Imran's personal blog

May 9, 2017

Hypothesis — competing without barriers

Filed under: Uncategorized — ipeerbhai @ 5:14 pm

One of Porter’s 5 forces is the threat of new entrants.

The car rental business has been hemorrhaging cash because, well, anyone can lease you a car.  There’s the big guys — Hertz, Avis, Alamo, etc…  when you need to rent for a day or a week, maybe a month or two.  Then there’s the dealerships, who may short term lease you a car.  Then, there’s “Joe’s car rental”.  I don’t recall the name, but it was a real car rental place in my college town that actually rented to college students.  Old beaters — but the big guys don’t normally rent to people under 26 due to the insurance costs.

The problem car rental places have is this:  If they’re making good profits, then new entrants will follow with lower prices.  This is good — exactly what capitalism is supposed to want.  Remember, according to Adam Smith — profits are a sign of a problem.

But the question — how to compete with this?  You can do an “Uber” for car rentals, but I expect people want access to their own cars, and “Uber” is the best business possible here.

So, you try and compete on branding, efficiency of scale, or network effects.   Branding — “Pick Enterprise, we’ll pick you up.”  Network effects — no idea — maybe the “rent at location A, return at location B” — but network effects usually refer to demand side, not supply side.  Efficiency — “Buy lots of cars cheap, vertically integrate maintenance and fuel”.  There’s a new wrinkle in the efficiency game — efficiency of advertising.  The easiest business to win is to sell more to existing customers.  Cross-sell flights, hotels, and other travel services.  What else could be cross-sold?  Travel insurance?  How about car insurance?  “Dear Avis customer.  We need a lot of insurance on our cars.  We’ve partnered with Great Florida Insurance to create a bulk insurance package that we think could save you money.”  Gas?  But the real thing is to become a supplier of something.   Vehicle entertainment systems?  Burner pre-paid cell phones?

I would love to be a fly on the wall at Hertz’s executive level right now and see what they’re thinking.

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