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Porter’s Five Forces Analysis: The App-Based Taxi Industry

Roshini Muralidharan MBA 604, D1: Managerial Economics Dr. Amy Jauman September 24, 2020

Porter’s Five Forces Analysis: The App-Based Taxi Industry

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Abstract The following document consists of Uber's background, a summary of Porter's Five Forces analysis, and an appendix.

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Background Uber Technology Inc. was founded in 2009 by Travis Kalanick and Garrett Camp. As of 2017, the company had more than fifty million users, seven million registered drivers, and an average of one million daily Uber trips (Singla, n.d.)

To cater to a variety of passengers, Uber offers different types of cab models. UberX, Comfort, UberXL, Uber Pet in the economy range, and Luxury Black under the premium range.

Uber also incorporates surge pricing technology into their business model. According to Singla, "Whenever the demand increases, per mile prices, are automatically increased. The new price depends on the number of available drivers and the number of requests made by people who want to travel" (Singla, n.d.).

Porter's Five Forces Porter's five forces include internal rivalry, entry, substitute and complementary product, supplier power, and buyer power (David Besanko, 2016). An analysis is included below: Rivalry The industry experiences high levels of rivalry from traditional taxis to other app-based services. With Lyft being its biggest rival, they are attempting to gain market share as well as drivers. To prevent raising passenger costs, Uber should consider lowering its running costs.

The Threat of New Entrants There is a high threat of new entrants entering the market, as there are no entry barriers.

Since Uber uses an app for its service offerings, its interface and concept can be copied by competitors and new entrants and modified to their liking and offered at lower prices.

Substitute Product The industry observes a high threat of substitute products. Some of Uber's competitors include the following: Lyft, Curb, Didi Chuxing, Grab, and Ola (Johnson, 2017). Passengers can

Porter’s Five Forces Analysis: The App-Based Taxi Industry

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utilize public transportation modes, such as taxis, busses or subways, or other app-based services like Lyft if there is a slight increase in Uber's service fees.

Supplier Power Uber does not have designated vehicles for driver/passenger use. The company depends on the drivers owning cars. The car must have four doors, be less than ten years old, and pass a rigorous inspection conducted by a city-approved individual (Driver requirements). Therefore, the drivers are the suppliers, and they can negotiate, which directly affects the company's overall performance.

Buyer Power Buyer/passenger power is high. Generally, passengers are looking for the best value for the money and can switch to a competitor with ease. Unless they are loyal to the Uber brand, they can shift if service prices are not optimal. Therefore, Uber's competitive strategy is the price.

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Appendix: Five-Forces Analysis Template [ CITATION Dav16 \l 1033 ] Factors Affecting Rivalry among Existing Competitors To what extent does pricing rivalry or nonprice competition erode the profitability of a typical firm in this industry?

Current Characterization Moderate to high

Future Trend Uber drivers are the “sellers”

High

Rapidly growing and expanding to other areas such as Uber Eats, etc.

Significant cost differences among firms?

Low to moderate

Depends on the city, but Lyft can offer somewhat cheaper rides compared to Uber

Excess capacity?

High Uber’s concept is to utilize a driver’s unused car space to provide a ride to consumers Moderate to high

High

Moderate

High

Low

Moderate

Low

High

Moderate

High

Low to moderate

Moderate

High Uber uses a price leadership technique. Passengers are charged an upfront price based on the total trip’s distance and the time of day

High

Degree of seller concentration?

Rate of industry growth?

Cost structure of firms: sensitivity of costs to capacity utilization?

Degree of product differentiation among sellers?

Brand loyalty to existing sellers? Cross-price elasticities of demand among competitors in industry?

Buyers’ cost of switching from one competitor to another?

Are prices and terms of sales transactions observable?

Can firms adjust prices quickly?

Large and/or infrequent sales orders?

Use of “facilitating practices” (price leadership, advance announcement of price changes)?

High

Porter’s Five Forces Analysis: The App-Based Taxi Industry

History of “cooperative” pricing?

Strength of exit barriers?

High industry price elasticity of demand?

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service is being requested. If the carpool feature is used, the trip is provided at a discounted rate. Prices may also include tolls, and surge pricing rate if there is an event taking place in the area.

Low

Low

High High

Moderate High

Factors Affecting the Threat of Entry To what extent does the threat or incidence of entry erode the profitability of a typical firm in this industry?

Significant economies of scale?

Importance of reputation or established brand loyalties in purchase decision?

Entrants’ access to distribution channels?

Entrants’ access to raw materials?

Entrants’ access to technology/know-how?

Entrants’ access to favorable locations?

Experience-based advantages of incumbents?

Network externalities: demand-side advantages to incumbents from large installed base?

Government protection of incumbents?

Perceptions of entrants about expected retaliation of incumbents/reputations of incumbents for toughness?

Current Characterization High

Future Trend High

High

High

Low

Low

Low

Low

High

Low

Moderate

Moderate

Moderate

Low

Low

Low

Low

Moderate

Low to moderate

Moderate

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Factors Affecting or Reflecting Pressure from Substitute Products and Support from Complements To what extent does competition from substitute products outside the industry erode the profitability of a typical firm in the industry?

Availability of close substitutes?

Price-value characteristics of substitutes?

Price elasticity of industry demand?

Availability of close complements?

Price-value characteristics of complements?

Current Characterization High Lyft is a top substitute

Future Trend High Driverless cars

Low

Moderate

High Price determines how often passengers utilize the app Yes, high

Moderate

Moderate

Low

High

Factors Affecting or Reflecting Power of Input Suppliers To what extent do individual suppliers have the ability to negotiate high input prices with typical firms in this industry? To what extent do input prices deviate from those that would prevail in a perfectly competitive input market in which input suppliers act as price takers?

Current Characterization Is the supplier industry more Moderate concentrated than the industry it sells to?

Do firms in industry purchase N/A relatively small volumes relative to other customers of supplier? Is typical firm’s purchase volume small relative to sales of typical supplier?

Few substitutes for suppliers’ Low input?

Do firms in industry make Low relationship-specific investments to support transactions with specific suppliers?

Do suppliers pose credible Moderate

Future Trend High

Low Low to moderate

Moderate

Porter’s Five Forces Analysis: The App-Based Taxi Industry

threat of forward integration into the product market?

Are suppliers able to pricediscriminate among prospective customers according to ability or willingness to pay for input?

Moderate

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Moderate

Factors Affecting or Reflecting Power of Buyers To what extent do individual buyers have the ability to negotiate low purchase prices with typical firms in this industry? To what extent do purchase prices differ from those that would prevail in a market with a large number of fragmented buyers in which buyers act as price takers?

Current Characterization Moderate

Low

Do buyers purchase in large volumes? Does a buyer’s purchase volume represent a large fraction of the typical seller’s sales revenue?

Can buyers find substitutes for industry’s product?

Do firms in industry make relation-specific buyers?

Is price elasticity of demand of buyer’s product high or low?

Do buyers pose credible threat of backward integration?

Moderate

Moderate

High

High

Moderate

Moderate

Does the product represent significant fraction of cost in buyer’s business?

Are prices in the market negotiated between buyers and sellers on each individual

Moderate

Is buyers’ industry more concentrated than the industry it purchases from?

Future Trend

High High Low Passengers do not have the ability to bargain

Take-it-or-leave-it pricing is applied

High There should be visibility of whether or not the passenger is paying surge price or the normal rate. With Uber’s continued application of surge pricing, passengers may feel ripped off and will look at competitors.

Moderate No change in future But there should be visibility of surge pricing application

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transaction, or do sellers post a take-it-or-leave-it price that applies to all transactions?

References David Besanko, D. D. (2016). Economics of Strategy. Hoboken: John Wiley & Sons, Inc.

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Driver requirements. (n.d.). Retrieved from Uber: https://www.uber.com/us/en/drive/requirements/#:~:text=Minimum%20requirements. %201%20Meet%20the%20minimum%20age%20to,license.%204%20Use%20an %20eligible%204-door%20vehicle.%20 Johnson, M. (2017, October 17). Who Are Uber's Biggest Competitors? Retrieved from Zacks: https://www.zacks.com/stock/news/279108/who-are-ubers-biggest-competitors Singla, S. (n.d.). How Uber Works: Insights into the Business & Revenue Model. Retrieved from JungleWorks: https://jungleworks.com/uber-business-model-revenue-insights/ Smith, Y. (2018, December 4). Uber Is Headed for a Crash. Retrieved from Intelligencer: https://nymag.com/intelligencer/2018/12/will-uber-survive-the-nextdecade.html#:~:text=Uber%20does%20regularly%20claim%20that,means%20less %20utilization%20per%20driver.&text=Nor%20does%20being%20bigger%20make %20Uber%20a%20better%20business.