Innovation Management: Theories and Airbnb Case Study

Desklib provides past papers and solved assignments for students. This report analyzes Airbnb's disruptive innovation.

2019
Managing Innovation
Source: http://www.tutor2u.net/blog/files/innovation-business-background-concept-18726a.jpg

Table of Contents
Introduction............................................................................................................................. 2
Innovation Theories................................................................................................................. 3
Blue Ocean Strategy.............................................................................................................3
Disruptive Innovation Theory...............................................................................................6
Airbnb Inc – Company Profile...................................................................................................9
Airbnb Inc –Disruptive Innovation Theory/Model..................................................................10
Conclusion.............................................................................................................................. 13
Reference List.........................................................................................................................14
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Introduction
Innovation can be defined as a process of creating something new or creating a new way of
doing things. In a business environment, innovation not only involves creation and change
but another important aspect as well that's an improvement. Business innovation can be
defined as the process that consists of development or improvement of products, existing
processes, technologies, marketing activities, and designs that help in increasing the
organisational efficiency, reaching new markets and customers to enhance organisational
profit (Freeman, 2013).
The competitiveness of the current business environment has made innovation an integral
part of an organisations survival and growth (Bucherer et al., 2012). An organisation that
can effectively employ innovation management can become successful and a market leader
of their segment such as Apple, Google, Tesla etc. The innovation theories act as a tool for
managing innovation in business organisations. They help the organisation in effective
innovation management and attaining growth. The assignment addresses innovation
theories and their practical applications (Wisdom et al., 2014). The innovation theories
being discussed are the disruptive innovation theory and the Blue Ocean Strategy. In the
second part of the assignment, US-based Airbnb Inc will be considered in terms of the
Disruptive Innovation Theory.
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Innovation Theories
Innovation Management has become a much-discussed topic in today’s business
environment. This has happened due to its importance in the survival of an organisation and
its growth. The innovation theories provide the organisation with a tool to understand
innovation and its role in their organisation as well as manage innovation within the
organisation to aid the organisational growth and market positioning (Wisdom et al., 2014).
Blue Ocean Strategy
Blue Ocean Strategy was proposed by Renee Mauborgne and W. Chan Kim in their book by
the same name. It suggests ways of survival and growth to businesses that are in fiercely
competitive business environments by tapping into new and unexplored markets. The Blue
Ocean Strategy is based on the concept of value innovation (Mi, 2015).
Red ocean and Blue Ocean
The Blue Ocean strategy categorises the business environment into two distinct spaces, the
Red Ocean and the Blue Ocean. The Red ocean is the market place or business environment
that has a number of businesses operating within it indicating fierce competition and
conflict. It has a defined set of barriers and rules and the companies work within these
parameters. In the red ocean, the organisations continuously try to outperform while
acquiring a higher percentage of demand and share. The red space business environment
sees a lower level of growth and reduced profit due to extreme competition level. The
organisations in the red ocean strive to defend their current market position. Here the
companies operate under the aspect of Value cost trade-off that involves higher value
creation for customers at higher cost or reducing the cost by reducing the value being
provided to the customers (Mi, 2015).
The blue ocean is a contrast to the red ocean. It represents a business environment or
market place that's currently untapped and unexplored. In the blue ocean, the competition
is irrelevant due to the non-existence of the rules and barriers. The blue ocean requires
demand generation and creation instead of acquisition. The blue ocean provides the
organisations, opportunity to grow and acquire profits at a much higher pace. The blue
ocean business environment promotes innovation and pursuit of new opportunities. It
allows the companies to pursue both low cost and differentiation simultaneously. The blue
ocean could be within the active industry space (Mi, 2015).
Value Innovation
In the blue ocean, the competition becomes irrelevant through the creation of feasible value
for both the company and the customers. The value for the customers is inherent in the
pricing and the benefits of the products being offered by the company while the value for
the company is in the cost structure and pricing. The blue ocean strategy works only when
the buyer and company values align (Kim and Mauborgne, 2014).
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The alignment of company and buyer value is achieved through value innovation. Value
innovation is considered to be the basis or cornerstone of the blue ocean strategy. Value
innovation can be defined as the innovation process that facilitates the achievement of low
costs and product differentiation. Value innovation involves increasing buyer value and
making cost savings (Kim and Mauborgne, 2014).
The elimination and reduction of traditional competing factors allow cost reduction while
creation of elements new to the industry enhances buyer value. There are certain tools and
framework that help organisations in building a blue ocean strategy (Kim and Mauborgne,
2014). The following are some of these tools and framework
Strategy Canvas–It highlights current elements of the existing business environment such as
competing factors, buyer receivables, and details of the major competitors. These aspects
are graphically depicted as a value curve and it indicates the organisation’s performance
within the industry competition parameters. It helps in the identification of alternatives and
non-customers. This helps in reorienting the organisational focus and visualising a blue
ocean strategy (Borgianni et al., 2012).
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Value
Innovation
Cost
Savings
Buyer
Values

Source: Example of Strategic Compass
Four Actions Framework– This helps in the reconstruction of the element of the buyer value
by creating a new strategic profile or value curve (Borgianni et al., 2012). It involves the
following four aspects
1) the factors that can be eliminated
2) the factors that can be raised above the industry standards
3) The new factors that can be created
4) The factors that need to be reduced below the industry standards
Source: Four Actions Framework
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ERRC grid or the Eliminate Reduce raise Create Grid is a complementary tool of the four
actions framework. It allows the organisations to act on the above four factors prior to
enacting a new value curve (Borgianni et al., 2012). The four factors are scrutinised by using
a simple matrix.
Development and Execution of Blue Ocean Strategy
The development and execution of Blue ocean strategy involve the following six steps
(Becker, 2014)
 Reconstruction of existing market boundaries
 Focusing on the whole picture instead of predefined notions – This involves the use
of strategy canvas.
 Focusing on non-customers and the similarities in their requirements
 Focusing on the challenges in order to build a viable business model
 Managing the hurdles within the organisation such as employee resistance, lack of
motivation, and lack of resources
 Executing the strategy within the organisation by using fair and transparent
processes
Disruptive Innovation Theory
The Disruptive Innovation theory and the term disruptive innovation are devised by Clayton
Christensen (Christensen et al., 2015). The disruptive innovation can be defined as the
process through which a new product or service starts at the bottom of the market but
gradually it moves up to topple or displace established product or service of the
competitors. In other words, it involves a scenario where an established company is
successfully challenged by a new entrant with less resource access (Christensen et al., 2015).
The disruptive innovation scenario contains two types of companies; the first one is an
established company that focuses on the creation and improvement of the products and
services sought by their most profitable customer segment (Christensen et al., 2015). This
constitutes focusing on one segment and exceeding their requirement while ignoring other
segments. The second type of company is the new entrant that focuses on the ignored
segments and offers low-cost products and services that are suitable for the segments. This
allows these segments access to products that were otherwise inaccessible. The disruption
occurs when the target customers of the first type of companies start adopting products or
services of the second type of company (Christensen et al., 2015).
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Source: Disruptive Innovation Theory
Clayton Christensen suggests that there are the following three elements of disruption
(Christensen et al., 2015)
 Every market has a performance or improvement rate that the customers can
support – There’s a limitation to the improvements that the customers can
utilise. For example, out of the continuous offerings of car engine advancements
related to the performance of the engine, the customers can only utilise a few
due to factors like speed restrictions, safety issues, etc. The customers are
divided into a number of tiers on the basis of their demands with the higher tier
members being the most demanding.
 Every market has a distinct and different improvement trajectory depicting the
innovating companies–The rate of technological progression of product or
service is always higher than the customer's ability to utilisation. Due to this, the
organisation will eventually end up with technology that’s outside most of the
customers' ability to use it (Wan et al., 2015).
 Sustaining vs. disruptive innovations – The established companies have the
ability to fight and win every battle on sustaining innovations irrespective of the
difficulty level of the technology. Sustaining innovations involves gradual
improvements in products or services to fulfil the demands of the customers. On
the other hand, disruptive innovations start at a far inferior technological level
but are far economical and targeted at less demanding customers. This results in
the disruption of the existing trajectory and its redefinition.
After the product gets established at the lower tiers of the market, the rate of
technological progression allows it to reach the technological levels being
demanded by the higher tiers of the market. This leads to the displacement of
established products, services, and company. A good example of an established
company and brand being displaced is the downfall of Nokia in the mobile phone
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industry. Nokia was the market leader in the mobile phone segment. It got
displaced due to the entry of low-cost smartphones and the company’s inability
to counter it (Wan et al., 2015).
The disruptions can be of the following types (Wan et al., 2015)
 New Market Disruptions – The product or services under this category are easy
to use and affordable allowing the customers without any history of using similar
products to start using them. The new market disruptors focus on the creation of
a new value network to overcome non-consumption. As these disruptions
improve, they pull customers out from the established markets into the new one.
 Low-End Disruptions–These are the disruptions that get established at the lower
tiers of the market.
 Hybrid Disruptions – These are a combination of both the New-market and Low-
end disruptions.
Companies that fit the Disruptive Innovation Model need to exhibit certain characteristics. It
must have a business model that’s innovative and focused on the lower tiers of the market
segment. Another characteristic is that disruptive innovation should be of a lower quality as
compared to established similar products and services. The lower quality can be indicated
through the absences of features or benefits (Wan et al., 2015).
Airbnb Inc – Company Profile
Airbnb is a global company based in San Francisco, USA. The company provides online
hospitality and marketplace services through mobile applications and website. The company
provides a platform through its mobile app and website that allows users to offer lodging
services. The lodging being offered is usually the spare rooms, unused space, or vacant
homes owned by the users. People use the Airbnb platform to seek such low-cost lodging
alternatives. Airbnb Inc has a worldwide company value of $38 billion while its revenues in
2017 were $2.6 billion with a user base of 150 million users. Airbnb operates across 80000
cities in over 190 countries with 2.9 million hosts and 4 million listings. The companies has a
shared economy business model that involves sharing underutilised assets (Guttentag and
Smith, 2017).
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Airbnb Inc –Disruptive Innovation Theory/Model
Airbnb started in 2007 as “Air Bed & Breakfast” as a means to advertise and rent out unused
space and earn from using the unutilised space. The company was officially launched as
Airbnb Inc in 2009 and it’s considered to be the first entrant in the peer-to-peer lodging
market. To qualify under the Disruptive Innovation model, Airbnb should be able to exhibit
two characteristics inherent to the Disruptive model. The first characteristic is having a
business model that’s focused on the lower tiers of the market segment. Airbnb qualifies
this criterion by offering low-cost lodging solutions on its platform through peer-to-peer
sharing (Guttentag, 2015).
The products offered by Airbnb lacks the traditional features common to hotel industry such
as brand reputation, room service, security etc. This allows the company to fulfil the second
criteria that involve disruptive products lack the features and benefits associated with their
traditional counterparts and offer something different. At the time of inception, Airbnb
popularity was limited and focused on the lower tiers of the market. This indicates the initial
stage behaviour of disruptive innovation. The growth chart of Airbnb mimics the conditions
on the growth of disruptive innovation with minimal growth in the early years and explosive
growth in later years (Guttentag, 2015).
Source: Airbnb Growth Chart
The lodgings offered by Airbnb provide benefits such as low costs, stay in a residential
locality, etc. Airbnb offers a variety of lodgings at a relatively lower cost as compared to any
hotel. This is due to competitive pricing by the hosts. The prices are competitive due to a
number of factors such as the hosts don’t depend on the income lodging, lower labour costs
etc. Another benefit associated with Airbnb is the freedom of use of house amenities such
as washing machine, refrigerator, kitchen etc. The guests staying at Airbnb location gain
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first-hand local experience and even authentic information from a local's point of view. This
feature attracts a large number of tourists making Airbnb popular among tourists (Guttentag
and Smith, 2017).
Innovative Practices at Airbnb
Airbnb doesn't own any of the properties but provides a platform backed by the company
owned technological infrastructure to be used by hosts and guests alike. The company uses
advanced technologies 2.0 to enable peer-to-peer sharing. The technologies being used
include programming languages Ruby and JavaScript, Nginx web server, and big data tools
like Druid, Presto, and Airpal. The company also provides the hosts and guests with the
services of collecting and distributing payments. The company provides the cloud-based
platform for payment purposes (Guttentag, 2015).
It also provides the guests with an alternative to the hotels that cost less and at locations
that are convenient for the guests. The company offers compensation to the hosts alike for
specified safety or maintenance issues. This contributes towards trust building among the
host resulting in an increase in listings. From the marketing point of view, the company
ensures that the images being used by the hosts are of good quality and beautifully present
the available rent space. The company helps the hosts in deciding the price and keep it
competitive through tools like Airbnb price calculator and pricing strategy (Guttentag, 2015).
Airbnb and Hotel Industry
The hotel industries response to Airbnb was a classic example of the disruption, the first
stage was denial, the second stage was an attack by the hotels, and the third is participation.
At first, most of the hotels didn’t consider Airbnb as a threat and later on started attacking
the company by negative researches, lobbying etc. And finally, the hotels started
considering platform based peer-to-peer business model as a viable business venture and
seek ways to enter the market. The lodging services being provided by Airbnb is affecting
the established Hotels in a negative manner (Guttentag and Smith, 2017). The cost-effective
and abundant alternative provided by the company has a negative effect on the hotel
industry. The hotels are expected to experience a decline of 0.35% in monthly revenues with
every increase in Airbnb listings by 10%. The Airbnb is presenting a major threat to the
established hotels by acquiring hotel clients and changing their future preferences
(Guttentag, 2015). The effect of Airbnb in other lodging service providers can be clearly seen
from the following graph
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Source: Business insider- 2015, Morgan Stanley survey report
Airbnb is presenting a threat not only to the hotels but a variety of players in the hospitality
industry such as rentals, corporate apartments etc. The established hotels are unable to
replicate or counter the innovative approach and practices of the Airbnb and as a result,
they are losing business. Innovations are a necessity in the hospitality sector due to the
fierce competition prevalent in the sector. A benefit for the Airbnb is that it’s outside the
purview of many a regulation and rules that govern the hotel industry (Guttentag, 2015).
Future Pathways and Threats
The current relief from rules and regulations being enjoyed by the company is not a long-
term benefit since the regulatory frameworks for peer-to-peer sharing will be instilled by
the countries at one time or other. An example of such issues is the recent prohibition of
unlicensed rentals at many a place like San Francisco, New York, etc. The addition of
platform-based lodging services by a number of established groups may become a threat to
Airbnb business but the innovative approach of Airbnb may give it the edge it requires to
fight the hotel industry (Guttentag, 2015). The Airbnb is expanding at a phenomenal rate
and such exposure is allowing it a wider playing field as compared to the hotels. The
company has to contend with a limited number of direct global contenders allowing it to
progress almost unrestricted. The company is further focusing on becoming an end-to-end
travel seller allowing it to grow faster while helping the company from its regulatory
problems (Guttentag, 2015).
The regulation can be considered as the biggest threat to Airbnb growth. A string of strong
restrictions on the hosts may turn out to be a hurdle that the company may be unable to
cross. The company needs to explore ways to counter the regulatory threat and innovate to
continue its growth (Guttentag, 2015).
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