Uber: an unprofitable company worth billions. But those who look only to the past or present are certain to miss the future ©.
Prof. Ricardo Britto
Doctor in Business Administration at USP
Dean of IBS Americas
According to the latest news, Uber had over $1b in net losses in the Q3 of 2019 (Feiner, 2019). The second quarter was even worse for the company: it lost $5b and had a record low revenue growth rate. Apart from this, Uber was refused to maintain the presence in its biggest market in Europe as the company lost the license to operate in London. Yet, after a slight decline, Uber’s shares gained ground again, and investors are bullish about next year’s business prospects.
Generally, large-cap companies that are losing money today are being punished by the market. But Uber has a very different story to tell: it is pioneering a new industry and working towards future goals, which sets the foundation for attractive long-term margins. Indeed, traditional companies, like Walmart, seem more attractive with their better-then-expected results in net profit, revenue and return on invested capital. But old valuation metrics aren’t always applicable anymore as today’s public market investing landscape has changed and investors are now in favor of risk takers and cash-burners (Baskin, 2014).
In the digital era companies can no longer be competitive by just managing financial assets and liabilities well. Nowadays, firms have to mobilize and exploit their intangible assets to stay competitive and provide innovative products and services customized to specific market segments. Usually, in order to run business, companies adopt strategies around customer relationships, core competences and organizational capabilities, but they tend to use only financial measurements in order to motivate and evaluate performance. In 1992, Drs. Robert S. Kaplan and David P. Norton offered a more comprehensive management framework – the Balanced Scorecard (BSC) which adds indicators that connect long-term financial success to customer and financial objectives, internal processes as well as employee and system performance. The framework is based on four main areas:
- Financial perspective: measurements that indicate if the organization’s strategy, implementation, and execution are improving the bottom line. The data can include financial ratios, budget variances, income targets, etc.;
- Customer and stakeholder perspective: measurements that track competitive and strategic efforts in the business’s customer and market segments. The information is collected to gauge customer satisfaction with the quality, price, availability of products or services;
- Internal process: measurements that focus on existing and new internal processes to ensure the company’s current and future success. Operational management is analyzed to track any gaps, delays, bottlenecks, shortages or waste;
- Learning and growth perspective: measurements that track how the firm is improving employee skills, IT systems and specific organizational procedures.
The objective of BSC is to provide an alternative management approach that helps companies achieve long-term investment, instead of pursuing only short-term financial goals. Each of the components of the framework should be clearly specified and communicated using a corporate-level BSC, which is to be linked to the BSCs of each business unit. To get everyone to contribute to the implementation of strategy, companies must share their long-term visions and strategies with all their employees. Thus, BSC fosters a shared understanding of an organization’s vision of the future by aligning the day-to-day working process that employees are going to follow (Tarver, 2020). In other words, it gives organizations a way to “connect the dots” between the various components of strategic planning and management, meaning that there will be a visible connection between the projects and programs that people are working on, the measurements being used to track success (KPIs), the strategic objectives the organization is trying to accomplish, and the mission, vision, and strategy of the organization.
Other elements present in the BSC framework are:
- Strategy Mapping is used to visualize and communicate how value is created by the organization. A strategy map is a simple graph that shows a logical, cause-and-effect connection between strategic objectives;
- KPIs monitor the implementation and effectiveness of an organization’s strategies, determine the gap between actual and targeted performance and determine organization effectiveness and operational efficiency;
- Strategic Initiatives are projects that are designed to help the organization achieve strategic objectives and have significant organization-wide impact;
- Cascading is a BSC means to translate the corporate-wide scorecard (referred to as Tier 1) down to first business units, support units or departments (Tier 2) and then teams or individuals (Tier 3).
Due to the increasing complexity of organization, the Balanced Scorecard approach, when implemented correctly, can provide decision makers with the guidance needed to direct the company towards the achievement of its strategic goals. Nevertheless, the concept has some limits and has been criticized by some scholars. One of the drawbacks is related to the idea that it is just a list of metrics which does not offer a unified view or clear recommendations. The main problem is that it does not provide any practical steps for deployment and some executives might see it as a “quick fix” that can be easily installed in their firms. Moreover, while BSC tends to improve performance, it excludes external environment factors and focuses more on internal aspects. According to the Bain & Company’s Management Tools & Trends survey (2017) 29% of 1,268 managers mentioned the use of BSC with relatively low satisfaction rates (3.93 out of 5), which indicates that the framework might be outdated.
Despite being criticized, BSC framework’s main strength is that it can be applied in multiple industries and companies’ types and sizes. Consider Uber as an example, a company that went from the most feared startup in the world to its massive IPO in 2019. Currently, the company has a market cap standing at $50.279b, its price-to-sales ratio is 3.39, it pays no dividend and it is unprofitable (Yahoo, 2019). It has a long-term $5.7b debt that will need to pay at some point. But many investors still believe its shares are worth buying for a simple reason: Uber’s success story attributes to going beyond traditional financial KPIs requirements and expectations of business performance (Kilgore, 2019).
Customer and stakeholder perspective: From the very inception Uber took a strong position regarding its seamless customer experience which actually minimizes clients-driver interaction time. The firm’s customer experience KPIs include clients’ satisfaction ranking, overall rating, surge and non-surge rating, acceptance and cancellation rates, fare reviews per trip, total 1-star and 5-star ratings; revenue and profitability from different customer tiers such as UberX, Uber Comfort, VIP, Uber Black and Uber Pool users, customer acquisition and retention measurements, etc. A customer-centric model simply makes clients fall in love with the company from the first ride (Stankiewicz, 2019).
Internal process: Apart from focusing on conventional performance metrics, such as improvements in costs, quality and schedules, Uber tends to derive internal processes from the demands and expectations of external stakeholders. The company integrated innovation and diversification as critical components in this perspective: it has extended its services to food delivery and micro-mobility system with electric bikes and scooters and introduced Uber ATG (Advanced Technologies Group) that is developing self-driving cars.
Learning and growth perspective: A central group of drivers-based measures is used by Uber in order to track their performance. For example, a driver would be deactivated if his or her performance based on overall customers’ evaluation is lower that a certain minimum level established by Uber. What is also important is that Uber introduced the VIP status drivers receive when they sustain excellent rating over a period of time.
All these measurement systems applied by Uber are linked to the company’s general strategic objective: making transportation fast, reliable and affordable for everyone and being the number one preferred service. In fact, the company is already estimated to have 100 million users worldwide with a 69% market share in the United States for ridesharing and a 25% market share for food delivery (Levy, 2019). Market share of the leading ride-hailing companies in the United States from September 2017 to August 2019 Profit (Source: Statista, 2019)
Implementing BSC measures helps the firm define and refine vision, strategy and objectives. But when it comes down to aligning strategic objectives from top to bottom, it is not easy for some companies to ensure that all workers contribute to the established goals and values. Uber, for example, has a sordid history around sexual harassment issues with both corporate employees and its drivers (O’Brien, 2019). While it successfully resolved the issue with the office stuff, the company can do little with its drivers who are not employees and are classified as independent workers. Uber’s business model is generally being criticized worldwide for undermining working conditions, clogging up city streets, destroying the traditional taxi industry, minimizing the tax it pays, side-stepping national regulations and fostering a culture of toxic masculinity. Consequently, Uber has been banned in cities including London, Frankfurt, Barcelona and Budapest. After losing its London operating license, Uber’s stock tanked 6% (Khan, 2019). As a possible solution, Uber might try to tighten up its driver registration procedures and track them more closely.
Undoubtedly, ridesharing and the online food delivery industries have robust growth opportunities. With its plummeting revenue, safety issues and bold initiatives, Uber has a distinct profile of company suitable for risk-seeking investors. For those who are dissatisfied with the amount of money Uber is losing, there are other growth stocks to consider, such as Home Depot, Colgate, Costco, BestBuy or Walmart with historical EBITDA growth stability and increasing sales (Kolakowski, M.). But keep in mind that financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success. These financial measures might be inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.
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