure I

Figure I, while it shows some fluctuation in weekly revenues, provides insight to Ubers success
in major US cities while also the potential for global expansion (Shontell)

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Figure II

Figure II, helps to visualize the companys growth as secondary markets such as New
York City, Chicago, Los Angeles, and Washington DC began to match volume of Ubers primary
market, San Francisco (Shontell)
Figure III

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Figure III, the revenue breakdown from New Years Eve in 2013, provides insight to the
companys ability to capitalize on major holidays across the country. The company benefits from
increased demand (Shontell)
By November of 2014, Uber had 1,700 corporate employees and hundreds of thousands
of drivers worldwide. The growth forced Uber out of its headquarters at the time and into a 10story, 423,000 square foot office with capacity for 2,000 employees in the Mission Bay area
(Cushing). During this massive expansion, Uber increased the number of company drivers at a
rate of 20,000 per month. In 2009, the United States transportation industry had only about
111,000 chauffeured vehicles. This meant that every month, when compared to the 2009 figure,
Uber added 18% of the total numbers of chauffeured vehicles in the United States (Wessel). As a
result of this staggering growth, Uber managed to raise $1.2 billion in funding in December of
2014 giving the company a total valuation of $40 billion. Four years prior to this round of
funding, the company was valued at just $60 million. At this rate, Uber appreciated in value by
$19,839 per minute (Gongloff). More recently, in December of 2015, Uber sought $2.1 billion in
funding at a $62.5 billion valuation. Investors are willing to pay a significant premium in order
to buy a stake in Uber as the taxi and limousine market represented just $11 billion in annual US
revenue in 2014 (Wessel). Uber is able to command this premium based on the potential for
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global expansion as well as the development of other service lines. The company plans to spend
$1 billion in an expansion plan throughout Asia. This plan will focus mainly on China as the
company hopes to operate in 100 Chinese cities by the end of 2016. As of January 2016, Uber
operated in 22 cities in China and launched in 15 cities in the Sichaun providence, an area with a
population over 80 million. Chengdu has become Ubers most successful city when measured by
completed trips after just nine months of operation (Russell). In addition to the globalization of
the brand, Uber is experimenting with a food delivery service and new technology including selfdriving cars. To help raise this funding, Uber is citing a gross revenue run rate of over $10
billion. Although this is a highly attractive figure for investors, a run rate simply extrapolates
revenue from a recent week, month, or quarter over an entire year. This figure also does not
factor in expenses and driver commissions. With these factors taken into consideration, the run
rate may be misleading and potentially inaccurate. However, during 2015, Uber managed to
increase its gross revenue in the United States by roughly 200% and the total number of trips
increased by 250% (Newcomer).
III. Impact on the Taxi Industry
After Uber started to capture significant market share in San Francisco, the San
Francisco Municipal Transportation Agency reported that between January 2012 and July 2014,
monthly trips per taxicab fell from 1,424 to just 504. Just as Kalanick had hoped, Uber began to
destroy the taxi industry (Cushing). Uber and other ridesharing competitors enjoyed incredible
success taking on traditional taxis as a result of the revised business models. Unlike Uber and
other ridesharing platforms, taxi companies are forced to purchase medallions ranging in price
from $250,000 to $1 million for each cab in service in order to follow industry regulations
(Constine). Additionally, taxi services must cover maintenance costs of vehicles as they are

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company owned cars (Frizzle). Beyond the revised business model, Uber prices, especially
UberX, have decreased with company expansion. In June of 2014, UberX lowered its fare prices
in San Francisco by 25% making UberX 45% less expensive than a traditional taxi. This price
cut made UberX 13% less expensive than its competitor Lyft. Although prices vary from city to
city and are impacted by surge pricing, the convenience factor of Uber makes taxis much less
attractive. Prior to the 25% price cut in San Francisco, Hansu Kim, the president of DeSoto Cab
stated, With Uber, Lyft, and the like, we would be surprised if the cab industry survives another
18 months in the city (Constine). According to Tech Crunch contributor Josh Constine, taxis
were marred by inconvenient meatspace hailing, unreliable scheduled pickups, beat up cars, and
unaccountable drivers (Constine). In order to allow taxis to continue competing with the new
platforms, cities such as Seattle have passed legislation attempting to regulate ridesharing firms
with varying degrees of success. In March of 2014, the Seattle City Council unanimously passed
legislation to cap the number of ridesharing drivers that could be on the road at a specific time.
Ridesharing companies were limited to just 150 active drivers on the road. In total, it was
estimated that Seattle had 2,000 ridesharing drivers when the legislation was approved (Essif).
Although this type of legislation is controversial as many see it as limiting innovation and the
positive advancement of the transportation industry, it appears that it is necessary in order to
keep traditional taxi companies in business.
i. The Taxi Disruption Cycle
According to Elad Gil of Tech Crunch, the classic cycle of disruption can be broken
down into 4 states. The first state is incumbent overconfidence, then the disruptor begins to take
significant market share there is a sudden incumbent collapse. As the incumbent fails to
effectively respond, they enter the too little too late phase and finally a state of ongoing decline.

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This cycle is best depicted by the graph below.

(Gil)
The incumbent taxi industry failed to see the true threat of ridesharing competitors. Rather than
attempting to innovate in order to update their business operations, taxi companies tried to use
regulatory actions against these firms. For example, UberCab was forced to change its name to
Uber and faced cease and desist orders. The industry then fell into a sudden collapse and a
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cyclical transition of taxi drivers leaving their current jobs. As taxi drivers looked for other
employment opportunities such as Uber, Uber was able to expand its supply of vehicles. With
increased supply of vehicles, Uber gained more customers. As a result of the greater demand for
Uber drivers, more taxi drivers switched over to Uber. In 2014 alone, over 2,800 of 8,500
registered taxi drivers in San Francisco left their companies for ridesharing platforms. In
response to the declining taxi industry, traditional taxi companies are beginning to respond. The
San Francisco Municipal Transportation Agency and other cab companies responded to the new
competition by increasing the supply of medallions. However, with Uber and other ridesharing
platforms stealing such a significant portion of market share, these actions will most likely prove
to be too little too late in the long run. Taxi companies should have noticed the changing
business environment when Uber began to enter the market and implement their own form of a
smartphone application. Finally, as Uber continues to expand, the taxi industry will enter the
final stage of ongoing decline. Although the traditional taxis such as Yellow Cab will not
immediately disappear, these businesses will continue to lose customers and they will be forced
to downsize (Gil).
ii. Ongoing Decline of the Taxi Industry
While the disruption of the taxi industry has been most significant in Ubers original
location, San Francisco, other cities are beginning to catch up. In New York City, the average
cost of a medallion fell from $1 million in the summer of 2014 to $690,000 in the summer of
2015. Over a two-year period, in areas outside the Central Business District, the total number of
ridesharing trips increased from 4.8 million to 7.3 million with the number of taxi rides falling by
600,000. Additionally, within the Central Business District over the same two-year period, the

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number of Uber rides increased from 175,000 to 1.8 million while taxi rides fell by roughly 1.4
million (A Tale of Two Cities).
In Seattle, the total taxicab industry revenue fell from $100 million in 2012-2013 to just
$72 million in 2013-2014. Despite the decreased revenue, taxi companies increased the total
number of miles driven from 65.8 million to 67.3 million over the same period. Mayor Ed
Murray also overturned previous legislation that capped the number of ridesharing drivers in
June of 2014. Murray struck a compromise that removed the cap on the number of ridesharing
drivers while agreeing to issue 200 new medallions over a four-year period (Soper).
As of the summer of 2015, it has been estimated that the number of ridesharing drivers in
the city is as high as 5,000. Finally, Seattle taxicabs are currently in danger of losing their
exclusive right to pick up passengers at the Seattle-Tacoma International airport. While Uber
drivers can drop customers off at the airport, Seattle Yellow Cab has enjoyed the exclusive right
to picking passengers up. However, the Port of Seattle is currently in discussions to allow
ridesharing platform to pick passengers up. This would further damage the state of traditional
taxi companies in Seattle (Soper).
Finally, in Boston over the first half of 2015, the volume of taxi rides fells by 22%. This
decline in rides amounted to 1.5 million fewer rides and a $33 million decrease in fares. This
drop in revenue has adversely impacted taxi driver. For example, during an 11-hour shift,
Nasreldin Ibrahim, a taxi driver with 17 years of experience, earned just $70. After paying
expenses to the taxi company, his profits were drawn down to almost nothing. Other drivers
have seen weekly profits drop from between $700 and $800 dollars before the expansion of
Uber, to under $200 (Newsham).

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When taking into consideration the three cities discussed above as well as the current
expansion plans for Uber, it is evident that the taxi industry is between the phases of too little
too late and ongoing decline. Although taxi companies continue to attempt to compete with
ridesharing applications, it is unclear if their efforts will ultimately prove to be successful.
Despite Ubers widespread success, it is still necessary for the company to think critically about
its future. In order to understand what lies ahead for the firm, it is helpful to consider a SWOT
analysis.
III. Uber SWOT Analysis
i. Strengths
Uber has become an incredibly successful company because it conveniently matches
riders with drivers. Although it is still a service to get a paying customer from point A to point B,
the technologically savvy application allows users to seamlessly request a driver and pay for the
ride. This removes the hassle of hailing a cab or contacting a dispatcher. Additionally, within
the application, users are provided with a fare estimate and real time GPS location of their driver.
With the wide popularity and expansion of their brand, Uber is the most recognizable of the
ridesharing applications. In order to maintain their brand recognition, Uber attempts to hold their
drivers to a high standard. These drivers must pass a background check and are held accountable
via an in application driver rating system. After each ride, the passenger uses the application to
rate their driver. If the drivers rating falls below 4.6 out of 5 stars, the driver will be at risk of
being deactivated from the system (Cook). Another major advantage of the Uber business model
when compared to traditional taxis is that Uber does not own any of the vehicles in its fleet.
Rather, the drivers who are considered private contractors, are responsible for the vehicles. This
helps drive down operational costs. Also, since drivers are not considered employees, they are

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offered flexible working hours of their choice. Finally, as discussed in the previous section,
investors are anxious to purchase a stake in the company and are willing to pay a massive
premium. This ease of funding has allowed Uber to pursue not only national but global
expansion. As a result of this success, Uber has started to experiment with additional service
lines such as food delivery and technological ventures including driverless cars.
ii. Weaknesses
Despite Ubers massive expansion and business success, the company is not without
weaknesses. First of all, Uber is a technologically advanced taxi service. Uber offers the same
service as traditional taxis with a more convenient process. This makes the business model
highly replicable. While it is unclear if Uber will be adversely affected by the introduction of
new and improved competition, it remains a possibility.
A second major weakness is the lack of connection between the corporate side of the
company and the drivers. Since drivers are not employees, there can be significant disconnect
and a lack of loyalty between the two branches of the company. Recently, a body of Uber drivers
filed a class action lawsuit in the belief that they have been misclassified as independent
contractors. They believe that they are entitled to reimbursement for their expenses including
gas and vehicle maintenance. The lawsuit also challenges Ubers decision to include a gratuity
in the passengers bill to discourage tipping. The case is scheduled to begin trial on June 20,
2016 (Lorenzetti). It is feared that if the lawsuit is successful, Uber will be forced to
significantly raise prices and thus make the service much less attractive to consumers. Higher
operating costs will drive prices up and decrease the number of drivers in the Uber network
(Dean).

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Beyond the relationship between the corporate and driver side of the business, many have
called into question the true safety of using the application. Although it is a convenient business
model, UberX drivers are not professionally trained (drivers from Ubers luxury car service,
UberBlack, must have commercial drivers licenses). The qualifications for Ubers noncommercial service lines: UberX, XL (SUVs) and Plus (luxury sedans) are the following: the
driver must be at least 21-years of age, have access to a 4-door car that is 2006 or newer for most
markets, in-state auto insurance with the drivers name on the policy, an in-state license for at
least one year, current registration, and the driver must pass a background check (Whats the
Difference between UberX).
In February of 2016, although it has yet to be finalized, Uber settled two lawsuits for
$28.5 million. The two lawsuits claimed that Uber misled customers about a Safe Rides Fee
and the background check that drivers must pass. The company first implemented a $1 fee and
later ranged from $1.35 to $2.30 depending on the market. If the lawsuit is approved, Uber will
be forced to change the name of the fee to a Booking Fee. Additionally, Uber will no longer
be able to advertise with phrases such as industry leading, best available, and strictest
safety standards possible. Customers claimed that they have been misled because Uber
background checks do not require the use of fingerprints of government databases (Schena).
Additionally, since drivers are not employees, it is also unclear how responsible Uber can
be held for their drivers. In October of 2014, an UberX driver attacked a customer with a
hammer (Said) and in February of 2016 in Kalamazoo, Michigan, an Uber driver turned gunman
killed six people while injuring two more. Between shootings, the man operated as an Uber
driver (Conlon and Valencia). A final concern for Uber is the potential for privacy violations.

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Since the application tracks where riders are picked up and dropped off, many fear that this
private information could be exploited.
Within the corporate side of the company, Uber has developed somewhat of a poor
reputation. Venture capitalist and author Peter Sims claims that Uber is, the most arrogant
company Ive encountered, and the most unethical. I dont say that lightly (Cushing). Also, the
employees have described a corporate culture with frequent promotions and demotions, high
levels of fear and pressure with little support (Cushing). Employees are expected to be on call
24-7 and it is not uncommon for company chatrooms to be live at three in the morning. This
corporate culture may eventually prove to be highly problematic as current employees grow tired
of the demands. Also, as millennials begin to enter the workforce, these new workers will be
much less tolerant of the current state of Ubers corporate culture.
iii. Opportunities
Ubers largest opportunity is the potential for growth. Since the business model is highly
scalable, Uber will continue its massive global expansion capitalizing on markets where taxis are
inefficient and expensive. This potential for expansion will allow Uber to seek more investment
and increase firm value. Additionally, within the United States, Uber is able to expand into rural
areas where taxi services are limited or unavailable. Finally, as technology continues to improve,
the service can be further streamlined. Examples of this may include increased application
performance, the lowering of driver expenses as a result of more efficient vehicles, or the
implementation of driverless cars.
While Uber has suffered from a poor reputation, the company has the opportunity to shift
its marketing strategy. Uber should capitalize on the positives of the company such as reducing
drunk driving, reduced emissions as fewer cars are on the road, and the creation of new jobs.

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Utilizing these aspects of the company will enable Uber to strengthen its reputation and ideally
improve long term business success.
iv. Threats
Although Uber faces competition from both the traditional taxi service and other
ridesharing platforms which may continue to force prices down, the most pressing issues are
internal. While Uber claims that drivers can earn a median annual salary of $74,000 in major
markets, this figure assumes that drivers will work more than 40 hours per week and does not
include expenses such as gas and maintenance (Cushing). With lower salaries and a lack of
employee benefits, Uber runs the risk of losing their driver base.
Additionally, as seen in cities like Seattle and San Francisco, Uber could face stricter
government regulation in the future. Outside of the United States, Uber is exposed to foreign
regulations. For example, after struggling to take hold in Germany, the German government has
banned UberX from the country (Scott). Although Uber is appealing the ban, this is a perfect
example of the impacts of different regulatory environments.
IV. Strategic Recommendation
To a certain extent, Uber has become a victim of its own success. The rapid growth and
seemingly constant investment has thrown the company into a worldwide spotlight. As the taxi
industry has been flipped upside down, Uber can easily be seen as a villain. Taxi drivers find
themselves struggling to earn a living wage as the result of the success of the ridesharing
industry. It does not help Ubers case that they have developed an anti-regulatory attitude.
Additionally, Ellen Cushing of the San Francisco Magazine writes that, its not just that Uber
has adopted the business school maxim, Dont ask for permission; ask for forgivenessit has
instituted the policy of asking for neither (Cushing). Yet, despite the widely held negative view

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of Uber, it has undoubtedly made the taxi industry more accessible for people around the world.
Young consumers are simply more comfortable using their smartphone to hire a ridesharing
driver. The added convenience and comfort has forever raised the standard of the taxi industry.
Minor details such as the friendly drivers and added perks such as playing music from a personal
device during the ride have made Uber a staple application in smartphones across the globe.
However, in order to continue this success, Uber must improve its public image. It must first
reconcile the differences between the corporate branch and the drivers who make the company
work. Without drivers, Uber doesnt exist. Although they may be classified as private
contractors, Uber drivers deserve better perks and benefits. The $74,000 median salary
advertised by Uber simply isnt realistic for the vast majority of drivers. Uber must achieve a
better balance between profit maximization and driver satisfaction. This may come through the
form of increased pay, maintenance and fuels subsidization, or benefits such as health insurance.
Rather than focusing strictly on expansion, Uber needs to apply some of the raised capital
towards its drivers. It is simply unacceptable that corporate Uber employees using the
companys services ask to be dropped off at a location other than the companys office when
going to work (Cushing). These employees should be proud to tell their Uber drivers that they
too work for the company.
After reconciling the differences between corporate headquarters and the drivers, Uber
needs to address its public image. Rather than boasting about destroying the taxi industry, Uber
should market itself as improving the way people can travel from point A to point B. As
previously mentioned, Uber should advertise itself based on the positives that it offers such as
taking drunk drivers off of the road and decreasing greenhouse gas emissions. Furthermore,
Uber needs to implement stronger safety and risk management measures for its drivers. Events

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such as the driver attacking a customer with a hammer and the recent Michigan gunmen could
prove to be detrimental to the companys long run success. Uber users need to be 100%
confident that their trip will be safe. Finally, Uber needs to be more conscientious of its global
expansion. As seen in the US, Uber has the ability to immediately impact the incumbent taxi
industry. This makes the company highly controversial. By understanding different cultural
values and government regulations around the world, Uber can help mitigate the risks associated
with globalization.
A final strategic recommendation to Uber is to continue to view itself as a technology
firm rather than a transportation company. The incumbent taxi industry became complacent as it
settled for small improvements such as cleaner and more efficient vehicles. As result of the lack
of innovation, the taxi industry is being disrupted. Uber can avoid this collapse by utilizing the
most recent and powerful technology in their business model. Technological innovation has
allowed Uber to grow into the company that it is today, and technological innovation may prove
to be the key to Ubers long term success.

Works Cited

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Conlon, Kevin, and Nick Valencia. "Kalamazoo Uber Driver Picked up Fares between Killings,
Source Says." CNN. N.p., 22 Feb. 2016. Web. 28 Feb. 2016.
Constine, Josh. "UberX Wages War On Bay Area Taxis With 25% Price Cut." TechCrunch. N.p.,
30 June 2014. Web. 29 Feb. 2016.
Cook, James. "Uber's Internal Charts Show How Its Driver-rating System Actually Works."
Business Insider. Business Insider, Inc, 11 Feb. 2015. Web. 29 Feb. 2016.
Cushing, Ellen. "The Smartest Bro in the Room." San Francisco Magazine. N.p., 21 Nov. 2014.
Web. 12 Feb. 2016.
Dean, Zach. "Uber Lawsuit Will Put Us Back in Taxicab Hell." The Huffington Post.
TheHuffingtonPost.com, 14 Oct. 2015. Web. 29 Feb. 2016.
Diakopoulos, Nicholas. "How Uber Surge Pricing Really Works." Washington Post. The
Washington Post, 17 Apr. 2015. Web. 29 Feb. 2016.
Epstein, Zach. "New Years Eve Surge Pricing Enrages Uber Users; One Man Hit with $1,100
Fare." BGR. N.p., 04 Jan. 2016. Web. 29 Feb. 2016.
Essif, Amien. "Is Seattle's Rideshare Crackdown Actually a Win for Taxi Drivers?" In These
Times. N.p., 21 Mar. 2014. Web. 28 Feb. 2016.
Frizzle, Sam. "A Historical Argument Against Uber: Taxi Regulations Are There for a Reason."
Time. Time, 19 Nov. 2014. Web. 12 Feb. 2016.
Gil, Elad. "Uber And Disruption." TechCrunch. N.p., 19 Jan. 2014. Web. 29 Feb. 2016.
Gongloff, Mark. "Uber's Value Just Doubled To $40 Billion In 6 Months (Sorry, Haters)." The
Huffington Post. TheHuffingtonPost.com, 04 Dec. 2014. Web. 29 Feb. 2016.
"The History of the Taxi Industry." TaxiFareFinder Newsroom. N.p., 1 Nov. 2012. Web. 15 Feb.
2016.

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Lorenzetti, Laura. "Everything to Know About the Uber Class Action Lawsuit." Fortune
Everything to Know about the Uber Class Action Lawsuit Comments. N.p., 02 Sept.
2015. Web. 29 Feb. 2016.
Newcomer, Eric. "Uber Raises Funding at $62.5 Billion Valuation." Bloomberg.com. Bloomberg,
3 Dec. 2015. Web. 29 Feb. 2016.
Newsham, Jack, and Dan Adams. "Boston Taxi Ridership down 22 Percent This Year - The
Boston Globe." BostonGlobe.com. N.p., 19 Aug. 2015. Web. 29 Feb. 2016.
Russell, Jon. "Uber Makes First Big Expansion In China As It Aims To Reach 100 Cities
In 2016." TechCrunch. N.p., 18 Jan. 2016. Web. 29 Feb. 2016.
Said, Carolyn. "Uber Hammer Attack May Clarify Firm's Responsibilities." SFGate. N.p., 9 Oct.
2014. Web. 29 Feb. 2016.
Schena, Susan C. "$28.5 Million Settlement Proposed For Uber Passengers In Safety,
Advertising Lawsuits | Patch." Livermore, CA Patch. N.p., 16 Feb. 2016. Web. 29 Feb.
2016.
Scott, Mark. "As Uber Stumbles, German Rivals Prosper." Bits As Uber Stumbles German Rivals
Prosper Comments. N.p., 4 Jan. 2016. Web. 29 Feb. 2016.
Shontell, Alyson. "LEAKED: Internal Uber Deck Reveals Staggering Revenue And Growth
Metrics." Business Insider. Business Insider, Inc, 20 Nov. 2014. Web. 29 Feb. 2016.
Soper, Taylor. "Seattle Legalizes Uber, Lyft to Operate without Caps - GeekWire." GeekWire.
N.p., 14 July 2014. Web. 29 Feb. 2016.
"A Tale of Two Cities." The Economist. The Economist Newspaper, 15 Aug. 2015. Web. 29 Feb.
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Wessel, Maxwell. "Making Sense of Uber's $40 Billion Valuation." Harvard Business Review.
N.p., 10 Dec. 2014. Web. 29 Feb. 2016.
"Whats the Difference between UberX, XL, UberSelect, and Black Car?" RideSharingDriver.
N.p., 16 Nov. 2014. Web. 29 Feb. 2016.

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Case Study III

The Battle between Fossil Fuels and Alternative Energy

Emaan Jaberi

I. The Battle between Fossil Fuels and Alternative Energy

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The energy industry is a hotly contested marketplace that can be more or less split up into
two sectors. The first sector is fossil fuels such as, coal, natural gas, and oil. Fossil fuels are
currently the worlds primary energy source (EESI). Having formed from organic material over
millions of years, they are a major driver of the worlds economic development. Fossil fuels
major drawback is that they are finite [resources] [That] can also irreparably harm the
environment (ESSI). Yet despite these two prevalent drawbacks, they still play a pivotal role in
the energy industry. The second sector in the energy market would be alternative energy; solar
power, hydroelectric, wind power, and other sources that do not deplete natural resources or
harm the environment (Oxford). This sector of the energy industry has been continuously
attempting to find ways to usurp fossil fuels hold on the energy market. (Side note: for the sake
simplicity, nuclear energy will not be addressed, but should be considered to be in the same camp
as fossil fuels.)
Unlike Netflix and Uber, there has not been a monumental moment depicting alternative
energy as having significantly disrupted the fossil fuel industry. Instead, there is a one sided
battle between the two industries, as alternative energy has continuously fought to disrupt the
energy market and take hold against an incumbent that has significant control over the
marketplace. Although there have been many innovations in regards to alternative energy, the
fossil fuel industry has been successful in stifling their disruptive capabilities for the time being.
The fossil fuel industries success in hampering alternative energy does prompt a question: how
long can fossil fuels continue to remain supreme, and prevent disruption? Also, what lesson is
there to be learned from fighting innovation?

II. The History of Fossil Fuel Dependency

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Coal is considered the most plentiful source of energy in the fossil fuel group and has
arguably the longest history (Department of Energy). Coal rose to prominence most notably
during the Industrial Revolution, when the United States and other nations began to utilize steam
ships and railroads as their primary forms of transportation (Department of Energy). With an
increased demand for coal, came the increased search and creation of coal mines, which
demonstrated the abundance and availability of coal. Coal use became prevalent, as it began to
be used in manufacturing and to generate electricity for homes as early as the 1880s (Department
of Energy).
With the great pace of industrialization and the push to continue advancement, oil came
about as a new fuel source that could increase productivity. The oil industry began to truly
expand in 1901 with the discovery of the Spindletop Geyser, which was the one of the first
major oil wells drilled (History Channel). In subsequent years, the dependency on oil continued
to grow as automobiles and airplanes relied on it for energy (History Channel). Oil had become
the primary energy source for transportation in an economy that was becoming increasingly
interconnected. With its foothold already in the energy industry, oil and coal, along with natural
gas, began to grow in prowess as they were seen as the prerequisites of creating new industrial
civilizations (Mitsubishi). With increasing demand for fossil fuels, came increasing profit for
companies such as Standard Oil, as fossil fuel companies became wealthier and have more
influence politically (History Channel).
III. A Simple and Brief History of Alternative Energy
Early records of history note that wind has been a source of energy for significant period
of time. From as early as 5000 B.C. wind was utilized to propel boats, and for irrigation by
pumping water through fields (Wind Energy Foundation). Throughout the 20th Century, large

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scale wind farms were created to generate electricity (Wind Energy Foundation). In the 1970s,
oil shortages threatened the United States, when the government began to grant incentives and
collaborate with the wind energy industry to advance technology (Wind Energy Foundation).
These incentives helped spur new advancements to make this form of alternative energy viable
against oil. In the 1980s and early 1990s, low oil prices threatened to make electricity from
wind power uneconomical leading to slower wind energy growth (Wind Energy Foundation).
Slowing growth for wind energy led to most of the incentives being cut, while subsidies and
incentives built into the fossil fuel industry remained, allowing for these technologies to flourish.
Another form of alternative energy is hydropower, which is harnessing the energy created
by flowing water (Department of Energy). Like wind energy, hydropower has been around for
thousands of years through inventions such as water wheels, that would utilize currents from
rivers to grind wheat into flour (Department of Energy). Hydropower became more prominent
when technology was developed to create hydroelectric turbines and dams. In 1893, the first
U.S. commercial hydropower plant was created in Redlands California (Department of Energy).
Moving into the first half of the 20th century, more hydroelectric dams were created, leading to
the development of mega hydro-electric plants such as the Hoover Dam and the Grand Coulee
Dam (Hydropower). The constructions of these large scale dams were not confined to only the
United States, as China created the worlds largest hydroelectric facility, the Three Gorges Dam,
which opened in 2008 (Hydropower). Additionally, hydroelectricity is seen as a powerful source
for emerging economies such as Brazil to establish energy independence.
A third form of alternative energy is solar energy. The most common form of solar energy
was by harnessing the suns radiation through photovoltaic energy (aka solar cells) (Reece).
Through the use of selenium, it was discovered that light without heat or moving parts, could be

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converted into electricity (Reece). Although selenium was not necessarily efficient, it did
provide grounds for further experimentation of ways to harness electricity from the solar rays,
without using complex designs and moving parts. In 1953, it was discovered that solar cells
could be made using silicon, making them efficient enough to run small electronic devices
(Reece). This led to solar cells being sold commercially in 1956, however, the cost was around
$300 for a 1-watt solar cell, far too expense for the average consumer (Reece). Through
continuous innovation, various space programs, and even research spearheaded by Exxon, solar
cells became more efficient and practical.
Through their long history; hydropower, wind power, and solar power, have all made
incredible advancements. Despite these advancements, and the increased efficiency in
alternative energy, they have yet to disrupt fossil fuels dominance in the energy industry.
IV. Changing Preference and Trends
As the global population continues to grow, the presence and importance of millennials
continues to grow as well (Council of Economic Advisors). By 2020, it is expected that
millennials will make up half of the global workforce, demonstrating that they will have a large
impact on global trends and preferences (Catalyst). A survey conducted by Deloitte in 2015,
went as far as stating that Millennials have recently inched past the other generations to corner
the largest share of the US labor market (Deloitte 2)

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To

put

this in another perspective, (by examining the graph above), Millennials are depicted as being
over one third of the United States population (Council of Economic Advisors). The next largest
segment is the Baby Boomers, who until recently, were the major influencers of market trends
and preferences. As Baby Boomers continue to age out of the population, the balance of
population distribution will begin to shift further and further towards Millennials, granting their
preferences larger weight in comparison to other market participants.
Millennial preferences are wider and more idealistic than previous generations. As a
result, their outlook on the world has far reaching impacts, with the energy industry being no
exception. Millennials have a desire to be socially responsible consumers and want companies
that align with their values (Jobe). As a result, this generation is far more receptive to companies
that enact wider and more prevalent policies revolving around corporate social responsibility.
With their increased level of technological literacy, Millennials will campaign for new customer
service channels and utilize data and technology to not only research new sources of energy, but
to hold corporate actors accountable for their actions (Jobe). Additionally, roughly 71% percent

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of Millennials consider alternative energy development a priority over fossil fuel exploration
(Jobe). That within itself is noteworthy, because as Millennials become more dominate in the
market place, and become managers of companies, their desire to abandon fossil fuels and seek
an alternative energy source will become the norm. Ultimately, Millennials have the potential
to steer the industry, which could be a promising step away from fossil fuel dominated business
environment (Jobe).
Millennials are not the only individuals acting, as a powerful movement is quickly
emerging around the country and around the world. [where] organizers whove been fighting
the fossil fuel industry for decades are being bolster (McKibben). Indigenous groups,
communities that have been affected by fossil fuel production, and students from a variety of
campuses have united in a well-represented front to protest issues such as the Keystone Pipeline
(McKibben). This growing globalized movement is garnering much national attention, depicts a
trend away from fossil fuels and towards clean, alternative, green energy.
V. The Battle against Green Energy
As previously discussed, there is a growing trend towards alternative energy, and an
overall green movement well in progress. Many countries in Europe receive over one third- and
some, over half- of their electricity from renewable sources (Elliot). Many countries like
Germany have made long term commitments to facilitate developers, and help finance projects
that focus exclusively on renewable energy. This demonstrates that these countries have placed
alternative energy has a priority. The United States on the other hand, has fallen behind in their
transition to alternative energy sources.

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Examining the graph above, the United States only receives 10% of their annual energy
consumption from renewable energy (USGS). This is significant when taking into account that
this 10% portion of renewable energy is made up of seven different methods of producing
alternative energy. When comparing this to other sectors, petroleum accounts for over one third
of energy, while solar is only 4% of the total 10% that is renewable energy. Some countries, like
Portugal receive roughly 45% of their energy from renewable energy sources (Elliot). Is this
because the United States lacks the resources to pursue renewable energy? As mentioned
previously, Germany makes an effort to prioritize innovation in this field. The United States
routinely boasts themselves as being on the cutting edge of innovation and progress. Despite
this, the United States is far behind in regards to renewable energy policy, while European
countries have experienced disruption in the fossil fuel industry, allowing alternative energy to
proliferate.
As depicted below, the United States is seen as one of the top five most innovative
countries, typically finding itself on the innovative edge, instead of as a laggard (Florida). This
map takes into account patents per capita (Florida). Using this base assessment, the

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innovativeness of each country was measured, ranking the United States as the first in innovation
(Florida)

However, despite a very visible capability to innovative and issue patents on novel and
useful ideas, there still appear to be other forces at work preventing alternative energy from
disrupting the energy market. The fossil fuel industry is notoriously well known for having one
of the strongest lobbyist groups in the country. In recent elections, they spent millions of dollars
to protect interests in oil, natural gas, and coal, to prevent regulations, or any other changes to the
business environment that may diminish their dominance (Hamburger). Through their lobbying
efforts, the fossil fuel industry is capable to secure millions of dollars in subsidies to help
continue research and production of these resources. A study from the IMF estimates that the
fossil fuels industry receives $10 million dollars a minute in subsidies, or roughly $5.3 trillion
dollars in 2015 (Carrington). To put it in another perspective, fossil fuels received 75 times
more subsidies than alternative energy in 2013 alone (Marston). This demonstrates a
significantly uphill battle, with fossil fuels being arguably pushed forward. Meanwhile

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alternative energy companies and researchers are left to fend for themselves, despite the growing
trends and preferences of consumers within the marketplace.
VI. Fossil Fuel SWOT Analysis
Before describing two innovating companies in the field of alternative energy, and the
implications of their endeavors, a succinct SWOT analysis will help set the basis of the
remaining analysis.
i. Strengths
As mentioned before, the fossil fuel industry demonstrates several key factors that are
significant strengths to their market dominance. First, they dominate the market in terms of
energy provided, with only 10% being alternative sources. Second, a majority of the products
that are used every day require the production of petroleum, such as plastics, nylon rope, rubber,
and house paints (Ranken-Energy). Next is the immense amount of lobbying power the fossil
fuel industry has at their disposal. Elon Musk, a prominent figure in the tech world, went as far
as describing the oil lobby as similar to big tobacco in how they attempt to undermine climate
science and launch misinformation campaigns to maintain demand of fossil fuels (Vaughn). The
significant media presence of fossil fuels allows this industry to continue to operate prosperously
despite a wealth of knowledge and actors working against them. Finally, the substantial amount
of subsidies mentioned before act as another strength to the fossil fuel industry. With the aid of
these subsidies, fossil fuel companies can maintain low research and development costs, and
maintain low prices.
ii. Weaknesses
The most significant weakness of the fossil fuel industry is the limited supply of
resources. Coal, oil, and natural gas are all finite resources, and they will eventually become

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exhausted. Furthermore, as these resources become more scarce, more expensive and invasive
techniques will be needed to extract these resources from rather inconvenient areas that could
draw significant backlash from the public.
iii. Opportunities
Before reading this section, please read the threats section to gain context. As mentioned
below, the trends moving against fossil fuels, and the lowering of oil prices have begun to reduce
fossil fuel revenues. These trends, and the drop in demand, provide an opportunity for fossil fuel
companies. This opportunity lies in cutting supply, while simultaneously beginning to push for
the development of alternative energy resources. Currently, fossil fuel companies are positioned
in the most effectively to promote such a change. With their significant research and
development facilities, large amounts of capital, and their influence within politics, they have the
potential to reshape the marketplace. Additionally, by being proactive and abandoning the
mindset that they will not be disrupted, fossil fuel companies have the potential to make
alternative energy more efficient and available to a wider market, while simultaneously making
the move to insure that they remain dominate within the marketplace.
iv. Threats
A major threat to the fossil fuel industries, specifically oil and natural gas, is the decrease
in oil prices. Oil and natural gas are compliments in production, and with the oil supply
exceeding demand by 700,000 barrels per day, incentive might build to lower production of
oil, and in turn diminish production of natural gas (Deloitte). However, at OPECs last meeting
in November, they decided to maintain production levels (Deloitte). This decision has caused oil
prices to continue to be volatile, and significantly affect the oil revenues of many petroleum
exporting and nations.

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Additionally, as mentioned before, there have been growing trends to move away from
fossil fuels. As these trends continue to grow and gain momentum, the demand for fossil fuels
will continue to decrease, potentially creating a greater disparity between oil production and
usage. If this continues, countries depending on significant fossil fuel revenues and exports to
countries that are beginning to become fossil fuel adverse may see a decline in their revenue,
proving disastrous for companies mining and drilling for fuels in their countries.
VII. Tesla, and Solar City
A current force playing a potential role in disrupting fossil fuels is Tesla. Fossil fuels
have always been a chief source of energy, partially because of their significant grasps on most
modes of transportation. The steam engine required coal to move trains and early steamships
across long distances. Petroleum is needed to fuel automobiles and airplanes to help consumers
travel on a day to day basis. With Tesla, although expensive, came one of the first remarkably
successful fully-electric cars. Teslas market capitalization was around $28 billion dollars as of
2014, and was voted as one of the most loved vehicles of America (Baer). Although some
argue that Tesla isnt as disruptive as many believe, their outspoken goal of creating an
affordable mass-market electric vehicle that will supplant gasoline-powered cars demonstrates a
significant attempt at usurping the fossil fuels industry (Harvard Business Review).
Along with Teslas movement to disrupt the gasoline dominate auto industry, comes their
Powerwall storage system, a battery created to provide a simple and more attainable solution
to storing solar power (Battisti). The battery would be aimed at homeowners, businesses and
utilities to help smooth out fluctuations in the solar power grid, making it a more realistic
alternative for consumers (Cardwell). This can be seen as a major disrupter to the standard way
consumers power their homes and offices, as it provides an alternative away from using power

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grids that utilizes fossil fuels, and natural gas to give energy to consumers. Although these
batteries are in an early stage, with the growing trend of consumers to seek out these alternatives,
it could provide the demand necessary to help Tesla acquire funding to develop even better
versions.
Working in tandem with Tesla is Solar City, a major producer of solar panels. Solar City
follows the belief that solar power can and will become the worlds predominant source of
energy within our lifetime (Aziz). Elon Musk, the major player behind this partnership, has
been utilizing each companies strategic advantage to create a strong competitor in the alternative
energy market that can realistically become a threat to the fossil fuel industry. Ultimately Tesla
and Solar City have been able to catch hold of the current energy trend, and while Millennials are
not necessarily capable of purchasing these items yet, according to their preferences, they may
become major consumers in the near future.
VIII. A Change in the Energy Climate
With the growing trends towards alternative energy - the prevalence of the millennial
generation, along with the threats of low oil prices and finite fossil fuel supplies - the energy
industry is in a unique situation. The climate in the energy industry has reached a point where
individuals like Musk believe that by definition, we must move to renewable energy
(Alderton). But, what is seen instead is a continued reluctance by the fossil fuel industry to
budge at all, as their subsidies remain incredibly high, and their lobbying efforts strong. The
fossil fuel industry can be seen as being stuck in a mindset, that they must continue their business
model in order to maintain their profit margins. Their resistance to the change in trends
demonstrates an overconfidence bias, in which they believe that their business model can

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continue to thrive, even though the external marketplace is rapidly changing. Yet, they have
been incredibly successful in battling alternative energy.
Ultimately, as many people believe, it is not a matter of if they will fold, but when. With
this race against the clock scenario, the fossil fuel industry must begin to act. As mentioned
previously in the SWOT analysis, they can change their course, and instead of spending an
immense amount of resources on stifling alternative energy innovation, they can utilize their
position to be an innovator in the field. Essentially, this would be the best way in which they can
prevent their own disruption, by leaping ahead of their disruptors. This is much easier said than
done, because to change their mindset they must be willing to change their culture and accept the
growing trends that are felt within the marketplace. There are a variety of ways this could be
done; hiring Millennials who have these preference, by collaborating with companies such as
Tesla and Solar City to create strategic partnerships, or using their lobbying groups to help create
an effective timeline to insure their survival, and a safe transition to alternative energy. The only
frightening thing is, consumers (primarily Millennials) have grown to have a lower level of trust
and expectation for the fossil fuel industry.
IX. Recognize Trends, and Adapt
Ultimately, the battle between alternative energy and fossil fuels can be viewed as an
example of resistance to adaptation. The trends towards alternative energy have been visible for
a long time, as early as the 1970s, and a have grown significantly since the emergence of the
Millennials. It is coming to a point that change is inevitable, but the window of time that fossil
fuels have to act before falling a victim to disruption is slowly shrinking. Their current mindsets,
biases, and cultures, hang as obstacles to their long term survivability. Although it may not
necessarily be Tesla and Solar City that disrupt them, there is a growing a demand that they

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cannot ignore any longer. In conclusion, fossil fuels can no longer afford to fight and ignore
trends, they need to adapt or fall victim to their own stubbornness.

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Musk." GoodSpeaks. N.p., n.d. Web. 01 Mar. 2016.
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Vision for a Solar Energy Future. The Week, 17 June 2014. Web. 01 Mar. 2016.
<http://theweek.com/speedreads/451481/elon-musk-lays-vision-solar-energy-future>.
Baer, Drake. "The Making Of Tesla: Invention, Betrayal, And The Birth Of The
Roadster." Business Insider. Business Insider, Inc, 11 Nov. 2014. Web. 01 Mar. 2016.
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Carrington, Damian. "Fossil Fuels Subsidised by $10m a Minute, Says IMF." The Guardian.
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Council of Economic Advisors. 15 ECONOMIC FACTS ABOUT MILLENNIALS (n.d.): n.

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Department of Energy. "DOE - Fossil Energy: A Brief History of Coal Use in the United
States." DOE - Fossil Energy: A Brief History of Coal Use in the United States.
Department of Energy, n.d. Web. 01 Mar. 2016.
<http://www.fossil.energy.gov/education/energylessons/coal/coal_history.html>.
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Hamburger, Tom. "Fossil-fuel Lobbyists, Bolstered by GOP Wins, Work to Curb Environmental
Rules." Washington Post. The Washington Post, n.d. Web. 01 Mar. 2016.
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Harvard Business Review. "Tesla's Not as Disruptive as You Might Think." Harvard Business
Review. N.p., 01 May 2015. Web. 01 Mar. 2016. <https://hbr.org/2015/05/teslas-not-asdisruptive-as-you-might-think>.
History Channel. "Oil Industry." History.com. A&E Television Networks, n.d. Web. 01 Mar.
2016. <http://www.history.com/topics/oil-industry>.
Hydropower. "A Brief History of Hydropower." A Brief History of Hydropower. International
HydroPower Association, n.d. Web. 01 Mar. 2016. <https://www.hydropower.org/a-briefhistory-of-hydropower>.
Jobe, Bana. "6 Ways Millennials Will Change the Energy Industry from the Inside Out." Oncor.
Oncor "The Wire", n.d. Web. 01 Mar. 2016. <http://thewire.oncor.com/News/Pages/6Ways-Millennials-Will-Change-the-Energy-Industry-from-the-Inside-Out.aspx>.
Marston, James D. "The Oil and Gas Industry's Assault on Renewable Energy." Environmental
Defense Fund. Environmental Defense Fund, n.d. Web. 01 Mar. 2016.
<https://www.edf.org/blog/2013/04/26/oil-and-gas-industry%E2%80%99s-assaultrenewable-energy>.
McKibben, Bill. "The Fossil Fuel Resistance." Rolling Stone. N.p., 11 Apr. 2013. Web. 01 Mar.
2016. <http://www.rollingstone.com/politics/news/the-fossil-fuel-resistance-20130411?
page=2>.
Mitsubishi. "History of Fossil Fuel Usage since the Industrial Revolution." History of Fossil
Fuel Usage since the Industrial Revolution. Mitsubishi, n.d. Web. 01 Mar. 2016.
<https://www.mhi-global.com/discover/earth/issue/history/history.html>.

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Ranken-Energy. "A Partial List of Products Made from Petroleum." A Partial List of Products
Made from Petroleum. N.p., n.d. Web. 01 Mar. 2016. <http://www.rankenenergy.com/products%20from%20petroleum.htm>.
Reece, Will. "The History Of Solar Power." Experience.com. Experience, n.d. Web. 01 Mar.
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7780670>.
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about Hydroelectricity, the USGS Water Science School. USGS, n.d. Web. 01 Mar. 2016.
<http://water.usgs.gov/edu/wuhy.html>.
Vaughan, Adam. "Elon Musk: Oil Campaign against Electric Cars Is like Big Tobacco
Lobbying." The Guardian. Guardian News and Media, 24 Oct. 2013. Web. 01 Mar. 2016.
<http://www.theguardian.com/environment/2013/oct/24/elon-musk-oil-electric-carstobacco-tesla>.
Wind Energy Foundation. "History of Wind Energy." History of Wind Energy. Wind Energy
Foundation, n.d. Web. 01 Mar. 2016. <http://windenergyfoundation.org/about-windenergy/history/>.

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Case Study IV
Peer to Peer Lending:
A Potential Partner to Traditional Banks

Andrew Coatsworth

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I. Defining the Shadow Banking System
Shadow bank, a term coined by economist and former PIMCO managing director, Paul
McCulley, in 2007, refers to financial intermediaries that perform bank like operations (Kodres).
However, unlike traditional banking institutions, shadow banks do not take bank deposits. As a
result of their refusal to accept deposits, shadow banks escape much of the government
regulation impacting traditional banks. Shadow banks are thus able to take on increased levels of
market, credit, and liquidity risk without the need for capital requirements to back up the risk
(Shadow Banking, Investopedia). Utilizing leverage, shadow banks raise short term resources in
order to invest in long-term illiquid assets, a process known as maturity transformation.
Although shadow banks enjoy highly reduced government regulation, they also do not have
access to government support programs such as deposit insurance, rediscount operations, nor
lending of last resort from the Federal Reserve. These criteria encompass a broad range of
institutions including investment banks, hedge funds, private equity funds, pension funds,
insurance companies and the quasi-government agencies, Fannie Mae and Freddie Mac (Farhi
and Macedo). Ideally, shadow banks safely provide investors with access to otherwise
unattainable investment opportunities. However, a lack of disclosure, obscure and illiquid
investments, a lack of governance, ownership structures between traditional banks and shadow
banks, and little to no capital requirements to fund losses and cash redemptions crippled the
shadow banking industry during the Great Recession (Kodres). In addition to being hurt during
the financial downturn, the shadow banking industry played a major role in the housing market
collapse and the overall state of the economy.

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II. Shadow Banking and the Great Recession
During the Great Depression, The Federal National Mortgage Association, Fannie Mae,
was established to develop a secondary market for home mortgages. In order to create
competition in the secondary market, the government created the Federal Home Loan Mortgage
Corporation, Freddie Mac, in 1970. Fannie Mae and Freddie Mac provided banks with a buyer
for their mortgages in an attempt to help mitigate the banks risk exposure. In order for Fannie
Mae or Freddie Mac to purchase mortgages, banks had to meet strict requirements. One of these
requirements was the prohibition of redlining. Redlining is the refusal to finance a home
purchase in a neighborhood considered to have a high risk of loan default. In the 1990s, under
the urging of the Clinton Administration, lending institutions were forced to prove that they were
not redlining in order to utilize the mortgage secondary market. Banks had to fulfill a quote of
minority mortgage lending and in turn were forced to lower their lending standards. However,
the lowered standards did not necessarily impact the banks because they were able to flip the
riskier loans to Fannie Mae and Freddie Mac. These institutions then packaged the mortgages
together, securitized them and sold them off to investors as collateralized debt obligations
(Watkins).
In response to the September 11th, 2001 terrorist attacks and the Dotcom Bubble bursting,
Federal Reserve Chairman at the time, Alan Greenspan, lowered interest rates to 1%. Greenspan
hoped that a lowered interest rate would keep the United States economy going strong.
However, in response to the lowered interest rates, investment institutions had a lower incentive
to invest in treasury bills, which although safe, now only offered a miniscule return. While
investors were negatively impacted by the lower interest rate, banks were now able to borrow at
the 1% interest rate. The increased level of cheap credit was passed on from the banks to

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consumers (Jarvis). The combination of cheap credit and ability for lending institutions to sell
mortgages on the secondary market created substantial demand for mortgages. Additionally,
accounting scandals at Fannie Mae and Freddie Mac opened the door for Wall Street investment
banks to take control of the secondary mortgage market. In response to the increased demand for
collateralized debt investments, traditional banks as well as shadow bank lenders began issuing
subprime mortgages. Potential homeowners were not required to verify their income. Instead,
the mortgage application asked for a stated income. Applicants were able to inflate their
incomes in order to guarantee that they would receive the mortgage. Additionally, with the
increased volume of lending, demand for homes skyrocketed and thus drove prices up.
Investment bankers based investment decisions on models that assumed home prices would rise
in perpetuity. As more homes were sold, more mortgages were flipped to investment banks for
securitization. Investment banks pooled the mortgages together creating cash flow-generating
assets that could then be sold to investors. Known as collateralized debt obligations, these
investments were offered at various risk levels called tranches (CDO Definition, Investopedia).
In order to be sold on the secondary market, the CDOs needed to be rated. Credit rating
agencies including Moodys Investor Service and Standard & Poors were tasked with rating the
CDOs. Yet, a conflict of interest arose when the credit rating agencies earned a fee for their
services. The incredibly high level of demand for CDOs incentivized the rating agencies to give
the CDOs an undeserving AAA rating. These perfect credit rating enticed investors on a global
scale. As described in the 60 Minutes report, this system of subprime lending and collateralized
debt securitization created a House of Cards that would eventually collapse (House of Cards).
When subprime borrowers were no longer able to make monthly payments, the revenue
streams to the CDO investments dried up and these borrowers were forced out of their homes.

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Widespread evictions shot demand for homes down while supply increased. This drastic shock
in supply and demand drove home values down. In turn, it was no longer feasible for some
homeowners to make their monthly payments as their mortgage exceeded the value of their
home. In this case, these homeowners walked away from their houses, further suppressing
demand while increasing supply. As the shadow investment banks saw their revenue streams
disappear, investors quickly attempted to back out of the CDOs (Jarvis). Investment banks
experienced a crippling bank run. Without capital reserves, these shadow banks found
themselves stuck with illiquid, toxic, and nearly worthless investments. However, some of the
loan originators included buyback options in their mortgages. These banks were forced to
repurchase the essentially worthless mortgages (Farhi and Macedo). This process led to the
bankruptcy of major firms such as the Lehman Brothers and Washington Mutual and the fire sale
of other firms including Merrill Lynch.
In response to the state of financial crisis, the government was forced to issue massive
bailouts to financial institutions. Among these bailouts included the American International
Group Incorporated, AIG. Prior to the economic downturn, AIG held positions amounting to
$460 billion in the credit risk market and $60.6 billion in mortgage backed assets. AIG received
a $200 billion loan from the Federal Reserve (Farhi and Macedo). In addition to widespread
bailouts, the Obama Administration passed the Dodd-Frank Act in 2010 to reform Wall Street
and provide increased levels of consumer protection. Among the provisions includes the
Consumer Financial Protection Bureau. The CFPB was created to prevent predatory mortgage
lending and ensure that the vicious lending cycle as seen prior to the financial collapse cannot be
repeated (Dodd-Frank, Investopedia).

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As a result of the new legislation, strict lending standards have been imposed upon banks
to help prevent subprime lending. Although this legislation is intended to prevent further
financial distress, it has helped develop a new market for lending. Alternative lending has grown
out of the shadow banking industry and provided the opportunity for borrowers to access
financing in new ways.
III. Origin and Definition of Alternative Lending
In response to the increased regulation of the lending industry following the financial
crisis, many borrowers found themselves being turned away from big bank loans. These
borrowers were simply too risky for banks to accept them as borrowers. This created demand for
alternative lending, a subset of the shadow banking industry. Alternative lending is a broad
range of funding options available to small business and consumers (Sims). In most cases,
alternative lending platforms provide borrowers with more flexible repayment schedules and
faster allocation of capital. However, since alternative lenders capitalize on riskier borrowers
who are unable to obtain traditional bank loans, alternative financing generally commands higher
interest rates. Although alternative lending includes a broad range of business models and
lending platforms, for the purpose of investigating disruptive technology, this paper will focus on
peer to peer lending.
IV. Peer to Peer Lending Overview
Peer to Peer lending platforms connect those in need of cash with those in possession of
surplus cash. Peer to peer lenders target borrowers with a blemished credit record who otherwise
may not be able to secure or loan from a traditional bank or be forced to pay exorbitant interest
rates. Additionally, peer to peer lenders offer unsecured loans meaning that borrowers do not
need to post collateral in order to receive the loan (Light). Unlike traditional banks, peer to peer

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lenders do not supply the funding for the loan (Cunningham). Instead, they connect a borrower
with a private investor. Initially, the investors consisted mainly of wealthy individuals looking
for an alternative to the low rates offered by savings accounts. However, after developing a
proven track record of promising returns, institutional investors such as hedge funds are
beginning to invest heavily in peer to peer lending while replacing individuals (Cox). It has been
estimated that institutional investors supply approximately 70% of the funding for peer to peer
lending with individual investors claiming the remaining 30% (Nykiel). The two major peer to
peer lenders in the US, Lending club and Prosper offer loans averaging roughly $15,000 with
interest rates ranging from 6.6 to 35.8%. Lenders can earn rates ranging from 5 to 9.5%
depending on the risk of the borrower and the peer to peer firms take a fee of roughly 5% (Cox).
In October of 2008, an article published in the New York Times outlined the murky future
of peer to peer lending. Although these firms had the ability to locate credit in a down economy,
SEC investigations and widespread investor fear of loan default led to a halt in lending. This
posed a major issue for those seeking credit as traditional banks were forced to turn down
dependable borrowers and peer to peer lending no longer posed as an alternative (Stone).
However, peer to peer lenders have overcome these issues. A study conducted by McKinsey
which found that by the end of 2015, peer to peer lenders would be able to offer loans 400-500
basis points lower than an equivalent bank. Additionally, many believe that peer to peer lending,
an industry doubling its lending ever nine months, is set to explode (Mauldin).
Although the peer to peer lending model on the surface appears to be a prime example of
economy sharing, where those with excess goods are lent to those in need, the fine print tells
another story. Both Lending Club and Prosper have partnered with a WebBank, a small Utah
based bank. When these two firms approve a borrower, WebBank issues the loan. The peer to

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peer lenders then purchase the loan two days later and sell it to the investors who agreed to lend
the money. This has become an incredibly lucrative and low risk business strategy for WebBank.
In 2014, when Lending Club and Prosper created $4 billion and $1.6 billion respectively,
WebBank returned 44% on its equity. For the 38 WebBank employees, the amounted to over
$400,000 in profit each. WebBank is able to earn such a significant return because they simply
act as a pass through for the lending. They do not have to devote a significant amount of
capital and are able to profit from the volume of loans offered by the peer to peer lenders
(Mauldin).
Lending Club and Prosper also benefit from their strategic partnership with WebBank.
Under the Depository Institutions Deregulation and Monetary Control Act of 1980, statechartered banks are permitted to charge interest rates up to the maximum rate allowed by the
state in which the loan is made or the maximum rate allowed by the banks home state. Since
WebBank is FDIC-insured and chartered as an industrial bank in the state of Utah, Lending Club
and Prosper are shielded from usury laws. Utah state law does not limit interest rates on loans
subject to a written agreement. This loophole allows Lending Club and Prosper to charge
interest rates that adjust for a borrowers risk, yet may seem to be exorbitant (Donegan and
Leriche).
V. Peer to Peer Lending SWOT Analysis
i. Strengths
Arguably its most differentiating strength when compared to traditional banks, peer to
peer lending platforms rely on a technologically driven simplified lending process. Whereas
traditional banks utilize complicated, paper driven loan application, peer to peer lenders use
proprietary algorithmic credit scoring technology through a website rather than a physical

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branch. The technologically based peer to peer lending platforms are thus able to capitalize on
lower overhead costs while borrowers enjoy a simple, streamlined application process.
According to Renaud Laplanche, the founder and chief executive of Lending Club, it costs the
firm approximately 2% to make a loan compared to the 5-7% range for a traditional bank
(Noonan and Arnold). These lower loan creation costs allow investors higher returns through
peer to peer than through traditional bank deposits. As a result of the improved investment yield
opportunities, peer to peer lenders are able to easily find lenders to match with borrowers.
In addition to demand for lending opportunities, the United States economy relies upon
credit. The vast majority of consumers are forced to take out debt in order to pay for living
expenses. This need for credit, as seen during the financial crisis, can lead to overly risky and
ill-advised business decisions. However, the current state of peer to peer lending allows for the
distribution of credit without any major lending risk. Although lending is inherently risky, if a
peer to peer lending firm such as Lending Club serves as a poor matchmaker between lenders
and borrowers, lenders will no longer supply capital for loans. While high default rates may hurt
some investors in the short run, they will be able to quickly adapt (From the People For the
People).
Another major strength for peer to peer lending platforms is their ability to successfully
lend to customers unable to obtain loans from banks. Traditional banks avoid making these
loans for two reasons: the borrowers are too risky and the smaller size of the loans are simply not
profitable for the large banks. Peer to peer lending platforms thus face reduced competition as
banks do not directly seek out these loans. Additionally, since peer to peer lending firms do not
accept deposits, they face reduced government regulation. Finally, peer to peer lending is a

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rapidly growing industry. Marketplace loan origination has doubled every year since 2010,
while peer to peer lending is doubling every nine months (Can P2P Lending Reinvent Banking?).
ii. Weaknesses
Lending Club and OnDeck, two major peer to peer lending platforms, established
respective values of $9.5 and $1.5 billion at their initial public offerings. Yet many financial
analysts believe peer to peer firms will face a limit in their attainable market share. While peer
to peer firms are a major player in the small business loan market, traditional banks continue to
dominate the overall consumer credit market. For example, in the first quarter of 2014, Lending
Club issued $791 million worth of loans. During the same time period, JPMorgan Chase issued
$47 billion in consumer loans. Additionally, the entire American consumer credit market totals
approximately $3 trillion (Barnes). These factors suggest that although the peer to peer lending
industry has experienced massive growth, the vast majority of borrowers are content with
traditional bank loans. Beyond being dwarfed by the traditional banking industry, many peer to
peer lenders currently charge exorbitant rates to small business owners. For example, a 3-month
term loan from OnDeck to a small business charges a 70-80% APR. The longer term loans from
OnDeck, capped at 36 months, range between a 30-40% APR. A Bank of America small
business credit card on the other hand, charges an APR in the 11 to 21% range (Seo).
Although peer to peer lending firms believe that their proprietary credit rating system is
just as effective as those employed by traditional banks, there is reason to believe that these
unconventional systems will eventually fail. Banks such as JPMorgan Chase and Bank of
America have unlimited access to economically valuable data such as account balances, cash
inflows and outflows, and spending data. Peer to peer lenders, on the other hand, rely upon nontraditional, publicly available data. Since the data is publicly available, it is difficult for the peer

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to peer lenders to truly differentiate themselves and it is also possible for banks to integrate this
public data into their own metric systems.
Another major weakness that peer to peer lending firms must consider is the impact of
changing economic conditions. Analysts predict that the next major financial crisis will wipe out
the peer to peer lending industry. These analysts believe that in poor economic conditions,
default rate on peer to peer loans will skyrocket and thus render this business model obsolete
(Noonan and Arnold). Additionally, unlike traditional banks, peer to peer lenders do not have a
guaranteed government safety net. It is highly unlikely that the government would utilize
taxpayer dollars in order to bailout peer to peer lenders as a result of high default rates.
However, increased interest rates could also adversely impact peer to peer lending firms. With
institutional investors supplying roughly 70% of the capital, an increase in interest rates would
cause these investors to look elsewhere in hopes of earning higher yields (Seo).
While peer to peer lending is fundamentally different than the investment banks, hedge
funds, and insurance companies that played a major role in the financial collapse, peer to peer
lenders are lumped into this group. The institutions have become a main point of debate in the
current presidential race and it is unclear how future legislation will impact these firms. Should
the government decide to clamp down on the shadow banking industry and tighten lending
standards for non-bank institutions, peer to peer lenders could lose the majority of their
borrowers.
Finally, although peer to peer lending is a rapidly growing market, the business model is
highly replicable. Within the alternative lending market as a whole, it is estimated that there are
1,300 companies competing for a 1% market share compared to 6,500 traditional banks
competing for the remaining 99% (Feldman). It is difficult to envision peer to peer lenders and

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more generally alternative lenders capturing a large portion of the traditional banks market share
especially when considering the level of competition among alternative lenders.
iii. Opportunities
While it is unclear how much room for growth peer to peer lending currently has, it is
evident that this alternative lending platform is trending upwards. PricewaterhouseCoopers
estimates the industry will grow to $150 billion by 2025 with other estimates at $1 trillion
(Hernandez et al.). Although $1 trillion is most likely a highly inaccurate projection, it is
undeniable that peer to peer lending has room for expansion. Arguably the most obvious
opportunity for expansion involves broadening the services that peer to peer lenders offer.
Currently, 80% of marketplace lending is applied towards consolidating debt and small business
loans. While there is an estimated $100 billion worth of unmet demand for small business loans
in the US, peer to peer lenders must look beyond these risky investments in order to truly capture
market share. Other potential areas for expansion include the $1.2 trillion student loan market,
auto loans and mortgages (Can P2P Lending Reinvent Banking?). Beyond entering new loan
markets, peer to peer lenders can expand the services that they offer to their customers. For
example, in order to increase the likelihood of loan repayment and customer retention, lending
platforms could add advisory services and other long term engagement tools to create a more
complete product offering (Feldman).
A second potential opportunity for peer to peer lenders is to capture the trust and business
of the up and coming millennial generation. As millennials continue to enter the work force,
there will be an increased demand for millennial credit. According to a Morgan Stanley study,
48% of US citizens ages 18-34 are aware of or have used peer to peer lending compared to just
36% of the total population over the age of 18 (Can P2P Lending Reinvent Banking?).

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Millennials have also shown an increased reliance upon smartphone applications including ride
sharing, food delivery services, and mobile banking. This suggests that there is an opportunity
for peer to peer lenders to capture the business of the millennial generation through their
technologically driven platforms. PricewaterhouseCoopers suggests that peer to peer lenders can
capitalize on the millennial desire to conveniently transact online and lack of loyalty to
traditional banks (Hernandez et al.). Additionally, millennials expect instant gratification when it
comes to the delivery of goods and services. Peer to peer lenders must capitalize on this desire
and continue to outpace traditional banks on the delivery of loans.
Finally, peer to peer lending platforms have the opportunity to partner with traditional
banks in order to increase business and potentially revolutionize the banking industry. There are
multiple strategies that traditional financial institutions could employ to develop strategic
partnerships with peer to peer lenders. The first, and most simplistic, involves banks purchasing
peer to peer loans. Banks can utilize complex algorithms to select loans of the desired size and
maturity. Both parties will benefit as peer to peer lenders earn more revenue in fees while banks
can receive increased interest payments for making their funds available. A second strategic
partnership is a white label opportunity. Peer to peer lenders and banks would collaborate to
increase the number of loans available. If bank rejects a customers loan application, the
customer can be referred to a co-branded peer to peer lending site. The bank could also utilize
the peer to peer application process and offer its own loans through the online platform.

iv. Threats

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Currently, the most realistic threat to peer to peer lending platforms is the existing level
of competition. In 2015 alone, over 400 firms have entered the peer to peer market (Currie). In
addition to the competition among peer to peer lenders, traditional banks still control the
majority of the credit market. These banks have the ability to buyout peer to peer firms or create
their own. This would further drive up the level of competition and make differentiation among
firms even more difficult. Additionally, in 2015, Goldman Sachs announced that they are
developing a peer to peer lending branch. The firm will begin to offer unsecured personal loans
as well as lending to small businesses. Goldman hired former Discover executive, Harit Talwar,
to run the operation and committed significant resources to the project (Lichtenwald). This is a
significant shift for Goldman, a bank that has spent nearly 150 years serving mainly powerful
and privileged clientele. In the past, Goldman has required a minimum balance of $10 million in
order to be a private wealth client (Corkery and Popper).
Peer to peer firms must also consider the impacts of an economic downturn. Although
the economy has improved immensely since the housing collapse, the worldwide economic state
still appears to be volatile. As previously discussed, high default rates or an increase in interest
rates could have the ability to wipeout the peer to peer lending industry.
Finally, government regulation has the potential to greatly restrict peer to peer firms
ability to lend to consumers. If the government decides that peer to peer firms are making risky
loans that may adversely impact the economy, they will undoubtedly crack down on the industry.
Considering the Lending Club and Prospers partnership with WebBank, it appears to be more
and more likely that the government will regulate the peer to peer lending industry. It is unlikely
that the partnerships will be allowed to continue as WebBank essentially earns risk free profit
that is then passed on to investors.

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VI. Summary
Although peer to peer lending has experienced massive growth since the financial
collapse and many speculated that it could be a major disruptor to the banking industry, it
appears that there are too many factors working against these firms for complete disruption to
occur. At the current pace, peer to peer firms will become dominant players in the consumer
debt and small business markets. However, the traditional banking institutions are simply too
powerful and well entrenched to let the peer to peer industry gain significant market share.
While peer to peer lending offers a fresh, technologically driven take on financing, it has proven
to be difficult for these firms to differentiate themselves based solely on technology. Technology
has forever changed the nature of business transactions, however, in order to achieve sustained
success, a company must have multiple strengths. Currently, peer to peer firms rely too heavily
upon their advanced technology. They are simply not strong enough in other areas to truly
compete with traditional banks. Despite these weaknesses, peer to peer lending firms and banks
still have the opportunity to mutually benefit from partnerships.
VII. Strategic Recommendation
Rather than seeking to disrupt the banking industry, peer to peer lending firms should
strategically partner with major traditional banks such as Goldman Sachs and Bank of America.
Although firms including Lending Club and Prosper already partner smaller banks, this strategy
appears to be unsustainable as it will likely be upended by increase government intervention.
Partnering with major banks will allow for customer referral systems, co-branding, or complete
buyouts. Peer to peer firms have far too many factors working against them to truly disrupt
traditional banks. However, when paired together, major traditional banks and peer to peer firms
would help mitigate these risks. For example, banks could provide traditional underwriting

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knowledge and government insured capital, while peer to peer firms offer an innovative lending
strategy and application process. With access to the banks capital, peer to peer firms would
reduce their exposure to potential changes in economic conditions. Banks, on the other hand,
would gain access to a forward thinking business model that utilizes modern technology and
provides a streamlined access to financing. With the economy recovering effectively, major
banks have announced near-record-levels earning and are currently attempting to expand
lending operations (Hernandez et al.). Partnering with peer to peer firms would allow banks to
effectively increase lending while providing peer to peer firms with means for long run
sustainability. Additionally, as seen by Goldmans decision to develop a peer to peer branch, big
banks are beginning to see the value of peer to peer lending. However, creating a peer to peer
lending arm from scratch may prove to be costly and difficult. Rather, big banks could look to
acquire preexisting platforms such as Lending Club and Prosper. This process would allow big
banks to quickly integrate the new lending platform into their existing framework while
capitalizing on the peer to peer firms expertise and current customer base. Two potential
partnerships strategies are proposed by PwC are outlined on the following page.

Figure I White Label Partnership

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White Label
partnerships will allow big banks to leverage the low cost structure of peer to peer firms and provide the banks
with an alternative for customers who would otherwise be turned away (Hernandez et al.).

Figure II Big Banks as Investors

Partnering as investors will provide big banks with the opportunity to diversify their portfolios as well
as handpick loans that they believe will be profitable (Hernandez et al.).

Finally, peer to peer lending executives have suggested a willingness to pair with banks.
In December of 2015, OnDeck and JPMorgan Chase agreed upon a strategic partnership to allow
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OnDeck to originate, underwrite, and distribute loans targeted specifically at small businesses
(Seo). Also, Renaud Laplanche of Lending Club expressed that traditional banks face
competitive threats from the technology industry, yet, It doesnt need to be a confrontation
between banks and the tech sector. It can be a partnership between banks and innovators
(Noonan and Arnold). However, peer to peer firms must act with a sense of urgency. As
exemplified by the Goldman Sachs expansion and the JPMorgan Chase partnership, big banks
are catching on quickly.
Despite the short track record of success for peer to peer lenders and the future
uncertainty, banks must think critically about the state of their operations. While peer to peer
firms currently do not have the ability to disrupt the banking industry, strategic partnerships
between these two parties has the potential to revolutionize an outdated system.

Works Cited

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Barnes, Samantha. "Peer-to-Peer Lending-Disruption for the Banking Sector?" International
Banker. N.p., 08 Feb. 2015. Web. 10 Feb. 2016.
Buhayar, Noah. "WebBank: Where Peer-to-Peer Loans Are Born." Bloomberg.com. Bloomberg,
16 Apr. 2015. Web. 02 Mar. 2016.
"Can P2P Lending Reinvent Banking?" Morgan Stanley. N.p., 17 June 2015. Web. 9 Feb. 2016.
"Collateralized Debt Obligation (CDO) Definition | Investopedia." Investopedia. N.p., 18 Nov.
2003. Web. 02 Mar. 2016.
Corkery, Michael, and Nathaniel Popper. "Goldman Sachs Plans to Offer Consumer Loans
Online, Adopting Start-Ups Tactics." The New York Times. The New York Times, 15
June 2015. Web. 02 Mar. 2016.
Cox, Jeff. "A Shadow Banking Sector Has Gotten 65 times Larger." CNBC. N.p., 15 Mar. 2015.
Web. 24 Jan. 2016.
Cunningham, Simon. "Peer to Peer Lending Sites: An Exhaustive Review." LendingMemo. N.p.,
08 May 2015. Web. 24 Jan. 2016.
Currie, Antony. "Alternative Lenders Facing First Major Disruption." Reuters. N.p., 09 Dec.
2015. Web. 09 Feb. 2016.
"Dodd-Frank Financial Regulatory Reform Bill Definition | Investopedia." Investopedia. N.p., 21
July 2010. Web. 15 Feb. 2016.
Donegan, Susan L., and Lucy Leriche. PEER-TO-PEER LENDING (n.d.): n. pag. Vermont
Department of Financial Regulation, 1 Dec. 2015. Web. 2 Mar. 2016.
Farhi, Maryse, and Macedo Cintra, Marcos Antonio. "The Financial Crisis and the Global
Shadow Banking System." The Financial Crisis and the Global Shadow Banking System.
Regulation Revues, Spring 2009. Web. 15 Feb. 2016.
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Feldman, Amy. "Disclosure Needed: A Guide To Alternative Lending Regulatory Issues As
Treasury Comment Period Ends." Forbes. N.p., 29 Sept. 2015. Web. 5 Feb. 2016.
"From the People, for the People." The Economist. The Economist Newspaper, 09 May 2015.
Web. 24 Jan. 2016.
Hernandez, Roberto, Richard Altham, Martin Touhey, Anthony Ricko, Jason Chan, and Craig W.
Schleicher. "Peer Pressure." PricewaterhouseCoopers (2015): n. pag. Web.
"House of Cards: The Mortgage Mess." 60 Minutes. CBS News. 27 Jan. 2008. Television.
Jarvis, Jonathan. "The Crisis of Credit Visualized." Crisis of Credit. N.p., 22 Jan. 2011. Web. 15
Feb. 2016.
Kodres, Laura E. "What Is Shadow Banking? - Back to Basics - Finance & Development, June
2013." What Is Shadow Banking? - Back to Basics - Finance & Development, June 2013.
International Monetary Fund, June 2013. Web. 9 Feb. 2016.
Lichtenwald, Ryan. "Goldman Sachs Is Entering P2P Lending Becoming the 1st Bank to Launch
a Platform - Lend Academy." Lend Academy. N.p., 16 June 2015. Web. 02 Mar. 2016.
Light, Joe. "Would You Lend Money to These People?" WSJ. N.p., 13 Apr. 2012. Web. 02 Mar.
2016.
Mauldin, John. "Peer to Peer Lending Is Set to Explode." Business Insider. Business Insider, Inc,
26 Dec. 2015. Web. 24 Jan. 2016.
Noonan, Laura, and Martin Arnold. "Beyond Banking: Alternative Groups Seize Business from
Lenders - FT.com." Financial Times. N.p., 13 Nov. 2013. Web. 16 Feb. 2016.
Nykiel, Teddy. "Getting Loans Through Peer-to-Peer Business Lending." NerdWallet. N.p., 29
Sept. 2015. Web. 9 Feb. 2016.

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Seo, Tom. "J.P. Morgan, OnDeck And The Future of Alternative Lending." TechCrunch. N.p., 14
Dec. 2015. Web. 16 Feb. 2016.
"Shadow Banking System Definition | Investopedia." Investopedia. N.p., 03 May 2009. Web. 3
Feb. 2016.
Sims, La Mancha. "What Is Alternative Lending?" Aabaco Small Business. N.p., n.d. Web. 15
Feb. 2016.
Stone, Brad. "Lending Alternative Hits Hurdle." The New York Times. The New York Times, 15
Oct. 2008. Web. 24 Jan. 2016.
Watkins, Thayer. "The Nature and the Origin of the Subprime Mortgage Crisis." San Jose State
Department of Economics, n.d. Web. 9 Feb. 2016.

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The Implications of Disruption and Innovation

Andrew Coatsworth
Emaan Jaberi
I.

Disruptive Technology and Uber

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As the study of disruptive technology has gained popularity, countless scholars have cited
Clayton Christensen's model for disruption. Christensen uses the Netflix disruption of
Blockbuster as a prime example to support his model. Netflix originated as an inferior service:
customers could only rent up to three DVDs at a time and the business model suffered from a lag
in delivery as the DVDs were sent through the mail. However, as Netflix began to take market
share and eventually introduced the streaming service, they were able to completely disrupt
Blockbusters business model. Netflixs ascension in the home entertainment industry follows
Christensens model for disruption as visualized below.

Although this model applies to many cases of disruptive innovation, according to Christensen,
Uber does not fit the mold. Simply shaking up the taxi industry does not qualify Uber as a
disruptive innovation. Rather, Christensen asserts that Uber is a sustaining innovation. Uber
improved the taxi industry by providing a more personalized, convenient, and comfortable
service. They did not, however, significantly alter how customers can get from point A to point
B. Yet, Christensen is viewing Uber as a taxi service instead of a technology firm.
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When classifying Uber as a taxi service, it is true that it does not fit into Christensens
model for disruption. However, Christensens model was developed during a period of far less
advanced technology. At this point, Christensen could not have known the impact of
smartphones and the eventual ability for firms to fully implement technology into their business
models. Ubers true innovation stems from the company providing customers with the ability to
hail a ride at the push of a button. Additionally, Uber streamlined the payment process through
complete digitization. Uber earns profit through its ability to adjust prices based on supply and
demand. This pricing model revolves around the utilization of a proprietary algorithm. With
these facts considered as well as Ubers interest in self driving cars, it becomes difficult to
classify Uber as a taxi service. Ubers dependence on and development of technology makes it a
technology firm. However, even when considering Uber as a technology firm, the company does
not fit into Christensens model. Uber, unlike Netflix. offered a superior product at company
inception when compared to its competition. As seen the case discussion, Uber has adversely
affected the taxi industry to the point where taxi company owners are in serious doubt regarding
the futures of their businesses. When taking the impact on the taxi industry into account, it is
impossible to label Uber as anything other than disruptive.
The rise and impact of Uber has proven Christensens model to be out of date. As
discussed in the introduction, innovation can stem from the revision of a business model. When
companies question the core beliefs of an industry, they can begin to see new ways to earn profit.
This ability mainly stems from the advancement of technology. In the case of Uber, Kalanick
and his team of entrepreneurs realized the demand for a modernized taxi service in San
Francisco. Customers were unhappy about the availability and service level of the existing taxi
industry. By questioning the business structure of the traditional taxi industry, Kalanick and his

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team realized the potential for the ridesharing business model. This realization allowed Uber
customers to hail rides at the push of a button. Ubers new business model, not the service itself,
led to the disruption of the taxi industry.
While Uber is one example of disruption caused by the implementation of a
technologically enabled business model, it is proof that the ability to disrupt in new ways exists.
Although it may be unlikely and incredibly difficult, technology can disrupt long standing
industries seemingly overnight. As a result of this rapid disruption, Christensens model can no
longer be visualized as a family of up upward sloping lines. It may prove to be the case that the
majority of innovations still follow this path. However, if the Uber trend continues, Christensen
will be forced to add an additional family of horizontal lines. These lines will signify companies
that are able to capture significant market share without initially offering an inferior product.
According to Vivek Wadhwa in his rebuttal to Christensens model, Disruption is no longer a
narrow field that can be handled by a new division or department of a company. It is happening
wherever technology can be applied. Companies need all hands on board - with all divisions
working together to find ways to reinvent themselves and defend themselves from the onslaught
of new competition. This is a company-wide effort which requires bold new thinking
(Wadhwa). Wadhwa supports the idea of a revised model where companies no longer disrupt
from the bottom of the existing market. This revised model is visualized on the following page.

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(Christensen)
II. Creating an Environment for Innovation

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As mentioned in the introduction, in order for companies to develop an environment to
best foster innovation, both incumbents and small firms must aspire, choose, discover, evolve,
accelerate, scale, extend, and mobilize. Additionally, firms must question the core beliefs of
their industries in order to look for new, technologically enabled business models. Establishing
these factors into corporate culture helps executive, managers, and employees to be forward
thinking and fend off potential disruptors. On the flip side, startups can maximize their
likelihood of successful disruption by employing these strategies from company inception.
In the case of Blockbuster and the taxi industry, executives became too comfortable with
the state of their companies. This complacency prevented business executives from noticing the
rising competition from Netflix and Uber. When the executives did notice the increased
competition, their responses proved to be insufficient. Rather than taking the necessary
preventative measures that would have resulted from forward think managers, Blockbuster and
taxi company owners were forced to react at a rapid pace. However, since these firms suffered
from complacency, these responses largely proved to be insufficient.
While Uber and Netflix were able to disrupt their competition, it is important for current
managers to maintain and improve upon company culture. Executives must remain aware of
potential threats and provide their employees with the tools and environment required to achieve
long run success.
Although the future of peer to peer lending and alternative energy firms are unclear, they
can learn from the success of Uber and Netflix to incorporate these strategies. Both peer to peer
and alternative energy firms have the potential to shake up their respective industries, but they
also face incredibly powerful longstanding incumbents. These firms will need to employ
forward thinking strategies in order to reach their full potential for disruption.

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Since traditional banks and oil companies have yet to be disrupted, it may not be too late
for these companies to respond to the new competition. Although it may be difficult to
significantly alter the corporate culture within these longstanding incumbent firms, it is
necessary that they fully understand the threat that this new competition poses. Traditional banks
and oil companies cannot allow themselves to fall victim to complacency and suffer the
disruption experienced by Blockbuster and the taxi industry.
III. The Necessity to Address Biases and Mindsets
A failure to address biases within a companys culture can result in a mindset where the
executives believe they are invulnerable to disruption. As depicted earlier, over confidence and
confirmation bias were two factors that led Blockbuster to not purchase Netflix, and fail to
realize that they were a potential threat. Blockbusters mindset continued, as they repeatedly
tried too little too late to attempt to address the disruptive nature of Netflix. Instead of looking
forward on what new choices they could make, they decided to fall back on their past decisions
and reinstitute late fees, rather than fully committing to new projects such as mail driven DVDs,
or attempting to fully integrate an online streaming program like Netflix. Looking forward,
Netflix should be weary of these similar biases to prevent themselves from falling victim to the
same disruptive force they created. Instead of looking towards information to confirm what they
believe to be true, they should actively pursue disproving it.
The same goes for Uber, a company that took advantage of the overconfidence bias of the
taxi industry, which believed that because of the immense regulation revolving around their
transportation industry, that competitors would have a hard time penetrating the market. As a
result of Taxi industrys overconfidence, they failed to realize that their market could be
disrupted by an outsider who is not necessary trying to establish themselves as a member of the

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transportation industry, but a facilitator of a shared economy. Likewise, Uber should be weary of
other actors within the technology industry that may be trying to find a way to disrupt Uber, or
maybe an individual from another industry that could find a viable business model. Although
such a concept may not outright be foreseeable, to prevent overconfidence, Uber should always
be searching and expecting a competitor to step up and challenge their dominance.
The Fossil Fuel industry is also a victim of the same mindset, strapped with biases.
Fossil Fuel companies have enjoyed their reign as leaders in the energy industry for much of the
modern era. Without any legitimate competitors from outside the industry, they are mostly
fighting amongst other fossil fuel companies that can either produce more, or can produce for a
lower cost. This has built an overconfidence bias within the industry that has led to lobbying and
a build-up of both political influence and subsidies. Both of these sources lead to a continuing
confirmation bias, as they are able to subsidize the costs of production and continue to be
profitable despite lowering oil and energy prices. However, this mindset does leave them
vulnerable to alternative energy companies that are striving to disrupt them. Although it may not
be as immediate as when Uber disrupted the taxi industry, the longer these alternative energy
sources are left unaddressed, they have the potential to disrupt. As a result, the Fossil Fuel
industry should stop continuously assuming that they can triumph over them as they have in the
past, but look forward and resist their stubborn mindsets and accept the changing environment
revolving around energy.
IV. The Rising Dominance of Millennials
Another key issue with understanding our current marketplace, is the necessity to address
the shift in market dynamics. As mentioned previously, Millennials are becoming, and will be
the most dominant force in our markets for a significant amount of time. This generational group

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values fast paced innovation, and are incredibly tech friendly. Additionally, they have quite
different preferences than their parents, being more intrigued with the why, and implications,
than simply results and bottom line. Failing to anticipate, and pay attention to the change in
demographics in movie renters was an issue that Blockbuster dealt with. Blockbuster failed to
realize that the DVD would catch up, allowing for Netflixs model to become increasingly
viable. Additionally, Blockbuster failed to notice that innovators, and the early majority moved
towards Netflixs online driven DVD rental service, helping them pave the way to having a
larger market impact.
The banking industry should also be wary of the rise in Millennials in regards to peer to
peer lending. As this sort of borrowing and lending service begins to diffuse into the
marketplace, it will create a greater level of accessibility to Millennials. Millennials are known
for wanting to have easy access to services, and are incredibly comfortable utilizing the internet
and other resources to accomplish their needs. With the rise of peer to peer lending, banks and
other financial institutions should understand what could be driving Millennials appeal towards
these sorts of resources.
The taxi tndustry demonstrates another case in which a failure to pay attention to
generational changes in the economy can lead to a disruption in their market. The traditional
model of either calling and waiting for a taxi to be dispatched to customers, or hoping to see one
come by, are both models that would frustrate the average Millennial. Paying attention to
changes in market dynamics, would have made the Taxi Industry be aware of this massive
economic force that demands instant connection through available technology, and their desire
for ease of access and payment. Uber was able to capitalize on this by having a one click
function to connect a consumer with an Uber driver, while also handling payment. This created a

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lot more simplicity for Millennials, who greatly prefer these sorts of luxuries over the
unpredictability of having to hail a traditional taxi.
Finally, the fossil fuel industry also demonstrates a level of vulnerability to Millennials
and a change in the economic trends of todays marketplace. As denoted already, other countries
besides the United States have made significant strides towards moving away from fossil fuels
and utilizing alternative sources of energy. However domestically, only 10% of our energy
sources from alternative renewable sources. With Millennial preferences towards green energy,
and companies paying attention to their social and environmental impact, there has become a
growing display of discontent pointed towards the fossil fuel industry. As a result, we see a
significant amount of support for companies that strive to disrupt the fossil fuel industry, such as
Tesla and Solar city. In actuality, these alternative energy are outmatched in terms of resources,
and could be seen as underdogs as they attempt to taken on fossil fuel companies. However, as
Millennials continue to become larger participants in the marketplace, and even become
employees of the fossil fuel companies, the marketplace should begin to see a change, as their
mindset becomes overpowered by the desires of the marketplace. Ultimately, the fossil fuel
industry should begin to take more note of the change in trends and market demographics, and
begin to adapt now, instead of ignoring these change in trends. Ignoring the increasing
importance of Millennials could lead to the eventual disruption of the fossil fuel industry.
V. Final Remarks
As the examination of the four case studies depicted, disruptive innovation occurs in a
wide variety of industries and to varying degrees of success. In todays technologically enabled
business environment, incumbent firms must be hyper vigilant of new competition. Companies

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must learn from the success stories of Uber and Netflix while also from the failures of the taxi
industry and Blockbuster.
While the ideas and insights discussed in this paper may help to provide a framework to
either create a disruptive innovation or fend off a new threat, there is no formula to these
processes. Some innovations result from a stroke of genius and have the potential to disrupt
overnight while others may take a significant period of time. Firms must constantly be aware of
the ever changing business environment. This includes new business model applications,
technological advances, and threats from startup companies. In total, all firms, both incumbents
and potential disruptors must take forward thinking and proactive measures in order to increase
the likelihood of long term success.

Works Cited
Christensen, Clayton M., Michael E. Raynor, and Rory McDonald. "What Is Disruptive
Innovation?" Harvard Business Review. N.p., 01 Dec. 2015. Web. 04 Mar. 2016.
Wadhwa, Vivek. "What the Legendary Clayton Christensen Gets Wrong about Uber, Tesla and
Disruptive Innovation." Washington Post. The Washington Post, 23 Nov. 2015. Web. 14
Mar. 2016.

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