Answered: Identify THREE (3) global challenge…

Understanding Business

12th Edition

ISBN:9781259929434

Author:William Nickels

Publisher:William Nickels

Chapter1: Taking Risks And Making Profits Within The Dynamic Business Environment

Section: Chapter Questions

Problem 1CE

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Identify THREE (3) global challenge trends, Discuss each trend and how it is applicable to the Uber case? Provide adequate information linking to the case to support the discussion. Other relevant background information and examples linking to the case can be incorporated.

Transcribed Image Text:Uber also aggressively cut the price of its UberX service by 20% that week, to price itself significantly lower than regular taxis just before Lyft entered the market. The bottom line of Lyft and Uber's rivalry was that the latter enjoyed a first-mover advantage and, having established a presence in major cities beforehand, benefited from network effects and sufficient margins which allowed it to cut prices when needed, to erect barriers to entry and slow down the growth of competitors. Uber's significantly higher market valuation also helped to raise more capital each funding round - it raised $1 billion in July 2015 while Lyft raised only half the amount in the same year. This helped sustain any losses in operations in an era of price cuts. Finally, Lyft tried to expand fast — it raised $250 million in 2014 and another $530 million in March 2015, with the main goal of expanding internationally and entering less competitive markets without already entrenched competitors. DIDI In China, Uber found itself in the position of the much smaller late entrant. Here, Didi was the clear leader. Didi-Kuaidi, referred to as Didi by the public, was the product of a merger between Didi Dache and Kuaidi Dache, two of China's leading taxi- hailing apps. In February 2015, the merged entity was valued at $6 billion, and doubled to $12 billion by September in the same year. Didi's services covered 80% of China's huge market of 800 million city dwellers, being a deep-pocketed dominant player reaping the network-leveraging dividends of having drivers and customers hooked on to its product early. Didi was also far more successful than Uber in the aspect of legal legitimacy, acquired from its local connections 10. Didi enjoyed backing from powerful Chinese government investors, the most notable one being the China Investment Corporation, China's sovereign fund in charge of managing foreign exchange reserves. These well- connected investors opened up opportunities for Didi at the expense of its competitors, which included working with regulators. A success was commemorated in October 2015, when Didi became the first car-hailing app to be awarded an official license in Shanghai. This authorization was hailed as a landmark decision, allowing Didi to operate its ride- hailing business in the city without any fear of legal infringements. It assuaged concerns among taxi drivers, as one revealed in September 2015, "I worry all the time about being caught and fined by the government. My biggest concern is policy uncertainties." With this formal recognition, more drivers were certain to sign on with Didi vis-à-visits competitors, which could not provide the same level of regulatory security. From the beginning, Didi pursued an aggressive strategy to lure as many drivers to its app as possible. Didi spent $700 million on rewards to taxi drivers between 2013 and 2014, attracting both new drivers and switching drivers from existing taxi companies with monetary incentives. So important were taxi companies as a source of growth that the sales team in Didi even went to the streets to promote their app to cabbies. By allowing its mobile apps to be used by taxi drivers as an additional channel to attract more passengers, Didi sought to convert these drivers to work for them exclusively during peak hours by offering more attractive rates and bonuses. This method of attracting and converting drivers with the use of incentives allowed Didi to swiftly convert a large number of taxi drivers, quickly scaling their operations in other cities. It also highlights the main difference between Didi and Uber's business model — Didi started out with taxi drivers adopting its app, before adding non-traditional transport services to its portfolio while Uber started out with the intention of disrupting the taxi industry itself by replacing its services. Part of Didi's fast growth was also due to tweaking and expanding its business model to meet unique local demands. For example, urban dwellers frequently looked for a compromise between overcrowded public transportation and the high cost of driving to work themselves, which led Didi to introduce Hitch as a service offering in its app, which was a group ride-sharing service along preset routes. Hitch was for casual drivers who wanted to recoup some gas money and toll fees on their daily commute - by inputting their start and end points into the app, Hitch connected them with nearby passengers heading in the same direction, allowing them to share the ride. This was different from the more traditional taxi-type service as drivers had control over where the ride ended, and they did not make a profit off the service passengers only paid for the cost of gas and tolls. This allowed for fares that were 30-40% lower than those of regular taxis. For Didi, Hitch encouraged consumers to try Didi's services at a low cost, therefore, opening a pathway for them to convert to the more expensive for-profit taxi service eventually. Clearly, Didi understood the local market's needs well enough to carry out effective customer segmentation to target the differentiated needs in its product development. This allowed for the building of customer loyalty to the main corporate brand, and the greater willingness to try and switch between Didi's various services, depending on the occasion of travel.

UBER'S RESPONSE TO DIDI'S MULTIPLE SERVICE OFFERINGS
Uber had prioritized China as a key market for expansion, and it was befuddling to the company to be in a distantly second position. Uber to Didi in China was like Lyft to Uber in
the US. In a cruel twist of fate, Didi recently invested $100 million in Lyft in September 2015, forming an international ride-sharing partnership. Uber managed to capture only
11.5% of the Chinese market, but experts did not find it surprising given China's unique institutional structures. Greg Tarr, partner at Cross Pacific Capital, commented, "When
you have great technology and a great business model but don't understand some of those local business premises... West Coast aggressiveness will only get you so far. China is
such a different animal in terms of dealing with the local culture, the protectionism and the fact that you don't have local investors." This demonstrated the need for Uber to better
understand the Chinese market, rather than merely transplanting its San Francisco model of attracting American drivers and dealing with local regulations. Uber thus attempted to
work closely with China's Ministry of Transport by setting up servers in China, in an effort to obtain an internet service company license by sharing data with local transport
authorities. Reformation in Uber's marketing strategy in China was a priority, and steps were taken to set up local teams to localize logistics, including language and support
services. At consumers' requests, Uber strategically partnered with Chinese search giant Baidu, ditching Google Maps for Baidu maps into its app. Baidu also prominently
advertised Uber on its main page with a prominent "Get a Car" button, linking it to Uber's app. Partnerships with Alibaba also allowed Uber to use the simpler and non-credit card-
based payment mechanism of Alipay. This was important as many Chinese residents did not own credit cards. Uber competed vigorously with Didi on many other fronts to attract
drivers to sign on with their companies. Both offered bonuses for drivers who hit ride targets, in a bid to extend geographical coverage and reduce wait times. This was based on an
industry-wide understanding that spending cash to build an operational base as quickly as possible leveraging on economies of scale was the only way to win in China. As Didi's
President, Jean Liu, revealed, "By using subsidies to get more cars on the road... waiting times were shortened, fares became cheaper, more users were drawn on to the platform
and drivers on the platform. We have already created such a virtuous circle of increased orders, customer retention.” To try and respond more effectively to Didi's diversification
of services, Uber looked beyond its typical car-ordering model that worked so well in other international markets. In August 2014, Uber announced the implementation of People's
Uber, where drivers offered "non-profit" rides to carpooling passengers who only paid for the cost of gas and maintenance. This was Uber's version of Didi's Hitch, competing
directly to attract people who wanted low-cost rides. Uber seemed to be playing catch-up rather than setting trends in the China market. The race to grab market share was critical
because it was understood that whoever got ahead first would remain the dominant player for a long time. Uber had to decide how to effectively compete with a much larger
competitor, where to side-step competition and innovate new services, and where and how to go head-on with Didi.

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