Innovation Theory: Diffusion, Disruption, and Airbnb's Business Model

This report delves into innovation theory, examining diffusion and disruptive innovation with a focus on their application in business. It begins by defining innovation and its importance for organizational success, highlighting disruptive innovation and diffusion of innovation. The report then provides examples of diffusion and disruptive innovation theories, outlining their processes and principles, including the consumer adoption pattern in diffusion theory and the eight principles of disruptive innovation. It evaluates both theories, noting criticisms of diffusion theory and benefits of disruptive innovation. The report further applies these theories to Airbnb, exploring the company's background, past, and present, and offering future recommendations. It concludes by summarizing the key concepts and implications of innovation theories in modern business contexts. Desklib provides access to similar solved assignments and past papers.

Running Head: INNOVATION THEORY 0
Innovation Theory
Report
Student Name
2/19/2019

INNOVATION THEORY 1
Table of Contents
1. Introduction.............................................................................................................................................2
2. Innovation theory example......................................................................................................................2
2.1 Example.............................................................................................................................................2
2.2 Process and principles of innovation theory......................................................................................3
2.3 Evaluation..........................................................................................................................................6
3. Application of theory in Airbnb...............................................................................................................7
3.1 Background of the company..............................................................................................................7
3.2 Past and present of the company......................................................................................................7
3.3 Future Recommendations.................................................................................................................8
4. Conclusion...............................................................................................................................................9
5. References.............................................................................................................................................10
6. Appendices............................................................................................................................................12
Appendix I..............................................................................................................................................12
Appendix II.............................................................................................................................................13

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1. Introduction
Innovation is a process of transforming an idea, information, and creative thought into the
more effective product, services, and processes that generate value for which people will pay
(Dawson & Andriopoulos, 2008).
Innovation= Creativeness + Commercialization
Innovation is essential for the growth and success of an organization or business. It became an
important part of the survival of business to innovate by knowing the needs and requirements
of the customers than only they will gain competitive advantage. The organization needs a
proper arrangement to encourage innovative things on the premises by disrupting the
traditional business model to gain new market and network.
Disruptive innovation is a process of dissolving the current or existing market and developing or
creating a new market on the basis of the innovative and unique approaches. When any smaller
company with their limited resources challenges the incumbent business by to innovate a
product or services which never existed before leads to disruption in the industry (Christensen,
et al., 2015). Diffusion of innovation is related to the concept that explains how, why and at
what rate ideas are spreading and affecting the business productivity. Once an innovation is
done, the next step is to spread that from innovator to people, which come under diffusion. It
failed sometimes because that does not reach to most of the people due to competition from
innovators, weakness in the innovation and lack of awareness (Rogers, 2010).
The concept of innovation and implication of its theories can be seen in the businesses who
adopt new technology, trends and business model for boosting the innovativeness in the
market. The report consists of process, principles, and evaluation of innovation theories and its
application in Airbnb organization. The concept of disruptive innovation is used to consider
Airbnb’s business model, which is based on innovation in modern internet technology with cost
saving. Despite that, the report contains the potential of the company to disrupt the traditional
market of the accommodation sector, and impact of Airbnb on destinations whether positive or
negative.
2. Innovation theory example
2.1 Example
Diffusion Innovation Theory

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Innovation and its effect can be seen through the implication of these two theories. Diffusion of
innovation explains how a product or services spread and gain momentum in the market.
Adoption of the product is the result of this theory, it means a person is not using the product
that they previously used and accept or replace it with innovation (Tidd, 2010).
Disruptive Innovation Theory
Disruption is a change in the market due to any innovation in the technological aspect or in any
other field. Disruptive innovation is done when new product or services launched in the existing
market at lower cost and performs better which disrupt or replace the existing product and
transforms the industry. Nowadays this theory is broadly used or often applied to many
situations where a new technology disrupts the existing business and challenge the status quo.
The firms that proved to be disruptively started by successfully targeting the segments that
were not considered by the incumbent and gaining position by delivering more functionality
that is suitable at a lower price (Johnson, 2015).
When a small company successfully challenges the incumbent business by offering product and
services to a niche market, that was previously ignored by the giant businesses is called
disruption. Appendix II illustrates the disruptive pattern, the new product or services is not
always better than the already existing product but the smaller company continues to develop
its offering with better functionality at a lower price which appeals to more customers. After
that, the demand for small company product expands beyond the initial niche customers to a
large share of buyers.
2.2 Process and principles of innovation theory
Diffusion Innovation Theory
There are four main elements of this theory or a process that encourages the spread of a new
idea (Piperopoulos, 2012).
 The Innovation: An idea to spread among the people, first step is to know the target
audience for presenting the innovation than determining their needs and usefulness and
accordingly new product should be developed.
 Communication: Channel for spreading the idea to the public is an essential step. To
transfer message from one person to other communication channel is used, new ideas
are spread to the people with help of mass media it helps in developing and changing
the attitude of the person regarding the new innovation.
 Time: An element, which is important to take decision when innovation should be done.
The innovation-decision process is a mental process, which involves accepting, or
rejecting of the idea by the public, there might be chances of failure of an idea if not

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implemented on accurate time. The rate of adoption of an idea varies from people to
people for a given time period.
 The social system: This is the combination of interrelated units that are involved in
problem solving to accomplish a common goal. The committee comprised of individuals,
organization or groups and all these is bound by some area in which diffusion can occur.
Consumer adoption pattern -
Adoption of an idea or product does not occur at the same time in a social system; instead, it is
a process, where some people adopt new idea quickly or accept it early than others. People
have different characteristics so they respond accordingly to an innovative idea or product for
adopting it (Rogers, 2010).
Appendix I summarizes the strategies used for understanding the response and behavior of
public in respect of adoption.
1. Innovators: People who are curious to try new things or have interest in experimenting
with new ideas come under category of innovators. The risk-taking ability of these
people is more and always ready to accept the new product.
2. Early Adopters: These people are already well versed with the need for change and
ready to accept the new ideas comfortably. They enjoy leadership roles by giving
opinions on each new invention and support change opportunities.
3. Early Majority: People who believe in things by seeing the evidence comes under this
category, before adopting any innovativeness they listen to success stories and evidence
of the innovation’s effectiveness. They adopt the product earlier than average person
adopts but require a solid proof to rely on.
4. Late Majority: They are afraid of change or do not want to take risk, people under this
category adopt new things when majority of people already tried. Strategy adopted by
the businesses to reach these people is to give them information about how many other
people tried the innovation and adopted it successfully. This helps in spreading of
innovation to the mind of public and changes their behavior towards innovativeness.
5. Laggards: These people mostly resist change and do not have interest in accepting the
new things. They are very conservative and bound by their tradition, belief, and values.
Strategy to reach this population includes giving statistics, fear appeals, and pressure
from adopter groups.
Diffusion of Innovation theory has application in many fields including communication, social
work, marketing, technology, agriculture, criminal justice, and public health. For instance,
manufacturing units are hiring workers with online platform called Syft. This platform helps in

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identifying well-trained workers at low cost to the industries in cities across the UK. This
innovation is spreading and adopted by most of the industries.
Disruptive Innovation Theory
Success is not about innovation only. It is about improving products and making things better
for others at lower cost to improve the living. It is all about disruption, reinvention, and
challenging their own success. There are eight principles that are discussed below for disruption
and leads to innovation (Hessman, 2014).
1. Let go of the past: Taking decision always based on experiences is good but living in the
rules of past can limit the imagination and refer to small thinking.
2. Encouraging environment: The best things come when employees think out of the box
and they will get the environment in which they express their ideas and views openly
without any judgment.
3. Embrace failure: Encouraging team to think of failure is important nourishment for
innovation in the business. Ideas should be carefully developed through several trials
and adjustments to bring them to harvest.
4. Do the opposite: For great innovations it is essential to stand out from the crowd, doing
the opposite – upending expectations, running towards the thing everyone else is
running from is necessary which leads to success and invention.
5. Imagine the possibilities: Imagination has power to find out the possibilities that do not
exist yet and for successful business one should be looking to the opportunities that can
be avail for reinventing the process, life and business.
6. Separate entity: Business should be separate from its owner so that any outcome
cannot affect the owner and he can start new after so many failures and create a new
version of success.
7. Reject limits: Disruptive innovation can be done when there is no limit of experiments
and trials. A disruptor will constantly meet with resistance and the people who do not
want change always criticize the ideas which tend to reduce the belief in process of
disruption.
8. Aim beyond: The innovation is done only when goals are clear and specific, proper
research, data collected and deep understanding of project can lead to forwarding
implementation and successful idea generation.
Disruptive technologies innovation become an intrinsic part business and lead to focus on
developing new offerings for growing need of the customers. For instance, the artificial
intelligence and autonomous vehicles are the biggest disruptors on the market. Driverless

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vehicle technology has the potential to be a market changer in the UK, it changes the way of
driving the car and offering major benefits for road safety, social inclusion, from emissions and
congestions. Another disruptor is artificial intelligence, which is present in the surroundings of
people on daily basis; an example includes Siri, Alexa, and Google assistant that are present in
many homes.
2.3 Evaluation
Diffusion Innovation Theory
Criticism:
Theory of diffusion also has some criticisms:
 It states adopter follow a specific pattern for accepting an idea but it may vary
sometimes innovator will be the laggard.
 Theory of diffusion does not state the situation when innovation modified in the middle
of diffusion process how it affects the whole process.
 The main criticism of theory is that it does not give clear picture of how successful
innovation will be in near future.
 The focus of theory is on that diffusion is one-way thing which moves from opinion
leader to locals, sometimes an innovation may be accepted by the locals first and then
by the rest of people.
Disruptive Innovation Theory
The important benefits for businesses who have applied the principles of disruptive innovation
are:
 New Market: Innovation helps in finding an area for opportunity by identifying need of
the customer but in the beginning, the idea seems to be shrinking and not gaining the
market share. These lower area or niche of the market offers lower margin, they are
unattractive to the giant firms and creating space at the untargeted segment of the
market for disruptive competitors.
 Improving existing process: The most preferred way of disruption is by improving
already existing processes for the possible solutions to consumer needs. Identifying new
sides for internal development is essential for quickly adopting the change in the
industry and for evaluating own processes, services, and product (Coulson-Thomas,
2017).
 Attracting Employees: Getting diverse people from different backgrounds provide
unique perspective, and help the company to encourage innovation and to think out of

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the box, Businesses that are curious for new ideas and open to challenges tend to put a
premium on innovation and will attract people with those qualities
 More opportunities: When any company is, open for innovation than they will be open
for new opportunities in the future that might not exist now. Through disruptive
innovation, many areas will be open for the company to think and get the opportunities
availing in the market (Bruns, 2013).
3. Application of theory in Airbnb
Disruptive innovation can be seen in many sectors because of technology advancement in all
the areas, how it affects or changes the current market scenario for already established
companies. The application of theory can understand with the help of a company that disrupts
traditional accommodation sector. Airbnb is a company who provide online platform to local
people for renting their residences to tourist for accommodation. The company was established
recently but growing rapidly and currently selling many millions of room annually. The growth
can be analyzed through the concept of disruptive innovation theory, which states that lack in
traditional offering benefits the other and can transform or capture whole market (times,
2019).
3.1 Background of the company
Airbnb is the ten years old tech- hospitality platform that started in 2008 in a flat in San
Francisco, California. The two university graduates developed a website to advertise their
apartment as an “AirBed and Breakfast” for conference delegates who were looking for the
cheap accommodation in the country and after some time they shared the platform to other
people for providing shared spaces. The website of their new ideas was re-launched in 2009 as
airbnb.com with the expanded service offering. It operates an online business in hospitality
services which can be accessible by its websites and mobile app and permits the
accommodation or homestays to tourist in a country (Airbnb, 2019).
3.2 Past and present of the company
Disruptive innovation theory states that new products enjoy the limited popularity initially and
then grow in size when entering in the mainstream market. This pattern describes the growth
of Airbnb in perfect manner as initially, the company was earning low margins but from last few
years experiencing an unpredictable growth in the accommodation sector (Guttentag, 2015).

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Founded in 2008, initially the growth of the company was slow as it took up to February 2011
for the organization to book its first million room nights but by end of January 2012 the
company reached a total of five million night booking and by mid of 2012 an average of 38,000
people were using this platform for accommodation and four million people had used Airbnb
for booking at the end of 2012. The growth of the company can be analyzed through the above
statistics that how a disruptor changes the whole market in few years of establishment
(Guttentag & Smith, 2017).
Currently the world’s biggest online platform with 4.5 million properties within 81,000 cities
and over 300 million guests and now stepping at its next stage of growth that will push the
company to have 1 billion annual guests by next decade (Mody & Gomez, 2018).
Legal issues - Airbnb facing the legality and tax issues as the rental activity of company is illegal
and avoiding its full tax obligations, the company helps to encourage the growth of informal
tourism accommodation sector. The informal sector refers to the production of goods and
services that are unregulated by public authorities. Many countries do not permit the short
term renting or limited the number of times per year a residence can be rented out but Airbnb
violated the laws and expands its informal accommodation operation to the whole world
(Guttentag, 2015).
The tax obligation on company was because it is operating in the informal sector where guests
avoid paying the taxes charge on accommodation due to that illegal act company is gaining
competitive advantage as it reduces the cost for the customers. Airbnb strategy has been to
stronger the foundation before facing its legality issue, as company has grown to the point that
it is getting government attention which increases the chances of highlighting the legal issues
and tax obligation on the company. The government should change the legal action regarding
the tourism sector for encouraging the disruptive innovator and establish a uniform tax on
short-term rentals (Biemans, 2018).
3.3 Future Recommendations
The regulatory environment of Airbnb is illegal due to that it is difficult to predict the future
growth of the company but it operates parallel with the traditional accommodation sector by
targeting the niche market and its size will never affect the traditional service provider as both
have different target audience (Ahlin, 2014).
Airbnb should try to focus on to the higher end of the market that is business travelers and
wealthy leisure travelers. Hotel industry also starts competing with the brand Airbnb by
providing experience of local cheapest hotels to the tourist and it gives tourist the peace of
mind offered by recognizable brands. The company also takes some step towards providing an
authentic brand to the public with new offering, the newest product Airbnb plus that

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guaranteed to meet certain standard of the high profile people with proper hospitability
services by charging higher rate (Luqi & Saloomeh, 2019).
Regulating environment of the company will be proven as threat in the long-term growth;
Airbnb should try to compromise with the cities tax and laws or create a partnership with them
for collection of tax and also maintain good relation with the government for future progress in
different cities (Amabile & Rigolizzo, 2015).
4. Conclusion
Innovation is generation of new idea and transforming that idea into a product or services for
benefit of others. Innovativeness becomes the necessity of the market without it no one can
survive or grows; customer satisfaction can be attained through continuous changes and by
understanding their needs. Theory of innovation includes the way at which an innovation
spread and disrupts the whole existing market. Diffusion of innovation leads to the rate at
which any new idea, product, processes, or services become popular such as soft, a platform for
hiring the workers gain popularity in UK. Another theory of innovation is disruptive innovation,
which states how a new idea disrupts or affects the whole industry and gain momentum over
the existing businesses.
The concept of disruption can be understood with the help of its application in Airbnb
Company, a platform that based on the model of peer-to-peer accommodation facility to tourist
at lower price. The company disrupts the hotel industry by providing space and local
accommodation to the travelers in the country with help of digital technology, in spite of facing
some legal issues regarding small rental agreements and tax Obligations Company showed the
tremendous growth in the sector and will be the major giant players in the industry.

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5. References
Airbnb, 2019 Overview of the Airbnb community in the UK. Available from:
https://www.airbnbcitizen.com/wp-content/uploads/2018/10/AirbnbUKInsightsReport_2018.p
df [Accessed 21 February 2019].
Ahlin, B., 2014. Entrepreneurs’ creativity and firm innovation: the moderating role of entrepreneurial
self-efficacy. Small Business Economics, 43(1), p. 101.
Amabile, T. & Rigolizzo, M., 2015. Entrepreneurial creativity: The role of learning processes and work
environment supports. The Oxford handbook of creativity, innovation, and entrepreneurship, p. 61.
Biemans, W., 2018. Managing innovation within networks. London: Routledge.
Bruns, P., 2013. Corporate Entrepreneurship: Innovation and Strategy in large organisations. 3rd ed.
london: Palgrave MacMillan.
Christensen, C. M., Raynor, M. & Mcdonald, R., 2015. What is disruptive innovation?. Harvard Business
Review, December.
Coulson-Thomas, C., 2017. Stimulating creativity, enabling innovation and supporting entrepreneurship.
Management Services, 2017(Summer), p. 26.
Dawson, P. & Andriopoulos, C., 2008. Managing Change, Creativity and Innovation. 3 ed. UK: Sage
Publications.
Guttentag, D., 2015. Airbnb: disruptive innovation and the rise of an informal tourism accommodation
sector. Current Issues in Tourism, 18(12), pp. 1192-1217.
Guttentag, D. A. & Smith, S. L., 2017. Assessing Airbnb as a disruptive innovation relative to hotels:
Substitution and comparative performance expectations. International Journal of Hospitality
Management, Volume 64, pp. 1-10.
Hessman, T. M., 2014. Disrupt or be disrupted: Eight Principles of Disruptive Innovation. Industry Week,
27 June.
Johnson, W., 2015. Disrupt Yourself: Putting the Power of Disruptive Innovation to Work. New York:
Bibliomotion inc..
Luqi, L. & Saloomeh, T., 2019. Impact of Airbnb on Customers' Behavior In the UK Hotel Industry.
Tourism Analysis, 24(1), pp. 13-26.
Mody, M. & Gomez, M., 2018. Airbnb and the Hotel Industry: The Past, Present, and Future of Sales,
Marketing, Branding, and Revenue Management. Business Practices, Fall 2018, 31 october.

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Piperopoulos, P. G., 2012. Entrepreneurship, Innovation and Business Clusters. 1 ed. London: Routledge.
Rogers, E. M., 2010. Diffusion of Innovation. 4 ed. New York: The Free Press.
Tidd, J., 2010. Gaining Momentum: Managing the Diffusion of Innovations. London: Imperical College
Press.
times, N. Y., 2019. Disruptive Innovation: Uber, Airbnb and other companies reshaping the market. 1 ed.
New York: Educational Publishing.