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Is your organization ready for Digital Leadership?

Amit Dugh & Ravi Dugh, May 29, 2020

Digital Transformation is not just another buzzword anymore.  This process requires an organization to have data digitized. Therefore, the digital transformation of an organization is a necessary condition for being a digital leader. As data become the new currency in the information age, algorithms become the core of business excellence. Successful businesses are those that are capable of redesigning their businesses for the new digital age. I say the new digital age because we are using data to make better decisions, and with this computing power, we are shaping the competitive landscape using data.

Further, it is not only the use of data alone but also algorithms coupled with human decision-making that will determine your success or failure in the new digital age.  At the heart of algorithms is data. All organizations have all sorts of data generated at various points in the value chain.

So, is your organization ready for digital leadership? The maturity of your organization depends on how it manages its data. Roughly, digital transformation maturity can be divided into four levels.

Let’s start by thinking about how your organization currently manages and uses data.  The answer to these four questions below will determine your AI readiness and digital maturity:

  • Do you have data in silos? You perform a fundamental analysis of your data with KPIs. Data analysts distributed across the organization but only serve specific department functions.
  • Do you integrate data across the value chain to make sense of what happened? You have the diagnostic ability to perform advanced analysis, including historical trends and KPIs across the value chain. Typically, this is a business intelligence function in an organization.
  • Do you have the ability to predict using the data? You can predict what will happen and have forward-looking indicators. You have a data science team that generates insights to drive business decisions.
  • Do you ability to make something happen? You can utilize algorithms to optimize business in real-time to drive decisions and improve KPIs.  You have an established data science team across the organization with business managers who are taking strategic decisions to stay ahead of the competition.

Most organizations will fall across various maturity levels depending on how they use data across their value-generating functions. To assess an organization’s data maturity, you have to look at the core functions, e.g., production, supply chain, marketing, sales, customer service, etc. that generate the most value for the organization and evaluate its digital readiness.  Also, not all functions in the organizations can lead to a big difference in its digital competitiveness.

Data-driven companies dominate the markets as you can see, the market capitalization of data-driven companies has been higher than they have ever been in the past.

Data-Driven Transformation_ex01_tcm-156855.jpg
Source: BCG

According to a survey by Deloitte, digital maturity translates to better financial performance.

Source: Deloitte

Innovation is at the forefront of the digital economy, and many countries compete for the digital leadership position. See below chart depicting the data maturity of companies for the top 8 countries.

Data-Maturity by Country.png
Source: BCG

Data is an essential input in this information age, and data with human interaction (decision making) is going to be the new profitability lever for the new digital age. A massive digital transformation happening in almost every industry and digital maturity will separate winners from losers.

References

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Uber is relying on network liquidity to turn to profit

Improving margins for Uber is dependent on the network effects of liquidity provided by drivers and riders. For the quarter ending December 31, 2018, Uber had 91 million and 3.9 million, MAPCs (Monthly Active Platform Consumers) and drivers, respectively.

Ravi Dugh, May 4, 2019

Uber is the world’s largest ridesharing platform. In 2018, The company had Gross Bookings of $49.8B, revenues of $11.3B, and Gross Platform Adjusted Contribution Margin of 9%.  Uber is not profitable and had a net loss of about $4B in 2017 and $1B in 2018.

How does Uber plan to improve margins and grow profitably?

Uber aspires to have the largest network in each market to improve margins by creating a network liquidity effect (Figure 1).

Figure 1[1]

The company uses promotions and incentives to attract both drivers and customers to increase liquidity in the network. This practice results in negative margin until the company achieves a network size. Once the company reaches an operating level then, it slowly plans to take the incentives away. Uber goes on to state that its margin advantage depends on alternatives such as the cost of personal vehicle ownership. Specifically, as per S-1 filing, Uber says,

“In addition to competing against ridesharing category participants, we also expect to continue to use Driver incentives and consumer discounts and promotions to grow our business relative to lower-priced alternatives, such as personal vehicle ownership, and to maintain balance between Driver supply and consumer demand.”Uber S-1 Filing

Above information yields two conclusions:

•    As competition in ridesharing services increases, margins will come under pressure. Also, hailing taxis may be cost-effective in many cases as Uber charges surge based pricing.

•    Uber’s return to profitability is linked affordability to own a personal vehicle.

How do alternatives to Uber determine liquidity in its network? Uber did about 26 Billion miles in 2018 with Gross Bookings of $49.8B. So, the average of Gross Bookings per miles comes out to be $1.91, and it is $1.19/km. Although it is just an average over whole operations, the cost of hailing taxi rates per mile across the world[2] are comparable to get insights. It is cheapest to hail a ride in Cairo at $0.10/km, and it is most expensive to hail a ride in Zurich at $5.19/km. Given that the cost of vehicle ownership varies across the world[3], the driver incentives to participate in Uber’s network will also vary.  From a driver perspective, it will be income generation capability that will motivate them to participate in Uber’s network vs. others. From a consumer perspective, if it becomes cheaper to own a vehicle, then more people will own cars as opposed to taking a Uber ride. Generally speaking, if the cost to own a private vehicle increases, then Uber makes more money and vice-versa. 

Figure 2[4]

In summary, it will take a dominant position in the market to improve the margins as in network effects businesses, the winner earns a disproportionately big chunk of the industry profits. Further, any short term incentives for drivers and customers will be reduced over time. The cost-effectiveness of personal vehicle ownership will keep a cap on Uber’s ambitions to penetrate the total serviceable market (Figure 2). The fundamentals of sharing economics are strong but it remains to be seen how Uber returns to profitability.  

[1] Source: Uber’s S-1 Filing

[2] https://www.travelandleisure.com/travel-tips/ground-transportation/carspring-taxi-index-cabs

[3] https://www.telegraph.co.uk/expat/before-you-go/the-price-of-driving-car-ownership-costs-around-the-world/

[4] Source: Uber’s S-1 Filing

Featured Image Credit: Photo by Aaron Sebastian on Unsplash