Question

strategic alternatives and recommended strategy for uber (strategic audit)

Answer 1

Here is my list of top 7 strategic decisions for Uber:

1. How hard and deep to play in the Autonomous Vehicle space?

Over the past two years, Uber visibly made it its highest priority to chase pole position in building Autonomous Vehicles (AVs) — perhaps at any cost.

Company needs to decide how much they want to prioritize AV development, and re-evaluate what approach (build/partner/buy) wants to take for each subsystem that goes into bringing AVs to market.

It is extremely important for Uber to get the timing of its investments and strategy in this space right. Investing too far ahead of the market would mean diverting resources and focus away from the core ride-sharing and personal transportation business. On the other hand, falling behind the market would bring the risk of other AV leaders building out a network of vehicle supply and demand to parallel Uber’s.

2. How to build a real Transportation-as-a-Service business?

Uber and Lyft have outgrown the pre-existing taxi market in their core geographies, but are barely beginning to scratch the surface of a much larger market — that of personal vehicle replacement. The figure below illustrates the relative sizes of consumer spend on each of these buckets. Business spend in these categories is separate, but this captures the basic idea.

Consumers in the US spend over $1.1 Trillion on owning, fueling and maintaining personal vehicles. US auto sales continue to be at record highs year over year. Uber, even with its current annualized gross ride value of over $32B (global number; US likely $15–20B), hasn’t begun to replace personal vehicle ownership at any meaningful scale yet. This is because Uber hasn’t made a dent on the primary use case for personal vehicles — the work commute.

Uber’s on-demand services provide high flexibility and custom routing, but are too costly (and this includes Uber Pool) for the commute use case for most consumers. The commute use case requires a solution that is lower cost, and more predictable and reliable.

The holy grail in the smart transportation business is to address the commute use case more effectively. The broader opportunity is to offer Transportation-as-a-Service (TaaS) subscriptions. Imagine if you could pay a fixed fee — similar to your current car payment — and get reliable transportation between home and work (across modes of transport), along with a number of weekend rides every month.

This would be like Amzn Prime for transportation, except with an ARPU that is an order of magnitude higher. The company that cracks this could have the basis for building a trillion-dollar value business over the years. Uber has trialed offerings along these lines inside major city downtowns, but I believe it’s core model of dedicated car and driver on demand cannot support the price points necessary to serve the commute use case in North America, where most commuters live in the suburbs.

3. Growth or profitability? or both?

Uber 1.0 appeared to prioritize current and future growth well above profitability. CEO needs to decide where he wants to be on the growth to profitability dial now and in a couple of years. In my view, in the near future, the business would need to demonstrate sustainable profitability in its core segment (i.e. ride sharing in Western markets) while demonstrating a few curated, credible seeds of future growth. Contrary to some recent reporting on the topic, I believe ridesharing as a business can be reasonably profitable in Western markets, and Uber already has the scale to get there. The path to regional profitability doesn’t necessarily involve raising headline prices for consumers. Instead, Uber needs to drive up its net revenue per ride (after discounts, driver bonuses) and effective utilization of vehicles on its network; increase density of UberPool rides (or tweak its business model); and judiciously optimize fixed costs. It appears there is much foundational work on strategic finance and real time reporting that may need to be done, and CEO and whoever he hires as CFO may need to first put in place the right decision support infrastructure that can enable the company to make decisions based on fully loaded costs

4. Transportation or Logistics? or both?

Logistics is a very large market adjacent to Uber’s core Transportation market, yet distinct from it. Uber currently has initiatives such as UberEverything (including UberEats for Food Delivery, UberRush for delivering goods) and UberFreight (load pooling for trucks) in the logistics space. It has also previously experimented with other models within on-demand logistics. Uber needs to decide how core Logistics is to its long-term plans. Each of these segments have different industry dynamics, many have a different set of supply or demand partners, and some involve building an entirely new network with a new category of vehicle. Moreover, each segment is highly competitive, with dedicated startups and incumbents fighting to win each of those segments. Are these services really core to Uber’s long term plans, and if so, in what geographies? For the ones that are, the company needs a better plan — organic or inorganic — to win in these spaces. For segments determined to be non-core, it needs to quickly re-deploy teams, capital and attention into its core Transportation business

5. Which geographies?

Another decision company make is which international markets Uber wants to “own” over the longer term — and then go all-out after those, while exiting others which don’t move the needle in the right direction. Fortunately, the team have solid reference points in the Didi (China) and Yandex (Russia) transactions. Markets such as India and Southeast Asia may offer potential long term upside, but will be relatively small, distracting and cash-draining in the near term. Moreover, markets such as India have low ASPs in the ridesharing space with extremely challenging unit economics, and winning such markets sustainably will require very different strategy and tactics than in core Western markets. Are these battles ones that Uber wants to fight and continue investing behind? Or is it better off holding stakes in the market leaders in most emerging markets?

6. How nice to play with regulators?

This is one of the stickier decisions. Uber famously grew while disregarding regulations and regulators. This approach worked well for the company in many markets, while it backfired in several others. As a company now at a different stage of evolution, and under new management, Uber has an opportunity to consider a different tack. Company needs to decide whether to continue with status quo or take a more conciliatory approach towards regulators and town planners. The latter approach could mean slower growth in several markets in the near term, but it could lead to a de-risked regulatory future that public market investors would be more comfortable with. Moreover, such an approach would be more likely to open paths to other models within the broader Transportation-as-a-Service vision.

7. Secure deep-pocketed investor?

Softbank Vision Fund’s size and approach enable it to tilt the outcome in leadership battles for massive markets. With Softbank’s interest in owning the ride-sharing space globally, having Softbank on Uber’s side rather than its opponents’ has to be a key strategic step.