THE NEW ECONOMY DRIVERS
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.
Figure 1: THE MAJOR DRIVERS OF THE NEW
ECONOMY
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?
Figure 2: Uber create a healthy
ecosystem for their driver
Source: http://www.thestar.com.my/News/Nation/2014/10/19/Under-fire-but-the-Uber-drivers-are-still-on-the-road/
Source: http://www.thestar.com.my/News/Nation/2014/10/19/Under-fire-but-the-Uber-drivers-are-still-on-the-road/
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.