Strategic Error Can Drive Cultural Toxicity

Uber’s “toxic culture” was a symptom of a single strategic error in the original design of its business model. Were it not for this error, Uber and its culture could have been insulated from the hubris of its dynamic and visionary CEO and could have, for the foreseeable future, continued its meteoric growth under his leadership. The lesson here is the prohibitive cost of a small error in strategic thinking.

The Arrival of Uber

In 2008, Travis Kalanick and Garrett Camp conceived of an idea that would disrupt the taxi industry worldwide. By June 1, 2015, Uber was valued at over $50 billion and had grown into a transportation network spanning 311 cities in 58 countries. 

The success of the start-up was driven by both the speed and excellence of its execution and the effectiveness with which it removed the pain and frustration from taxi customers. A ride is ordered with the tap of a button; locations and routes are determined by GPS; and cost is automatically charged to the card on the user account. Meanwhile, drivers are generally diverse individuals with varied interests; many hold other jobs, doing this on the side. They are generally interesting and courteous, and therefore can offer passengers an opportunity for interesting conversation if they want it. If one doesn’t wish to engage with the driver, he or she doesn’t even have to say an address. It’s as easy as hopping in and out. 

Uber’s arrival saw the promise for many of an end to discourteous or inarticulate taxi dispatch personnel. No more hassling with other passengers while competing for a ride in an often-dirty taxi on a busy city street. No need for drivers without familiarity of their own city’s geography and traffic patterns, no more resentful tips to drivers you don’t believe deserve the tip, and no more rummaging for cash at the end of the trip to pay for the ride. (Remember, in those days, taxis mostly did not accept credit cards and were not using GPS.)

In designing its business model and strategy, Uber, consciously or subconsciously, followed the precise four strategic design steps I advise corporations to follow in Lead by Greatness

  1. Take an inventory of all your assets as a team or company. Then, by combining various assets, identify some unique or unusual capabilities you have that enable you to add significant value to others in ways your competitors cannot.
  2. Clearly identify and articulate who your primary beneficiary is. This is the set of people who could gain the most from the value you add by using your unique capabilities.
  3. By deep empathizing with your primary beneficiary, identify his or her insecurities, or intangible needs and yearnings (in Uber’s case—the resentment, inconvenience, and frustration of taxi-riding). Then figure out how, using your capabilities (in Uber’s case—its technology, its ability to build a network of drivers, its marketing strength, and its relatively flawless execution capability) you can satisfy those intangible needs. 
  4. Design your business model to provide a product or service specifically for your primary beneficiary so that it addresses his or her insecurities, and then market it widely.

So where did Uber go wrong? Was it just the toxic culture that it is said to have spawned? If the culture was so bad, why have more than 1,000 employees petitioned for Kalanick’s return to an active role after his June 20th departure from leadership? Why is Uber’s eroded leadership team pleading with employees to stay? The problem wasn’t the culture. The toxic culture was the result of a strategic error.

Drivers Are the Real Customer

Although Uber did follow the four steps of strategic thinking, it identified the wrong set of individuals as its primary beneficiary. Farhad Manjoo of The New York Times commented, “By managing drivers as contractors rather than actual employees, it accelerated a new way of thinking about labor,” but there was nothing wrong with managing drivers as contractors; this has been key to Uber’s success. The blunder was not that Uber saw drivers as contractors; the blunder was that it did not see drivers as its primary beneficiary, its real customer. 

Where Uber regarded passengers as its primary beneficiary, it should have regarded passengers as the drivers’ customer, not its own. Drivers provide the revenue. Drivers interface directly with the passenger and with the company. Drivers get even more value from the Uber offering than passengers do. Drivers should have been managed somewhat like a franchise manages its franchisees—giving them the brand, the technology, and the support, and requiring of them a high standard of delivery quality.

Instead, Uber regarded drivers as dispensable (because of an unlimited pool) commodities needed to serve its customer, the passenger. It created efficiency for passengers with supply-and-demand algorithms that squeezed the drivers’ revenue, and discouraged passengers from giving tips to the drivers. There developed a culture of human exploitation which was challenged by an attempt to have drivers classified as employees. Such an attempt would upend the Uber model. It would be better to leave the drivers as independent contractors but treat them as franchisees, as Uber’s primary beneficiary.

As a result of Uber drivers feeling exploited, many doubled up as Lyft drivers where they felt more valued and generally received tips from satisfied passengers. This reaction diluted the Uber brand, which further eroded when drivers told their passengers stories about the malaise at inaccessible Uber corporate. The drivers, interfacing with the passengers, infected them with negativity which flowed back into the corporation itself.

Had Uber identified drivers as its primary beneficiary, it would have focused on supporting drivers and providing (as far as possible) for their well-being. Rather than seeing itself as a provider of rides for passengers, Uber should have seen itself as an enabler for people with underutilized vehicles and available time, yearning for autonomy to earn additional income. Autonomy is a deep and widespread intangible yearning, especially among millennials, and drivers value it enormously. The result would be over 160,000 (in the U.S.) loyal drivers and committed ambassadors for its brand. Their enthusiasm would have inspired passengers with loyalty to Uber and would have overflowed into the corporation and infused into the culture of its now 15,000 employees. In this model, with Uber focused on driver satisfaction (its true customer), it would not have needed to worry much about passenger satisfaction. Happy drivers would serve their customers well, and the Uber brand would be enhanced.

Uber vs. Lyft

On the other hand, Lyft got their strategic thinking right. Lyft drivers are also not employees. However, they are the set of people whose well-being is the primary focus of the company. Unlike Uber, tipping has always been encouraged in the Lyft model. Using the asset of its alliance with General Motors, Lyft has a capability that Uber does not. It can and does provide free vehicles (including maintenance) to loyal drivers who complete a predetermined number of rides each month. Many Lyft drivers say they wouldn’t drive for Uber on the side, as “that wouldn’t be doing right by Lyft.”

Uber’s 10 percent decrease of active users this year starkly contrasts with Lyft’s 40-plus percent growth of active users in the same period (Figure 1). 

Figure 1: Trended Share of Rides

Source: 1010Data, “Taking a Stance Lifts Lyft’s User Base”, March 2017

In most of Uber’s major U.S. markets, Lyft has seen large increases in consumer spending (Figure 2).

Figure 2: Lyft Surges on Uber Woes

Source: TXN Solutions, George Petras, USA TODAY

It would be easy to attribute this merely to Uber’s reputational damage and the #BoycottUber campaign. However, it seems clear that Lyft is not only benefitting from its rival’s error; Lyft is also doing something very right, and its strategy is paying off. Lyft is focused on its drivers, and sees itself as there to serve them.

Transformation or Cosmetic Surgery?

Interestingly, while employees generally seem unhappy about Kalanick’s departure, drivers are looking forward to a better future. One of the first changes at Uber, virtually hours after Kalanick’s departure, was the introduction of a tipping option in the Uber app. Is this the beginning of true transformation at Uber, or is it a panicked attempt to copy Lyft and plug the holes in the dike?

There are clear reasons why over 70 percent of transformation initiatives fail. Generally, the reasons for failure lie in not integrating all aspects of the transformation—strategy, leadership behavior, process, structure, and culture—and aligning them to an overarching philosophy. A philosophy of transformation deals with some important why and what questions, such as:

  • What are we transforming from and what are we transforming to? 
  • Why are we doing this? Reasons need to be more fundamental and inspirational than ‘optimization of efficiencies’. 
  • Is this transformation aligned to the values of our key leaders and to the organization’s values?  

One of the most exhilarating contributors to successful transformation is redefining the primary beneficiary for whom you design your business model and your product. Consider a healthcare organization grappling with the question of who its primary beneficiary is. A large and reputable healthcare organization recently realized that while it must serve all of its stakeholders—the physicians and surgeons that bring patients in, the patients themselves, and the payers who are the insurance companies—it had not focused on any primary beneficiary of its services. Upon analysis, it found that its business model and product are designed to serve everyone but the patient’s deep intangible needs. Shifting its strategic focus to the patient—while continuing to care for the other stakeholders)—is unleashing innovation and proving transformational.

Is the primary beneficiary of a cable news network station its viewers or the advertisers who fund it? Again, the station needs to satisfy both constituents, but how it designs its business model will be impacted by the primary beneficiary it chooses to focus on, and changing that focus can be transformational. We recently worked with a developer of high-tech materials for high-performance sportswear. They, too, grappled with who they should design their business model to serve—the sportswear manufacturers who buy their technology, or the sportsmen and women who use it. They have also embarked on a transformational journey that includes changing the focus of primary beneficiary.

If Uber is truly transforming, it will be dealing deeply with the above questions and more. It will be redefining who it truly serves: the drivers rather than the passengers. It will align its strategy, leadership behaviors, culture, structures, and processes to this changed focus. If Uber does this in a carefully integrated and authentic way, it will resume its trajectory of growth. 

That is how to crack the code of successful transformation.

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