Disruptive Innovation: Accommodation Businesses

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Table of Contents

Introduction
Airbnb’s Impact on Hospitality Industry
Potential Solutions for Marigold Star Hotel
Effective Pricing Policy
Maintaining the Course
Entering the New Market
Best Strategy
Practical Recommendations
Conclusion
References

Introduction

The 21st century has brought a range of technological advancements, which transformed multiple areas of business. The broad implementation of internet resources in the spheres of tourism and hospitality entailed the creation of new services that imposed competition on traditional accommodation forms. The Airbnb company appeared in 2008 and has grown significantly since then. Consequently, millions of domestic and international tourists are now able to book affordable apartments at various locations. Airbnb offerings have become the new reality of the industry, changing the status quo and causing concerns on behalf of traditional hotels. Nevertheless, the extent to which Airbnb affects the industry is not universally acknowledged. Despite doubts concerning the nature of disruptive innovation, an in-depth assessment of the new industry reality is required. The purpose of this paper is to evaluate the impact of Airbnb on the hospitality industry within the context of Marigold Star Hotel’s situation and propose a viable strategy for both hotel management and equity company.

Airbnb’s Impact on Hospitality Industry

Airbnb is a recent innovation that reflects the spirit of the 21st century. The company was founded in the year 2008, and its development has been rapid since then (Glusac, 2016). As the core of its business activities, Airbnb offers peer-to-peer accommodation opportunities, meaning that travelers can rent a listing from another individual, rather than a commercial organization. This format appears to be beneficial for a wide array of people. Firstly, travelers receive a broader variety of accommodation options, which are often cheaper than hotel rooms or better located within the same price range. Secondly, property owners have a new way of earning money through safe Airbnb deals. Mobley (2020) says that Airbnb devotes increased interest in risk scoring and background checks of network participants. As a result, the company has had resounding success and has become the largest home-sharing network worldwide (Glusac, 2016). Overall, Airbnb offers about two million listings, most of which are targeted at regular low-to-mid range clients (Glusac, 2016). The popularity of the company is explained by its innovative, Internet-based approach, making it a fresh addition to the market in the eyes of the public.

Nevertheless, despite Airbnb’s evident advantages for guests and property owners, there are players in this market that were negatively affected by its emergence. The company has been conquering large portions of the hospitality market due to its unique position in the travel industry. Moreover, Airbnb envisions further expansion, as it aims at entering other segments than its usual affordable accommodation. According to Glusac (2016), the organization’s plans are connected to business travelers and high-range clients. Nevertheless, low-to-mid-range guests have always been the core of Airbnb’s customer base. Mobley (2020) states that most low-end hotels could not offer their customers a desired level of comfort, while high-end accommodation opportunities had high prices. Airbnb managed to bridge this gap, as most of its listings provide good value and interesting locations for tourists.

Consequently, the company managed to alter the rules of the market, especially in the aforementioned segments, where it had the most significant presence. Von Briel and Dolnicar (2020) state that the residents of popular tourist destinations now report a reduced quality of life following Airbnb’s emergence in their areas. First of all, there are fewer housing options in the market because many owners opt for renting out their property to guests instead of selling it. This tendency increases competition in the real estate market and entails higher prices, making housing less affordable. At the same time, there is additional competition in the sphere of hospitality, as well, because potential hotel guests may decide to rent an Airbnb instead.

The role of Airbnb in the hospitality industry can be examined within the framework of the concept known as disruptive innovation. Christensen et al. (2018) write that the term is often overused, as it is applied to all new challenges the industry faces. The true concept of disruptive innovation suggests that new advancements bring significant changes to the overall functioning of the industry. In other words, for the challenges to be called disruptive innovation, they must originate from new technologies or methods that have emerged in the industry. Research conducted by Hopp et al. (2018) suggests that the ways of managing disruptive innovations and keeping up with the rapid changes have become topics of paramount importance in the business community. Accordingly, the hospitality business should not leave the new situation without reaction.

Airbnb meets the criteria of disruptive innovation, as it appeared due to technological advancements and changed the hospitality market rules. As it is evident from the previous information, Airbnb continues its global expansion, encompassing new destinations. Moreover, the company is willing to extend its operation to include new target audiences. As mentioned before, it performs best in the sphere of economy class travel. Nevertheless, the company sees environmentally-friendly and business travel as promising market segments, as well. Therefore, Airbnb is capable of asserting its position on different levels, thus imposing competition on an array of hotels worldwide. In addition, Guttentag and Smith (2017) report that almost two-thirds of Airbnb guests use the service as a replacement for traditional hotel accommodation. The prospects of Marigold Star Hotel are not as daunting, but it is possible to expect a 30-percent customer loss in the upcoming years if Airbnb’s plans are implemented.

Potential Solutions for Marigold Star Hotel

Overall, there are several challenges that the hotel and its owners face in the discussed situation. First of all, it is important to prevent the current guests of the hotel from choosing Airbnb over Marigold Star. Accordingly, preserving and developing the aspects that made them choose this hotel in the first place will be a task of paramount importance. At the same time, it is vital to continue expanding the customer base by providing evident benefits for potential clients. One of Airbnb’s primary advantages consists of its affordable accommodation prices. Marigold Star should adjust its operations accordingly and offer better value for its guests. Nevertheless, it would be unwise to sacrifice the property’s profits for the sake of competing with Airbnb, which is why an extensive cost-benefit analysis is required at each stage. In addition, it is crucial to make further decisions in light of the interest of both equity companies and hotel management.

The research shows that three potential strategies may be implemented in this situation. The first one consists of adjusting the pricing policy of the hotel to compete with what Airbnb has to offer. Roma et al. (2019) note that it is usually low-to-mid-range hotels that demonstrate pricing flexibility, while high-end hotels keep their tariffs at a considerable level. Secondly, it is possible to stay on the previous course and assume that Airbnb’s potential is exaggerated. This strategy is widely used in Istanbul, another popular destination, where hotel owners and managers do not see the peer-to-peer market as a significant threat (Alrawadieh et al., 2020). Finally, it is possible to follow the path of AccorHotels and acquire a share in the peer-to-peer market as a way of adapting to changes (Glusac, 2016). The last example demonstrates that it is possible to acknowledge the threat of disruptive innovation without opposing it.

Effective Pricing Policy

The first approach suggests that Marigold Star Hotel should implement significant changes in its pricing policies to efficiently counter the effect of Airbnb’s expansion. Indeed, prices are important elements of customer expectation and satisfaction. However, Wong et al. (2020) underline the crucial role of perceived value in the described context. In other words, it is not the amount of money a guest is to pay for accommodation that plays the decisive part but the quality and quantity of services provided for it. Airbnb’s listings demonstrate an array of undeniable advantages, which, however, are not absolute. The low-to-mid range segment being the target audience of the company, such accommodation offers usually imply that attractive locations and reasonable prices are incompatible. Yang et al. (2018) call such aspects crucial to the customers’ decision-making process. As a result, guests opt for centrally located apartments that cost the same amount of money as remotely affordable hotels. Marigold Star Hotel must admit the competitive advantage of Airbnb in this respect while focusing on other aspects with great potential.

Pricing flexibility implies a variety of options, which, however, should focus on the low-to-mid-range market. Since the majority of customers look for value, and not the prices alone, Marigold Star can concentrate on the area in which hotels easily prevail, which is services. In the vast majority of cases, Airbnb’s listings are regular apartments, and the tariffs only include the right to stay at the property and use its facilities. On the other hand, hotels traditionally offer their clients attractive service packages. The list starts from basic ones, such as housekeeping and towel change, and extends further to encompass free parking and airport transfer. Even the first category is usually present at all hotels, thus granting them a valuable advantage as compared to Airbnb’s listings. Accordingly, effective pricing should concern not only tariffs but also the quality and quantity of services.

Maintaining the Course

At the same time, some hotels do not admit that Airbnb is a disruptive innovation that may have a considerable impact on the market. According to such businesses, the accommodation market possesses strong traditions, which their customers value. This logic suggests that Airbnb is a different product, which cannot compete with the services hotels have to offer. Therefore, there is no need to adjust prices as a response to the company’s expansion. Furthermore, it is better to focus on improving the quality of proposed services in the same manner as before. Alrawadieh et al. (2020) refer to the experience of hotel managers from Istanbul, who see the effect of Airbnb as insignificant and incapable of actually influencing the entire industry. Spoken differently, such an approach denies the very nature of Airbnb as a disruptive innovation. Maintaining the course does not suggest that Marigold Star and the equity company should take no further action. On the contrary, the hotel must remain in a state of continuous development, which, however, will be determined by the internal vision instead of external factors.

Entering the New Market

Finally, there is another option, which may suit the equity company in this scenario. It is possible to accept the rules set by Airbnb and attempt to compete with it in its market. In this case, the equity company may purchase or rent property similar to Airbnb’s offer. As Glusac (2016) states, this strategy was implemented by the French AccorHotels group, which confirms the viability of the approach. In the same manner, the equity company can acquire several potentially profitable locations in the area and rent them out at conditions similar to Airbnb’s listings. In this scenario, the threat posed by disruptive innovation is recognized, but the action plan is proactive, unlike the first option, which merely reacts to the challenges. In other words, the equity company will be able to challenge Airbnb in its market segment instead of devising new defense strategies. Nevertheless, substantial expenditures are required actually to impose competition on Airbnb in this segment. Therefore, the company may have to cut the budget of Marigold Star, and this strategy cannot be deemed acceptable if hotel personnel’s interests are considered.

Best Strategy

Having considered the particularities of the present situation, effective pricing seems to be the optimal choice in the case of Marigold Star. Maintaining the course would imply ignoring the emerging market of peer-to-peer accommodation, which cannot be underestimated in the 21st century. Airbnb has been gaining importance in recent years, which is why some measures must be taken. At the same time, the third strategy is also questionable, as entering the short-term apartment rental market would require significant investment on behalf of the equity firm. Simultaneously, the hotel management would end up in an unfavorable position due to a lack of financing and attention. An effective pricing policy can respond to the interests of all parties, including the clients, bringing back substantial returns.

Practical Recommendations

As for practical recommendations, it is necessary to conduct a comprehensive analysis of the guests’ experience at hotels and Airbnb properties to discern their preferences. This way, Marigold Star will be able to implement meaningful changes correctly. Second, it is necessary to focus on the mid-range market as the group with mixed reports. Budget-level accommodation is the sphere where Airbnb demonstrates a significant competitive advantage, whereas the company’s influence on the high-end category is not likely to skyrocket in the upcoming years. Revised bonus programs would give the guest of the hotel an impetus to become regular customers and opt for Marigold Star. For example, regular dates may have better offers, whereas prices on holidays can increase for some rooms. This way, the hotel will be able to offer better value while still making profits. Additionally, bonus programs for regular guests may be a good idea, as well. Overall, these recommendations focus on the short-to-mid-term effects of Airbnb’s expansion and provide a basis for Marigold Star Hotel’s development.

Conclusion

In conclusion, Airbnb is, indeed, a disruptive innovation, changing the landscape of the hospitality industry. Marigold Star faces considerable threats as the company expands in its territory, and actual measures must be taken. The analysis suggests that the best way to improve the hotel’s position would be to remain reactive and implement an effective pricing system. This way, Marigold Star will be able to retain a sufficient and loyal customer base, which is beneficial for both the equity company and the hotel.

References

Alrawadieh, Z., Guttentag, D., Cifci, M. A., & Cetin, G. (2020). Budget and midrange hotel managers’ perceptions of and responses to Airbnb: Evidence from Istanbul. International Journal of Contemporary Hospitality Management, 32(2), 588–604. Web.

Christensen, C. M., McDonald, R., Altman, E. J., & Palmer, J. E. (2018). Disruptive innovation: An intellectual history and directions for future research. Journal of Management Studies, 55(7), 1043–1078. Web.

Glusac, E. (2016). Hotels vs. Airbnb: Let the battle begin. The New York Times. Web.

Guttentag, D. A., & Smith, S. L. J. (2017). Assessing Airbnb as a disruptive innovation relative to hotels: Substitution and comparative performance expectations. International Journal of Hospitality Management, 64, 1–10. Web.

Hopp, C., Antons, D., Kaminski, J., & Salge, T. O. (2018). Disruptive innovation: Conceptual foundations, empirical evidence, and research opportunities in the digital age. Journal of Product Innovation Management, 35(3), 446–457. Web.

Mobley, E. (2020). Airbnb – Global strategy. Journal of Information Technology & Economic Development, 11(1), 15–24.

Roma, P., Panniello, U., & Lo Nigro, G. (2019). Sharing economy and incumbents’ pricing strategy: The impact of Airbnb on the hospitality industry. International Journal of Production Economics, 214, 17–29. Web.

von Briel, D. & Dolnicar, S. (2020). The evolution of Airbnb regulation – An international longitudinal investigation 2008-2020. Annals of Tourism Research. Web.

Wong, E., Rasoolimanesh, S. M., & Pahlevan Sharif, S. (2020). Using online travel agent platforms to determine factors influencing hotel guest satisfaction. Journal of Hospitality and Tourism Technology. Web.

Yang, Y., Mao, Z., & Tang, J. (2018). Understanding guest satisfaction with urban hotel location. Journal of Travel Research, 57(2), 243–259. Web.

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