Annex 3 - Uber's Competitive Advantage Vis-à-Vis Porter's Generic Strategies
Annex 3 - Uber's Competitive Advantage Vis-à-Vis Porter's Generic Strategies
Annex 3 - Uber's Competitive Advantage Vis-à-Vis Porter's Generic Strategies
Michael Porter’s ‘generic strategies’ are considered as one of the definitive guides
on how to establish and maintain a competitive advantage. Porter’s prominent
research establishes that competitive strategy is critical to an organization’s
profitability and long-term survival. According to Porter, companies can establish
competitive advantage based on cost, differentiation or focus. Organizations that
do not make clear strategic choices are ‘stuck in the middle’. Further, Porter
stated that these companies typically lose to companies who have established
superior differentiation or cost advantages in the long-run. Is this still true? Or,
can a hybrid strategy be successful in today’s unpredictable operating
environment? Is competitive advantage derived through Porter’s generic
strategies or has the paradigm shifted towards a platform strategy or value
innovation? The goal of this paper is to answer these questions using a comparison
and contrast of generic strategies relative to hybrid strategies, value innovation,
and platform based strategies applied to Uber’s competitive positioning.
Introduction
Organizations that do not make clear strategic choices are ‘stuck in the middle’.
According to Porter certain companies typically lose to other companies who have
established superior differentiation or cost advantages in the long-run.
Competitive advantage grows out of value a firm is able to create for its
buyers that exceeds the firm’s cost of creating it. Value is what buyers
are willing to pay, and superior value stems from offering lower prices
than competitors for equivalent benefits or providing unique benefits that
Uber’s
© 2017Competitive Advantage
IUP. All Rights vis-à-vis Porter’s Generic Strategies
Reserved. 7
more than offset a higher price. There are two basic types of competitive
advantage: cost leadership and differentiation (Porter, 1985, p. 3).
Hybrid Strategies
While Porter contends that cost leadership and differentiation are incompatible,
other strategists argue that organizations who successfully combine low costs
and differentiation “create synergies that overcome any trade-offs associated with
the combination” (Parnell, 2006, p. 1141). As seen in Figure 2, “The era in which
combining competitive strategies was synonymous with stuck-in-the-middle
alternatives has been left behind” (Salavou, 2015, p. 80). In this scenario, a single
strategic focus or a position of strategic purity may also lead to some challenges
as follows (Miller, 1992; Beal and Yasai-Ardekani, 2000; and Salavou, 2015):
• Pure strategies are easy to imitate, and companies adopting them may
be at a disadvantage compared to those that combine them in a creative
way and benefit from multiple sources of advantage.
Additional research supports the notion that “the more complex and
multidimensional the profile of a hybrid strategy, the more balanced and defensible
and this significantly reduces Uber’s type and demand period. It outlines the
variable cost structure. route and provides an estimated time
of arrival (ETA). This is a big win for
customers, noting a tendency of cab
drivers to screen their fares for intended
destinations a nd to even reject
electronic sources of payment.
• With Uber, tip is included and riders have
the ability to split or share a fare (as both
features are built into the application).
• Uber ensures quality assurance which
is delivered through their dual rating
system, enabling riders and drivers to
provide anonymous feedback regarding
their experience.
• Uber offers a high standard of service
and a choice of platform, from Uber X
(low cost, environmentally friendly
hybrid cars) to Uber Black (luxury). In
addition, Uber drivers are required to
keep their car clean and offer simple
services such as placing or removing
luggage from the trunk.
• Overall, Uber has been successful in
delivering a superior client experience
and elements that are perceived as
luxury to the mass market. As a result,
they have significantly enhanced
customer loyalty.
its strategic position will be” (Salavou, 2015, p. 90). Using this logic, Salavou argues
that the combination of three generic strategies is better than the combination of
two, which is better than a single, distinctive strategy. Research by Pertusa-Ortega
et al. (2009) and Claver-Cortés et al. (2012) agree with this position, outlining the
following arguments:
A business can select any point along the continuum, and multiple value
propositions may be possible for the same point. Within this context, the
key to a successful competitive strategy is not low costs, differentiation,
or focus per se, but how various strategic components are integrated
into an effective overall value proposition. As such, the concept of value
subsumes the notions of low cost, differentiation, and focus, and there is
no mutual exclusivity involved. Ceritus perabus, organizations with more
attractive value propositions are more likely to be successful than those
with less attractive value propositions (Parnell, 2006, p. 1144).
Differentiation
High
4
Hybrid
3 Focused
5
Differentiation
Perceived Added Value
Low Price
2 6
Low
1 7
Low Price, Strategies Destined for
Low Added Value Ultimate Failure
8
Low Price High
Source: marketingteacher.com
In order to gain market share, the perceived value from the consumer is the
key success factor. Uber’s value proposition appears to place them in the enviable
positions of hybrid (#3, denoted by low price and high perceived value for Uber X)
and differentiation (#4, denoted by medium price and high perceived value for
Uber Black). It is important to note, that areas 6, 7 and 8 represent the so-called
‘swamp’ (Bowman and Faulkner, 1997). These strategies are destined for failure
as consumers pay a high price, but perceive a low value. One may argue that this
is the area that the traditional taxi model occupies, noting that Uber’s value
proposition of lower prices and higher perceived value have placed the traditional
taxi business model under intense competitive pressure.
Uber has successfully established their organization as a cost leader and they
have differentiated their value proposition in the eyes of their customers. As a
result, one can argue that Uber is not ‘stuck in the middle’ and the failure to choose
a single (distinct) strategy has not resulted in inferior performance. In fact, Uber’s
hybrid business strategy appears to have resulted in superior performance, noting
an economic valuation of $68 bn (Chen, 2015). “In 2016, equity markets placed
Red oceans represent all the industries in existence today. This is the
known market space. Blue oceans denote all the industries not in existence
today. This is the unknown market space. In the red oceans, industry
boundaries are defined and accepted, and the competitive rules of the
game are known. Here, companies try to outperform their rivals to grab a
greater share of existing demand. As the market space gets more crowded,
prospects for profits and growth are reduced. Products become
commodities, and cut-throat competition turns the red ocean bloody. Blue
oceans, in contrast, are defined by untapped market space, demand
creation, and the opportunity for highly profitable growth. Although some
blue oceans are created well beyond existing industry boundaries, most
Kim and Mauborgne (2005) believe that ‘red ocean firms’ deplete their resources
trying to secure a larger proportion of the existing customer demand. In contrast,
‘blue ocean firms’ or market creating companies deploy effective strategies to shape
their business environment, generating new demand and expanding their industry
as a whole. Where a ‘red ocean firm’ assumes a trade-off between low cost and
differentiation (as per Porter’s model), a ‘blue ocean firm’ seeks to achieve both
strategies simultaneously in order to create additional demand in a manner that is
difficult for competitors to imitate and replicate.
In this case, the rise of Uber appears to be a textbook case of blue ocean
strategy and value innovation. Uber has been successful in driving down costs
and simultaneously driving up value for customers, reconstructing the market
boundaries in the mature Taxi and Limousine industry. Instead of focusing on the
existing industry and competition, Uber focused on the needs of customers, creating
a leap in value for buyers which has enabled them to capture a new market space,
with a significant leap in demand.
Once again, this evidence re-enforces that Porter’s concept of being ‘stuck in
the middle’ (value-cost trade-off) does not apply to Uber and that the simultaneous
pursuit of low cost and differentiation (a hybrid strategy) has enabled Uber to
establish a competitive advantage. This also leads us to pose the question, has
the competitive environment fundamentally changed and has the relevance of
Porter’s generic strategy framework diminished in the digital age?
Forces of Change
According to Fabian Dalken, the forces of change including ‘globalization,
deregulation and digitization’ (Dalken, 2014) have fundamentally changed the way
we do business. In today’s competitive landscape, organizations have to integrate
their strategies into a global environment. Globalization extends markets and has
enabled new start-up companies (like Uber) to enter new markets faster than
ever before. Bang and Markeset (2012) identified five predominant drivers of
globalization:
1. Size Effects: The size effects include a larger potential market which
creates a larger number of potential clients and a larger group of potential
2. Location Effects: The location effects include more complex supply chains,
fragmented value chains, outsourcing and offshoring opportunities.
Kim and Mauborgne (2005) agree that globalization reduced trade barriers and
advances in technology have reshaped the competitive landscape:
• This is certainly the case with Uber versus Taxi, noting that Uber’s
Application Program Interface (API) brings together drivers and riders
more efficiently and effectively than the traditional taxi dispatch system.
This technology has provided Uber with an asymmetric information
advantage over its competitors and enables them to significantly reduce
their cost structure.
As noted above, the emergence of innovative new technology has led to the
formation of new strategies and the creation of new business models that have
successfully disrupted traditional lines of business. Does this mean that technology
has created a platform to support and potentially replace existing business practices,
precipitating a paradigm shift?
Platform businesses (like Uber) bring together producers and consumers in high-
value exchanges. “The chief assets are information and interactions, which together
are also the source of the value they create and their competitive advantage”
(Van Alstyne et al., 2016, p. 4). The authors state that the driving force behind the
internet economy is ‘demand-side economies of scale’, also known as network
effects. (Van Alstyne et al., 2016). For a business like Uber, the larger the network,
the better the potential match between supply (drivers) and demand (riders),
enabling the organization to harness spillover effects.
Based on this, one of the greatest challenges for a platform business is attracting
a critical mass of customers. “If you don’t have customers, there is nothing to
scale” (Blanding, 2016). In Uber’s case the company started out with black cars
driven by professional drivers. Doing this ensured that “customers would have a
great experience virtually every time they used the service – and they could then
rely on customers to spread the news of that experience by word of mouth”
(Blanding, 2016). This is a key insight to a platform business. According to Michael
Blanding, platform businesses like Uber and Airbnb resolved the issue of supply
side first. In this model, “if you get the right suppliers, the customers will experience
their high quality service and then do the marketing for you” (Blanding, 2016).
While Van Alstyne et al. (2016) have made a compelling case for platform
businesses and the new rules of strategy, one question still remains—which strategy
is the most relevant today? If nothing else, our review of Porter’s generic strategies,
hybrid strategies, blue ocean strategy (value innovation) and platform strategies
has demonstrated that each model has its own merits. In addition, each model
helps us to understand a complex business environment and that establishing and
maintaining a competitive advantage in an ever changing world is not a simple task.
According to Rita Gunther McGrath, “neither theory nor the practice of strategy
has kept pace with the realities of today’s boundary less and barrier free markets”
(McGrath, 2014, p. 1). As a result, McGrath believes that the traditional approach
of building a business around a competitive advantage no longer makes sense.
Disruptions are coming closer and closer together and the competitive
environment is in perpetual motion. Globalization has caused many of
the barriers to entry that once protected companies and sectors to fall.
Your competition isn’t just the company down the street any longer; it’s
companies from anywhere in the world. We’ve seen the fall of regulation
in many industries. We’ve seen the rise of digitization, which has created
instantaneous information flows and incredibly fast investment markets.
There are a number of forces that have converged to make attractive
opportunities more visible to more players, and the resources needed to
go after them are more available, too. All these dynamics make it very
Conclusion
In a rapidly evolving business world fueled by continuous innovation, it appears
that most strategies do become less relevant over time as the external environment
changes. While these strategies help us to make sense of a complex world, in
reality most strategies are helpful for academics and practitioners to understand
what happened, looking backwards in retrospect, relative to providing forward
looking insights.
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Reference # 02J-2017-10-01-01