THE NEW ECONOMY DRIVERS: A CASE STUDY OF UBER

TABLE OF CONTENT

1.0     INTRODUCTION                                                                    3

2.0     THE MAJOR DRIVERS OF THE NEW ECONOMY               6

3.0     DISINTERMEDIATION AND UBER                                     9

4.0     WHAT’S HOLDING UBER BACK AND HOW TO

OVERCOME IT                                                                      12

5.0     CONCLUSIONS                                                                     15

          ATTACHMENT

1.0       INTRODUCTION

Uber Technologies Inc. is an American international transportation network company headquartered in San Francisco, California. The company develops, markets and operates the Uber mobile app, which allows consumers with smartphones to submit a trip request which is then routed to Uber drivers who use their own cars. By May 28, 2015, the service was available in 58 countries and 300 cities worldwide. Since Uber's launch, several other companies have copied its business model, a trend that has come to be referred to as "Uberification".

Uber was founded as "UberCab" by Travis Kalanick and Garrett Camp in 2009 and the app was released the following June. Beginning in 2012, Uber expanded internationally. In 2014, it experimented with carpooling features and made other updates. By mid-2015, Uber was estimated to be worth $50B.

The company expanded into a new city each month starting in May 2011, including New York City, Chicago and Washington, D.C. The Uber app's coverage expanded to Paris in December 2011. In May 2012, Uber launched a beta test in Philadelphia, followed by an official launch in the city that June. Uber expanded rapidly into overseas markets in 2012 and 2013.

Paris was the first city outside of the U.S. where Uber's service began operating in December 2011 prior to the international LeWeb Internet conference. In 2012 it launched its services in Toronto, Canada, a 90-driver launch in London, a Sydney, Australia launch in November 2012, and a soft launch in Singapore in January 2013. Sydney was Uber's first launch in the Asia Pacific region. Consumers in Johannesburg, South Africa, were able to use Uber after it was launched in September 2013. Uber was then started in Cape Town on October 10, 2013, after a six-week "testing phase".

In August, the company began offering its ride services in Seoul. In June 2014, Uber launched its services in Tijuana, Mexico.

In June 2014, Uber announced that it had raised $1.2 billion in funding, and it publicized an $18.2 billion valuation. In summer 2014, Uber announced it had raised $1.5 billion in venture capital.

Following a soft launch of the Uber app in the Sanlitun shopping district in March 2014, an official launch was held in Beijing, China, in mid-July 2014. The company's service operates in China’s four largest cities. In July 2014 Uber announced a nationwide rollout of UberX in India. In addition to a Bangalore presence, Uber's inaugural Indian location that was publicized in August 2013, drivers in Delhi, Hyderabad, Chennai, Mumbai and Pune made UberX available to users in those cities Although the Metropolitan Government of Seoul stated in mid-2014 that it would seek to ban Uber from operating in its jurisdiction, while also developing its own Uber-like app for registered taxis to be launched in December 2014,[34] Uber introduced its UberX service in the city at the end of August 2014. According to the Wall Street Journal, UberX uses a "for-pay rideshare scheme" and "trips cost less than the same journey in an ordinary taxi". At the time of the launch, an Uber representative based in Seoul said that a charge will not apply to rides in Seoul until further notice.

As Uber grew internationally, it also began to experience disputes with governments and taxi companies in those regions. In April 2014, Uber was banned by the government in Berlin, although the company remains active in other German cities. The ban is still being discussed as of December 2014. Taxi drivers in London, Berlin, Paris and Madrid staged a large-scale protest against Uber on June 11, 2014.

Also in February 2015, Uber announced a collaboration with Carnegie Mellon to found the Uber Advanced Technology Center, a new facility in Pittsburgh meant to support research in the development of self-driving vehicles. Additionally, Uber expanded its UberPOOL services to Los Angeles and New York City, expanding further in March, to offer UberPOOL in Austin, Texas, in anticipation of the South by Southwest festival. In April 2015, Uber renamed its UberFRESH program as UberEATS and expanded the service to include Barcelona, Los Angeles, Chicago and New York City.

The following month, Uber launched its UberMilitary Families Coalition, a new project to support its existing UberMilitary initiative. The project seeks to partner Uber with existing military family organizations and hire more military dependents, in addition to veterans, as drivers. Also in May 2015, Uber updated its app to include accommodations for drivers who are deaf or hard of hearing.

2.0       THE MAJOR DRIVERS OF THE NEW ECONOMY

Many forces play a major role in reshaping the world economy, among them technology,

globalization, and market deregulation. Here we will describe four specific drivers that underpin the new economy:  digitalization and connectivity; disintermediation and reintermediation; customization and customerization; and industry convergence.

a)      Digitalization and Connectivity

Much of the world’s business is now carried over networks connecting people and

companies. These networks are intranets when they connect people within a company to one another and to the company mainframe; extranets when they connect a company with its suppliers and distributors; and the Internet when they connect users to the worldwide “information repository.” Companies also interact with suppliers and customers to buy and sell over the Internet.

Global connectivity is being further enhanced by wireless communication. Consumers and businesses in Europe and Japan are already deeply involved in m-commerce (m for mobile) using systems such as NTT DoCoMo; the U.S. market for m-commerce is much less developed.

b)     Disintermediation and Reintermediation

The amazing success of early online dot-coms such as AOL, Amazon, eBay, Yahoo! and others struck terror in the hearts of many established manufacturers and retailers. Compaq had its hands tied because it sold its computers through retailers, whereas Dell Computer, which sold directly to customers, was able to grow faster by harnessing the Internet to sell online. Many established intermediaries—notably bookstores, music stores, travel agents, and stockbrokers—felt intense pressure as online competitors emerged. They feared, and rightly so, being disintermediated by the new e-tailers. Although some established middlemen lost their businesses, new Web-based middlemen such as Priceline.com sprang up to serve businesses and consumers, bringing reintermediation on a grand scale.

Traditional “brick-only” firms—such as Compaq, Barnes & Noble, and Merrill Lynch—dragged their feet, hoping that the assault of online-only firms would falter or disappear. They finally created their own Internet sales channels, offering a careful blend of off-line and online operations to retain the loyalty of retailers, brokers, and agents. Ironically, some competitors with off-line and online channels became stronger than pure dot-coms because they had a larger pool of resources and well established brand names. Meanwhile, many Web-based businesses have had financial woes, downsized to cut costs, and eventually declared bankruptcy—even as other pure dot-coms continue to prosper.

c)      Customization and Customerization

Customization means that the company is able to provide individually differentiated products, services, prices, and delivery channels for each customer. By going online, companies enable consumers to become prosumers, self-producing consumers who can essentially design their own goods. Companies have also acquired the capacity to interact individually with each customer by personalizing messages, products, and services. The combination of operational customization and marketing customization has been called customerization.

Customization may be very difficult to implement for complex products such as automobiles, and it can raise costs beyond what customers are willing to pay. Another potential problem is that some customers don’t know what they want until they see actual products, and companies do not want to allow customers to cancel orders once production begins. In addition, customized products may be hard to repair. On the other hand, customization has worked well for some products—laptop computers and skincare products—and is an opportunity worth investigating.

d)     Industry Convergence   

Industry boundaries are blurring at an incredible rate. Pharmaceutical companies, at one time essentially chemical companies, are now adding biogenetic research capacities in order to formulate new drugs, new cosmetics (cosmonautical), and new foods (nutraceuticals). Film companies such as Kodak were also chemical companies but now are moving into electronics to digitize their image-making capabilities. All these companies are recognizing that many new opportunities lie at the intersection of two or more industries.

3.0       DISINTERMEDIATION AND UBER

Disintermediation is a long fancy word that means essentially cutting out the middleman (intermediaries).  Granted, the phrase “cutting out the middleman” has become a bit of a cliché and anyone who claims that their business does this should be looked at with skepticism.  That being said we are in an age where there is huge potential for disintermediation in many industries.

What makes Uber is an extraordinarily important company? In one word, freedom. Disintermediation is Internet’s biggest gift. Uber is one of the best examples of how disintermediation can transform industries in which unions, lobbyists, regulation, and bureaucracy have created obstacles to progress, openness, and competitiveness. Which is why wherever Uber operates, unions, lobbyist, regulators, and bureaucrat make every effort possible to block them, make them illegal, or otherwise stop them from operating. The same applies to other companies that are disintermediation other inefficient industries.

Most of Uber driver in different countries feel Uber is the best company they ever work.  They believe Uber has changes their lives, even the ones that used to own taxis before. What is more is that they are now genuinely concerned about their ratings and quality of service. When was the last time a cab driver in New York, whose medallion costs one million dollars, showed any concern about his cost, quality of service, or your satisfaction?

Free markets are not about job security, regulations, collective bargaining, or keeping others out. They are about expanding demand and the universe of services and products, and growing the ecosystem. It is about creating a bigger pie. It is about execution, and providing equal opportunity.

Disintermediation is the key to free markets and equal opportunity. Equal opportunity, however, does not mean equal outcome.

Which is why it is interesting to think about what will happen when “Uberization” is applied to other industries, as it inevitably will.

This model offers on-demand products and services, choice, quality, value, and of course, accountability. It is highly portable across geographies and industries. It is efficient, scalable, and offers transparency, flexibility, a feedback loop, and competitive, market adjusted pricing. Such competitive pressures also push out the poor performers and bring down prices.

Clearly this is not an easy task. Uber has demonstrated world-class execution, and has thus made it look easy.

So imagine what if we applied these principals to the industries that need it most? Like health care, education, or government services? Imagine being able to choose your doctor the same way you chose your ride. I know this may be too simplistic, but if indeed this happened, the changes would have incredible ramifications.

Your appropriate medical data would be portable and available to the doctor of your choice on demand upon your selecting of that doctor and the service. You will know how much most of your visits and procedures would cost before you select your doctor. The doctor would have to take into transparency, accountability, customer satisfaction, and costs.

As disintermediation causes relationships to become more one-to-one, there will be significant reduction in costs, bureaucracy, and administration layers, which of course is why those whose interest are aligned with the current system will fight this change. But as Harry Browne said, “Voluntary association produces the free market - where each person can choose among a multitude of possibilities.” So as we cheer Uber on, we wait with anticipation for others to come along and Uberize our other dysfunctional industries, and maybe even government agencies.

The last point I will make is that with disintermediation come massive opportunities.  Every industry builds up barriers to entry.  No need to list all of them, but we all know the relevance of this.  When an industry gets disrupted it becomes much more accessible to the start-up small time entrepreneur who may or may not have access to large amounts of capital.  Gaining access to capital is also becoming easier for small time entrepreneurs.

4.0       WHAT’S HOLDING UBER BACK AND HOW TO OVERCOME IT

Uber is more like of disruptive innovation theory, because the challenges the transportation company is encountering as it seeks to expand into new cities helpfully illustrate how to assess an idea’s disruptive potential.

This is important, because companies that adhere as closely as possible to the patterns of disruption have the greatest chance to create explosive growth and transform markets. Those that deviate from the approach can succeed, but they are likely to have to fight much harder and spend much more.

Based on the field work applying Clayton Christensen’s foundational research on disruptive innovation, we look at potential disruptors’ performance in three critical areas.

First, the would-be disruptor should follow an approach that makes it easier and more affordable for people to do what historically has mattered to them. Making the complicated simple and the expensive affordable is why disruptors have the potential to dramatically expand a constrained market or prosper at price points that are far lower than market leaders’.

Uber nails this. Getting a taxi is a maddeningly complex task in cities around the world. Uber’s slick user interface solves the problem in a simple, elegant way. It has had to deal with occasional customer complaints about so-called surge pricing (when the price of a ride shoots up dramatically at times of high demand, such as during major weather events or on New Year’s Eve). But it probably has a more committed user base than any business launched in the last five years.

Next, the innovator has to develop a behind-the-scenes advantage:  a way of producing a product or service that seems magical from the customer’s perspective and that is difficult for other companies to replicate. Ideally, the innovator has a proprietary technology that makes the offering simple and affordable, or it has developed an innovative operating model that enables the business to keep its costs radically lower than competitors’ as it scales up. Either (or ideally both) of these advantages helps the innovator defend itself when existing competitors or others inevitably respond by trying to emulate its success.

Uber looks solid here, as well. Its powerful back-end system allows it to manage a real-time network of cars in an extremely simple and potentially low-cost way. It can take advantage of network effects in its operations, since the more drivers it recruits, the more valuable its service become and the more other drivers want to join in.

The final area — and the one where Uber faces clear challenges — is whether the would-be disruptor is following a business model that takes advantage of “asymmetries of motivation”. In simple terms, that means a disruptor is attacking markets that existing companies are motivated to exit or ignore because they are unprofitable or seemingly too small to matter.

Consider the early days of Salesforce.com. The company sold its cloud-based customer relationship management software to small companies that could never afford more-sophisticated applications sold by industry leaders like Siebel. Salesforce.com didn’t compete against these applications. It competed against pen and paper and handmade spreadsheets. In its early days, market leaders felt no pain because Salesforce.com wasn’t taking away any of their customers; rather, it was creating new ones.

The other way disruptors take advantage of asymmetries of motivation is to build a business model that makes it financially unwise for incumbents to respond. This is at least one reason why Netflix ended up crushing Blockbuster. Netflix’s business model did not require it to charge the late fees that made up the vast majority of Blockbuster’s profits. Naturally companies are unlikely to follow strategies that appear to destroy profitable revenue streams or promise to lose them money.

Uber is following neither of these paths. It targets exactly the same customers that taxi companies want. And customers pay fares that are generally comparable, if not higher, than ordinary taxi fares. Taxi companies therefore are naturally neither motivated to ignore nor to flee from Uber. Rather, they are fighting fiercely with every tool at their disposal, including protests by taxi drivers and legislative action.

Worse, the battle between traditional taxis and Uber has attracted opportunity-sniffing entrepreneurs who want to help the incumbents fight back. For example, one of the most popular apps now in Singapore is called GrabTaxi, which uses an Uber-like mobile interface to simplify the process of ordering a traditional cab. That allows cab drivers to offer many of the conveniences of Uber without being disintermediated. GrabTaxi isn’t trying to disrupt the market; it’s trying to help established companies fight back against entrants.

All of these battles are great for consumers, who get to enjoy simpler, increasingly more convenient solutions. There’s little doubt that Uber will continue to penetrate the markets it targets — particularly with its growing war chest of venture capital funding. But because it appears to be missing a key disruptive ingredient, the fight looks like it will get increasingly difficult and expensive.

5.0       CONCLUSIONS

Four major drivers of the new economy are digitalization and connectivity, disintermediation and reintermediation, customization and customerization, and industry convergence. The new economy is shifting old economy business practices toward organizing by customer segments (instead of only byproducts), focusing on customer lifetime value (instead of only transactions), focusing on stakeholders (not only shareholders), getting everyone involved in marketing (instead of only the marketing department), building brands through behavior (not just advertising), focusing on customer retention (as much as customer acquisition), measuring customer satisfaction, and under promising and over delivering.

Companies face many questions in adopting e-marketing, including how to design an attractive Web site, how to advertise online, and how to build a sound revenue and profit model for dot-com businesses. Companies are also becoming skilled in customer relationship management (CRM), which focuses on meeting the individual needs of valued customers. This requires building a customer database and using datamining to detect trends, segments, and individual needs to guide marketing activities.

Uber and the like are writing another chapter in that history. They offer new services that can both fill the gaps between and often compete with traditional public transportation services, but in ways current policy never envisioned. Can public transportation learn to live, cooperate and even learn a thing or two from these new ways of doing business? Thus far, the answer appears to be yes, but as these services spread — and they will — what they and public transportation do next will shape cities not only in the near future but beyond.  

ATTACHMENT

REFERENCES

Benenson Survey Group (BSG). “Survey of Uber driver-partners.” Internal Survey. December 2014. Available at http://www.bsgco.com/uber.

Chou, Yuan K. “Testing Alternative Models of Labor Supply: Evidence from Taxi Drivers in Singapore.” University of Melbourne, Department of Economics Research Paper, 2000, 768.

Farber, Henry S. “Why You Can’t Find a Taxi in the Rain and Other Labor Supply Lessons from Cab Drivers.” NBER Working Paper, October 2014, No. 20604.

Uber Website, https://www.uber.com/cities?gclid=CKi6vcuexb0CFcyhOgodXCoAxg.