Porter’s Five Forces Analysis on Uber
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Michael Porter’s five forces analysis assists in analyzing of the level of competition and business strategy development that shapes every industry and helps determine an industry’s weaknesses and strengths. It draws upon industrial organization economics to derive five forces that determine the competitive intensity and therefore the attractiveness of an industry. The five forces framework works by looking at the high points of five essential elements that affect competition. These fall under Supplier Power, buyer power, competitive rivalry, threat of substitutions and potential new entrants.
Understanding the network channels, potential growth and attractiveness of a company in the transportation industry demands the use of Porter’s five forces analysis. Uber is one of the fastest growing omnipresent ride-sharing transportation company that has managed to command a significant presence in the main parts of the world spreading by over 60 countries since its inception in 2009. Within the few years of existence, the organization has succeeded in capturing the loyalty of its customers by catering to the on-demand rides of individuals of all caliber of society. This has, in turn, enabled Uber to expand its market share and provision of better services. With the enormous glory and popularization surrounding the company, Porter’s Five Forces Analysis brings to light the strengths and weakness the firm possesses in the industry in various countries.
1. The potential threat of new market entrants:
A company’ position can be immensely affected by the ability of other organizations to enter their market. The potential risks that the enterprise face are as follows;
- Setting itself in the technological arena, Uber aims to provide a linking bridge between customers and transport providers. This market requires a higher amount of initial capital to start up, and though Uber’s founders parted with a substantial amount of capital, upcoming rivals are utilizing lesser initial capital to jump start their operations thereby quickly penetrating the market.
- Though Uber’s policy is to freely offer their software to willing clients, these services can however easily be swapped at zero charges. As the demand to balance costs become imminent, Uber is not invulnerable to raising rates, making it easier for other organizations to penetrate the industry. The ease of service swap by customers is a strong force because it defines the firm’s survival rate in the sector.
- Various problems have popped up in Uber operations; legal issues, negative press around several areas and even fines by government authorities such as Germany, France, India, Thailand, Netherlands and United Kingdom has made the market to be under controversies thereby making new entrants very cautious stepping into the business. This has at least for a short period, reduced the threat of new entrants into the market who must work in overcoming all these challenges.
- As a technology-based company, it is not easy for Uber to stop any form of imitation by any other transportation firm. This means that it is easy for the concept to be copied by new ride-sharing companies and other competitors thereby to not only operate in the same way as Uber but to also charge less for the same distance.
2. The threat of substitutions:
A Substitute is a well know fear that is experienced in a competitive business environment. In the transportation industry, there are numerous member organizations that can quickly provide a replacement for Uber services. With the service quality that Uber provides, taxi services, for instance, is the closest opponent and a potential substitute emerging from the traditional transportation industry. Taxi service is traditional to towns with ride-sharing operations because of both its lower-cost and efficiency, and user-friendly designing. As such, their abundance is enough to curb Uber from elevating the service fees. It is noteworthy that due to price sensitivity, a minor rise of Uber rates can result in customer taking on the services of its closest adversaries and alternatives. Moreover, due to the presence of other public means of transport like trains, private cars and even self-driving cars (Google Cars) that offer similar services can threaten Uber’s existence or operations. A constant threat of substitutes is currently a weak force in the case of Uber.
3. Supplier Bargaining Power
This is the ability of suppliers to drive up the prices of a company’ inputs. The threat of supplies to Uber is experienced below:
- Oil and gas suppliers is another major provider. The oil price has been plunged since 2015, and the lowest level has reached less than $30 in the year 2017. Highly fluctuation of the price of such an essential component to company’s transportation industry brings a high risk to the market because of the level of uncertainty and non-predictability of oil to powers vehicles. Suppliers of these components thereby have a high bargaining power in the operations of Uber.
4. Threat of buyers: High- Buyer Bargaining Power
The strength of customers can affect the performance of a firm by lowering the prices placed on the products and services.
- Uber’s clienteles are sensitive to price variations due to the existence of alternatives and rivals. As the market grows bigger, the number of opponents bringing customers more choice also becomes larger thus makes the switching cost for customers comparatively low. This is because Uber application software is not only free but just requires a client’ registration. Customers can therefore freely choose between Uber, Curb, Lyft, or other emerging ride-sharing entities at no cost.
- The number ownership of private cars has experiences a huge rise during the past few years, and though the parking problems have been more severe than ever before, this has not stopped individuals from desiring the status attached to one owning a car. This as an alternative means that the demand for Uber services is low.
In light of these factors, the buyers’ bargaining power has limited the amount of income for the firm, hence solidifying it as an active force.
5. The degree of rivalry:
This is the strength of competition in the industry. The trend of concentration of the industry appears to be higher than previous years, and the existing companies in the market compete with both suppliers (car drivers) and customers.
Though there are some competitors such as Curb and Didi Chuxing, Lyft is considered the principal competitor of Uber. Lyft has an almost indistinguishable business ideas and procedures to that of Uber. Not only are the two firms contending for market share but also the suppliers. A modern business setting demands organizations target a customer base within a given geographical locations to cut on the operation cost. This is the incident for Lyft and Uber. Uber has a deep-rooted business system and massive capital investment. In essence, it is a market trail-blazer, but small variation strategies limit the firm’s potential. Competition is a weakening force given Uber’s supremacy. Uber is indeed a dominant force in the ride-sharing industry. However, there is a need for improvement of its innovative strategies to gain a competitive edge. The transport sector especially the US has many alternates and competing entities. To survive, it is vital for Uber to lower the cost of operation to avoid raising customer charges.
It is not identified what Uber’s future is. Google Cars are a serious threat to its success. Uber should address the flaws found in the SWOT and turn weaknesses into strength. The team must work and exploit the opportunities and avoid the shortcomings.
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