Uber: global disruption of an old industry

A look at how a tech start-up disrupted a global industry and grew to a bigger valuation than Ford and GM in just 5 years

1. Did you choose the company as an example of effectiveness or ineffectiveness? Why?

Uber is a clear example of effectiveness in delivering technological disruption to a global scale very rapidly. You cannot get to a valuation of $68B (surpassing Ford and GM) in 5 years without having a very well aligned business and operating model.

The hype around the movement is real with articles like: “The Uberpreneur: How An Uber Driver Makes $252,000 A Year” popping up all around. This particular one describes how Gavin Escolar uses his uber as a showroom for his jewelry business, but Escolar is far from the only person that managed to make a lot of money using Uber’s platform.

The world is not all sunshine and rainbows for the tech company though. They face stiffer and stiffer competition in the bigger international global markets (China and India particularly) from local players and are currently fighting lawsuits in almost all the cities they operate. But despite these complications, they’ve managed to create one of the most successful global growth story of the last decades.

 

2. Describe the company’s business and operating models. What is interesting about them?

Business model: Uber connects people who need a ride with people who are willing to give you a ride for a fee. It uses dynamic pricing to match supply (of drivers) with demand (of passengers).

Value creation

For passengers

  • No waiting around or looking for a taxi
  • No need to carry cash
  • You can track and ETA your ride
  • Cheaper than normal taxi
  • Contact info of driver and travel history if you lost any item

For drivers

  • Flexible work schedule
  • Additional source of revenue
  • Easy payment system
  • Higher fares in peak periods

Value capture

They simply collect a fee (around 20%) for every ride completed using their app.

Operating Model:    Uber has mainly two assets. One is their people and the other is their technological platform. They grow by bringing their service to a new geography, their first asset is responsible to initially create a driver base for the app while the second asset is easily transferable from one geography to the next.

The most interesting thing about Uber’s business and operating models for me is its simplicity. It completely disrupted a very old industry that hadn’t changed in decades. Nothing they did was revolutionary, they saw something that wasn’t working well and found a way to make everyone in the system better off.

 

3. Do the models align and support each other?  How?  What specific features of the operating model are designed to create and sustain competitive advantage?  What features of the business model leverage unique capabilities of its operating model?  What are the implications for performance?

One of the most successful thing Uber has done is grow globally at a blistering pace. The way they did this in their beginnings is to go around cities’ cab stand and talk to taxi drivers about all the incremental advantages that partnering up with Uber would bring to them. I was part of this effort in Montreal and was really surprised how easy it was to do this. Simply telling drivers that Uber would provide them with an iPhone so they could use the app was enough to get a significant percentage of them through the door.

Uber doesn’t need to do this anymore though, they have created a global brand that people recognize everywhere. They can therefore concentrate on marketing and advertising their entry into a new market, sit back, and wait for drivers to show up to their door steps. Which they do. In masses.

Because their only assets (tech platform and people) are very malleable, Uber is able to very rapidly adjust in order to grow as they have done from an early stage start-up to a globally recognized company.

As some of their markets are now becoming more mature, Uber is switching from a growth model to a more “sustain” approach. Here again, they can leverage their assets to quickly respond to market pressures. Surge pricing is a great example of such adaptation. Sure there was a lot of work in the background designing the algorithm to provide surge pricing, but to the end user, the transition was seamless. From one day to the next, the new operating model was pushed to their tens of million users.

This nibble model together with the largest user base of any comparable service makes Uber a giant that’s very hard to push around. Just look at Lyft that is offering anyone who can refer them a driver $1000. The fact that the competition is willing to go that far to acquire new drivers speaks to the importance of the user base in this market and how far ahead Uber already is.

 

References

http://www.iplanner.net/business-financial/online/how-to-articles.aspx?article_id=business-model-uber

https://www.quora.com/What-is-Ubers-business-model-1

http://nextjuggernaut.com/blog/how-uber-works-business-model-revenue-uber-insights/

http://www.forbes.com/sites/liyanchen/2015/12/04/at-68-billion-valuation-uber-will-be-bigger-than-gm-ford-and-honda/

http://www.forbes.com/sites/jonyoushaei/2015/02/04/the-uberpreneur-how-an-uber-driver-makes-252000-a-year/

 

 

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5 thoughts on “Uber: global disruption of an old industry

  1. Etienne, solid pick in Uber! I think it’s success really highlights the value in having a business and operating model that support each other in perfect harmony. Interesting that you worked on the adoption of new drivers in Montreal. I have used Uber in several different countries now and remember being really surprised when it existed in Brussels (it was the first place I used it other than the United States). As you mentioned above, it is absolutely huge that Uber seems to have to do very little to gain traction in new areas. When I visit my girlfriend in Birmingham, AL I generally panic when I have to get an old fashioned taxi. Despite being one of the largest US towns, it is without the glories of Uber. I imagine that this is due to legal challenges and you eluded to as well. I think challenging the legal status quo could be added to why Uber is successful. Seems to me that this is one “fight” of man y as the world moves to a driver-less car model and Uber is paving the way to garnish a lot of those profits, too.

  2. Etienne – I enjoyed reading your article. I agree with you and Doug that Uber’s operating and business models are very well aligned at this point. However, I do not think that Uber should become complacent at this point. Actually, I believe Uber has an opportunity, as Doug alluded to in his last sentence, to enhance its operating model with the development of driver-less cars to better support its business model. With driver-less cars, Uber would not need to worry about attracting the right drivers, and Uber could actually keep all of the customers’ payments – not just the 20% fee that Uber is collecting now. Also, with this operating model, Uber could offer its customers even lower prices, and Uber potentially could provide even shorter waiting times in the future depending on how many driver-less cars it puts on the road. Obviously, this would require a large investment, but I found it very interesting that Google invested $258 million dollars into Uber in 2013 and more in 2014. It appears that both Uber and Google believe that there potentially is a large market for a driver-less Uber service, and I think Uber should act now to ensure that no competitors steal its business.

  3. Etienne–solid write up. I enjoyed reading your prognosis of Uber and its business model! I am curious to see how they continue to differentiate themselves from taxis and competitors like Lyft. As a former San Franciscan I remember using Uber when it first came out and only included a fleet of black cars, only to introduce UberX to compete with startups like Lyft and SideCar. They used to differentiate themselves by only allowing newer models of cars (I remember back in 2012 or so that I couldn’t use my 2004 Honda to drive for them) but I’ve seen the quality of the vehicles deteriorate. When regulations kick in for markets they’ve penetrated and prices increase, I’m excited to see what happens to their brand–maybe that’s why they lobby so hard to keep it from happening.

  4. Many thanks for sharing Etienne, such an interesting company! I use it almost everyday. In London, I remember checking my Amex bills and realized I was spending like 1500 pounds per month on Uber! No wonder why it’s worth $60Bn!
    I have always wonder why/how Uber has been more successful than other online taxi companies that existed before them. Addison Lee in London was extremely successful with its app system, and got crushed by Uber in a few months! Maybe the compensation/commissions offered to the drivers were better. If that’s the case, I wonder how Uber would react if a-like-of Lyft were to come with a more agressive pricing strategy.
    I wonder how the contractual relationships with the drivers will evolve, it can have a huge impact on the performance and valuation of the company (if Uber needs to hire them and pay social and health insurances), especially that the legal case is filed in California, its home market!
    I also wonder how successful the company will be in its new products (food and package deliveries).
    Many thanks again! JC

  5. Etienne, great post. Enjoyed learning about Uber’s early on boots-on-the-ground expansion strategy – had no idea that’s what they did.

    There are two aspects of its operating model that I find particularly interesting. First is the surge pricing that you mentioned. While theoretically, it makes perfect sense – allow the supply and demand dynamics of the market dictate pricing – I’ve found that in practice, it can sometimes be too extreme and even alienate some customers. For instance, I remember a couple of years ago when Chicago had a dreadful winter, the surge pricing got up to 5x on some snowy days. Not only would I never use the service for 5x, which from Uber’s perspective is fine since they have other customers who would, I developed a somewhat negative perception of Uber, and I know many of my friends felt the same way. In fact, it even pushed me to use Lyft more. This is perhaps irrational as it’s not Uber’s fault that supply and demand was so unbalanced, and most of the benefits of surge pricing accrues to the drivers, but Uber should still take into consideration the deleterious effects extreme surge pricing can have on its brand.

    Pooling is another, relatively newer, aspect of its operating model that I find very interesting. Since its introduction, I almost exclusively use UberPool over UberX, which costs ~30% less with maybe a 20% chance of there being another passenger. I imagine the algorithm for this can be tricky, and it’s imperative that it’s right since Uber bears all the risk of mispricing this service, but if they do get it right, this represents a pretty compelling opportunity for them to serve a lot more customers with the same driver base.

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