Uber Technologies International Business Strategy Questions Analysis The question “Lyft, Inc. is an American ridesharing platform that is a direct competi
Uber Technologies International Business Strategy Questions Analysis The question
“Lyft, Inc. is an American ridesharing platform that is a direct competitor of Uber Technologies, Inc. in the US market. Using Lyft as an example, explain the importance of network effects for business success in the presence of a competitor. Why did Lyft manage to successfully enter the US market for ridesharing and compete with Uber, i.e., why is ridesharing not a dominant firm industry? Explain by referring to concepts such as multi-homing costs, network effects and product differentiation. ”
word limits 300 words
I’ll attach notes, slides, as well as Q&A clarification Explain why network is important in a competitive industry
why is ridesharing not a dominant firm industry? Barriers of entry are low
multi-homing costs, drivers low, and employees low
network effect, the more the users= the greater the value. How did this work for Lyft? Bc
its already famous now. First of all lyft increased the number of their rides which
increased their drivers, which increased the number of their passangers so their value got
higher and network effect was positive
differentiation; so now we can have to prove that lyft is better than Uber; lyft has cheaper
prices as well as lyft has a more focused target group with US and Canada while Uber is
more internationally. So quality of Lyft is better than Uber according to customers
reviews.
Answer in max. 300 words
International Business Strategy
Part II
Strategy for the Information Economy
Prof. Dr. Thomas Kittsteiner
GUtech, March 2020
CHAIR IN MICROECONOMICS
Prof. Dr. Thomas Kittsteiner
mikrooekonomie.rwth-aachen.de
Ø Brief CV:
Diploma in Mathematics (University of Hamburg)
Doctoral degree in Economics (University of Mannheim)
Postdoc in Economics (University of Oxford, UK)
Senior Lecturer at Department of Management (London School of Economics, UK)
Professor in Microeconomics (RWTH Aachen)
Ø Teaching:
Strategy for the Information Economy (LSE, RWTH), Managerial Economics (LSE,
RWTH), Competitive Strategy (LSE, RWTH)
Ø Consulting:
Auction and Market Design (eBay Germany, DaimlerChrysler, DAX 30 Company),
Market Analysis (major UK auditing firm)
Ø Research:
Industrial Economics, Strategic Management, Auction and Market Design,
Organisational Economics, Experimental Economics
3
Timeline IBS Part II (01/03/20 05/03/20)
——————– Preliminary ——————–Sunday
Lecture: Introduction, Chapter 1, Chapter 2
Monday
Lecture: Chapter 2,
Information concerning part II of exam,
Introduction to group work/ team case presentations,
Assignment of group work, Group-work
Tuesday
Group-work (including mandatory status report),
Online-submission of team case presentations (Powerpoint)
Wednesday
Team Case Presentations
Thursday
Feedback, Case Discussion, Wrap-up, Q&A
Strategy for the Information Economy
Introduction
5
What is the aim of the course?
What I want to do
Analyse and develop strategies for the information economy based on
economic principles (and models)
Concentrate on those economic insights that are particularly relevant for
companies in the Internet Economy
Approach: derive strategies and conditions under which they are successful
based on general principles
Show how such strategies work in practice by looking at some specific case
studies
What I do not want to do
Speculate about the future/ tell you what the latest trend is or what the latest
technology can offer in terms of opportunities
Concentrate on particular trends (but instead on durable insights)
Give universal solutions/ strategies (as they do not exist)
Discuss product specific trends, markets, etc.
Strategy for the Information Economy
6
What kind of companies are we looking at?
We will mainly look at
Companies that offer content (information/ information goods):
e.g. search results, news, price comparisons, general knowledge,
music, video games etc
Companies that offer infrastructure (platforms): e.g. operating
systems, movie players, video game consoles, online auctions,
online communities, music compression etc
Often companies offer both! (Google, Sony,
)
Strategy for the Information Economy
7
What specific topics are we looking at?
Information
goods
platforms
properties
properties
High fixed costs
Low marginal costs
Exhibit network
effects
issues
issues
Strategies for
Pricing
Differentiation
Versioning
Strategies for
Lock-ins
Network competition
Envelopment
Openness vs Control
Evolution vs Revolution
Strategy for the Information Economy
8
When an industry with a reputation for
difficult economics meets a manager with a
reputation for excellence, it is usually the
industry that keeps its reputation intact.
Warren Buffet
Strategy for the Information Economy
Differences in Profitability Across Industries
Security Brokers and Dealers
Soft Drinks
Prepackaged Software
Pharmaceuticals
Perfume, Cosmetics
Advertising Agencies
Profitability of Selected
U.S. Industries:
Average ROIC 1992-2006
Distilled Spirits
Semiconductors
Medical Instruments
Men´s and Boy´s Clothing
Tires
Household Aplliances
Malt Beverages
Child Day Care Services
Household Furniture
Drug Stores
Grocery Stores
Iron and Steel Foundries
Cookies and Craekers
Mobile Homes
Wine and Brandy
Bakery Products
Engines and Turbines
Book Publishing
Labortory Equipment
Oil and Gas Machinery
Soft Drink Bottling
Knitting Mills
Hotels
Catalog Mail-Order Houses
Airlines
Source: M. Porter, On Competition
Strategy for the Information Economy
9
10
Porter’s (1980) Five Forces Model
THREAT OF
NEW ENTRANTS
BARGAINING
POWER OF
SUPPLIERS
RIVALRY AMONG
EXISTING
COMPETITORS
THREAT OF
SUBSTITUTES
BARGAINING
POWER OF
CUSTOMERS
Model developed to assess
industry attractiveness -> is it a
desirable industry in which to
compete?
Today used to analyze firm’s
external environment -> what
factors in the firm’s external
environment create threats and
opportunities for the firm?
Strategy for the Information Economy
11
Structural attractiveness of an industry
Structural attractiveness determined by five forces of competition:
1.
2.
3.
4.
5.
Intensity of rivalry among existing competitors
Barriers of entry for new competitors
Threat of substitute products or services
Bargaining power of suppliers
Bargaining power of buyers
Porter: The internet has not changed the relevance of these forces and
to understand impact of internet on possibilities for value creation
we need to understand how internet impacts on the five forces
As strength of forces varied from industry to industry general
conclusions about impact of internet difficult.
Strategy for the Information Economy
12
Creating and sustaining competitive advantage
Competitive advantages result from sustainably doing things better than
competitors and offering superior value to customers in areas
customers recognize and deem as important to them.
Company
Competitive
advantage
Value offered
to customers
Customers
Competitors
Value offered
to customers
Strategy for the Information Economy
Competitive Advantage: Wedge Between Costs
and WTP
Competitive advantage
a wider wedge than competitors between the willingness to pay
(WTP) it generates (the value it adds for customers) and the costs it
incurs (its operational effectiveness)
for a meaningful set of customers and products
enables firm to entice customers away (i.e., offer them a larger
difference between WTP and price) and make money (i.e., a
spread between price and cost) even if a competitor sets its price at
its costs
Strategy for the Information Economy
13
14
Sustainable Competitive Advantage
An important lesson in strategy:
A sustainable competitive advantage must be
based on something unique.
A unique capability or market position is
necessary for a sustainable competitive
advantage but not sufficient:
A sustainable competitive advantage must
enable the firm to add and capture value
in the long run.
Strategy for the Information Economy
15
Obtaining a sustainable advantage
Two ways to obtain a sustainable advantage:
1. Achieve cost advantage through operational effectiveness: do
things better than your competitors (should be based on unique
resources/ capabilities)
2. Be able to charge a higher price through strategic positioning:
do things differently from competitors
(in a way that delivers a unique type of value to customers, should
also based on unique resources/ capabilities)
Because competitors can easily copy your firms advances with respect
to improving your advances in operational effectiveness (in combination
with using the internet) you should focus on strategic positioning.
Strategy for the Information Economy
16
Unique resources and capabilities
Resources/ capabilities with four properties are relevant:
1. Valuable: can be used to reduce WTP-cost gap
2. Rare: hard for competitors to obtain
3. Non-substitutable: cannot be replaced by other resources/
capabilities
4. Imperfectly imitable: hard to imitate
Strategy for the Information Economy
17
Chapter 1
Strategies for information goods
18
Information goods
Information goods: Anything that can be digitised!
Cost structure of information goods:
First copy costs: High fixed costs (costs of first copy)
Fixed costs mainly sunk costs
Low variable per unit costs: if information delivered over internet
these are almost zero
No capacity constraints: variable unit costs constant,
large scale of operation
substantial economies of scale!!!
Other properties:
Experience goods
Easy to copy illegally
Important to attract consumer attention (danger of information overload)
Strategy for the Information Economy
19
Market structures for information goods
Large firms have cost advantage:
assume fixed costs ?? and marginal (or unit) costs ??
? long-run average costs ??/?? + ?? are decreasing in output ??
Market cannot support many firms that offer same good:
competition drives prices close to marginal costs ?? and firms might
not be able to recoup ??
Two sustainable market structures:
Dominant firm industry: One large firm has big cost advantage
over small rivals (if there are any)
Differentiated product market: Several firms producing the same
kind of information but in different varieties
Strategy for the Information Economy
20
Determinants of market structure (homogeneous good)
Minimal efficient scale (MES) is minimum size for a firm to be
competitive:
– output level for which long run average cost (LRAC) is
minimised
– or for which LRAC cannot be reduced by more than 10%
The larger MES is relative to the size of a market, the more likely the
market is to be concentrated
For example, if MES is 10% of the market, there is room for about
10 firms in the market
Strategy for the Information Economy
21
Minimum efficient scale
Industry with capacity constraints/ Industry with constant marginal costs
increasing marginal costs
??(??) = ?? + ????:
??(??)/??
??/?? + ??
??
??
??????
Increasing returns to scale
??
?? close to the minimum
(e.g. within 10% of it)
?????? = ??/(?? ? ??)
Strategy for the Information Economy
??
22
Basic strategies
Dominant firm industry:
Achieve cost leadership through economies of scale and scope
reduce average cost by increasing volume (standard strategies of reducing
unit costs of production usually do not work, as they are small anyway!)
price competition is fierce (if there is any) as products are not differentiated
and firms try to increase output
even without competition, pricing is important to maximise value of product
Differentiated product market:
Add value to information to distinguish yourself from competition
Try to make sure there are no close competitors by differentiating your
product
Try to protect your information commodities by intellectual property rights
Strategy for the Information Economy
23
First-mover advantages
Due to strong economies of scale market leaders often are also cost
leaders
a first-mover should be able to keep its dominant position if
it has same (similar) technology and financing possibilities as a
newcomer
It has a good pricing strategy
General pricing strategies for leader (who cannot prevent copying
of its information):
Drop prices in time to discourage entry (limit pricing): Signal willingness
to fight, sales today may reduce demand tomorrow (durable goods),
lock-ins
Play tough to establish reputation that entry will be met with aggressive
pricing: Price setting not only drives out current competition but also
prevents future competition (consider this when evaluating price wars),
make sure you can win price war (and that others believe that as well)
Strategy for the Information Economy
24
If you have price setting power
Costumers demand given by demand function:
Some customers are willing to pay more than others
How to set price if you can only set one price for all customers?
price
Profit (without fixed costs)
??
??
number of items sold
Strategy for the Information Economy
25
Personalising
If you have possibilities to set prices and/or product design you should:
Maximise the value of the product for individual customer
Price in order to capture as much of this created value as possible
How to do it:
1. Know your customer
2. Personalise your product
3. Price your product taking into account what you know about a
customer and what you sell to her/him
Personalised pricing (first degree price discrimination):
Sell to each customer at a different price
Versioning (second degree price discrimination):
Offer a product line and let customers choose which version to buy
Group pricing (third degree price discrimination):
Set different prices for different groups of customers
Strategy for the Information Economy
26
How to get information about customer
Registration and billing
If you can make users to register, you can ask for information like
postcode etc.
bribe users to fill out questionaire by offering valuable service in
exchange
Buy information from those who have it (e.g. ISPs)
Observation
Analyse customers clicks (and store them, e.g. in cookies or on
own server)
Write own user platforms that collects and analyzes additional
information (e.g. how long a customer views a particular page)
Strategy for the Information Economy
27
Pricing: some general remarks
The more your good is tailored to the individual customers need, the
more price setting power you have (due to less competition) and the
more you can charge (due to higher created value)
If you can only set one price and customers differ in their willingness
to pay the optimal price trades-off per unit profit and total units sold
If you can set different prices to different customers you will be
better off (optimally you would ask customer to pay her/his
willingness to pay)
Information is key for this kind of price discrimination
Strategy for the Information Economy
28
Graphical representation of idea
price
Optimal Price is 7!
Profit
demand
Profit
Customer #
value
1
10
2
8
3
7
4
4
5
3
Strategy for the Information Economy
29
Personalised pricing on the internet
Due to one-to-one communication and cheap and individualised data
collection you can easily:
offer different customers different products (versions of the product)
offer each customer a different price
Be aware of shill accounts, strategic provision of information, consumer
outrage, legal obstacles
Collect and analyze individual consumer behavior
you can use promotions to measure demand
What if you are not allowed/ it is not accepted to set individual
prices?
Strategy for the Information Economy
30
Group Pricing
Group pricing (as opposed to personalising product and price) can be
beneficial if
group members have similar price sensitivity which differs from
those of customers belonging to other groups
This assumes that a group member cannot pretend to be from a
different group and/or trade with members of other groups
there are network effects: value to customer depends on total
number of customers of product
you want a certain group of customers to get locked-in
Strategy for the Information Economy
31
Versioning: general principles
Two principles of versioning to maximize and extract value:
1. Offer versions tailored to the needs of different customers to
maximise total value of product you are providing
2. Design these versions to accentuate the needs of different groups
of customers. Emphasizing the differences of the versions (and
charging different prices!) allows you to maximize gains as each
customer selects the version that fits her/him best.
Additionally, you can get information about individual customers
preferences, as they self-select and buy the version most attractive to
them (at the demanded prices).
This might later help to change pricing to personalised pricing!
Strategy for the Information Economy
32
Versioning: Example
Two types of customers for a virus scanner (in equal proportions)
Type 1 mainly requires standard functionality and is willing to pay $100
and only an additional $50 for extended functionality
Type 2 requires extended functionality and is willing to pay $300 for
extended functionality and only $100 for standard functionality
No per-unit costs of production, fixed costs sunk
If type of individual customer unknown, personalised pricing not
possible
Profit is maximised if standard version is sold for $100 and extended
version for $300, as type 2 would buy extended version and pay
$300 at these prices
Strategy for the Information Economy
33
Product dimensions and customer types
Dimension
Customer types
Time (delay)
Patient/ impatient
User interface/ flexibility of use
Casual/ experienced
Location
local/ distant
Image resolution/ sound quality
Speed
Non-professional/professional
Capability/ features/
comprehensiveness
General/specific or
occasional/frequent
annoyance
High-time-value/ low-time-value
support
Casual/ intensive
Strategy for the Information Economy
34
Adjusting price and dimension
What are the optimal prices for different versions:
If premium price version attracts low-end customers:
no problem as they pay more ?make high-end version
as attractive as possible
If low price version attracts high-end customers: costly
cannibalisation
Discount high-end version: but make sure to check whether
high-end version is already good enough and whether reducing
price increase sales enough to make up for lower price
Reduce quality of the low-price version: As you usually produce
high-price version first this can be done at little costs
Strategy for the Information Economy
35
Bundling
Advantages of bundling:
Way to offer customer to buy another product at lower incremental
price than stand-alone price (if goods are partially substitutes)
When integrated design is possible: economies of scope in
production and quality improvements (simplification of interfaces)
Consumer might buy bundle even if she does not need all
components (because of the option value). If she later needs that
component she will use the one she already has (lock-in)
Bundling may allow monopolist to extend market power to markets
of complementary products (by foreclosing access to its customers)
Way to reduce dispersion in customers willingness to pay
(if personal pricing not possible)
Strategy for the Information Economy
36
Bundling: example
Situation:
100 customers
two products (A and B), produced at no costs
50% of customers willing to pay $5 for A, rest willing to pay $10 for A
50% of customers willing to pay $5 for B, rest willing to pay $10 for B
Component pricing:
Optimal to set price of $5 for A and also for B: every customer
purchases A and B and pays $10 ?Profit is $1,000
Strategy for the Information Economy
37
Bundling: example
Bundling:
Scenario 1
50 customers willing to pay $5 for A and $10 for B
50 customers willing to pay $5 for B and $10 for A
Optimal to set price of $15 for bundle: every customer will purchase
bundle ?Profit is $1,500
Scenario 2
25 cust…
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