Henley Management Group Pty Ltd

Is Cheating the New Competitive Advantage?

By Max Zornada

Among the latest wave of new start ups shaking up the business world and their respective markets are companies like Uber, recently valued at a stratospheric US $50 Billion and Airbnb, valued at US $ 25 Billion. Both these companies are yet to turn a profit. At a more local level, one of the trends being supported by both our state and city level governments is that of ‘pop up” cafes, food sellers and bars. These are small businesses that sell coffee or food from mobile carts, vans they can move from location to location, or temporary locations they can readily be set up and dismantled.  

A key theme in all of the literature on business strategy is the idea that to be successful, organisations must have a source of competitive advantage – ideally, one that is sustainable over time and difficult to copy by competitors. Often quoted examples include competitive advantage based on cost, a unique skills, a proprietary technology, superior customer service etc. 

Although it is not clear at this stage whether companies like Uber and Airbnb will be successful or ever turn a profit and the economics of “pop up” venues are not clear, it seems to me that one thing these new and so called “disruptive” business models have in common is that their key source of competitive advantage is cheating. 

For example, by defining themselves as a technology company, Uber avoid most of the regulatory compliance and associated costs their competitors categorised as transport companies (i.e. taxi and limo services etc.) cannot avoid. Similarly, with Airbnb in the hospitality industry. 

In an earlier age, taxi companies could have probably fielded equally convincing arguments about being “technology” companies on the basis of having a telephone system for hailing a taxi. An app for hailing a taxi is no different to using a telephone in an age when instant messaging has all but replaced actual conversations. Similarly with “hiring” practices, Uber, Airbnb and”pop-ups” dodge many of the requirements imposed on their competitors by labour laws. 

In many parts of the world local and state level governments have become enamoured with these new business models out of a misguided sense of promoting innovation while, tieing the hands of existing industry players with regulation, making it difficult for them to respond. Similarly, “pop up” venues do not pay rent and are not subjected to many of the regulatory requirements applying to a permanent venue.  

I am not suggesting that all such regulation should be removed. Its there for a reason. Hotel guests have a right to expect to be able to stay in accommodation that is safe, does not violate building codes, fire safety regulations, food safety regulation etc. and similarly with users of taxi services. 

It is disingenuous for companies like Uber to call themselves a technology company when they are in fact in the transport business. Their app is little more than an enabling technology in the same way as a website and telephone connection is for almost all businesses today. 

As with every other disruptive technological change in the past, regulators are several steps behind and are yet to really “get it”. This has created a temporary “bubble” allowing these new organisations to exist and prosper free of competition. 

When regulators finally wake up and realise Uber is just another taxi company, Airbnb no different to a hotel chain the only difference being in the way they source and manage their assets. 

It will be interesting to see if any of these companies ever make a profit or justify their stratospheric valuations when the bubble bursts and they are forced to compete on an equal footing, or will they experience the same fate as Webvan, Boo.com and Pets.com, the last generation of stratospheric valuations applied to retailers who also mistakenly thought they were tech companies.



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