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Disruptive innovation, business model and sharing economy:

the bike-sharing cases in China Steven Si, Hui Chen, Wan Liu and Yushan Yan

School of Management, Zhejiang University, Hangzhou, China

Abstract

Purpose – The purpose of this study is to connect disruptive innovation and sharing economy by exploring the underlying mechanisms of how a disruptive innovation–based business project creates, delivers and captures value in sharing economy through analyzing the case of bike sharing in China. Design/methodology/approach – An elaborate case study is used to unfold the process as well as the underlying mechanism and relationships among disruptive innovation, business model, bike-sharing business and value creation in sharing economy. Findings – Bike sharing case fits well in disruptive innovation theory. Its low price and great convenience have led to rapid development in China. However, failures to improve their products and services and build an effective business model which can create, deliver and capture value have caused the failure of many bike- sharing companies. Other factors such as strategic decision-making, internal management problems, external conflicts as well as uncivilized consumer behaviors have also inhibited the sustainable development of bike- sharing companies. Originality/value – The theoretical contributions of this study include the following: to explore how a disruptive innovation–based business creates, delivers and captures value successfully in sharing economy. This study contributes to both research and practice on disruptive innovation and sharing economy.

Keywords Disruptive innovation, Bike sharing, Business model, Sharing economy, China

Paper type Case study

1. Introduction The creation of new businesses through disruptive innovation has occurred over the past years and has led to the establishment of a range of sharing businesses. The concept of “sharing economy” dates back to 1980s. It is generally believed that its predecessor was “collaborative consumption”, which was proposed by Felson and Spaeth (1978). They suggested that what consumers need was the use value of a product rather than the product itself. Accordingly, it contends that it is more beneficial to lease than to buy. Through sharing economy, firms can gain certain market shares while at the same time enabling consumers to have access to the products or services with lower costs. Thus, since 2015, the sharing economy has gained its popularity worldwide. In some emerging economies such as China, tens of thousands of sharing economy projects appeared in the past five years. These products can be shown from small commodity-like sharing umbrellas or sharing portable batteries to durable consumer goods such as sharing bikes or cars. Therefore, sharing economy has become a hot topic in both academia and practical usage recently.

People are increasingly interested in understanding the role of sharing economy as platforms to provide new opportunities for entrepreneurship. The two driving factors of this phenomenon are new network technology and innovative application, especially disruptive innovation application due to the consistency of its basic connotation with that of sharing economy. Such disruptive innovation seeks to identify potential low-end or niche markets with advantages in subordinated attributes (e.g. cheaper, simpler ormore convenience) which are not valued by mainstream consumers (Govindarajan and Kopalle, 2006b; Govindarajan

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The papers form part of special section “Social Innovation and Entrepreneurship in the Sharing Economy”, guest edited by Wenzhi Zheng, Jun Yang, Yenchun Jim Wu and Chunpei Lin.

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/0025-1747.htm

Received 23 June 2019 Revised 24 November 2019 Accepted 4 January 2020

Management Decision Vol. 59 No. 11, 2021 pp. 2674-2692 © Emerald Publishing Limited 0025-1747 DOI 10.1108/MD-06-2019-0818

et al., 2011) but are highly relevant to the value objectives of the sharing economy. It is a new stream of research with a lot of questions to be explored. Although there are some scholars who have noticed this connection and made their efforts on it (e.g. there have been popular discussions on disruptive innovation and Airbnb) (Dogru et al., 2019; Guttentag, 2015; Guttentag and Smith, 2017; Lorde and Joseph, 2019), there are few studies exploring the link between disruptive innovation and bike sharing. Our study adopts the case of bike sharing in China as an example to explore how enterprises create, deliver and capture value in sharing economy through disruptive innovation. We address the following questions: How did bike sharing successfully enter the urban transportation market in a short time? Why then did so many bike-sharing companies become broke or are stuck in predicament soon after the prosperity of the industry?We choose this case because it is an extreme case; the bike-sharing industry has shifted from prosperity to a surprising predicament in just a few years. Numerous bike-sharing companies have become broke or stuck in financial difficulties, which can best illustrate challenges faced by entrepreneurs and their firms in sharing economy. Second, it is a disruptive innovation–based sharing business model which aims to create and deliver both economic and social benefits. It represents a kind of social innovation with the duality of the sharing economy and disruptive innovation. This duality adds to the complexity of the case andmakes our researchmore comprehensive, which can help people to better understand how disruptive innovation–based business projects create, deliver and capture value in sharing economy and to learn lessons from the failure of some bike-sharing companies. From the analysis of the relevant literature and case study, we have identified the main factors that caused the failures of the bike-sharing companies in China that include the following: 1) the failure of continuously improving and delivering high-quality products and services and ineffective operation as well as financial management; 2) Lack of an appropriate business model; 3) The impact of some strategic and social factors such as strategic decision- making, internal management problems, external condition constraints, suboptimal social system with underdeveloped social maturity and irresponsible user behaviors (see Figure 1). This study aims to deepen the understanding of both disruptive innovation and sharing economy by connecting the relevant new businesses within the Chinese context.

The rest of paper is organized as follows. Section 2 reviews related literature on disruptive innovation and illustrates why bike sharing can be regarded as a disruptive innovation– based business. Section 3 introduces the case of bike sharing in China and discusses the failure issues and problems. Section 4 discusses key issues that can be learned from this case study. The main conclusions are summarized in Section 5.

2. Theoretical background 2.1 Disruptive innovation Disruptive innovation is an important strategy and is widely used in different industries after it has gained attention in both academic and practical domains (Christensen et al., 2018). This innovation refers to a process in which startups or small new entrants invade the established markets by providing products or services that are inferior to those provided by incumbents in the attributes that mainstream customers value but with advantages in other subordinate attributes which are appreciated by the neglected customers of incumbents from low-end markets or new markets (e.g. Adner, 2002; Christensen et al., 2015; Danneels, 2004; Govindarajan and Kopalle, 2006a, b). The disruptive innovation process emphasizes several key points. First, it is a process rather than a mere outcome (e.g. Ansari et al., 2016; Christensen, 2006). Second, it initially focuses on the low-end markets or the new markets (e.g. Christensen et al., 2004; Christensen et al., 2015). Third, its products or services are usually inferior to those of incumbents in attributes that consumers in the mainstream market are more interested in and value, but they still can meet the needs of consumers from

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Figure 1. Developing process and consequences of sharing bikes from the perspective of disruptive innovation

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the low-end or new markets in the attributes that these consumers value (e.g. Bower and Christensen, 1995; Christensen, 1997; Huesig et al., 2014). Fourth, its products or services do not develop along existing technological trajectories (e.g. Bower and Christensen, 1995; Christensen et al., 2000; K€onig et al., 2012). Finally, the mainstream and subordinated attributes of products or services provided by disruptive innovation will continue to improve until they meet the needs of consumers in mainstream market and gradually penetrate into the mainstream market (e.g. Bower and Christensen, 1995; Christensen et al., 2015).

According to its definition and connotation, the developing process of disruptive innovation involves two stages (see Figure 2).

In the entry stage, disruptive innovation positions in the low-end markets or newmarkets ignored by incumbents. It attracts underserved consumers from these markets toward products or services which have comparative advantages in subordinated attributes, so as to avoid the competition with incumbents while gaining market space (Huesig et al., 2014; Pinkse et al., 2014). In the transformation stage, the mainstream attributes of its products or services will gradually improve through continuously improving technology or process until they attract mainstream consumers and win a certain market share of the mainstream market. Based on the literature on disruptive innovation, the success of a disruptive innovation–based business project largely depends on whether the attributes of the mainstream products or services are improved in the transformation stage (Bower and Christensen, 1995; Christensen et al., 2015; Crockett et al., 2013; Govindarajan and Kopalle, 2006a). It also depends on whether an effective business model is built to create, deliver and capture value so as to successfully commercialize the outcome of disruptive innovation (Chesbrough, 2007, 2010; Cozzolino et al., 2018; DaSilva et al., 2013; Groen et al., 2008; Hwang and Christensen, 2008; Wu et al., 2010). The business model should carefully adjust to integrate advantages in both mainstream attributes and distinct attributes in order to build up the competitive advantages of the disruptive innovation–based business project.

Phase 1: Entry stage Phase 2: Transformation stage

- Inferior in mainstream attributes

- Strong in subordinated attributes such as

lower price, higher accessibility or more

convenience

- Position in low-end markets or new

markets neglected by incumbents

- Improve attributes especially mainstream

attributes until they meet the requirement of

mainstream consumers

- Build a business model integrating advantages in

both mainstream attributes and distinguished

competitive advantages

- Invade mainstream markets from low-end or new

markets and gain market share

- Gain market space for early development

- Competitive advantage

Transfer into commercialization and development

Key successful factorfoundation

Getting the disruptive innovation project successful

Figure 2. The two stages of the

development of disruptive innovation

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The notion of business models has been closely related to disruptive phenomena. Christensen (2006) has emphasized the importance of business models for incumbents

facing technological disruption. He argued that disruptive innovation was more about a disruptive business model that paralyzes the current market leader rather than about the pure use of technology. He also stressed that “disruption” was not an intrinsic phenomenon and could only bemeasured relative to another company’s business model. In other words, an innovation which was disruptive to one company might be sustaining to another, depending on their current business model. Commercialization of disruptive technologies is more important than ever today (Wu et al., 2010). The economic value of any invention (including new technologies) can only be realized through commercialization by business models (Chesbrough, 2010). Pure new technologies can be commercialized in different ways through different business models (Chesbrough, 2007). Therefore, the understanding of innovation must be expanded to include new business models accompanied by pure new technologies or R&D processes (Chesbrough, 2007). Flexible and dynamic business models will greatly contribute to value creation and sustainable competitive advantage, thereby allowing disruption to be managed (Alberti-Alhtaybat et al., 2019; Bohnsack and Pinkse, 2017). However, it is important to note that disruptive innovations usually adopt completely different business models that are not only economically sustainable but also consistent with existing market realities, customer expectations and competitive pressures (Chesbrough and Rosenbloom, 2002; Christensen, 2006; Cozzolino et al., 2018; DaSilva et al., 2013; Markides, 2006; Sandstr€om, 2011). This requires a new approach to converting value into profits, particularly in terms of revenue and pricing structures (Kammerlander et al., 2018).

2.2 Disruptive innovation and bike-sharing From literature, it can be seen that sharing economy shares some theoretical foundation with disruptive innovation. First, both sharing economy and disruptive innovation focus on low-end segments of the mainstream markets or nonconsumers of mainstream products and services. Second, both sharing economy and disruptive innovation reduce transaction costs (Guttentag, 2015; Schwalbe, 2018), allowing small startups and new entrants of a market to do business with fewer resources, so as to gain opportunities to invade the market. Sharing economy proposes new and highly flexible business models to acquire idle resources at a very low cost (Widtfeldt Meged and Zillinger, 2018). The basic notion of sharing economy is that idle resources, such as physical assets or services underutilized by individuals, can be mobilized through networks and platforms, as well as can be directly connected to the market, where these resources will be exchanged for free or at a lower cost than regular transactions. Third, according to the core connotation of disruptive innovation, many projects of sharing economy are in line with the characteristics of disruptive innovation and therefore can be regarded as disruptive innovation projects (Dogru et al., 2019; Guttentag & Smith, 2017). For example, bike sharing can be regarded as disruptive innovation. As a new business of sharing economy, bike sharing targets low-end and niche markets of transportation by its free-floating bike renting services with low price and great convenience. It initially focuses on the low-end markets or the nonconsumers through low-cost bike renting services. Bikes are simpler and slower than other vehicles, and the bike-renting services are simpler than those of incumbents. They still can meet the needs of consumers from the low-end markets and the previous nonconsumers of public transportation in the attributes that these consumers value, especially for the need of solving the point-to-point commute problem in short distance (the so-called “the last kilometer” problem). What is more, it does not develop along existing technological trajectories of other vehicles. Finally, the surviving bike-sharing companies (such as Hellobike) have continued to improve the mainstream and subordinated attributes of their

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products or services and attracted consumers in mainstream market; they have gradually penetrated into the urban transportation market and become indispensable.

3. The bike-sharing cases in China 3.1 The emergence of bike sharing The sharing economy has become very popular in China since 2015, with hundreds of thousands of sharing projects launched in various industries. According to the annual report on the development of China’s sharing economy in 2018[1], the transaction volume of China’s sharing economy market was about 4920.5bn RMB in 2017 (about 728.77bn USD[2]), an increase of 47.2 percent over 2016 that was jointly released by the Sharing EconomyResearch Center of the State Information Center of China and the Sharing Economy Committee of the internet Association of China. Of this, the nonfinancial sharing sector accounted for 2094.1bn RMB (about 316.45bnUSD), an increase of 66.8 percent over the previous year. In the past five years, China’s sharing economy has penetrated into many segments such as transportation, accommodation, catering, cultural creativity, education and training, medical diagnosis and manufacturing services. Financing in the sharing economy totaled about 216bn RMB (about 32.64bn USD) in 2017, up 25.7 percent from the previous year.

In 2015, under the wave of sharing economy, sharing bikes emerged in the urban transportation market and were quickly promoted nationwide. The first domestic bike- sharing brand is ofo, marked by its striking yellow bikes. It first appeared on the campus of Peking University in 2015 as a “sharing scheme” project in which 200 students’ bikes are recycled and converted to sharing bikes. The different users can share the right to use of a bike at different time of a day at a very low price. This bike-sharing model was quickly appreciated by the investors, and this business model was immediately imitated by various followers. This new type of bike-sharing business was different from the early generation of designated docking public bicycles and traditional bike rental services. The internet- based “dockless” sharing bikes were randomly placed everywhere, and they did not need to get access or return at designated spots with fixed piles. Wherever people saw these sharing bikes, they could scan the QR code printed on the bikes to unlock them with the downloaded app on their smartphones or use a third party payment app such as Alipay or Wechat.

The finish of the rental service was also very convenient. People just needed to find a place to park the bikes and lock them; after this, the apps would automatically count the price and then offer several ways of payment to choose from. People could either choose to replenish their accounts of the brand or just use the third-party payment apps to pay the bill on their smart phones. With the deposit, one can pay through the electronic account and can withdraw any time, and some companies had some preferential policies to exempt deposit for particular customer groups. Moreover, any problems with the bikes or services could be reported through the apps immediately. Any unsuccessful service caused by problems of the bikes would not be charged. The low price and convenience have led to rapid development of this bike-sharing business.

3.2 The development of bike sharing According to the Statistical Report on the Development of Internet in China, as of June 2017, the number of users of sharing bikes has reached 106 million, and the volume of sharing bikes launched onto the market has reached 16 million. Moreover, as of July 2017, nearly 70 enterprises have entered the bike-sharing industry in less than two years. The data from China Bike-sharing Industry Research Report 2018 further showed that in 2017, China’s bike sharing companies have put 23 million bikes into the market in total, covering

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200 cities. This indicated that 7 million bikes were launched into the market in just 5 months.

Because of its attractive potential of benefits, the bike-sharing business model has quickly gained popularity among investors after it was promoted to the urban market, among which the two most notable ones were ofo and Mobike. According to its public data, ofo has completed 10 rounds of financing from December 2014 to March 2018, the total amount exceeding 2.1bn USD. On the other hand, the financing amount disclosed by Mobike during the same period was more than 915 million USD (see Table I).

The rapid influx of capital has accelerated the expansion of enterprises and industry development. But the intervention of these capitals also influenced the development of the bike-sharing business models. The expectations of investors affected the strategic decision of the bike sharing enterprises, leading to the start of a subsidywar in the industry. Subsidywar is a form of price war, and it is one of the most common tactics used by Internet technology companies in China and has already emerged in the e-commerce, group buying and ride- hailing sectors. In this competitive mode, companies try to grab market shares as soon as possible through spending huge amounts of money to compensate for the cost of consumers so that consumers can use the service in incredibly low prices, or even for free at the beginning. It is only after beatingmost of the competitors in the industry do they raise the prices to run their business in a normal way. In the case of bike-sharing industry, the participation of ofo andMobike, who have received themost financing, has intensified the subsidy war.

Consequently, those small bike-sharing enterprises with little capital support went broke and exited the competition in a very short time. Eventually, most of the previous 70 bike- sharing companies were shut down by the end of 2018; only a handful of large firms survived, such asMobike, ofo and Hellobike. But they also had different outcomes of development. Ofo, as the pioneer of the industry and one of the giants of bike-sharingmarket, failed, as it almost went broke and owed large amounts of money to suppliers and user deposits. Mobike, the

Ofo Mobike Time Round Amount Time Round Amount

2014.12 Angel 1,500,000 RMByuan (about 219,102 USD)

2015.3 Angel 1,460,000 RMB yuan (about 216,239 USD)

2015.10 Pre-A 9,000,000 RMByuan (about 1,314,617 USD)

2015.10 A 3,000,000 USD

2016.2 A 15,000,000 RMB yuan (about 2,191,028 USD)

2016.8 B Tens of millions of dollars (No exact figures were disclosed)

2016.4 Aþ 10,000,000 RMB yuan (about 1,460,685 USD)

2016.8 Bþ Tens of millions of dollars (No exact figures were disclosed)

2016.9 B Tens of millions of dollars (No exact figures were disclosed

2016.9 C 100,000,000 USD

2016.10 C 130,000,000 USD 2016.10 Cþ 55,000,000 USD 2017.3 D 450,000,000 USD 2017.1 D 200,000,000 USD 2017.4 Strategic

financing No exact figures were disclosed

2017.1 Strategic financing

A hundred million yuan level (No exact figures were disclosed)

2017.7 E Over 700,000,000 USD 2017.6 E 600,000,000 USD 2018.3 Eþ 866,000,000 USD (equity

and debt) – – –

Table I. Financing history of ofo and Mobike

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main rival of ofo, was acquired by Meituan, while the latecomer Hellobike surprisingly became the leader of the industry.

3.3 Failure issue and problems As showed above, the bike-sharing business in China has succeeded to some extent in the entry stage because they successfully construct their competitive advantage of low cost and great convenience. However, a lot of problems have emerged in the transformation phase in their developing process (see Figure 3), leading to the failure of many bike-sharing companies and the rapid decline of the bike-sharing industry.

We class them into three primary categories. The first is strategic decision making. It is important for companies to make appropriate

strategic choices (Kim &Min, 2015). For example, ofo initially chose to only concentrate on the campus markets; this was its first big mistake. The delay of entering the large urban market has provided time and space for its imitators to preempt the market. When ofo realized this and rushed into the urban market, one of its main rivals, Mobike, has already taken large market share and became a giant of the industry. The subsidy war has caused almost all the bike-sharing companies to spend too much money to attract users and grab market shares regardless of the cost and profit. But they neglected the importance of building business models for sustainable development. The heavy reliance on capital has also led to the risk of huge pressure on capital if investors cash out and leave the market. However, Hellobike did not participate in the subsidy war, but it chose to go back to the nature of disruptive innovation by focusing on improving the attributes of its products and services and refining its business model so as to gain market share and make profits. As a result, ofo and Mobike were stuck in a predicament, but Hellobike became the leader in the industry. On the other hand, without supervision and regulation, the huge amount of deposit has been misappropriated randomly by many bike-sharing enterprises, and we cannot verify the exact amount of money being used. This problem has destroyed the trust of users on these bike-sharing companies. Once there are problems, the panic users would scramble to ask for the refund of the deposit, which will greatly increase the pressure on the capital chain of the enterprises. This was exactly what several bike-sharing companies have experienced. For example, it has been reported by the media that as of the first half of 2018, more than 50 percent of ofo’s liabilities come from users’ deposits. At the end of 2018, above 10 million users rushed to apply for the return of their deposits after the exposure of the deposit problems of ofo by media. It was because of the frequent exposure of the news about the misappropriation and arrears of users’ deposits that many users dared not to use the bike-sharing services any more even though they had needs. There are also other strategic problems related to the failure of bike-sharing companies. For instance, many companies such as ofo chose to launch bikes asmany as possible regardless of the quality of bikes and users’ experience. The managers purchased cheap bikes which were easily damaged; they did not exert much effort to maintain their bikes. As a result, a lot of sharing bikes had long been unregulated, with the rate of loss, damage and abandonment remaining high.

These problems and the poor cycling experience have led to many consumers gradually losing confidence in these companies. Strategic adjustment also plays an important role in the success or failure of the bike-sharing companies. For example, it is very important to choose the right time to exit. Mobike agreed to be acquired byMeituan at an appropriatemoment and its founders left the companywithmoney to start their new business. However, the founder of ofo refused the proposal of acquisition, although he did not have the ability to help the company deal with the dilemma they faced; therefore, the company was stuck in a predicament with a very short amount of time.

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Figure 3. Problems faced by bike-sharing companies in transformation phase

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The second category of problems we suggest is the inner management problems. The rapid expansion has also brought many problems regarding the internal management of bike-sharing companies. Take ofo as an example. First, the game between entrepreneurs, management and investors has led to a management problem of factions. The intervention of different investors has brought about continuous changes of power in ofo. According to the media reports, new management joined the company every time after a new round of financing; almost all departments changed leaders constantly. All too often, when a new leader came along, he/she would hire his/her own team and marginalized the existing employees, which has created great redundancy in the organization. From 2016 to 2017, ofo has had management changes three times, and each management change has brought huge impacts to the company. Second, the lack of a sound management system gave rise to ofo’s problems such as concealment, false reporting and corruption. Third, young entrepreneurs fell short in professional management. The quality of management is key because they determine the success of the business model through their ability to acquire, combine and utilize valuable resources in a way that delivers value propositions to customers (Bocken et al., 2014). The management of an enterprise needs to constantly evaluate, measure and reconfigure its resource portfolio to respond to market and social needs, social changes and technological progress (Lahti et al., 2018). Unlike the traditional Internet entrepreneurship, the bike-sharing companies were growing too fast, and they had to face very high market complexity and uncertainty. However, many young founders of bike-sharing enterprises failed to handle. If the founders do not have the ability and experience to deal with the complex situation of entrepreneurship, professional managers can be introduced to reduce conflicts as much as possible through construction of management system. This is the basic requirement for the healthy development of the company. However, due to the rapid and blind expansion, the bike-sharing enterprises failed to have enough time and patience to establish a benign corporate culture and system, as well as business models.

Third, problems from external conditions have great impact on the performance of bike- sharing companies. As mentioned above, the strategic decision of large bike-sharing companies were deeply influenced by investors. The nature of capital requests that money should give priority to seek increase, as well as to obtain benefits and profits as soon as possible. In this regard, they seldom consider the sustainability of the business in the long run. The transition to a more sustainable business model requires a high upfront investment and a long time horizon. For these requirements, it may be difficult to obtain the approval of investors because this approach does not meet their short-term investment objectives (Lahti et al., 2018). For bike-sharing companies, the impact from investors on their strategic decision-making drove them to start price wars to gain market shares as much as possible in a short time, regardless of whether it was sustainable or not. This has directly led to the failure of many bike-sharing companies because their business models lack sustainability.

Another problem was supervision and regulation. Because sharing bikes were new inventions and their development advanced the formulation of policy, the supervision and regulation problems were quite serious in the first two years after their introduction. For example, bikes were randomly placed on sidewalks or streets because they were dockless, causing disorder in cities, especially in downtown areas. Another problemwas that in order to achieve rapid expansion, many bike-sharing companies put as many bikes as possible into the cities, regardless of public benefits, which seriously occupied public space and disrupted public order. For example, by the end of 2017, the number of sharing bikes has reached 2.35 million in Beijing, but the capacity of docking system was only 1.2 million. This extremely saturated state of sharing bikes quickly spread from first-tier cities to second-tier cities in China.

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Sharing bikes have occupied public space, sidewalks, blind lanes and nonmotorized lanes, and they are often parked disorderly, which has become a serious problem for urban management in many cities. Some cities even experienced extreme situation, with bike- sharing companies putting their bikes into the city without permission from the government. On the other hand, the degree of development of society and quality of people have not coped with the development of sharing economy, which is in need of better self-regulation of all stakeholders (e.g. bike-sharing companies and users).

4. Key issues for bike-sharing business in China There are lessons that can be learned from the different developing trajectories of bike- sharing companies and the rapid decline of bike-sharing industry.

4.1 Business models and value creation The importance of business models to disruptive innovation projects has been discussed in the literature (Bocken et al., 2014). The case of bike-sharing companies has also illustrated that the continuous improvement of mainstream and subordinated attributes of products/ services and the establishment of an effective and dynamic business model in the transformation stage are critical to their sustainable development.

Take the development of the three industry leaders, ofo, Mobike and Hellobike, as a comparison. As discussed above, ofo and Mobike participated in the subsidy war and invested a lot of money to fight for users andmarket share regardless of costs and profits, but they failed to establish a mature and effective business model and keep improving. Ofo’s performance was the least unsatisfactory. In order to significantly increase the number of vehicles on the markets, it chose to sacrifice the quality and purchased low-cost bicycles in bulk. This led to a high damage rate of ofo bikes, which actually increased the maintenance cost. In addition, this caused ofo’s user experience to become worse and user viscosity to decrease. Mobike has done relatively better because of its emphasis on investing in high-end bikes, and the quality of its vehicles was much better than that of other bike-sharing companies. However, due to its participation in the subsidy war, Mobike also inevitably fell into the dilemma of loss and it was difficult to achieve sustainable development. According to IPO prospectus of Meituan in 2018, Mobike has been losing money since it was acquired. The gross loss was 407 million RMB (about 61.5 million USD) fromApril 4, 2018 to April 30, 2018, equivalent to a daily loss of about 15 million RMB (about 2.3 million USD). This will be difficult to change in the short term, as Mobike has not yet been able to establish an appropriate business model to achieve sustainable development. On the other hand, as can be seen from the official websites of the two bike-sharing companies[3], there is no mature business model in operation.

In contrast, Hellobike was not involved in the price subsidy war, but it steadily explored and established an effective and dynamic business model to achieve its sustainable development. There were several main initiatives. First, based on the correlation to personal credit system of Alipay, Hellobike promoted the deposit exemption nationwide, avoiding the risk of deposit misappropriation faced by other bike-sharing companies. This makes Hellobike to avoid the risk of too much pressure on its capital chain so as to achieve a stable development. Second, after gaining a certain market share, Hellobike began to focus on improving product quality and seeking diversified development. According to the media[4], at an industrial-level conference hosted by Hellobike on December 20, 2018, the company announced that it attempted to achieve the goal of cost leadership by simplifying products, ensuring quality, improving and maintaining efficiency of operation and maintenance, implementing lean production and optimizing design in the future. The general manager of

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supplymanagement center of Hellobike further revealed that “Themajor business strategy of Hellobike in the next 3–5 years is to comprehensively upgrade the cooperation with suppliers through cost leadership, technological innovation, product experience and efficiency improvement.” In addition, Hellobike co-operated with a number of partners in the industrial chain to promise the quality of service in the future. According to the official website of Hellobike[5], their new generation of bicycles have been improved in the various aspects such as vehicle design, positioning, intelligent parking regulation technology, intelligent background planning scheduling, operation and maintenance personnel intelligent port refinement operation. By September 2019, Hellobike has entered more than 360 cities, 350 universities and 340 scenic spots, with 280million registered users and the first market share.

Third, Hellobike has evolved from the original single bike-sharing service to a comprehensive business professional mobile travel platform including Hello bike, Hello moped, Hello electric vehicle service platform, Hello electric facility and Hello ride sharing. Hellobike states that its vision is to provide users with convenient, efficient and comfortable vehicles and professional mobile travel platform to provide travel services. In the process, it attempts to build an integrated ecosystem around the “two wheels”. In addition, Hellobike has formed a set of industry-leading intelligent system called the Hello Brain, which is applied to the large amount of interconnected sharing travel equipment, to realize the intelligent decision of the entire business ecosystem of Hellobike. Based on big data, artificial intelligence (AI), cloud computing and other aspects, it attempts to realize the intelligentized decision-making of whole-chain operation of business, so as to achieve the optimal matching of transportation capacity, space and demand, as well as and to provide users with more efficient and high-quality travel experience, which is conductive to improve the overall traffic efficiency. Through the continuous improvement of products and services, and through an effective and dynamic business model to successfully commercialize its products and services, Hellobike, the latecomer, gradually became the industry leader.

Hellobike’s development is in line with the characteristics that a successful disruptive innovation project needs to meet in the transformation phase. Thus, from the comparison of the development of ofo, Mobike and Hellobike, it can be seen that continuous improvement of products or services and the establishment of effective and dynamic business models are key factors for the success of disruptive innovation project.

However, as bike sharing is a new practice, they face high uncertainty. In such an industry, customer preferences and behaviors are unknown or undefined, and the needs for product attributes are uncertain. In addition, early business models have not yet developed clear or established value chains or value delivery mechanisms based on extensive research and dissemination (Lahti et al., 2018).

When bike sharingwas first launched, its business logic was that the enterprises provided customers with cheap and convenient bicycle rental service through purchasing and offering bikes uniformly. Fees were charged based on the time of use. This rental service seemed to be of high frequency and could create a very strong cash flow. But such a business model was yet immature, with many problems and lack of a stable and effective developing path. However, under such conditions, there was a large number of capital rushed into the industry crazily, leading to its explosive growth. The investors also brought the popular mode of “usingmoney to attract users” in e-business industry to the bike-sharing industry. Therefore, offering large amounts of subsidies and benefits to customers has become a common practice in the competition for market share. Under the boost of capital, those bike-sharing companies started to crazily purchase and launch bikes, spend huge amount of money on subsidies for users and participate in price wars with each other. The influx of capital has made bike- sharing companies to no longer think about how to compete with its competitors through

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continuous improvement. They even did not consider making profits. All they do was to constantly spend money and subsidize because it seemed that there would always be investment to cover the costs. At that time, the recognized competitive mode of the bike- sharing industry was expansion of financing and a broad bicycle launch. In this case, the bike-sharing projects have deviated from normal business logic and have virtually become a financing tool. It is not a real business model when running business is not for profit but for financing and beating competitors regardless of costs.

How does one define and find an effective and appropriate business model? Based on our literature review and case study, we propose that the future development of

the business model of bike sharing needs to grasp three key elements, which are value creation, value delivery and value capture (Teece, 2010; Wang et al., 2017) (see Figure 4).

First of all, bike-sharing companies need to make use of their competitive advantage as a disruptive innovation–based new sharing business to create value for consumers. The value of bike sharing lies in it providing low price, great convenience and effective solution to the point-to-point demand in short distance commute. This is also the key factor for the rapid development of bike-sharing business in the past and the basis for the bike-sharing companies to enter the urban transportation market and gain a certain market share. On this basis, how to design a clear and effective value chain or value delivery mechanism is the key to its businessmodel transformation.We suggest that there are fourmain aspects to consider. First, bike-sharing companies should improve the quality of their bikes and continuously improve attributes of their products. For example, a new generation of sharing mopeds has already been launched into themarket, making cyclingmore effortless so as to improve users’ riding experience. Second, bike-sharing companies should keep the low price of sharing bikes through reducing costs by improving technology and operation or other aspects. Third, bike-

Value creation

Value delivery

Value capture

Cheap

Convenient

Effective point-to-point commute in

short distance

Quality improvement of the bikes

Cost leadership through technology/

process improvement

Cooperating with government to

reduce negative impact on the order

of the society

Improve service content and value

personalization a closed-loop process asset sharing

usage-based pricing an agile and adaptive organization

a collaborative ecosystem

Figure 4. Transformative business model of bike- sharing companies

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sharing companies should solve the conflict with the government and collectively improve the management of sharing bikes. Suchmanagement could include controlling the number of sharing bikes launched in the cities and regulating the areas of launching and parking the sharing bikes, so as to reduce the negative impact of sharing bikes on the order of the urban publicmanagement. Fourth, bike-sharing companies should improve the content and value of their services, such as collecting, analyzing and sharing the big data of consumer cycling behaviour based on its platform, assisting the government in formulating relevant policies and urban development plans and providing information of its users’ commuting behaviour for enterprises in other industries. In addition to establishing a clear and effective value deliverymechanism, an effective value capturemechanism should also be designed. Based on the research of Kavadias et al. (2016), a transformative business model usually represents the following three or more features: (1) personalization, (2) a closed-loop process, (3) asset sharing, (4) usage-based pricing, (5) a collaborative ecosystem and (6) an agile and adaptive organization. Although no company can exhibit all of these characteristics, the more of them a company has, the better its chances of a successful transformation. This gives us some implications. First, bike-sharing companies can enhance their competitive advantage by providing more personalized products or services that are more suitable to the personal and immediate needs of customers than dominant enterprises or business models. Second, bike- sharing companies can replace the linear consumption process (in which the product is manufactured, used and then discarded) with a cycle mode, in which the used products are recycled and the overall resource costs are reduced. Third, bike-sharing companies can share expensive assets to reduce costs. The asset sharing can be accomplished even across the supply chain. Fourth, bike-sharing companies should continue to improve the charging mechanism based on usage. Customers are charged only after they used a product or service, rather than requiring them to buy it outright. This would benefit customers because it eliminates unnecessary costs of customers as they pay only after the use of the product/ service’s value. This also benefits bike-sharing companies because the number of customers may grow. Fifth, bike-sharing companies can build a more collaborative ecosystem so as to improve collaborations with supply chain partners, which helps these bike-sharing companies to reduce business risks and costs. Sixth, bike-sharing companies should build a more flexible and adaptable organization. If necessary, they should move away the traditional decision hierarchy model so that the decision-making better reflects the market demand and adapts to the market demands, as sell as realizes real-time adaptation to the changes of these demands. The result of doing this can providemore value for customerswith lower costs for the companies.

Through the improvement of these aspects, bike-sharing companies can establish a more effective value capture mechanism or profit model, thus getting a better chance of achieving the maximization of value.

4.2 Conflict management in several aspects Besides the business model, poor management of conflicts in several aspects also contributed to failure of bike-sharing companies. From our investigations of the case of bike-sharing business, four main conflicts that significantly impact the performance of bike-sharing companies can be identified.

(1) Conflict between the rising cost and maintenance of low price.

As bike-sharing companies should unremittingly improve their products and services, the costs would inevitably rise as well. In addition, the subsidy campaigns in the early stage have led to a large amount of spending, which aggravated the pressure on the capital chain of these bike-sharing enterprises. Therefore, companies need to find ways to increase their profits in

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order to survive. However, because bicycles are the most simple vehicles, the threshold of accepted price of consumers is quite low. If the fees are as expensive as other public transportation approaches, sharing bikes would be not so attractive to consumers and may face huge reduction in their orders.

Therefore, the conflict between the rising cost andmaintaining low price is one of themost challenging conflicts for bike-sharing companies. Companies have to figure out how to balance the rising cost and low price through innovation of technology and business model.

(2). Conflict with the government and other transportation participants.

As discussed above, the fierce competition for the parking area of bicycles has resulted in the siege of bicycles in cities and the disruption of the order of urban roads, which creates serious social problems. Therefore, a lot of cities have stopped issuing permissions for new bike launching. However, due to the poor quality and high damage rate of their bikes, many bike- sharing companies still launched new bicycles in Shanghai, Beijing and other cities, in violation of regulations in order to maintain their market share. That is, these bike-sharing companies did not choose to address the conflict through negotiation but tried to conquer the government. This has led to further intensification of the conflict between the bike-sharing companies and the governments. Such practice is not conducive to the development of the bike-sharing industry. On the other hand, the rapid development of sharing bikes is also harmful to the interest of other participants in the transportation system. Due to the low price and great convenience, sharing bikes have become a priority choice for many consumers. This has led to the deliberate damage of the bikes by some angry employees from other participants in the urban transportation market. As the bikes are randomly placed everywhere with low level of security protection, the bike-sharing companies still cannot figure out effective ways to protect their vehicles but have to only bear the damage.

(3). Conflict with investors and other stakeholders.

There are different participants in the market playing as partners to provide resources, knowledge and capabilities for bike-sharing enterprises. When these external resources are properly integrated into the enterprise, they will improve the key activities and product design of the enterprise, make it more sustainable and increase the total value which eventually flows to the society (Biloslavo et al., 2018). The core of value creation has shifted from a company to a network of different markets and social participants who participate in codesigning, cocreating and codelivering of a company’s value proposition (Biloslavo et al., 2018). Stakeholders are the core of the three-dimensional explanation of sustainable development (Birkin et al., 2010).

Because of its heavy reliance on capital, bike-sharing companies have one of the most intertwined stakeholder relationships. Especially for ofo and Mobike, who have received the most amount of financing, their strategic decisions are deeply influenced by investors. As discussed in previous sections, the intervention of investors has led to several problems. First, the intrinsic need of pursuing benefits of investors has forced the bike-sharing companies to participate in the subsidy war to gain users andmarket share as much as possible, regardless of whether they can sustain development in the future. Second, under the guidance of investors, the bike-sharing companies with immature business models did not focus on seeking sustainable development. Third, excessive dependence on capital alsomade the bike- sharing enterprises more vulnerable.

(4). Conflicts of management from inside the company.

As discussed before, the rapid expansion has also brought many problems for the internal management of bike-sharing companies. First, the game between entrepreneurs, management

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and investors has led to a management problem of factions. The intervention of different investors has brought about continuous changes of power in bike-sharing companies because they wanted a further control of these companies. Second, the lack of effective management system has caused management problems such as concealment, false reporting and corruption in the company. Third, young entrepreneurs were usually lacking experience and fell short in knowledge and capability of professional management, making them failing to address various problems in the developing process of their companies and to balance the tension between different stakeholders. Fourth, due to the rapid and blind expansion, most of the bike-sharing companies do not pay attention to establish an initial organizational culture and system.

4.3 Low social maturity and low matured user behavior Despite many existing problems, the idea of bike sharing is advanced and the benefit of the bike-sharing project itself is obvious. For example, it can effectively solve the problem of “the last kilometer”. It has made the city governments to re-examine and even adjust the redistribution of rights of using urban roads. Moreover, this green way of commute has eased the congestion level of cities and reduced emissions and pollution, at the same time. But how to develop the sharing business project and how to sustain its competitive advantage remains unresolved in the Chinese context. The investigation of this study indicates that it is particularly important that the government strictly implements rules and regulations to improve the social maturity and consumers’maturity. In addition, social entrepreneurship is another approach to improve the Chinese market, social maturity and consumers’ maturity. In that case, besides the consumers’ attitudes and behavior changes, the dignity and legitimacy of many sharing economy companies and entrepreneurs will be largely satisfied by the legitimacy-building activities in China.

5. Conclusion and implication As a disruptive innovation–based business in sharing economy, bike-sharing business has experienced huge ups and downs in the past four years. Because sharing bike is an effective solution to the point-to-point commute problem in “the last kilometer”, with low price and great convenience, the bike-sharing companies have obtained a large amount of financing in a short time and expanded at an incredible speed. The new innovation has substantially changed the structure of the urban transportation market and the way in which people commute. However, a large number of bike-sharing enterprises went bankrupt in a short period of one or two years after the prosperity of the industry. This is a representative case with many extreme phenomena for us to analyze. From the perspective of disruptive innovation, we suggest that two main reasons can explain the failures of so many bike- sharing companies. First, theymistakenly chose to participate in a subsidywar rather than to continuously develop and improve the attributes of their products and services under the intervention of capital. Second, they failed to establish a mature and effective business model that can help them to create, deliver and capture value in the transformation stage. In addition, there were several factors, such as the strategic decision-making problem, internal management problem, external inhibitors, conflicts existing in different aspects, the lagging development of Chinese society and uncivilized consumer behaviors, inhibiting the developing process of bike-sharing companies. These are key factors to be considered in the future development of bike-sharing business in the Chinese context.

Notes

1. “Report of China’s sharing economic development in 2018”. http://gjss.ndrc.gov.cn/zttp/gxjjfzbg/, 2019-5-13.

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2. All the amounts of money showed in RMB in this article are converted to US dollar based on the average exchange rate of RMB against US dollar in that year, i.e. 6.7518 in 2017 and 6.61741 in 2018.

3. Ofo, http://www.ofo.so/#/, 2019-11-19. Mobike, https://mobike.com/global/, 2019-11-19.

4. Sohu news, http://m.sohu.com/a/283277458_184641, 2019-11-19.

5. Hellobike, https://www.hellobike.com/index.html, 2019-11-19.

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Corresponding author Hui Chen can be contacted at: [email protected]

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