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Uber’s Competitive Advantage vis-à-vis Porter’s Generic Strategies Gareth Hales* and Carolan Mclarney**

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.

Porter’s Generic Strategies In the book Competitive Advantage: Creating and Sustaining Superior Performance (1985), Michael Porter introduced the concept of three mutually exclusive generic strategies, cost leadership, differentiation and focus that can be leveraged by an organization to establish and maintain a competitive advantage. Porter asserts that competitive advantage rests upon how well the executed strategy generates value. 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 *

Faculty, Management, Dalhousie University, 6100 University Avenue, Halifax, Nova Scotia, Canada, B3H. E-mail: [email protected]

**

Faculty, Management, Dalhousie University, 6100 University Avenue, Halifax, Nova Scotia, Canada, B3H; and is the corresponding author. E-mail: [email protected]

© 2017 IUP. All Rights Reserved.

more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation (Porter, 1985, p. 3). Figure 1 outlines three approaches to generic strategy that an organization can follow, defined by two axes, competitive advantage (lower cost versus differentiation) and competitive scope (broad target versus narrow target). Figure 1: Generic Strategic Approaches

According to Porter, the three generic strategies to choose between are as follows: 1. Cost Leadership: A position where an organization seeks to be the lowest cost provider to a broad spectrum of customers. If a firm can achieve the industry’s lowest costs and still charge average prices, it can outperform the competition. 2. Differentiation: A position where an organization seeks to distinguish itself from the competition by offering unique products or services that deliver superior value to a broad spectrum of customers. If a firm can differentiate itself, then it should be able to charge higher prices and earn higher returns to outperform the competition. 3. Focus: A position where an organization targets specific groups of customers or industry segments (narrow scope). A focus strategy works best when a group of buyers have specific (individualistic) requirements and when the competition is not serving the segment’s needs. A. Cost Focus: A position of defining a narrow buyer segment and providing the targeted customers with a desired product or service at a lower cost relative to the competition. B. Differentiation Focus: A position of defining a narrow buyer segment and providing the targeted customers with a unique product or service that delivers superior value relative to the competition. 8

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Porter believes that strategy is the creation of a unique and valuable position in the market. Competitive strategy is about being different. “The essence of strategic positioning is to choose activities that are different from rivals and a strategic position is not sustainable unless there are trade-offs with other positions” (Porter, 1996, p. 68). In other words, a trade-off means that “more of one thing necessitates less of another” (Porter, 1996, p. 68). Porter believes that a firm becomes ‘stuck in the middle’ when they fail to select and stick with a particular strategy, a position he describes as the “inherent contractions of different strategies” (Porter, 1996, p. 67). According to Porter, firms that are ‘stuck in the middle’ generally lose to firms with cost advantages or superior differentiation. An organization can become stuck in the middle if they pursue, but fail to realize one of the generic business strategies or if they try to pursue more than one generic strategy simultaneously. In the case of Uber, it appears that their business strategy contains both elements of cost leadership and differentiation. As outlined in Table 1, Uber’s strategy contains elements of Cost Leadership and Differentiation. This leads to the question, is Uber ‘stuck in the middle’ without a coherent strategy? Or, is it possible for a company to effectively deploy a hybrid strategy to establish and maintain a competitive advantage?

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): •

Companies focusing on one pure strategy may be less responsive to market changes and maintain lower agility and flexibility in offering products that focus both on costs and on specific product features.

•

Strategic specialization may leave serious gaps or weaknesses in product offerings and ignore important customer needs that could be detrimental to companies.

•

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 Uber’s Competitive Advantage vis-à-vis Porter’s Generic Strategies

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Table 1: Uber’s Strategy: The Simultaneous Pursuit of Low Cost and Differentiation Uber – Cost Leadership Elements Reduced Capital Expenditures: •

•

Uber’s capital expen ditu r es are sign ifican tly lower th an th eir competition. A traditional taxi company has “a central dispatching office, own a fleet of vehicles, fuel tanks, pumps and may operate a maintenance/repair shop (First Research, 2016, p. 1). Uber has access to a large fleet of vehicles, but they do not own any of the vehicles as assets. As a result, Uber does not have to “purchase, maintain or depr eciate veh ic les as c apital expenditures, making the company more agile” (Chan, 2014, p. 3). As a result, Uber can successfully scale their business (up or down) at a pace that traditional competitors cannot match.

Uber – Differentiation Elements Uber Application Program Interface (API): •

Flexible Employment: •

Uber provides flexible full-time and part-time employment opportunities, reaching a new market of potential drivers enabling them to work flexible hours and earn additional income.

•

Uber provides higher income for drivers relative to traditional taxis. “Even with Uber’s 20% cut, drivers make more than they do from the status quo” (Chan, 2014, p. 2).

Low Cost Structure: •

•

•

•

Uber’s operating costs are lower than the competition. “Uber has fixed costs and employs technology to achieve economies of scale” (Chan, 2014, p. 3). Uber’s Application Program Interface (API) brings together drivers and riders more efficiently and effectively than the traditional taxi dispatch system. This provides Uber with an asymmetric in fo rmatio n advantage over its competitors and enables th em to significantly reduce their cost structure. Uber’s mapping interface technology provides some significant advantages relative to their competition. Uber drivers do not have to “drive around looking for customers” (Chan, 2014, p. 3) which saves fuel and time. Uber’s low cost structure enables them the “luxury of reducing prices without hurting its bottom line” (Chan, 2014, p. 4). As a result, Uber can provide lower prices compared to traditional taxi operators.

Reduced HR Expenditures: •

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Uber drivers sign on to the platform as independent contractors. As a result, they are not direct employees of Uber

The Uber application has created a new platform that brings together drivers an d riders mor e effec tively an d efficiently than the traditional taxi business dispatch system. This new business model is perceived to provide superior value by customers.

Wha t di d U be r Experience):

Sol ve ?

(C l ie nt

Uber focused directly on the needs of customers and solved many sources of irritation that existed within the traditional taxi model as follows: •

Uber provides convenience, comfort and cost savings for business and leisure travelers away from home relative to the highly fragmented taxi market. For example, Uber leverages smartphones, real time processing and built in GPS, reducing the need of customers to book in advance.

•

Uber solves the difficulty encountered hailing a cab on street. They route a car directly to the customer and they provide the customer with information about the driver who is picking them up (including name, vehicle make, model and license plate number).

•

Uber has reduced the hassle and complexity associated with paying the driver, ensuring a safe and secure financial transaction for both parties. Their application provides an upfront fare estimate based on distance, car

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Table 1 (Cont.) type and demand period. It outlines the 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 des tin atio n s a n d to even r ej ec t electronic sources of payment.

and this significantly reduces Uber’s variable cost structure.

•

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, th ey have significantly en hanc ed customer loyalty.

Figure 2: Hybrid or Stuck in the Middle

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: Uber’s Competitive Advantage vis-à-vis Porter’s Generic Strategies

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•

Achieving a strong position in one generic strategy can also lead to improvements in the position of another generic strategy.

•

Operational efficiency gains achieved through the implementation of best practices and quality management make it possible to improve more than one position.

•

Hybrid strategies “avoid strategic specialization, which can be dangerous if it leaves weaknesses in product offerings and ignores important customer needs” (Salavou, 2015, p. 90).

•

Hybrid strategies may “help a company secure several sources of advantage and thus become more balanced” (Salavou, 2015, p. 90).

•

Hybrid strategies provide organizations with greater flexibility. As a result, firms who deploy hybrid strategies may be able to respond faster to changes in the environment, including customer needs and preferences.

•

Hybrid strategies that combine competitive advantages based on low cost and differentiation are more difficult to pinpoint, imitate and replicate.

Combination strategists, Cliff Bowman and David Faulkner elaborate on Porter’s generic strategies, arguing that buyers examine both price (low cost) and perceived quality (differentiation) in making purchasing decisions which are a function of both attributes. Sustainable competitive advantage is achieved by offering products or services that are perceived by customers to be (Bowman and Faulkner, 1997): •

Better than those of the competition regardless of price;

•

Equal to the competition but at a lower price; or

•

Better and cheaper.

Bowman’s Strategy Clock (Figure 3) provides eight potential strategies, in four different quadrants defined by price and perceived value. John Parnell positions the model as follows: 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). 12

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Figure 3: Bowman’s Strategy Clock

High

The Strategy Clock: Bowman’s Strategic Options Differentiation 4

Hybrid

Low

Perceived Added Value

3

5

Focused Differentiation

Low Price 2

6

1 Low Price, Low Added Value Low

8 Price

7 Strategies Destined for Ultimate Failure 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 Uber’s Competitive Advantage vis-à-vis Porter’s Generic Strategies

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the value of Uber, founded in 2009, above that of GM, founded in 1908” (Van Alstyne et al ., 2016, p. 62). According to Morgan Stanley, Uber have “between 84% and 87% of the US ride-share market” and they provided in excess of 168,000 trips per day in April, 2016 (Hartmans, 2016). While Porter’s generic strategy framework is still applicable, the facts in this case lead us to conclude that the concept of being ‘stuck in the middle’ does not apply to Uber. In fact, it appears that a hybrid strategy has helped Uber to establish a competitive advantage, placing intense pressure on the traditional business model of competitors in a mature Taxi and Limousine industry.

Blue Ocean Strategy and Value Innovation If a hybrid strategy or the simultaneous pursuit of low cost and differentiation enables an organization to realize superior performance, why did not taxi originate Uber’s value proposition and business model? Chan Kim and Renee Mauborgne argue that many established competitors allow the existing industry structure to dictate their strategies and that these organizations typically do not challenge the status quo (Figure 4). Figure 4: Blue Ocean Strategy Versus Red Ocean Strategy

Source: Digital CIO (2011)

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 14

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are created from within red oceans by expanding industry boundaries. In blue oceans, competition is irrelevant because the rules of the game are waiting to be set (Kim and Mauborgne, 2005, p. 25). 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...