PESTEL Analysis
An incumbent can be defined as a firm in position with a larger market share; hence dominates the market. A challenger on the other hand is another firm that tries to compete with the incumbent. The taxi industry has dominated many markets for a long time thus acting as a monopoly in the transport sector. However, uber being the challenger has emerged, and tends to throw stiff competition to the taxi business. It seems like this competition may lead to a collapse of the incumbent if action is not taken. Uber is a service of ride-sharing whose operations are similar to the taxi business, although key differences exist that makes one preferable over the other. This paper seeks to analyze the current conditions of the PESTEL, SWOT, Porters five forces among others while providing a solution to the same.
It is important to analyze the broad macro environment of the industry in order to gain an overview of the Taxi industry. Studying the macro environment takes into account the external and often dominant and uncontrollable factors that influence an organization (Aguilar, 1967). PESTEL analysis studies the influence of political, economic, social, technological, ecological and legal factors on an industry. Political factor establishes the role of the state and political forces such as government policies, labor laws, tax policies among others. These laws impact how organizations operate in the sense that organizations must adjust to both current and future legislations. Taxi legislation becomes necessity for all taxis putting an imperative role of the state on the business.
Economic factors such as growth of the economy, exchange rates and business cycles play an important role in the growth of businesses. Changes in fuel prices, falling turnover rates in the market and slowdowns in businesses are some major forces that affect the taxi industry. For example, an economic crisis can lead to constraints in consumer traffic, market spending and cash flow problems (Barney, 1991). Social factors refer to changes in demographics and cultures with some factors creating both opportunities and threats. Concepts such as an aging population has gained attention over the years due to its influence on the businesses. Additionally, companies are required to engage in corporate social responsibility, which is key in building an understanding between customers and marketers (Tenant, 2015)
Technology advancement opens opportunities for businesses, but in some instances, it can be challenging to others. Those companies that greatly benefit from technological advancement are those that become the frontrunners and adapt to such changes. This is because technology keeps changing and making influence the production and consumption processes, as well as, marketing efforts. Comparing Uber and Taxi companies shows that Uber remains at the forefront in terms of technology giving it an added advantage in the transportation industry. The world’s climate keeps changing and more climatic disasters are expected to happen in the future leading to environmental consciousness for companies. Such disasters result from issues such as pollution, waste and climatic changes. It is therefore key to consider such issues of ecological nature in the analysis of the external environment. Lastly is the legal environment, which lays out the legislative and regulatory constraints. Such laws include consumer rights, service and product safety and laws governing employment. The current situation for businesses in the transportation sector calls for new legislation hence affects those in the industry.
Porter’s Five Forces
According to Michael Porter, an industry is influenced by five competitive forces (Porter, 2008). This framework is useful for companies seeking to gain a competitive edge over challengers in an effort to better understand the industrial context. Three of the five forces emanate from external forces while two are internal. The three forces include the threat of new entrants, threat of substitutes and the degree of rivalry between companies (Porter, 2008). The other two forces are internal such that companies in a similar industry face and include the bargaining power of buyers and bargaining power of suppliers. An understanding of these forces enables a company to get an insight of formulation of the appropriate strategies for market success. Companies face a competitive threat of not only those companies that are well positioned in the market, but also the possibility that new companies may be allowed to enter the market. Theoretically, any company should be allowed a free entry and exit from an industry. However, most industries possess some characteristics known as barriers that protect the high profit makers from additional rivals. Introduction of barriers in an industry reduces the rate of entry into the market by new firms maintaining the profits levels of the industries that are already in the market (Business Dictionary, n.d.). In this case, therefore, entry barriers may be exploited or created to give a company an advantage over the others. The entry of Uber is an exploitation of barriers that has resulted into a major rival for the taxi industry.
Threat of substitute is mainly created when the demand for a product or service is affected by price changes of a substitute service or product. Existence of substitute products/services provides customers with more alternatives; thus, affecting demand. The demand for Taxis has dropped drastically since the entry of Uber (a close substitute service provider) in the market (Shepherd, n.d.).
The level of rivalry intensity varies across industries and is mostly used for the purposes of entry. Traditionally, industries were characterized with perfect competition where it was easy to enter into an industry and remain profit making (Porter, 1979). In the modern society, competition is not perfect and every company seek to gain an edge over the other eliminating the concept of passive companies. The taxi company was near monopolistic for many years until the emergence of Uber that has managed to scoop a large market share within a short period. The Taxi company no longer enjoys the low concentration of rivalry companies, but is striving to survive within the industry.
The bargaining power of buyers is characterized by the size and customer concentration in a market. How well informed the buyers are is also key in determination of buyer power. Schreuder (2013) emphasizes on distinguishing between buyer power and the willingness to use that power or the ability to use that power (Douma & Schreuder, 2013). Suppliers bargaining power, on the other hand, analyzes the size and concentration of suppliers in relation to industry participants. It also focuses on the degree of supplier differentiation. High bargaining power of suppliers allows suppliers to charge different prices to customers. In this case the buyer power is low in the market.
SWOT Analysis
SWOT analysis is an analysis tool that is used to analyze the capability of the firm based the current resources available for use. It is an important tool for generating options and providing future solutions based on the outcome of the analysis. The analysis generates a list of strengths, weaknesses, threats and opportunities of a company. Using this analysis tool, a company can spot a problem area, learn more about the current situation of the company and make reflection on how to improve the situation as it is currently. Strengths and weaknesses can be addressed by a firm internally as they deal with the internal areas in a company. On the other hand, opportunities and threats are external forces that can only be reacted upon.
The strength of Taxi companies is the fact that they have been in existence for a long time; hence, they have an already established market. Though some customers may or have left after an alternative came along, loyal customers remain. The fact that the apps used by the Taxis are sub-par as compared to those of Uber makes it a general weakness for them. Political and legislative regulations restrict the company from technological innovations. Technological advancements present both companies with the opportunities to capitalize on the generational needs of the modern society (Business Dictionary, n.d.). Both companies faces a threat should the legislation change, and may be forced to change their business model, which may challenge some of the advantages that they enjoy.
James Utterback came up with three phases of innovation namely the Fluid, Transitional and Specific phases (Kairosmanagement, 2013). The Fluid phase represents radical innovation at the time of introduction of a new service in the market. At this phase, there is consolidation of designs coming from different competitors with a dominant one being adopted by most of the market players. The second phase is the transitional phase that involves process innovation where every market player tries to come up with the best quality while reducing the cost of the service. The last phase is the specific phase that is concerned with elimination of those players that do not seem to compete well in the industry forcing them to move to other products. Incremental changes are made to the service to ensure that it fetches the most out of the available market.
Our incumbent, the taxi company, has gone through all the phases of product innovation but its growth is limited by the regulations and legislations in its operations. Uber is not governed by the government; hence is free to make innovations using the available technology without much supervisions and restrictions. This is the reason why Uber competes better than Taxi and has managed to get a good market share within a short time. Variety of quality services offered to customers by Uber emanate from utilization of advanced technology.
Technology passes through four stages in its life cycle namely the intro stage, growth stage, maturity and its decline stage. The intro stage represents the stage at which it is being adopted when the revenue is very low and more money is poured towards its development. At this stage, much feedback is needed with the early adopters on board. The growth stage is when the product or service is launched and the initial capital is recovered. At this point, the business will take advantage of all available platforms to make the newness of the technology known to many people (Bock, 2013).
Proposed Solution
Maturity stage is characterized with public awareness and acceptance of the product. However, saturation point is reached and competitors are on their toes leading to lower revenues. At this stage, incremental improvements such as redesigning, software update to mention a few; need to be made in order to remain relevant in the market (McAfee & Brynjolfsson, 2008). The decline/death stage is reflected by a decline in sales or a new replacement technology emerging in the market. This is a point of no return that most businesses dreads to reach. The only available option here is to move resources towards development of a new project that can fetch more profits (Kostas, 2013).
The Taxi Company is feared to get into the death stage due to the stiff competition lying in the market. The company is in the maturity stage where Uber, its major competitor, has risen. The company may thrive if incremental changes are made in its apps so as to remain competitive in the modern market. If no improvements are made technology wise, then it may get to the decline stage leaving Uber with the largest share of the market.
In our discussion, it is evident the incumbent company faces both external and internal forces that greatly affects its operations. The internal forces can be worked on and a solution obtained to make a throw back into the market. Technology is a key determinant of whether the taxi business will thrive again or enter the decline stage. Although legislative and political factors are seen to hamper the growth of taxi business, several redesigning and improvements can be made to improve the industry’s operations. The major development needed is creation of up-to-date apps that meet the needs of generation Y (Nelson & Metaxatos, 2016).
It is evident that many buyers do not have the willingness to pay high prices; hence; Taxi industry must offer affordable prices for their services while maintaining quality. Customers want to pay less for better services. The political legislation governing the operations of the Taxi companies need to add more resources into development of new technologies and latest service designs to attract more customers while engaging even the low income earners in their services. Competitors also ought to be restricted through introduction of new laws governing those in that sector such that none remains less privileged.
References:
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