Disrupting the Dispatch
By: Vivek Ramaswami & Connor Lyons
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
It’s 3:00AM on a Sunday morning in Vancouver, and a hardworking banker is attempting to find his way home after burning the midnight oil at his downtown office. Similar to many large metropolitan cities, it is virtually impossible to hail a cab on the street this time of day, let alone reach a taxi dispatcher. Furthermore, the nearest running bus is more than 10 blocks away. The banker would normally have used his smartphone to book a Town Car through Uber, the revolutionary mobile application connecting passengers with luxury vehicle drivers; however, just a few weeks earlier, the British Columbia Passenger Transportation Board deemed Uber illegal, citing a little- used rule preventing limo operators from charging less than $75 per ride. The ruling significantly reduced Uber’s presence in Vancouver, forcing the company to operate “underground.”
The ruling is nothing new for Uber. The three year old startup has been fighting with regulators in Washington DC, San Francisco, Toronto, and countless other cities. Although the company has been an astounding hit with both investors and consumers, it is struggling to define its role within the evolving car-service business. Recently, new mobile taxi applications are beginning to appear across the globe; services such as London’s Hailo and San Francisco’s FlyWheel. Each represents a challenger to Uber’s land grab strategy.
Starting Up a Startup
The idea for Uber was spawned by Travis Kalanick and Garrett Camp during a 2008 technology conference in Paris. Camp had come fresh off the sale of discovery engine phenomenon StumbleUpon, and Kalanick had recently sold his peer-to-peer delivery service, Red Swoosh. They had spent much of their time in San Francisco, and began venting mutual frustration with the city’s atrocious taxi industry. Inconsistent service and a lack of vacant cars were at the forefront of their dissatisfaction. The two serial innovators consequently sought to find a better way of cabbing in a major metropolitan city.
Camp began developing a mobile application to allow users to connect directly with luxury vehicle drivers in virtually all locations any time of day, avoiding directly entering the traditional taxi space where passengers must either call into a centralized dispatch or hail a cab on the street. By June 2010, Uber had three drivers cruising the streets of San Francisco on its test run. Three years later, Uber boasts thousands of users and has expanded to over 25 cities across the United States, Canada, Europe, and Southeast Asia.
Uber’s growth is fueled by funding from angel investors, venture capital groups, and major investment banks. After raising $12M from Benchmark Capital in early 2011, Uber raised a further $32M from investors including Menlo Ventures, Bezos Expeditions, and Goldman Sachs just 18 months after launch. Armed with $50M in secured capital, a growing presence in major US cities, and rapid increases in its user base, Uber entered 2012 poised for success.
Uber has faced a number of regulatory challenges with varying levels of success
Navigating the Speed Bumps
The taxi industry is a phenomenally difficult arena for new entrants; strict regulations and deep-rooted incumbents make it virtually impossible for new companies, let alone disruptive technologies like Uber, to succeed. The industry’s basic activity – transporting passengers to a specified destination for a fee – has changed little for decades. Furthermore, it is structured and regulated differently across markets; policy is usually determined at the municipal or regional level. Uber faces the trials and tribulations of being a disruptive company in what has been an inert industry.
A major barrier to entry into the taxi market is the limited number of licenses granted to taxi operators. In New York City, a city seemingly overwhelmed with yellow cabs, incumbents have protected themselves by influencing legislators to limit the number of new licenses, or “medallions,” granted on a periodic basis. Low supply and high demand have shot up the price of a single medallion to nearly $1M. Although Uber (the company) isn’t required to hold medallions to operate its mobile app service, Uber drivers must each own one. Restrictive laws range from floor rates, which limousine services must charge passengers, to domicile standards requiring the drivers to have lived in the city they operate in for a specified number of years. These rules have been set up to protect incumbent services.
New York City’s Taxi and Limousine Commission first banned Uber in September 2012. It proclaimed the adoption of any mobile applications used to hail cabs or pay for transportation services was unauthorized, effectively classifying Uber as illegal. San Francisco was quick to follow in its condemnation, slapping Uber with a $20,000 fine in November for illegally operating taxi-hailing services without the required permits.
Uber has since found success in cities like Washington DC and New York City, where regulators have allowed the company to operate on a trial basis; however, its battle to gain legal status has also cost Uber time and money, while causing it to experience the wrath of existing taxi companies.
The Challenge of Being First on the Road
Uber’s early success can largely be explained by its main competitive advantages:
Its reputation as a first mover, allowing the company to capture new markets and attract new drivers
An aggressive, entrepreneurial corporate culture, fostering respect from those who are keen to see liberalization of the personal transportation industry
Prioritization of customer service, allowing the firm to develop a loyal base of customers
Despite all its strengths and clear potential, there are two areas of concern Uber must remain cognizant of: being the first-mover is not always the best strategy for the long haul, and competition is often fiercer in evolving industries.
Sometimes “followers” inherit the biggest competitive advantages of all, and Uber must be wary not to bear the cost of liberalizing the currently restricted transportation industry only to open the door for others to surpass it. There are many examples of disruptive companies who have lost their strategic edge by being the frontrunner in new market development. Take, for example, Docutel, who quickly rose in the late 1970s upon developing the first ATMs. The company floundered merely years later after being surpassed by less expensive, more customer-friendly competitors. Docutel successfully transformed the average consumer’s banking habits, and Uber has done the same by being the first company to unite technological innovation with consumer demand for more convenient ground transportation. However, there is nothing stopping startups from imitating by coding a similar application. And they have. Uber is no longer the only on-demand transportation service in urban centres. Hailo – another mobile app car service, first launched in London – operates with regular cabs, enabling it to cater towards a more cost-conscious user base. This appeal could help the company gain better traction and brand recognition in the broader market compared to Uber.
The Road Map to Success
Generally, the “land-grab” strategy Uber has pursued when entering new locations has worked successfully. This strategy allows Uber to establish brand name before any of its competitors reach the market, and allows the company to claim priority on a city’s selection of licensed, for-hire drivers. There are several areas, however, in which the land-grab strategy could result in a disadvantage.
Uber is able to enter new markets rapidly by using a “silo” strategy; each new market – whether it be Toronto, Shanghai, or Singapore – operates independently. This structure allows Uber to quickly gain access. Unfortunately, it fails to effectively build-upon the resources and learning capabilities across the entire organization. Start-up organizations can benefit greatly from shared experiences to ensure the same mistakes are not repeated. For example, each independent silo is responsible for signing on new corporate clients. By approaching large multinational clients through a singular, centralized approach, Uber headquarters could better manage cost savings and client relationships. This would standardize Uber’s services internationally and help the company become a more effective global operation.
Grabbing land before first testing the market can also have serious consequences. If Uber doesn’t fully understand the preferences of passengers in a new market, they could risk burning bridges with its consumers in an industry characterized by low customer loyalty. One mistake, such as hiring unsafe drivers or failing to provide services in a high-traffic location, could damage Uber’s reputation and ultimately allow its competitors to fill the void. In February 2012, hundreds of town car drivers were dismissed from Uber’s San Francisco operations. Barely a month later, drivers began protesting outside Uber’s headquarters, claiming the company was treating them unfairly. Thedrivers wanted pay increases, full employee status, and better protection from passenger ratings. If drivers make similar demands across other markets, competitors like Hailo can learn from Uber’s labor failures and adapt accordingly.
Furthermore, Uber’s strategy of simply entering a new market without first establishing its legality with regulators could hurt its relationships with policy-makers. In cities where the company still operates an “underground” service, regulators have more incentive to shut down the business rather than work cooperatively to find a joint solution. This is especially true in cities with lots of taxis; although Uber can add convenience, hailing a cab in Chicago was never as difficult as in San Francisco. When there’s less desire for liberalization, consumers are less likely to publicly declare support for a new, innovative company to be allowed to operate. Uber may eventually find pursuing a “waitand- see” approach in certain markets could be more advantageous than simply entering before first doing its homework.
Finally, to convert its rapid growth into sustainable gains, Uber must ensure its entrepreneurial culture does not overwhelm and prevent balanced growth. Uber must stick to its fundamental strengths, but cannot be afraid to mold its business model to the evolving competitive landscape. Fortunately, the company’s entrepreneurial culture has shown adaptability, having recently announced a ride-sharing option in San Francisco to compete in that specific niche.
Future challenges lie in how it navigates the changing landscape of a newly-liberalized ground transportation industry. Should Uber stick to core competencies and the model that has brought it success in its early years? Or should it succumb to competitors’ adaptations of the model, continuing to innovate, and risk losing the edge it has built? Although there are several questions the company must answer, there is no question the late-working banker would be better off with Uber’s services than waiting around for the inefficient, protectionist services of the taxi-cab industry.
