Uber Strategy Paper

Strategy mid-term paper (Uber)

The concept of ridesourcing is revolutionizing the way people commute in urban areas. Ridesourcing or “on-demand” ride services primarily appeal to a younger, tech-savvy demographic looking for fast, flexible and convenient mobility. Founded in 2009, Uber was the first company to develop a technology platform which created an online, “two-sided” marketplace connecting passengers with drivers using their personal vehicles. Uber does not own any assets, but facilitates and controls the interactions between suppliers and consumers (business innovation). In order to support this novel business model and encourage innovation, the California Public Utilities Commission established a new category of motor vehicle carriers known as “transportation network companies” (TNCs).1 

Uber operates in the “passenger transportation” industry. Patents filed by Uber to protect its systems and processes are pending approval. Thus, prospective new entrants can easily replicate Uber’s model. Capital costs are low, as TNCs do not own a vehicle fleet. Potential entrants can design a mobile app and distribute it to suppliers and consumers at little to no cost. Given the lack of proprietary elements and low seed capital requirements, the barrier to entry is low and, correspondingly, the threat of new entrants is high. A number of companies have emulated Uber’s business model, and there is little differentiation between the services they provide. As a result, consumers have the option to choose between competing services, and this increases their bargaining power. The suppliers of ride services are individual drivers who have low switching costs, as they use their personal cars and purchase their own insurance. Uber does not charge any membership fee and offers its mobile app for free. These factors give the suppliers significant bargaining power. If Uber and other TNCs raise their prices, consumers can easily switch to taxi-cabs and other modes of public transportation. Hence, the threat of substitutes is high. TNCs such as Lyft, Rideshare and Sidecar have similar business models and compete for the same customers and suppliers in major cities across the country. They also match competitor pricing. Since there is limited differentiation, the rivalry among existing competitors is high.  Therefore, the competitive forces in the passenger transportation industry are very intense and could limit Uber’s ability to generate sustained profits.  

Uber’s competitive advantage can be evaluated by estimating the gap it has created between the customer’s willingness to pay (WTP) and its own costs. To satisfy the needs of its diverse customers, Uber offers a variety of ride options such as UberX, Taxi, Black, SUV and Lux3 (customization). The customers and suppliers use a smartphone equipped with a GPS and the Uber mobile app to find each other. This app can be used to request a ride, receive a fare estimate, and provide driver feedback as well as make payments (convenience). The majority of customers are picked up in less than five minutes2 (timeliness). Driver screenings, background checks and customer feedback are examples of some activities the company undertakes to maintain quality of service and deliver a consistent user experience (risk reduction).  Uber’s strategy to maintain regular contact with its customers enables it to build a tight connection with them and address their fundamental needs on an ongoing basis, thus creating a loyal customer base (embeddedness). For these reasons, the customer’s WTP is high.