Managing Innovation: A Case of Airbnb

Introduction

In the current rapidly growing world, the hospitality industry has heavily invested in technology with an aim of meeting the dynamic needs of its customers while improving guest satisfaction and offering a unique and memorable experience (Salvioni 2016). IT innovation capability has received significant attention by hoteliers as a source of competitive advantage (Nieves and Segarra-Ciprés 2015). Hotels are increasingly seeking to adapt new competitive services (Young, Corsun and Xie 2017) and offering exceptional guest experience (Constantinos-Vasilios Priporas et al. 2017).

Through the advent of new technology, business models have been disrupted over time, which has increasingly changed the way hoteliers operate and compete with their rivals (Nathalie and Béchir 2018). According to Biber et al. (2017), commercial innovation in the recent past, driven by changes in innovation and technology, has influenced how firms in the hospitality industry are organised in order to meet the changing needs of their customers.

This report focuses on innovation management at Airbnb. The disruptive innovation theory will be explored in relation to its use in Airbnb. The result will be an in-depth analysis of the historical development of the services offered by Airbnb as influenced by the disruptive innovation theory. The report will also highlight the possible future development pathways for Airbnb.

Disruptive Innovation

Disruptive innovation was first mentioned by Clayton Christensen back in 1997 in his book: The Innovator’s Dilemma. The theory rapidly grew to become among the most influential theories of innovation (Christensen 1997). Christensen (2013) terms disruptive innovation as innovations that influence development of new markets and value networks thus disrupting the existing markets and value networks within a short duration. Disruptive innovations are associated with displacement of earlier technologies. These innovations also improve the quality of services and products in ways that better serve the market (Christensen 2013).

Gobble (2016) delineates the process through which disruptive innovation take place. In the initial development stages, the products and services developed serve a niche market which has realised the value of the new product/service. Further improvements are then made to the product/service informed by the experience of the customer segment, which enhances the performance of the disruptive innovation. In many cases, the market niche using the product/service reviews it based on variation from mainstream products and anticipations thus seeking to be satisfied more than they were when using mainstream products (Nagy, Schuessler and Dubinsky 2016). Therefore, if the firm is able to accurately develop the product/service informed by consumers’ feedback, there is a higher probability of the firm gaining a competitive advantage. Guttentag and Smith (2017) write that in some instances, the performance of the disruptive innovation may remain inferior as compared to that of the mainstream innovation and ultimately market disruption is not realised.

Chase (2016) explores how disruptive innovators gain a foothold in the market and come up with two strategies. First, disruptive innovators may create a low-end product which appeals to customers that find the existing products too expensive, complex, or too difficult. These innovators might also focus on meeting the needs of a segment of customers whose needs have been overlooked by the mainstream innovators. Second, disruptive innovators may challenge the incumbents by shedding sophistication in what has always been provided with an aim of offering new attribute which the mainstream innovators are not offering.

The concept of disruptive innovation is essential for understanding what happens in the market and ways in which the changing needs of consumers could be met (Cesarani and Nechita 2017). Accessing that value is what Midgett et al. (2017) refer to as the critical part in adopting the disruptive innovation in that it requires critically thinking about the concept of disruptive innovation and its implication to the market. Many innovators fail to understand that disruptive innovation emanates from a conflation of the concept specific to industries (Nathalie and Béchir 2018). This implies that the kind of disruption that could succeed in one industry might not necessarily succeed in the other.

Constantinos-Vasilios Priporas et al. (2017) critique Christensen’s theory of disruptive innovation stating that an innovator can disrupt a market, a value chain or an entire industry with following Christensen’s theory of disruptive innovation. Here, the authors holds that an innovator could develop a new business model that forces the competitors to rethink ways of capturing value but this might not be disruptive as demonstrated by Christensen. This is so because it is not always the case that a new business model reaches out to the excluded customers, offers a lower-end alternative to the market, or uses more sophisticated offerings. For example, some business models create value through tapping excess capacity thus do not deliver value to segments that had not been previously served or previously overserved market segments (Midgett et al. 2017).

Disruption theory and Airbnb

Airbnb has a humble background but through innovation has developed to be among the most competitive firms in the hospitality industry. The founders, Chesky and Gebbia, could not afford to the rent an apartment in San Francisco and so they decided to turn their loft into lodging space to accommodate people travelling to attend design conference in the area (Mussi 2017). As they were trying to solve their problem, they happened to solve the problem of travellers that did not have a place to rent. This marked Airbnb’s entry into the hospitality industry. Initially the firm hosted 3 renters but within time they received request from other travellers, which led to expansion of the room. At this time, the founders were renting air mattresses and offering breakfast options in their apartment (Mussi 2017). The travellers told the founders what they wanted and the founders created it (Mussi 2017). Therefore, we can infer that Airbnb disruptive innovators gained market entry through serving the needs of a segment that had been ignored by the incumbents. This is so because the main idea for Airbnb founders was to offer visitors a way to save money by escaping the fees charged by hotels. As a result, low income earners were able to pay for their accommodation in San Francisco during design conferences.

The idea of enabling low-income earners to attend design conferences through offering cheap accommodation remained. In 2008, the Nathan Blecharzyk who was a computer engineer joined Airbnb and challenged the founders to reach more customers. Together, they advertised on Facebook and campaigned through emails, which helped reach more customers (Zervas, Proserpio and Byers 2017). This was the first innovative disruption Airbnb caused the hospitality industry, that is, advertising with the help of internet.

In 2009, Airbnb realised a drop in revenue and upon advice by Paul Graham they went to New York to gather reviews from customers they had hosted (Mussi 2017). After this visit, they updated their website informed by the experience of the visitors they reached and included high-quality images of the apartment. This action was in sharp contrast to the less-professional looking images contained in the competitors’ website. Today, the high-quality and professional photographs of listings on Airbnb’s website distinguish its properties from those of competitors, which evoked a sense of prestige among its customers (Mussi 2017). This was a disruptive technology as it entailed the use of sophistication to challenge the mainstream firms to rethink of the resolution of images contained in their websites. Again, this was a strategy that rewarded Airbnb with more customers (Guttentag 2015).

In 2010, Airbnb extended its offerings to include private rooms, entire apartments and homes, boats, castles, treehouses, manors, even islands, igloos, and tipis (Mussi 2017). This was another disruptive innovation that challenged incumbents to rethink the range of properties they offered their customers. This strategy facilitated Airbnb’s steady growth in that the firm realised revenue of $7.2 million in 2011 (Zervas et al. 2017). The strategy also gave the company a special market niche thus gaining new competitors (Accoleo and CrashPadder) that were on higher market positions (Guttentag 2015).

In 2012, Airbnb developed another disruptive innovation that challenged how firms in the hospitality industry advertised their products and services to the local people (Fang, Ye and Law 2016). Here, Airbnb acquired Localmind and NabeWise travel guides, which provided localised information on various destinations. This promotion strategy increased Airbnb’s revenue while enabling it gain competitive edge (Bock 2015). By 2014, the company was able to open offices in other countries, which promoted the firm to operate at a global level.

Within a period of 5 years, Airbnb was able to transform the way people travel and completely disrupted the hospitality industry. For example, in February 2011, the cumulative value for guest bookings was $1million, reached $5million in January 2012, and reached $10million by June 2012 (Gutiérrez et al. 2017). Disruptive innovation has facilitated this growth (Gutiérrez et al. 2017).

Fang et al. (2016) state that unlike many firms in the hospitality industry, Airbnb does not own the properties in which it hosts its customers but it charges both the host and the guest for using its website. In addition, the founders and stakeholders of Airbnb live in different properties under the management of Airbnb in order to gather valid insights of the Airbnb experience (Priporas et al. 2017). This provides the organisation with a deeper understanding of the needs of customers thus differentiating it from other firms in the hospitality industry.

Airbnb’s website is not structured by function as the websites of other firms in the hospitality industry (Nguyen 2014). Instead, the needs of hosts and guests inform user experience. The organisation encourages hosts to provide more information in their Airbnb profiles for credibility purposes. Guest reviews are also welcomed, which enhances the reputation of the hosts. This has helped Airbnb rise to a platform of trust and as a result travellers have felt safe requesting accommodation from the Airbnb (Ert, Fleischer and Magen 2016).

Airbnb has completely disrupted the hospitality industry by introducing the concept of cyber-agency (Guttentag 2015). Airbnb acts as a cyber-agent in that it connects buyers and sellers with similar objectives. The organisation makes profits by collecting a nominal agency fee with every successful deal between a guest and a host (Zervas et al. 2017). This has led to the realisation of a community of like-minded travellers, which leads the hospitality industry.

Through disruptive innovations, Airbnb has been able to put some hotels out of business while forcing others to rethink their value creation strategies (Schneider 2015). Every traveller is required to create a profile on Airbnb’s website before any reservations are made. The profile is accessible to hosts when the traveller makes a request for reservation. Once the request is received, the host views the profile and either accepts or declines the request based on the information provided in the traveller’s profile. In the website, the traveller and the host have a chance to share their travelling experiences, which creates a social value for Airbnb. Additionally, the fee a traveller pays through Airbnb is lower than other hotel charges, which has increased the demand for Airbnb services (Mody, Suess and Lehto 2017).

The uniqueness of Airbnb stays is another disruptive innovation that has helped in positioning the company. Airbnb hosts live in the apartments they rent or at least in the neighbourhood thus have special knowledge of interesting activities and local attractions that the travellers might enjoy. Airbnb encourages the hosts to suggest to the travellers these activities and attractions, which makes acquiring accommodation through Airbnb more interesting than booking hotels (Nguyen 2014). This concept has increasingly become popular as the sharing economy and has significantly changed the competition dynamics while posing threats to new entrants. As a result, Airbnb has become among the leading hospitality firms while limiting the threat of new entrants.

Airbnb has a unique business model built upon people that has also seen it rise to its greatness (Guttentag and Smith 2017). Today, many start-ups are not based on productivity gains influenced by eliminating human resources but those that gain revenue by leveraging software technologies to generate employment (Guttentag 2015). The labour intensive nature of the lodging industry has welcomed use of technology that replaces labour with an aim of raising profitability (Zervas et al. 2017). For any firm to be successful in the lodging industry, it should have the ability to create markets for customers and labour force, which is an outstanding strength for Airbnb. This is so because Airbnb helps homeowners raise an income through renting space in their houses while providing affordable accommodation to travellers. This unique and creative model that seen Airbnb gain popularity.

Airbnb has a unique product offering, which has enabled it stand against its competitors. The firm is a virtual marketplace connecting buyers and sellers for mutual benefit (Nguyen 2014). It is also a social platform through which hosts and guests exchange their travel experience. These experiences are not only interesting but also resonate with other people that could be yearning similar experiences. As a result, Airbnb has provided people a powerful mix of art, style and substance and people have become Airbnb’s spokesmen (Ert et al. 2016).

The sharing economy, allowing home owners to rent out space in their houses to travellers seeking accommodation, has become the biggest disruption in the hospitality industry courtesy of Airbnb (Cesarani and Nechita 2017). The travellers’ preference for peer-to-peer (P2P) accommodations has increased, which has gained Airbnb a competitive advantage in the hospitality industry. The competitors have been forced to rethink new ways of offering accommodation to travellers at low prices while maintaining their profitability. On the other hand, new entrants have been challenged on how they can gain popularity and benefit not only buyers but also sellers. The internet is at the core of the sharing economy in that it virtually connects hosts and guests. Technological advancements such as the use of smart phones have increased user access to internet, which has promoted the growth and popularity of the sharing economy.

Researchers from various fields offer different definitions for sharing economy (Quattrone et al. 2016) but there is no universal definition for sharing economy (Fang et al. 2016). Gobble (2016) examines the definitions of a sharing economy and finds Airbnb to possess three vital elements of a sharing economy. First, Airbnb offers an online platform that lowers the cost of connecting buyers and sellers. Second, Airbnb is P2P thus the hosts are also travellers thus the service provider and the client can play each other’s role interchangeably. Third, Airbnb is access-based, which implies it is based on the ability to buy access rather than own the properties in which its customers are hosted. As a result, Airbnb has been recognised a prominent example of a sharing economy in the hotel industry (Guttentag 2015).

Airbnb has been listed among the most innovative organisations across the world. Since its formation in 2008, Airbnb has steadily grown realising an increase in revenue every year. Currently, Airbnb has a global presence reaching over 34,000 cities in 190 countries (Carr 2013). The value estimate for Airbnb is approximately $10billion and is worth more than major hotel corporations across the world (Boswijk 2017). This is an indication that the disruptive innovation theory has worked for Airbnb.

Possible future development

Despite its success story, Airbnb has repeatedly been criticised for risking hosts to property loss. Airbnb does not conduct background checks on travellers prior to connecting them with hosts thus hosts only rely on reviews to decide the guests to host (Belk 2014). As a result, a lot of horror occurrences have been reported, which tarnishes the image of Airbnb. For example, a host had his apartment trend on the internet as a massive orgy location (Rosario, Sullivan and Tacopino 2014). With this and other similar threats to the safety of hosts, Airbnb should develop host protection strategies. In this case, Airbnb should develop software that scans the history of guests as they submit their reservation requests. The software should automatically drop applications made by people with criminal records. Airbnb has experienced inconsistencies in its revenue streams especially from apartments rented over short-terms, which has challenged projection of future revenue (Guttentag 2015). To overcome this limitation, Airbnb should develop software that allows vacation property owners to showcase their properties on the Airbnb’s website and standardise the prices to renting out spaces. With Airbnb’s success, its competitors have re-strategized their products and services and as a result many well-established sites such as TripAdvisor and HomeAway are offering services similar to those of Airbnb (Xie and Kwok 2017). Therefore, Airbnb is facing stiff competition in the hospitality industry, which underscores the need to rethink its positioning strategies. In various countries, Airbnb has failed to comply with the housing laws and regulations. Some cities such as Malibu and New Orleans among others in the US have introduced new housing laws banning renting houses for short-term (less than 30 days) and Airbnb has fallen into this trap severally since travellers might be on vacation for less than 30 days (Rauch and Schleicher 2015). As a result, Airbnb has paid fines for renting out rooms on short-term basis without seeking legal permission. With such limiting housing laws and regulations, the future of Airbnb is in question. This justifies the need for Airbnb to rethink how it can operate without overlooking housing laws and regulations in different countries. Preferably, Airbnb could develop software that automatically seeks permission for the organisation to host guests over short-terms with every successful reservation. However, this may require guests to seek reservation a month and above before they plan to visit the place of preference. As a result, Airbnb risks losing the chance to accommodate guests that have to make urgent visits. Still, Airbnb could develop a system that instantly sends it request to local authorities and alerts the recipient prompting them to make a quick response.

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