Competitive Strategy – Uber

This was a fascinating case for two reasons. 1) Because it was so current and in the news all the time. 2) This was written by Charles himself so I assumed there were very specific things he wanted us to learn from this case.

We talked about the ‘Rent yielding factor of production’ in a previous post. This is the one thing that allows you to make higher than normal profits or economic rents as economists will often refer to them. This case demonstrated the cartel like environment of the taxi cab medallion business. Since there were only so many medallions authorized in each city, these rent yielding factors of production were being sold for as high as $1 million in New York. The idea was that once you had one, you could make cash flows in perpetuity (in theory at least) or turn around and sell the investment for a handsome profit since the population and congestion in the cities would continue to rise increasing demand for transportation. Since the cities often collected a portion of the proceeds from the sale of medallions, they had little incentive to do something about this seemingly rigged system. This led to the perfect storm of exploitation of consumers as well as drivers by the owners of the medallions.

Enter Uber. A company born out of frustration due to the inability of a couple of Americans unable to find a cab in Paris when they needed one. They devised an excellent model of marrying the demand of affordable transportation to the supply of the hoards of people who had access to a car and wouldn’t mind driving customers around for some extra cash. A marriage ordained by a wonderfully simple technology solution that would operate on a pre-existing platform that just about everyone was now already carrying – the smartphone. To me, Uber has always been the king of leveraging microeconomic principles. Supply and Demand drive everything at Uber. If you look at surge pricing, that fundamental has microeconomics at its base. If demand is higher than the supply, prices immediately shoot up not only lowering the demand but also increasing the supply by incentivizing drivers to drive with the promise of higher pay. In terms of microeconomics, we would call this an increase in the equilibrium price. This level of instantaneous response was unheard of in any industry before but Uber implemented it flawlessly. They also managed to identify and eliminate another important hassle from taxicab hailing – the guesswork related to pricing and tracking. You know what you’d pay before you ever called for a ride and you could decide if that worked for you or not. Once you had requested a pickup, the ride would be up for the taking and as soon as a driver accepted it, you could see the geographical position as well as the estimated arrival time of the driver. This way you had very little guesswork pertaining to your ride.

It was an excellent example of competitive strategy. A very under-served market segment was identified (which incidentally was ridiculously large), all of the frustrations and pain points were well addressed by the solution. Honestly, the market was so ripe for disruption that even a half baked solution might have done the trick in my opinion. However this was much better than half baked. The perfect recipe of weak competition weighed down by bureaucracy and red tape and a frustrated customer base was ripe for disruption which is precisely what Uber did.

Overall the learning was – Find a market that is potentially large, be agile and exploit grey areas due to lacking regulation. Regulation will eventually catch up but you can have massive influence on that if by then you have already created something the people refuse to give up. Most importantly though, this case was an excellent example of how the world was shifting towards asset-less business models succeeding in a big way by just creating a service platform that helps supply meet demand – both being owned by regular people. Its the same model that Airbnb and Facebook also succeeded with.