Use the attached article and the outline
- Write a paper per current APA and 1200 words in length.
- Use the headings and subheadings provided to ensure specific handling of the relevant issues. Bear in mind that there may be some topics in the outline that are not addressed in this specific case.
CASE ANALYSIS OUTLINE
External Environmental Analysis (Outside of the organization)
Economic, Social, Political, Technological, Natural
Internal Environmental Analysis (Specific to the organization)
Market Analysis- Description of the market, Primary customers
Evaluation of Marketing Strategies
Product, Price, Distribution, Promotion
Evaluation of the other Functional Areas-
Finance, Production, Human Resources, Technology
Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis
State the Main Problems facing the business/organization
Development of Strategic Alternatives (2)
Evaluation of Strategic Alternatives (2)
Recommendation of the better Alternative
Implementation Techniques for Recommended Alternative (How, when,
Control Procedures to keep Recommended Alternative on course.\
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Why Can’t Uber Make Money?
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By any measure, Uber’s seven-year entrepreneurial journey has been extraordinary. No venture has ever raised more capital, grown as fast, operated more globally, reached as lofty a valuation — or lost as much money as Uber.
Last month, Uber reported a third-quarter loss of nearly $1.5 billion, bringing its 2017 year-to-date red ink to $3.2 billion. Losses of this magnitude are clearly not sustainable, and call for an explanation of why Uber has been unable to rein in ballooning costs and what it will need to do to survive, let alone prosper.
Much of the recent discourse on Uber has focused on the numerous unethical and possibly illegal corporate behaviors that continue to dog the company, six months after founder Travis Kalanick resigned as CEO. But while the reputational damage from Kalanick’s win-at-all-costs ethos has certainly not helped Uber’s cause, it has masked a far deeper problem facing the company. Uber’s elephant in the room is that its business model is fundamentally broken. To understand why, it is useful to assess Uber’s business model in the context of the history of the taxi industry.
Shortly after launching an app-hailing black car limo service in San Francisco in 2010, Uber founders Garrett Camp and Travis Kalanick recognized the potential to disrupt the $100 billion global taxi industry. After all, this heavily regulated sector had seen little innovation over the prior century, leaving customers to cope with an expensive, inconvenient service that rarely seemed available when most needed. Enter Uber, who incorporated widely available technologies – GPS, Google Maps and mobile computing – into a well-designed app to create a customer pleasing, smartphone-enabled urban transportation service.
Not only did Uber offer enhanced urban mobility, but it was usually cheaper and more convenient than taxis as well. Ride hailing and payment processing were fully automated and Uber was priced well below (30% or more) comparable taxi services. With better/faster/cheaper service, Uber became an immediate hit with consumers, emboldening the company to expand rapidly. To recruit drivers in Uber’s two-sided market, Uber promised high pay and flexible working hours as a compelling value proposition to independent contractors looking to supplement their income.
Venture capitalists were enthralled with the bold ambition of Uber’s disruptive business model, and eagerly jockeyed for the right to invest in the growing, if unprofitable enterprise. Uber raised a record- setting $11.5 billion through 18 funding rounds, ultimately valuing the company at $68 billion. Flush with cash, Uber raced to launch operations in 737 cities across 84 countries, delivering over 5 billion rides as of this writing.
There’s a lot to like in this story, except for one thing. The taxi industry that Uber is seeking to disrupt was never profitable when allowed to expand in unregulated markets, reflecting the industry’s low barriers to entry, high variable costs, low economies of scale and intense price competition — and Uber’s current business model doesn’t fundamentally change these structural industry characteristics. It is indeed ironic that Uber’s fierce determination to avoid regulatory oversight condemns the company to unprofitable operations that the taxi industry experienced during its pre-regulatory era.
To see these parallels, a little history is in order. The first gas-powered taxis appeared in New York City in 1907, and began replacing horse drawn carriages in for-hire service. Taxicabs gained momentum when the affordable Ford Model T was introduced shortly thereafter, ushering in a wave of new low-price taxi operators. This posed a serious threat to incumbent taxi companies wedded to higher cost automotive fleets, which precipitated violent protests in many major metro areas in support of regulations to severely constrain new entrants to the taxi market. Sound familiar?
Although a few cities legislated restrictions on the permissible number of taxi operators, the largest U.S. taxi market – New York City – remained largely unregulated well into the 1930’s. With the onset of the Great Depression, many unemployed workers turned to the taxi industry to try to earn a living. The resulting oversupply of taxis led to a collapse of fares, as taxi companies and drivers competed in a race to the bottom to attract additional customers. Driver net income and taxi company profits evaporated, the quality of drivers, cars and passenger safety deteriorated, and taxi oversupply exacerbated congestion on city streets.
This historical experience exhibits several parallels to Uber’s current business model, presaging the company’s dismal financial performance. The pre- regulated taxi industry was characterized by bounded demand, abundant supply, relatively undifferentiated service quality, extremely low barriers to entry, low customer switching costs, high variable costs and virtually no economies of scale. Many of these same conditions exist today for Uber and its competitors in the shared-ride market. While both then and now, consumers benefitted from low fares and short wait times, structural industry characteristics precluded profitable operations in both unregulated eras.
To “fix” this problem eighty years ago, New York City (and many other major metros) made a political decision to favor taxi companies and drivers at the expense of city residents. The Haas Act of 1937 established a licensing system, requiring a medallion for every taxi in New York City, and made it illegal to operate without one. This proved highly lucrative to the government, which sold the medallions in public auctions, and to successful bidders who could operate comfortably with the assurance of tight controls over competition.
Originally, New York set a limit of 16,900 taxi medallions, reducing that number to 11,787 after World War II. Fifty years later, the medallion cap was inched up to 11,900, and today, remains capped at 13,587. In contrast, absent regulatory oversight, the current number of shared ride cars operating in NYC has swelled to well over 60,000.
The impact of regulations arbitrarily capping taxi supply in NYC has been significant. While the population of New York City grew by 20% since the passage of the Haas Act in 1937, over the same period, the regulated cap on taxi medallions shrank by 20%. As a result, consumers have been subjected to longer wait times, higher fares, deteriorating vehicle quality and shoddy service, while incumbent taxi operators enjoyed escalating profits and soaring medallion values.
This is clearly evident in the secondary market for NYC taxi medallions, which serves as leading indicator of expected industry profitability. Between 1975 and 2013 (largely pre-dating Uber’s entrance), medallion prices in NYC increased by over 2,700%, far outpacing the growth of the Dow Jones stock price index.
But Uber’s aggressive NYC launch in 2011 ushered in a return to unregulated car service expansion, dramatically improving urban mobility at lower prices, but dragging the industry back to an era of profit-killing competition. Not surprisingly, NYC medallion prices collapsed, from a peak of $1.4 million in 2014 to as little as $150,000 three years later. And, in sharp contrast to the growing value of taxi medallions prior to Uber’s launch, the stock price of Medallion Financial Inc. — a publicly traded company which finances and trades in taxi medallions – collapsed by 85% over the past five years, while the Dow Jones stock price index appreciated by 47%.
In historical context, Uber’s extraordinary losses are thus not just a case of growing pains of an ambitious Silicon Valley startup, but a reflection of the deep structural deficiencies in ride-hail industry economics. Prior to artificial regulatory supply caps, the unregulated taxi industry was unprofitable and subject to growing concerns over negative externalities. Uber is now facing the same relentless drag on its P&L.
Supporters of Uber’s unfulfilled potential often point to Uber’s first mover advantage, strong network effects, asset-light business model, continued revenue growth and adjacent business expansion opportunities as reasons to expect a near-term turnaround. But none of these factors reverse the fundamental weaknesses in Uber’s business model.
For example, conventional wisdom has held that Uber would enjoy a global winner-take-most outcome because of their outsized balance sheet and strong network effects. But to the extent that network effects exist, they are local, not global. For example, the fact that Uber enjoys an 89% market share in Tampa, doesn’t help them in Portland, where Uber’s market share is trending below 50%. In fact, Uber has struggled to achieve market share leadership in many large foreign markets, including China, India, SE Asia and Brazil. Moreover, while network effects do exist within each metro market, the benefits are significantly weakened by extremely low switching costs, which enable drivers and riders to utilize whichever ridesharing service offers the best deal on any given trip.
While Uber’s business model has created enormous value for consumers, propelling the company’s rapid growth, its extremely aggressive pricing simply doesn’t generate enough revenue to deliver attractive compensation to drivers and sizable profits to shareholders. By pricing its services 30% or more below comparable taxi fares and then retaining 25% of gross bookings for itself, Uber has squeezed the revenues available to compensate drivers, who are ultimately responsible for providing the labor, equipment, maintenance, insurance and fuel to serve consumers. There is nothing in Uber’s business model that promises to reduce the factor costs of its ridesharing service, nor are there inherent economies of scale that would lower unit operating costs with continued growth.
This leads to an inherent conflict between the business objectives of Uber and its drivers. Uber’s revenues are directly proportional to the number of trips it can facilitate, and thus the company has strong incentives to continuously scale its business. Drivers of course want to maximize their revenue per hour worked. But as Uber continues to recruit drivers, the revenue potential per driver inevitably declines. As the highest revenue-generating neighborhoods become increasingly saturated, new drivers are forced to seek less attractive service territories to find customers.
These business model dynamics underscore the bleak earnings outlook for Uber drivers. A recent study found that Uber’s net driver compensation in three US major metropolitan areas in late 2015 was only $8.77 – $13.17 per hour, and this was before Uber instituted significant fare cuts in 2016. Uber’s low and declining pay has been a leading cause of Uber’s low driver satisfaction and growing turnover, both in absolute terms and relative to its main competitor, Lyft.
There are two possible remedies to improve driver compensation, but both alternatives would undoubtedly harm Uber’s already tenuous economics. Uber could raise fares at its current revenue sharing split, or increase the driver share of gross revenues.
Given the structural characteristics of the ride share industry – limited perceived product differentiation, fare transparency, low consumer switching costs and loyalty, and intense competition– Uber has been understandably reluctant to unilaterally raise fares. In fact, Uber and Lyft have been engaged in a race to the bottom on fare cutting and price promotions, reminiscent of the pre-regulatory taxi industry of yore. But urban transport demand isn’t elastic, so ridesharing price cuts have harmed driver compensation, which was the issue at the heart of the heated argument between Travis Kalanick and an Uber driver last year, that became a viral media sensation.
As for raising drivers’ revenue share, Uber and its drivers are locked in a zero sum game that leaves little room for generosity on either side. In fact, Uber’s temporary profit margin improvement in 2016 (albeit still yielding steep losses) was primarily driven by its decision to cut driver compensation rates.
From its inception, Uber has consistently favored consumer satisfaction over driver welfare – for example, evidenced by its longstanding reluctance to allow in in-app tipping, which even now is poorly executed – which has taken a heavy toll on driver satisfaction and retention.
Recent studies have indicated that Uber’s U.S. driver churn has sharply increased this year, to rates as high as 96%. Needless to say, it’s hard (and costly) to maintain double-digit growth rates, when only 4% of mission critical, de facto employees stay on the job for more than a year. As a result, Uber has been forced into perennially aggressive recruitment efforts, offering signup bonuses that can run well in excess of $1,000 (on top of normal compensation) for new drivers.
There is little reason to expect near term relief in Uber’s escalating driver recruiting costs (including the expense to maintain hundreds of physical “greenlight hub” locations that provide onboarding support) in the coming years, especially since Uber faces vigorous competition from other enterprises also recruiting part-time drivers, including Lyft, Instacart, DoorDash, Postmates, Grubhub and Amazon Flex.
Multiple management missteps have further hindered Uber’s performance, fueling growing distrust from customers, drivers and regulatory agencies. But Uber’s existential challenge remains its broken business model, which is increasingly testing the patience and confidence of its investors. At its current burn rate, Uber cannot survive more than two years without additional injections of capital, which is highly improbable at anything like its current valuation.
From the beginning, Uber made a calculated bet that it could achieve global domination, wiping out both incumbent taxi companies and competing shared ride providers, to be able to exercise monopoly pricing power in hundreds of metropolitan markets. But it now appears Uber has lost this bet in its headlong rush into an industry that has historically exhibited low profit potential.
Uber is hardly alone in its sisyphean quest for profitability. Every major ridesharing company in the world is still experiencing steep losses after five or more years of operation, including Lyft (U.S.), Ola (India), 99 (Brazil), and Didi Chuxing (China).
In Didi’s case, the company continues to lose (and raise) money despite its dominant market share, after buying out Uber’s Chinese operations 15 months ago. But reaffirming the low barriers to entry in this sector, other well capitalized competitors (UCAR, Meituan) have stepped up their operations, prolonging profit-killing competition for passengers and drivers in the Chinese ridesharing market.
There are undoubtedly defensible segments of the global rideshare market that can currently sustain profitable operations. And in the foreseeable but distant future, autonomous vehicle technologies may improve industry economics. But for now, CEO Dara Khosrowshahi will need some serious soul-searching to rethink Uber’s soaring ambition and penchant to win-at-all-costs in all markets. On its current course, Uber’s bridge to global domination is simply a bridge too far.
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