In 2015, technological developments allow people to move around cities without much hassle and without the necessity of owning a car through car-sharing services or new ride-sharing services. Uber likewise provides such convenience by allowing its users to place an order for private rides through a mobile app. Halfway through 2015, Uber had reached a pre-IPO market valuation of $50 billion, with operations in more than 300 cities in 58 countries. However, Uber still faces a lot of controversies amidst such wide operation and success. It also faces some resistance from stakeholders-regulators, competitors, drivers, and even from its customers and partners. This case study analysis discusses the scenario of whether Uber could continue on its operation.
Rosabeth Moss Kanter; Daniel Fox
Harvard Business Review (315139-HCC-ENG)
June 22, 2015
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Uber and Stakeholders: Managing a New Way of Riding Case Answers
UBER Inc., a transportation network company (TNC) was founded by Travis Kalanick and Garrett Camp in 2009, and by 2015, it had reached a pre-IPO evaluation of worth 50billion$. The disruptive technology firm, UBER, disrupted the taxi market and despite high resistance from the government, competitors, municipalities, and even customers in some cases, it is currently operating in 311 cities around 58 countries in the world. UBER provides a ride-sharing application that links technology with the transport industry. As the name suggests, UBER is a supreme example of a firm that followed unethical practices to reach its current position. Avoiding government regulations, providing services during the ban, sabotaging competitors, passenger information breaching are very few amongst the long list of unethical practices that the firm has been following to date.
Thus, given that most of the stakeholders in the value chain are unsatisfied with its unethical business practices, what should UBER do to improve its perception amongst the aforementioned?
UBER identified itself as a TNC, a line of business that has no hardcoded government regulations yet. Thus, at a systemic level, UBER, which was started under the name UBERcab, dropped “cab” from its name to avoid being regulated. Also, it is still operating in those cities where its operation has been banned by the government. At the Organizational level, the CEO, Travis encouraged unethical practices within the company to continue attaining high IPO valuation. Ethical standards were never embedded into business strategy. Higher government officials were lobbied by the firm to make favorable regulations. To win over its competitors, UBER encouraged its drivers to accept rides from its competitors and then cancel them, leading to customer frustration.
The firm’s current strategy is Cost Leadership, where its plans to beat its competitors by meeting customer ride demands at lower costs. The firm’s objectives include becoming the largest and preferred transport company, providing convenient and safe transportation, and working towards having a high-profit margin and IPO valuation. To attain all the aforesaid, a compromise had to be made on the ethical factors. Thus, to inculcate changes within the firm, major reforms will have to be performed.
Industry Structure and Trends
The taxi industry currently has 3 categories within Taxicabs, Limousine and Total Network Companies (TNC). The industry had reached a mature stage and is one of the highly regulated industry. To count a few Government regulations: Some cities sold costly medallions as the right to operate a taxi, few required taxi drivers to undergo special training, performed extensive background checks. However, TNC’s are newcomers in the industry and they are shaping the industry, as the government is unable to classify them and have no set regulations. Thus, other players in the industry are either suing the TNC’s or improving their services to compete against the new leaders. Economically, disposable income around the world is rising, and thus more people are opting for cab services to reach their destination. On the Social front, customers were frustrated with the quality, courtesy, and safety of the taxi service. Racism and poor feedback mechanism added to the frustration. Technologically, mobile applications have made travel convenient, better, and reliable for customers. There are continuous innovations occurring in the travel industry, which is becoming a threat for the existing competitors:
For example, Google was working on its own ride-hailing service. Environmentally, to reduce pollution and to avoid traffic congestion people are preferring carpooling. Value chain for UBER and the other TNC’s that shape the industry can be seen in Exhibit 1.
EXHIBIT 1: Value Chain
On ethical standpoint, other categories follow strict regulations, pay taxes and get medallions in some cases, but TNC’s don’t. Drivers in the value chain are also affected ethically, as they had to pay for their own insurance, they don’t count as company employees and have unstable income. The customers share their personal information on the applications which are being breached and in some cases are being used to threaten customers. In conclusion, the new category is offering convenience to most stakeholders, unethically.
Taxicab and Limo services within the US have revenues of 6.2bn and 4.5bn respectively, in 2014. Companies in these categories operate in a specific locality and drivers earn around 13$/hour. Limousine services charged a fixed rate /hour. The TNC’s don’t own a fleet and onboard drivers as contractors. Also, TNC’s have replicated their business models in other cities. Profit margins for TNC’s are currently at 20% around the world, and they are planning to increase it to 25%, for some cities. Drivers, earn 19.19$/ hour on average. However, their income is unstable, as firms in TNC are planning for price cuts.
Key Success Factors
The key success factors for the three categories the Limousine, taxi-cab, and Transportation Network companies (TNC) are stated as below:
- Technological Advancements to make rides easier for customers
- Customer Convenience which includes customer service, ease of booking, and quality
- Price as customers highly price-sensitive
- Ensuring Customer safety, especially that of women
- Innovation to provide unique ride experiences to costumers
- Driver Ease and Support: by the firm
- Ethical Code of Conduct and Branding to improve the perception
UBER as trying to adhere to most of the above mentioned KSF’s, by compromising on ethics. In conclusion, if a firm wants to follow all KSF’s if will have to reduce its profit margins or charge customers higher.
Competitive Situation Analysis
The FiveForcesModel can be seen in Exhibit 2. The suppliers here are drivers, Customers are Buyers and new entrants are considered to be entering in any of the 3 new categories. A key conclusion that can be made from porter’s five forces is that the industry is not a favorable industry to enter into.
Exhibit 2: Five Forces Model (Porter)
Existing Competitors within TNC’s were UBER, Lyft, Wingz and Summon. Uber and Lyft had somewhat similar business models and both were using unethical practices such as inadequate driver training, thorough background checks for drivers, to compete. Uber sabotaged Lyft customer base by using its drivers. UBER has a high valuation and its presence in multiple nations gives it an upper hand over Lyft. Exhibit 3 compares the players in the taxi industry, based on their ethical approach to business.
Exhibit 3 : Strategic Mapping
Industry-Wide Ethical Factors
Exhibit 4 lists out the stakeholders for UBER, and we can see that there are a number of stakeholders, who need to be managed closely by the firm. And as mentioned earlier, the ethical issue is currently being faced at both organizational and systemic level. For each stakeholder, implications of UBER’s business practices are categorized into positive, negative or neutral experiences, For ex, it is a –ve experience for government as regulations aren’t being followed.
Exhibit 4: Stakeholders Analysis (Positive, Negative or Neutral)
Uber is currently valued at 51bn $, and it is one of the most valuable companies in the world. As a result, it is comparatively easier for Uber to generate funds from Venture Capitalists. Current margin for UBER is 20% of the trip price. It is working on reducing the price of its service to provide cheaper service to the customer as well as increasing its margin to 25%.This will put drivers at a disadvantage and will reduce their income. UBER currently does not pay any taxes, nor pays for its contractor’s insurance. Subsequently, there are a lot of cost savings for the firm, which it returns to the customers in the form of low-cost trips. If new regulations are set by the government and UBER decides to reform its business practices or if UBER classifies itself into one of the existing categories, it would have a significant impact on the firm’s profitability. The table on the right compares the minimum fare in the 3 categories.
Information System, Brand Value, Customer Service, Pricing, and the Business Model itself are some of the core competencies of UBER, which are difficult to be imitated by the competitors. UBER has an advantage over its competitors as it doesn’t own any fleet and its drivers are not employees, but contractors.
Government around the world are a key stakeholder in the value chain, as UBER came in as a disruptor and found a loophole in the existing regulations. The firm classified itself into a totally new segment that had no regulations and despite being banned completely in 6 cities around the world, it continued its operations. Also, the firm lobbied regulators in the US and faced a lot of negative publicity as a result of its unethical business practices. The CEO, Travis did not follow up on any of the unethical approaches and in fact promoted unethical techniques to win market share from competitors.
On the Civil Learning Tool, Organizational learning for UBER is currently just defensive (or even a bit lower) as it is denying that it is using unethical practices, whereas the issue maturity is at an emerging state. Traditionally, the upper management sets the company policies, which are followed throughout the organization, however for UBER, the upper management, and the CEO do not institute any policies. Some Partners and Investors did not get along with the CEO’s values and thus chose to not invest.
Marketing and Competitive Position
UBER is an acknowledged leader and its negative publicity in media promotes its indirect marketing. UBER’s competitive advantage over its competitors would be its technology and its temporary competitive advantage is its pricing strategy and its business model. The firm’s image in front of almost all its stakeholders is deteriorating: customers are worried about safety, drivers about insurance and margins, investors are worried about unethical practices, and the government about regulating UBER.
Exhibit 5 states ethical considerations for UBER.
Exhibit 6: Decision Criteria
Considering the ethical theories mentioned above, decision criteria mentioned in Exhibit 6, and the pros and cons of each alternative, I recommend to proceed with Alternative 2, which is to fire the CEO or if needed, assign him a role on the board of directors. The new CEO will bring in diversity and form a balance between profitability and ethics, by institutionalizing new code of conducts, and by focussing on goodwill marketing to improve stakeholder’s perception. On the civil learning tool, we can see that the issue is in the emerging state and after firing the CEO, UBER will take a strategic decision of integrating societal culture into their core business strategy. (Exhibit 7). The new CEO will hire a third party of investigators to assess all the ethical loopholes and top management team will also undergo major changes. In the eyes of many stakeholder’s, UBER is known for ignoring and flaunting rules, however, goodwill marketing and branding expenditure will help improve their image drastically. Finally, the recommendation will have a financial impact to the shareholders, but in the long run, but by generating trust which is paramount to gain more customers, UBER’s shareholders will reap the benefits in long run.
Exhibit 7 : Civil Learning Tool