The Industrialist’s Dilemma — March 9, 2017

Robert Siegel
Mar 14, 2017 · 5 min read

Last week we were fortunate to have Tony Xu, GSB ’13 and CEO of DoorDash, as our classroom guest. While each of the instructors and almost all of the students have had first-hand experience in using the DoorDash service, the discussion surrounded the long-term implications of this new service on multiple constituencies — from existing logistics companies to consumers to merchants (and not just restaurants). And while it was clear that the change enabled by DoorDash is in its very early days, the speed and level of market revision that companies like DoorDash are bringing led us to draw three key takeaways from the class.

Tony Xu shares his vision for DoorDash

The Differences of 3-Sided vs. 2-Sided Markets

Tony discussed that, unlike some delivery marketplaces, DoorDash’s business is really a three-sided market comprised of Dashers (delivery), consumers and merchants. Tony also highlighted that the nature of the parties within each of these three markets are highly variable and differentiated. For example, end users of the DoorDash service have different requirements if they are an individual vs. a group when ordering a meal (accuracy vs. speed), different merchants have different levels of complexity in their products (requiring refrigeration vs. heat vs. neither), and different Dashers bring different types of capabilities to their work (for example, the size of one’s vehicle).

DoorDash has had to build a digital system that can meet the complex needs of each side of the market. Designing a system that does not effectively meet the requirements of all three parties prevents any new entrant from achieving the scale required to successfully meet all constituents’ goals.

We realized that by having three different markets to serve simultaneously, there is a barrier to entry to those who are currently only serving a two-sided market. For example, in the case of a ride-sharing service, once a ride-sharing company has a critical mass of drivers in an area, it is extremely difficult for a new entrant to enter that market as the fundamental needs of the market are met for consumers. But in the case of DoorDash, the ability to understand and meet the needs of merchants, in particular, by designing a product that serves their needs well, creates a barrier to entry for any current delivery service or potential new entrant to address the scale of the varied parties that DoorDash serves. DoorDash is thus attempting to establish its basis of competitive advantage as they designed a solution from the beginning that addresses all of the parties in the three-sided market, and by understanding the needs of merchants in particular (who are currently not a part of a ride-sharing solution), DoorDash has a head-start that becomes difficult for others to replicate if other systems were not designed for a three-sided market from day one.

Local Network Effects Can Be Specific

Much has been written about the difference between local and distant network effects, but DoorDash literally can leverage its physically local network effects in ways that others cannot. One interesting observation is that a small part of DoorDash’s business, commercial delivery, while quite constrained at the moment could become quite powerful over time.

To elaborate: If DoorDash is able to take advantage of unused capacity of commercial vehicles in an area, and those vehicles are not on another network (e.g. they would not likely be in a ride-sharing service), DoorDash is able to deliver a solution for what merchants need that other existing parties cannot. As such, DoorDash is able to give one side of the market (merchants) access to a resource that is needed to appropriately deliver a variety of goods to end users. Once a critical mass for these two sides (delivery and merchants) of the network is reached, DoorDash is able to offer the best solution available for these parties, which becomes a natural partnership that other firms do not have the ability to easily replicate with their existing resources. As such, other companies who try to meet the market’s needs as well as DoorDash would require other entrants to make an investment in new capabilities that are already being used effectively by DoorDash. Replicating these capabilities would be both expensive and difficult for others to attain.

Aaron Levie runs the room discussing three-sided markets

The AWS of Delivery?

One advantage that Amazon is able to offer companies with its AWS service is the ability to rent-out its computing services on a “per-bit” basis. Companies thus do not have to purchase their own servers, pay for their own bandwidth or have their own staff on board to manage, secure and operate a data center.

Tony shared how DoorDash is enabling restaurants no longer to have delivery personnel on their staff, and instead they can use the DoorDash service to reach customers in a more cost effective fashion than previously possible. This allows restaurants both to lower costs and also to increase the capacity utilization of its real estate and kitchens by giving reach to customers that it might not otherwise have had the ability to serve, all while leveraging someone else’s assets (in this case, the Dasher network).

We also found it interesting to consider how DoorDash can potentially be used in other parts of the food delivery value chain — any party who wants to focus on its core business can use DoorDash to move its product from one location to another since DoorDash understands the requirements of transporting food in a safe and high quality manner.

The long-term implications of this gave us a glimpse of where the company could grow over time, and how an industry such as food production, food preparation and food delivery could all be made more efficient and be restructured by the digital and physical network that DoorDash is implementing. This change from a vertical model to a more horizontal value chain has played out in many industries before (e.g. the personal computer industry).

In the case of DoorDash, the combination of its digital and physical systems could completely up-end the food value chain and is creating new opportunities for parties in the food industry to use a logistics provider in ways that were previously impossible to imagine.

The Industrialist’s Dilemma

A course at the Stanford Graduate School of Business taught by Stanford Lecturer and XSeed Partner Robert Siegel (@robsiegel), Box CEO Aaron Levie (@levie) and SAP Chief Innovation Officer Max Wessel (@maxwellelliot)

Robert Siegel

Written by

Lecturer @StanfordGSB, Seed-stage VC @XSeedCapital, @Cal undergrad, hockey/soccer fan, husband and father

The Industrialist’s Dilemma

A course at the Stanford Graduate School of Business taught by Stanford Lecturer and XSeed Partner Robert Siegel (@robsiegel), Box CEO Aaron Levie (@levie) and SAP Chief Innovation Officer Max Wessel (@maxwellelliot)

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