Uber and the sharing economy case study solution

Uber and the Sharing Economy: Global Market Expansion and Reception

case W04C79 February 19, 2016

Published by WDI Publishing, a division of the William Davidson Institute (WDI) at the University of Michigan.

©2016 Qingxu Jin (Bill), Carl Spevacek, Nasreddine El-Dehaibi, and Whitney Johnson. This case was written under the supervision of Andrew Hoffman (Holcim Professor of Sustainable Enterprise) at the University of Michigan’s Ross School of Business by graduate students Qingxu Jin (Bill), Carl Spevacek, Nasreddine El-Dehaibi, and Whitney Johnson. This case was designed for academic purposes to simulate a scenario that could occur in the business world. While secondary research was performed to accurately portray information about the featured organization, this is a hypothetical scenario, and company representatives were not involved in the creation of this case.

Alexander Cooper,i head of Asia expansion for Uber Technologies, Inc., was sitting in a Tesla that he did not own. The Tesla showed up for his Uber ride to the meeting he was about to have with Travis Kalanick, Uber’s CEO, and Ryan Graves, head of Global Operations. It was morning in San Francisco, California, but the sun was setting in China where the action had occurred. Cooper checked for updates on the new petition they had launched to keep Uber running in Hong Kong, where days before five Uber drivers and three office staffers had been arrested in a police raid.1 Hong Kong was a new market for Uber, and its success or failure there could define the company’s next move, not only in Asia, but globally. Uber had posted bail to release the drivers and employees, but the situation was still developing. The drivers would be due in court in several months on charges of operating without car permits. For Cooper, this represented another challenge to Uber’s growth. As he mentally prepared for his meeting, he knew that Kalanick and Graves, while concerned about the situation in Hong Kong, would have broader and more significant questions related to Uber’s quest for global expansion and leadership role in growing the sharing economy. What should be Uber’s next move? How would the company handle the challenges presented by their competitors around the world? What strategies should Uber implement? Should it leave its challenging global markets and simply focus on the U.S. market?

The Sharing Economy

Evolution and History

Broadly speaking, the sharing economy, also referred to as collaborative consumption, can be defined as an economic model that allows individuals to borrow or rent assets owned by other individuals.2 The concept of the sharing economy had existed for thousands of years, but the development of the Internet allowed the peer-to-peer rental market to expand hugely,3 and in 2011 collaborative consumption was identified by Time Magazine on its list of “10 Ideas That Will Change the World.”4 By 2015, the sharing economy had emerged as a serious economic model; five key sectors using this model were travel, car sharing, finance, staffing, and music and video streaming. A PricewaterhouseCoopers report projected that these five key sharing sectors would likely increase global revenues from $15 billion in 2015 to $335 billion by 2025.5

i Alexander Cooper is a pseudonym and a fictional character created for class discussion purposes and is not meant to depict a specific person within the Uber organization.

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Uber and the Sharing Economy: Global Market Expansion and Reception W04C79

The sharing economy was considered an alternative to conventional business models because it prioritized access to goods, resources, and services, rather than ownership of them.6 This new collaborative consumption model offered economic advantages over traditional business models. Providers generated revenue by utilizing underused assets, and users had increased access to goods and services at lower prices than with traditional providers.7 Sharing economies maximize a good’s capacity, saving time and money for both the producer and consumer.8

Driving Forces

The development of information technology significantly expanded the sharing economy. Smartphones and social media created increased and continuous access to information for consumers, allowing new users to discover and quickly adapt products and services within the sharing economy.9 Sharing in the economy had existed long before and could be thought of as a collaborative economy, but the Internet created a new platform on which the sharing economy could operate. The Internet transformed the sharing economy and enabled it to grow significantly in a short period of time within multiple sectors (see Exhibit 1).10

Exhibit 1 The Sharing Economy in Almost Every Sector

Source: Owyang, Jeremiah. “Collaborative Economy Honeycomb 2 – Watch It Grow.” Web-strategist.com. Accessed 6 Jan. 2016. <http://www.web-strategist.com/ blog/2014/12/07/collaborative-economy-honeycomb-2-watch-it-grow/>.

Another driver of the sharing economy was the financial crisis of 2008. The sharing economy emerged as a response to the economic downturn and instability that followed the 2008 financial crisis, resulting in networking and pooling of resources.11

Cultural shifts also helped nurture the development of the sharing economy. In the U.S., car ownership had long been a sign of independence and many people could not imagine their world without owning a car. This was not true for younger generations, however. A survey conducted by the technology and research firm Gartner found that 46% of adults between ages 18 and 24 would prefer to have Internet over a car, while only 15% of baby boomers answered the same.12

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Uber and the Sharing Economy: Global Market Expansion and Reception W04C79

Sustainability and Sharing Economy

There is also a sustainability case to be made for sharing economies. Using goods to their maximum capacity can reduce waste.13 Additionally, proponents of the sharing economy argued that increased utilization of underused resources could reduce the carbon footprint of a good.14 For example, a Fast Company business editorial focusing on innovation claimed that “when measuring carbon emissions, home sharing is 66% more effective than hotels” and “car sharing participants reduce their individual emissions by 40%.”15 Peers, a community that helps individuals find independent work opportunities and benefits, stated that car sharing could potentially reduce up to 72% of U.S. CO2 emissions.

16 By enabling more sustainable consumption, the sharing economy was compatible with economic growth, while simultaneously diminishing environmental impacts through reduced waste and efficient use of existing resources at the level of an individual consumer.17 At a broader societal level, the sharing economy had the potential to push whole communities toward shrinking their carbon footprints.

Social Benefit

Sharing economies also create social benefits. The growth of sharing economies can be described by the “Sharing S-Curve” (see Exhibit 2).18 Generally, sharing economies develop at a local scale, and start- up companies fulfill a niche role. Therefore, sharing economies promote interactions among individuals at this local level, which strengthens communities.19 Although seemingly insignificant, peer-to-peer interactions create meaningful connections between people, and some research even showed psychological and neurological benefits from participating in sharing transactions.20

Exhibit 2 The S-Curve of the Sharing Economy

Source: PricewaterhouseCoopers. “The Sharing Economy – Sizing the Revenue Opportunity.” Accessed 7 Dec. 2015. <http://www.pwc.co.uk/issues/megatrends/collisions/ sharingeconomy/the-sharing-economy-sizing-the-revenue-opportunity.html>.

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Uber and the Sharing Economy: Global Market Expansion and Reception W04C79

Trust and Transparency

Sharing economies depend heavily on trust and transparency. Companies within a sharing economy emphasize the importance of creating a reputation and building a relationship with their consumers.21 Consumers must trust that providers will provide a worthy product or service, and providers need to trust that consumers will pay and respect the product, as someone else will use the product again in the future.22 Thus, trust is required by both providers and consumers to make sharing economies successful.

Technology Innovation

The development of the sharing economy was also driven by value shifts among both service providers and consumers. Rachel Botsman, a professor at Oxford University’s Saïd Business School and widely considered a global leader providing insights into the collaborative economy, argued that technological innovations increased the connectivity of societies, which led to changing views on ownership and sharing.23

Challenges

Despite all the benefits accompanying the sharing economy and the presence of significant driving forces, there were significant obstacles to this system. Sharing economies worked well on local scales and sometimes across municipalities. However, it remained unclear if the benefits could be maintained in worldwide sharing economies.24

Regulatory barriers present perhaps the biggest obstacle and threat to success for the sharing economy. The innovative business models and practices of sharing economy companies such as Airbnb and Uber generated uneasiness among regulators, specifically related to the issues of market competition, consumer protection, and legality of operations.25 Citing negative consequences for citizens and governmental units, regulators feared that the ability of these and similar companies to generate a competitive advantage by offering lower prices to a consumer than traditional service providers, such as hotels or taxis, could ultimately displace these established industries. Uber, for example, was not subject to the same safety and tax regulations as traditional taxis or car services.26 Furthermore, these companies operated in a legally gray area. For example, Uber defined itself not as a taxi or transportation company, but as a technology platform.27 This definition pushed forward by lawyers at Uber had effectively protected Uber from complying with the Americans with Disabilities Act.28 Uber was sued several times, prompting it to provide more handicap-accessible vehicles. Governmental regulation or self-regulation by the company could therefore positively or negatively affect the potential market share of sharing economy companies.

Lack of trust was another setback to the sharing economy. A study by Carbonview Research showed that trust contributed 67% to the reason why individuals were hesitant to participate in the sharing economy (see Exhibit 3).29

The other factors that held people back, including effort and quality, related to the price point of the goods and sharing prices.

Transportation Sharing Economy

Within the automobile transportation sector several services fell under the umbrella of the sharing economy. These services ranged from traditional public transportation providers, such as taxis and buses, to the relatively new car- and ride-sharing providers, which included companies such as Uber, Lyft, and Zipcar. New peer-to- peer ride-sharing platforms were providing an alternative for traditional public transportation options.30 Uber specifically set out to offer an alternative to poor cab infrastructure and low service standards (i.e. dirty cabs,

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Uber and the Sharing Economy: Global Market Expansion and Reception W04C79

late cars, and the lack of credit card acceptance).31 Therefore, Uber and other transportation sharing platforms came to thrive on the fact that traditional service providers were falling short of consumer needs.

In 2015 only 8% of all adults had participated in some form of automotive sharing,32 indicating significant room for growth within this sector. Even more encouraging for the innovators, studies showed that consumers wanted the sharing economy to succeed in the automotive sector over all other sectors, and were prepared to accept a culture shift away from car ownership and toward increased ride-sharing.33

Exhibit 3 Why People Hesitate to Participate in the Sharing Economy

Source: Olson, Kristine. “National Study Quantifies Reality of the ‘Sharing Economy’ Movement.” 8 Feb. 2012. Accessed 6 Jan. 2016. <http://www.campbell-mithun. com/678_national-study-quantifies-reality-of-the-sharing-economy-movement>.

Uber: The Company

History

Uber Technologies, Inc., was founded in 2009 in San Francisco by Garrett Camp and Travis Kalanick with $200,000 of seed funding.34 During a discussion in Paris at Loic and Geraldine LeMeur’s LeWeb conference, Kalanick and Camp came up with the idea of a limo timeshare service in San Francisco, Kalanick’s and Camp’s place of residence, that would allow the two founders private access to a personal driver that could be accessed through an iPhone application. Camp developed the application prototype, while Kalanick’s original role was chief incubator, which involved temporarily running the company, developing the company through the prototype stage, which officially launched in 2010, and finding a general manager. In 2010, Ryan Graves, a former GE employee, was hired.35 Graves ultimately became head of Global Operations, while Kalanick served as CEO36 and Camp was appointed chairman.37