Disruptive innovation is probably one of the few ways that a startup can beat well-established (and well-capitalised) incumbents. The concept of DI has been stated as one of the most significant management concepts in business management. Clayton Christensen (CC) was ranked 1st Thinkers50 in 2011 and 2013, 2nd in 2015 and 3rd in 2017 (note this list is published only every second year).
But disruptive innovation (DI) is not what many people think. It gets often confused with breakthrough innovation (and other forms of innovation). But its playbook is fundamentally different from that of breakthrough innovation.
If you are a startup with a new microchip that (for argument's sake) is 100x faster than the best chip currently but the same in all other important attributes, then you have a breakthrough innovation and not a disruptive innovation. Your playbook will be very different from that of a disruptive innovator. The irony is that if you discovered a microchip that is much slower than the fastest chip currently but scores much better in other, not-yet mainstream attributes, your chances to succeed may be greater.
Equally, many will be surprised to hear that Uber does not fall under disruptive innovation. It’s not me saying this but Clayton Christensen who has uncovered and published the concept of disruptive innovation in the mid 90s.
But not so fast, let’s start at the beginning.
Here is how this article is structured:
- What exactly is disruptive innovation?
- Who will win when: entrant vs incumbent & the playbooks
- Why Uber is not a disruptive innovator
- Applying disruptive innovation on our lives
Understanding disruptive innovation is of great value for entrepreneurs/startups as well as intrapreneurs who are on opposing sides when it comes to disrupting or facing to be disrupted. They both have their own playbooks to get the best outcomes for themselves. Note, I am talking about “product” in this article, but it can equally be applied on services (as well as the “same” product delivered in a different business model).
Part 1: What is disruptive innovation (DI)
“First, a quick recap of the idea: “Disruption” describes a process whereby a smaller company with fewer resources is able to successfully challenge established incumbent businesses. Specifically, as incumbents focus on improving their products and services for their most demanding (and usually most profitable) customers, they exceed the needs of some segments and ignore the needs of others. Entrants that prove disruptive begin by successfully targeting those overlooked segments, gaining a foothold by delivering more-suitable functionality—frequently at a lower price.
Incumbents, chasing higher profitability in more-demanding segments, tend not to respond vigorously. Entrants then move upmarket, delivering the performance that incumbents’ mainstream customers require, while preserving the advantages that drove their early success. When mainstream customers start adopting the entrants’ offerings in volume, disruption has occurred.” Clayton Christensen
Ok, let’s unpack this brilliant but short summary ...
(1) Disruption often starts with “crappy” products
Yes, when you watch one of Clayton’s talks, you will almost always hear that disruption starts with “crappy” products (his word).
You will frequently hear him say that Toyota did not enter the US with a Lexus but with a rather inferior product compared to what was on the market at the time. But in conquered market segments that at the time could not afford higher-priced cars.
Some may want to call it a minimum viable product (MVP) though one can argue whether it's the same.
(2) Disruptive innovation (DI) delivers mainly on new performance attributes
The most important point about Disruptive innovation: while in some cases, it may be seen as “crappy” in the traditional/known performance factors, it typically delivers better on new performance attributes.
- Initially, these products may not even be seen as a real competitor by the incumbent. However, over time the disruptive product improves in ways that it also provides value on existing performance factors (value propositions).
- When Brian Chesky and Joe Gebbia put out an air mattress in their living room to sublet it via the internet in February 2008, no hotel perceived it as a formidable new competitor. Yet, it is how Airbnb started.
- In the very beginning, it may have created (some) new demand but from the mid-2010s, surveys showed that it was mostly (>95%) substituting (thus competing with) hotel bookings.
(3) The initial product/service can often serve as a beachhead
The disruptive product often creates a new market of new customer segments. This is why the incumbent can remain unfazed initially. However, the MVP (and its initial iterations) can serve as a beachhead from which to take things further.
And that is what happens frequently. The entrant has several options to branch out to.
Sleeping on an air mattress was certainly not the mainstream customer’s idea of lodging. But it helped to develop an online platform which could be used to rent out private rooms, entire homes, etc (only the listing type changed but not how the platform worked in principle).
Not having to sleep in the host's living room but having a private bedroom, hence, was already an innovation that would compete with some of the lower level hotels and traditional bed & breakfast.
(4) Performance trajectories
A valuable concept in the context of DI is that of performance trajectories. CC says that almost every industry has a critical performance trajectory.
There are industries / product categories where it is simpler to see. E.g., if you are producing computer memory, its capacity is often the most important performance factor. For microprocessors, speed is crucial. This was far more pronounced in the earlier days when there was not a microchip in every product that we use (i.e. the use cases were far more limited).
Airbnb scores lower on some performance factors that are considered basic requirements by hotels. E.g., it lacks room service (e.g. getting your bed done every day), doesn’t have a concierge, a restaurant, etc.
But it does great in other performance criteria, such as the properties of the accommodation, the number of amenities, etc. Where guests have (grudgingly) accepted to be staying in a shoebox sized hotel room (or 2-3 rooms for considerably higher rates), at Airbnb, they can have entire homes with 2, 3, 4 or more bedrooms plus living room, kitchen with amenities, gardens, BBQ areas and more. And these types of listings were added quite early on.
Below is how a basic performance graph could look like. I have added the performance attributes on the y-axis which is typically not done but I think it demonstrates the methodology better this way. It is illustrative only. We will look at another version shortly.
It’s crucial to notice that disruptive innovation occurs through a new set of performance factors. If you have an innovation that measures on the same performance factors, you are not a disruptor and the playbook is a different one! Of course, there will also be overlaps but there have to be some notable differences. More shortly.
Clayton Christensen (CC) advocates not to compare across individual features. His recommendation is to look at the “Jobs-to-be-done”. This is a more holistic view of the customer value proposition than a feature-based view.
Applied to our example, hotels and Airbnb are not just the providers of accommodations. But customers “hire” these places for a “job-to-be-done” (this is the terminology).
By this way of thinking:
Hotels are an accommodation which also takes care of some of the daily chores, such as making beds, tidying up, cleaning the room and bathroom, washing towels, cooking, taking care of the dishes and more. Thus, hotels get the job done of allowing guests to relax throughout. Call the job-to-de-done: “caretaker”.
Airbnb on the other hand provides larger accommodations with lots of amenities. It allows guests to do their own meals (saving money on what is often expensive), provides washing facilities for dishes and more. But it does not take care of these kinds of jobs for the guest. Thus it does not do the job (note, Airbnb Luxe provides such services). Call the job-to-de-done: “homy accommodation provider”.
It’s more than conceivable that consumers will choose to “hire” both Airbnb and hotels depending on what “job they want to get done” on the respective trip.
CC emphasised the “job-to-be-done” concept for a long time but only elaborated on it in more depth in the later years.
You can also split your product (or service) features as to which job they help to get done (better). E.g. in the diagram above, which jobs do the individual performance factors help to get done (nice little exercise for you).
(6) Disruptive innovation doesn’t catch on with mainstream customers until its performance reaches a certain level on the traditional measures
As the disruptive product improves, it also starts to deliver on the traditional performance criteria (this is part of the playbook). As it continues to do an increasingly better job in this dimension, a market shift can occur (if this doesn’t happen, we would not speak of disruption).
Airbnb has added a number of elements on the traditional performance factors. E.g. the check-in process has been taken care of. The App allows for guests and hosts to communicate. Service elements have been improved.
These app and process improvements address the lack of a concierge / front desk compared to hotels. The same holds true for their requirements for linens, towels, soap and other basic amenities. This is still not the same as a full hotel room service but it is reducing the gap.
As the disruptor builds on their own performance factors, they also start to satisfy more of the incumbent’s traditional performance factors. From there, they build on this and start moving up.
This often leads to a dynamic where the incumbent tries to get better on their performance factors leading to a frequently-observed market dynamic of fleeing up the performance ladder. More shortly.
(7) Two types of innovation/technology
CC distinguishes between two types of innovation in this context:
- Sustaining technologies/innovation: improve a product (or service) along the known (traditional) performance factors and trajectory. See the gradually sloping up trajectories in the performance chart for the various hotel tiers.
- Disruptive technologies/innovation: DI comes with and improves along different performance factors. This is the most distinguishing factor. They can trail incumbent products for a long time on the traditional performance factors. But at some stage, they get good enough on the traditional performance factors to appeal to large customer segments. From here, a market shift starts to occur towards the disrupting product.
CC gives examples where the disruptor contributed to the incumbent’s disappearance without ever having reached the performance levels that the incumbent achieved.
This is a fascinating thought.
And Airbnb, too, will never have certain attributes that hotels offer. The vast majority of Airbnb listings (exclude Luxe) will never have lounge areas, bars, restaurants or room services like hotels. And yet, these are some of the performance factors that hotels invest in a lot.
It can be frequently observed that the disruptor also engages in sustaining innovation (such as the items we called out for Airbnb: in-App communication, etc).
But the opposite can happen as well when the incumbents start delivering on the new performance factors / jobs-to-be-done. One of the jobs Airbnb gets done is to provide unique, authentic stays. And Hotels have started to work on this through their collection brands (more shortly). This is one way to combat disruptive innovation.
But the disruptor continues to innovate on the new performance factors. As Airbnb adds entire homes with dozens of amenities, they increase their lead in the new performance factors. It is difficult for the incumbent to follow such leaps (some hotels have started to provide a kitchen(ette) area and/or separate brands for serviced apartments, etc).
(8) Demanded performance levels
This then brings us to the next interesting thought around what customers demand. In some industries, this can change fast while in others it may only happen very gradually. Requirements for smartphones can change fast, for hotel rooms slowly. This has also a lot to do with the general pace of innovation in the respective sector.
But there is a limit to what consumers can usefully absorb in terms of the provided performance level.
Do we really need the 7th blade on our razor (or worse, a pivoting ball)? I don’t think so. Yet, a well-known company spent hundreds of millions (yes) on developing these “innovations”. Later, they spent a billion acquiring a disruptor (Dollar Shave Club) that offered a razor with two blades (isn’t it funny?). DSC was competing on additional factors, such as a subscription model and mailing razors monthly (which in itself was copying Nespresso’s innovation from the 70s).
In the early days, users could tell the difference of the resolution of smartphone cameras and it was the main advertising point. We are now at a point where other factors start playing a bigger role as well (wide angle, closeup, motion capture, video capturing quality, etc).
The point here is that what the firm considers as innovation provides only minimal improvement from the user’s perspective.
Let’s come back to hotels and Airbnb. Comparing across the job of “providing accommodation” to be done, we can observe that:
- If you looked at a typical hotel room 20 years ago and now, you could not tell a great difference (maybe the type of TV?). Some room sizes may have even shrunk with more sophisticated lighting making the room look larger. Hotels have reached the “peak” of the traditional performance factors. And they can’t offer larger rooms viably, esp in the mid-class segment. End of performance trajectory reached (within their business model constraints).
- Airbnb is beating hotels on the job-to-be-done of “providing accommodation” hands down in the same price category.
- Hotels have started investing more in the shared amenities / facilities, restaurants, pools, etc which are popular items and difficult to imitate for Airbnb (though as I covered in my premium resources, they are working on this).
- We can say that hotels are following the sustaining innovation trajectory adding some new performance factors with regards to shared amenities / facilities.
And hotels have started following CC’s tips in terms of creating new brands and businesses to compete with disruptors - more later.
(9) Experimentation is important
Clayton Christensen (CC) was advocating “agile” and experimentation early on (in the right circumstances). Of course, it is easier to experiment for start-ups for many reasons.
What’s often forgotten is that there are also limitations to experimentation within startups. Early decisions put the startup on a trajectory that still allows for a lot of experimentation but within confines. As I have argued last time, it’s highly unlikely you will experiment your way from Turo or Zipcar to Uber.
I will cover the topic of experimentation in more detail in a soon-to-come article on the lean startup and say a few more words on it in the next section.
Part 2: Who will win when: entrant vs incumbent & the playbooks
(1) When and why do incumbents “decide to get killed?”
Clayton Christensen (CC) has documented hundreds of incumbents that went out of business through disruption. His famous question to his audiences on his talks is when exactly the incumbent decided to “get killed”?
The answer is, of course, they didn’t. In fact, they lost because they have optimised all their processes to compete on the traditional performance factors extraordinarily well.
These optimisation processes include everything from resource allocation, to investment appraisals, to sales processes to career progression / remuneration of managers, etc.
If you think of a situation one incumbent vs one disruptor, the incumbent may be able to do better. But the situation is far more complex with many competitors on the incumbent as well as the disruptor side.
An incumbent trying to compete on the old and the new performance factors could get stuck in the middle and be outcompeted by incumbent-competitors that remain focussed on the traditional performance factors (yes, they too may “get killed” down the track but for a few years it will look as if they have outcompeted their competitor).
This is one of the reasons why it can be risky to try to imitate the disruptor. But there are many such reasons:
“Proposals to create new businesses in emerging markets are particularly challenging to assess because they depend on notoriously unreliable estimates of market size. Because managers are evaluated on their ability to place the right bets, it is not surprising that in well-managed companies, mid-and top-level managers back projects in which the market seems assured. By staying close to lead customers, as they have been trained to do, managers focus resources on fulfilling the requirements of those reliable customers that can be served profitably. Risk is reduced—and careers are safeguarded—by giving known customers what they want.” Clay Christensen
(Reminds us of Henry Ford’s famous saying “If I had asked people what they wanted, they would have said faster horses.” just replace “people” with “managers”)
CC’s books cover these aspects in great detail and in a way that will strike a chord with anyone working or having worked in large firms.
From the entrant’s perspective, this explains some of the “unexplainable” behaviours of incumbents and it’s important to know.
(2) Disruptor vs incumbent: typical dynamics
Having optimised their processes on excelling along the traditional performance factors, incumbents then just to that: excel on the traditional performance factors.
Often the disruptor starts to take away market share from the lower tiers of the market. In our case, we would speculate that Airbnb would take market share from bed & breakfast, economy and midscale hotel markets and then move upmarket over time.
The incumbent, on the other hand, moves upmarket and deploys their resources accordingly. Chipmakers build ever faster chips (Andy Grove, then-CEO of Intel, was the first big endorser of CC’s work. Having figured out why they were in the middle of being disrupted, they invented the Celeron, a far less capable chip on the traditional performance factors). Hard drive manufacturers build ever larger-capacity hard drives. And we would assume that hotels build more upscale & luxury hotels and refresh/reconfigure lower scale rooms to upper scale rooms (we will have a look if this is true shortly).
CC calls out that - ironically - it works initially. As incumbents move upmarket, they make higher profit margins and financial results may seem to improve, esp marginal metrics such as return on equity / assets (and often helped by reducing the denominator rather than increasing the nominator). There may be incumbent-mergers along the way.
Ironically, so CC says, everybody is happy. He doesn't miss to call out that the financial media cheers all along this process because of the higher profit margins and improving relative metrics.
(3) The Wile E. Coyote moment: outstripping the customer’s needs
Let me start with the same intro as in the last section and add one more sentence - see if it makes sense:
Having optimised their processes on excelling along the traditional performance factors, incumbents then just to that: excel on the traditional performance factors. But they realise too late that they are starting to exceed what customers can absorb (or are willing to pay more for the marginal utility/benefit provided).
This is where it starts to get tricky.
As the disruptor grabs one layer of the market after the other (or just some of the important layers for that matter), the incumbent moves up the ladder to the premium end.
In some cases, the disruptor starts to also take over the top-of-market. In other cases, the premium end is just too thin for the incumbent.
The big insight is that “It is the trajectory of the disruptive technology compared with that of the market that is significant.” Clay Christensen
Just as the incumbent if offering their “best product ever”, they “get killed”.
There is no further market tier to climb up to because either there is no technological solution or more intriguingly, the customer doesn't need an even better product on the traditional performance criteria.
If the incumbent could offer their top products at lower cost, they could probably fight more. But often the disruptor has a lower cost base.
This can be for several reasons. Incumbent’s legacy cost structures tend to grow over time making it difficult to untangle. Technologically, disruptors often start with an initially inferior, cheaper solution but figure ways to improve it to higher performance levels while still preserving the cost efficient characteristics.
There can be different ways how the later-stage dynamics pan out.
In some cases, the disruptor gets better and scores high on the same performance factors as the incumbent but also scores well on their own performance factors and comes at a lower cost making more and more customers switch.
In other cases, there is just enough value delivered on the traditional performance factors and significant value on the new ones (still at lower cost). As the entrant gets better across both (while the incumbent only does on the old factors), more and more customers switch.
Eventually, with their heavy cost structure incumbents spiral into non-viability. Some or many incumbents may disappear. A new demand equilibrium for the traditional performance factors vs new performance factors may emerge. I would assume this to be more likely where the traditional performance factors include jobs-to-be-done that are hard to fully replicate by the disruptor.
Premium airlines are still around but low cost carriers have taken significant market share (differing by region between 32%-57%). The tapering growth of LCCs’ market share could indicate that the new equilibrium has been reached.
In such cases, a co-existence of disruptor and incumbent can occur albeit shifted market shares.
(4) Who will win when?
Let’s just call ourselves “disruptors” and think we are invincible! Not so fast - incumbents also win!
Types of innovation:
- Sustaining innovation context → incumbents win: “Empirical findings showed that incumbents outperformed entrants in a sustaining innovation context but underperformed in a disruptive innovation context.”
- Disruptive innovation context → entrant wins
Now, what does that mean you might ask.
Basically, this goes to look at the wider context of the market and industry.
CC says that initially, they found a great correlation but were struggling to find a causation for the two observations above. Their ongoing research results then showed that the competition among entrants leads the smarter entrants to look for solutions to go upmarket on the traditional performance factors. Yes, it is what I have explained in the last few sections.
In a sustaining innovation context, improving on the traditional performance factors satisfies enough customers to stay with the incumbents. Here the market favours incumbents and disruptors may not make it or gain only a small market share of the traditional market (or grow their market share very slowly).
Keep in mind that these processes unfold over many years, sometimes 3-4 decades! (CC’s work is based on a lot of data points across a long period of time as is that of other good management researchers).
As I pointed out in my last article, there are over 800 companies in the Crunchbase database in the Sharing Economy space. How many “have made it” or are seeming to disrupt their industries? Maybe a dozen (being generous). That means there are still many areas that are in a sustaining innovation context (and I think change is approaching).
Where’s the lodging industry? Well, it might be somewhere in the middle - quite similar to the aviation industry with some geographical markets favouring the disrupting jobs-to-be-done and others the traditional. (In aviation, for example, there were many bankruptcies on both sides: incumbents and disruptors).
As you get away from simple one-concept-explains-it-all “management” books, you see it’s not black and white (that’s why I call my blog in-depth, real-world innovation).
But with CC’s science- and data-based approach, a number of great recommendations have emerged for both sides.
(5) The disruptor’s playbook
“Smart disrupters improve their products and drive upmarket.”
I think based on all I have covered, you already know what you should be doing:
- Enhance on the new performance factors & get better on the new jobs-to-be-done;
- Drive upmarket on the new performance factors;
- Drive upmarket on the traditional performance factors(!);
- Continue experimentation and find the right mix on improving on the new vs the traditional performance factors.
And don't forget: “The data supports the theory’s prediction that entrants pursuing a sustaining strategy for a stand-alone business will face steep odds: In Christensen’s seminal study of the disk drive industry, only 6% of sustaining entrants managed to succeed.”
Airbnb is a good example. They have created separate segments (and sub-brands) for the different layers of the market:
- Airbnb: the mainstream offering
- Airbnb for Work: business trips
- Airbnb Plus: competing with upscale hotels
- Airbnb Luxe: competing with luxury hotels
- They are doing all of this while still improving on the new performance factors but also replicating a lot of the traditional performance factors.
Here’s my reminder: Be sure that you are really a disruptor so that you choose the right playbook.
(6) Are you really a disruptor? Ideas for non-disruptors
Just stop for one second without reading on and repeat to yourself what makes a disruptor?
There’s a great chance that many who think they are a disruptor are in fact not!
A (potential) disruptor focusses on a set of new performance factors. They often score low on the traditional performance factors (at least initially).
If the core of your innovation is scoring high on the traditional (yummiest doughnut, fastest microchip, highest-resolution camera), chances are you have a breakthrough (or sustaining) innovation but not a disruptive innovation.
Disruptive innovation often comes from “left field”.
Equally, a startup with a breakthrough innovation that “only” innovates on the traditional performance factors should not follow the disruption playbook as most likely they will stand no chance to succeed (or a 6% chance as you have read above).
You have a better operating system than Microsoft? Congratulations, but please queue at the back, because hundreds of others did so before you. And they also got crushed.
(7) The incumbent’s playbook
CC says that experimenting and “getting excited” about small orders, low profits, etc is difficult for incumbents.
CC goes to say that the incumbent needs to create an independent organisation and brand. He also states that he gets regularly lectured by managers on the great cost of the latter (ie creating a new brand).
His reply then goes like: it is interesting that creating a new brand is not too expensive for the entrant who has basically no capital but too expensive for the cashed up incumbent. (note: that the theory emerged in 1995 when capital did indeed come at a cost whereas now there seems to be almost limitless funding for some startups …).
I have worked in a company where this recommendation (dual brand) has been followed for almost two decades and I know it can work.
Creating a separate organization is necessary only when the disruptive innovation comes at a lower profit margin than the mainstream business and must serve the unique needs of a new set of customers.
CC also points out that in some cases incumbents create separate organisations but then fold it into the mainstream too early to save on marginal costs.
WeWork’s main competitor IWG was founded some 20 years before WeWork. They have about 2 dozen brands focussing on different customer segments. It’s difficult to say what is the best approach. There can also be downsides of splitting one's power into too many brands.
And what about hotels? Well, they are following CC’s advice on the dot.
Accor hotels has some 3 dozen brands, whereas Airbnb has one brand only (though HotelTonight operates under its own name but this is a very different business altogether).
Take the example of boutique hotels.
One important guest job-to-be-done is to “provide unique / authentic / exciting stays” - and Airbnb is doing an extraordinary job in this dimension. Hotels have started to invest in this job through “collection brands” and boutique hotels. They combine this with their traditional performance factors of (room) services, facilities/amenities popular with those segments, etc.
You will certainly find that these types of hotels are also located in more “hip” areas whereas hotels tend to be clustered around the CBD, airport and other areas visited by business travellers on weekdays.
On a final note I want to add that since CC has written his first publications in the mid 90s, much has happened as to how to deal with underperforming businesses. Closing doors is not necessarily the most frequent outcome for disrupted incumbents. M&As, selling business segments, radical transformation and other approaches are among the ways to be disrupted (some of these may be “celebrated” by the financial media which may obfuscate what has really occurred).
Part 3: Examples
(1) Why Uber is not a disruptor
I am trying to sharpen your eye for what is and what is not disruptive innovation (DI) so that you can make the right decisions. Let’s start with an example of what is not DI.
Many would say that Uber is a disruptor. Not so CC:
“According to the theory, the answer is no. Uber’s financial and strategic achievements do not qualify the company as genuinely disruptive—although the company is almost always described that way. Here are two reasons why the label doesn’t fit:
- Disruptive innovations originate in low-end or new-market footholds [...]
- Disruptive innovations don’t catch on with mainstream customers until quality catches up to their standards [...]”
Some of CC’s comments on Uber are that:
- Uber started as direct competition to taxis. It also didn’t start as a “crappy” product at the bottom of the market. In fact, their product was superior from the gate.
- They competed largely on the same performance factors as taxis: waiting times, transport times, costs, comfort, transaction convenience, etc.
- The did not start initially in a new market but pretty much as head-on competition with taxis (and other transport).
- They also went straight for the mainstream market, not some lower-end market segments (say exclusively in suburbs with little taxi coverage).
- They didn't capture a new market as a foothold to improve their offering to the main market.
- And so on. I’m sure this helps your understanding.
That said, things are a bit more specific because taxi markets are highly fragmented. They are also highly regulated (which CC thinks is a major contributor). I have called regulation out as one contributor but there are many other contributors.
You can also compare Uber to other transport options: public transport, car rental and ask the question whether or not they are disrupting that space.
A fascinating question is whether Uber can disrupt car ownership (i.e. the business model of car manufacturers to sell directly to end-users). One could imagine that - esp with self-driving cars - Uber (and other ride-hailing companies) could disintermediate car manufacturers from end-customers (which could have devastating effects for car manufacturers). This will be an interesting one to watch over the coming years / decades.
Then there is the question of whether Uber could be disrupted themselves from the bottom through ebikes and escooters. As I have pointed out in our premium resources, Uber is entering the short-distance transport markets (<3miles) themselves through their Jump offerings (yes, for now, they have kept their acquisition under its original brand (following CC’s recommendation - we will see if this will remain for long).
You can learn more about Uber in our premium resources.
(2) Disruption example: Airbnb
Many of my readers are just happy with the general knowledge shared in my free articles. But there is far more to innovation than general knowledge. My premium resources show you a lot of other important aspects of it.
Linking management knowledge to relevant data is one of the key aspects of my premium resources which I consider essential to success.
The disruption chart shows the hotel and the Airbnb tiers (illustratively only). The performance factors have now been mixed and illustrative only.
Are we seeing disruption unfolding? Some signs speak for it. A 2014 article shows hoteliers underestimating the threat.
“He’s not alone in his thinking. “Our guests don’t want the Airbnb feel and scent,” says CN [note: name abbreviated], EVP of global product and operations at the Four Seasons. CN says that Airbnb doesn’t really compete with the Four Seasons because its amateur hosts can’t match the level of hospitality his hotel’s professional concierges offer, and its customers expect a “level of service that is different, more sophisticated, detailed, and skillful.” (DO [name abbreviated], VP of the Ritz-Carlton’s leadership and hospitality training center, told me she’s never even heard of Airbnb.)” FastCo
Not only do we witness here the typical denial but in the bolded section you also see one of the key issues of incumbents: comparing the disruptor on the traditional performance factors without looking holistically at the traditional and new performance factors.
Unlike Uber, Airbnb ticks many of the DI criteria:
- Started down market - air mattress, but moved pretty quickly upmarket;
- Still 40% are private rooms (in many large cities) - these are low market (bed & breakfast);
- They used the low-market revenues to move up-market;
- And are continuing to do so at a rapid pace: Plus, Luxe;
The rapid progress & growth has to do with the power of the platform business model which lends itself to fast scale. Slowing forces were of regulatory nature.
The typical story of disruption?
Did Airbnb have a noticeable effect on hotel revenues (yet)?
Even with the best intentions to not be biased, the answer seems to be a yes. Let’s look at some data. But what kind of data?
We need to look at aggregate economic data. One of the most important lodging industry economic metrics is RevPAR (Revenue per available room). It is also a key company-level metric. You will find this metric the annual reports of every hotel chain.
We can clearly see a stagnant RevPar for all regions except the Americas. One would be inclined to immediately say that it demonstrates the effect of Airbnb. But note that all curves are denominated in USD. That means that currency effects are not calculated out of the regions other than the US (and we know the USD has strengthened since the GFC). The other consideration is that one would need to overlay the overall economy.
That’s why I recommend looking at the “Americas” graph only. It can still have some Fx-issues for the non-US countries but the US market is the biggest therein. There is a >20% increase in RevPAR for 2009 which is thanks to the GFC rebound. I believe the most valuable part are the last 5 years in this graph for the US. We will look at the ADR chart in a minute but RevPAR is more significant.
We know that the economy has done well in those years - yet RevPAR growth has been very moderate. 2019 - a good economic year - led to a small decline in RevPAR. This can be indicative of an Airbnb-effect. But we need to be careful with such statements due to the complexity of the data.
But the next chart adds to it.
We see a considerable contraction of hotel rooms in the economy and midscale tiers (the percentage figures show the growth rates for each tier). As per the earlier remarks, these are the tiers that Airbnb users have substituted with Airbnb bookings initially.
These rooms have not disappeared (there is an overall growth of 3.5% over the years). As you can see from the growth of the various upper scale tiers, these rooms have been repurposed (they will have undergone a refresh / renovations, etc). But essentially, hotel rooms have gone from lower to upper tiers.
Remember the incumbent climbing up the performance ladder? Well, I think we have considerable evidence for this process in this chart.
Incumbents seem to have started climbing up the performance ladder (on the traditional performance metrics). We could be in the early/mid phases of this process. As we know, the air gets thin as the incumbent climbs up the ladder.
The process typically unfolds over a long period of time (for capex-intensive industries over decades). But Airbnb is not capex intensive, has sufficient funding and is not just going one step at a time. They are attacking all tiers of the performance spectrum at the same time (remember Plus and Luxe).
Another important industry and corporate metric is ADR (Average Daily Rate). It is a measure of profitability (I am explaining ADR, RevPAR and other important industry metrics in more detail in my Airbnb premium resources).
It might sound great that ADRs are increasing but don’t forget that it is fitting very much to the unfolding of disruption. The incumbent achieves higher margins because they climb up the performance ladder (and is being cheered by the investor community).
Given a considerable amount of inventory (rooms) has moved up the performance ladder you would expect nothing less than this. In 2019, ADRs fall off the cliff. This is remarkable given it coincided with a good economic environment (at least from a jobs perspective - here a scholarly article that shows the hotel industry demand elasticity in correlation with income as one of the key drivers).
It would have been great to observe these metrics in 2020 and 2021. But the data will be greatly skewed by Covid. On the other hand, covid highlights another aspect of Airbnb - and that is its potential resilience due to the diversified nature of its listings (urban vs rural on the top-level but then even more). I have covered this aspect as well in the pro resources.
Is the data that we have sufficient to talk about an ongoing disruption?
Well, that’s exactly the difficulty. It is hard to judge while disruption is unfolding. It’s easy to say in hindsight. But there are some clear indications.
Important are the drop off the cliff in both ADR and RevPAR in 2019. But more important is the incumbents’ moving up the performance ladder (on the traditional performance criteria).
I encourage anyone to make their own judgment.
Part 4: How to measure your life?
Oops, are we in the wrong blog?
CC was a great mentor for me without ever having met me. That has a lot to do with his book “How to measure your life?” and his online talks that I have watched over a hundred times. I have read all of CC’s books (except for the domains-specific ones on education and healthcare). And the most important one - I have found - was the latter mentioned one.
CC has transferred his concepts to our lives and asks if we/you are making the same mistakes as firms.
Are we measuring our lives on the “traditional” / wrong performance factors?
If you don’t have the time to read the book, I recommend watching one of these two talks. They cover business management and its application to our lives.
It gives us an opportunity to think through where we will end up if we follow our individual (current) trajectory.
In a nutshell, Clayton says that we might be measuring our lives on wrong performance criteria. We may be measuring our lives based on how high we made it in the organisational hierarchy, the budget we managed or how many people reported into us.
He also says that, like companies, we may be spending our time based on wrong return on investment calculations. When we have half an hour left in the evening, we may be doing a marginal / relative ROI calculation and deciding to spend it on work / career related activities. We might be missing out on helping others or spending time with our family.
The short term consequences are minor, the long term consequences severe.
Clayton’s thoughts were instrumental to my decision to share ridiculously more than any other free source on the topics that I am covering.
Clayton’s generosity was legendary. His dry humour hilarious. And his dealings with his health problems admirable.
Clay Christensen, TEDxBoston, 2012 (~20mins)
Many of his talks were after a stroke where he battled to find the right word (his speech centre was affected and he had to relearn talking - at times together with one of his grandchildren as he tells us).
He said that when he will have his “interview with God” (he was deeply religious), the only thing that his life will be measured in will be the number of people he helped.
Clayton passed away in January this year.
I think he is being positively surprised during his “interview with God” of the staggering amount (I guess many millions) of people that he has helped.
I count myself lucky having found such an inspirational mentor as Clayton - without ever having met him.
May you rest in peace, dear Clay!