Wednesday, April 16, 2014

Airbnb: A Blue Ocean Strategy

In this blog post, I use Airbnb as an example of a blue ocean strategy. I link Airbnb’s ability to successfully create a blue ocean to Christensen’s argument in “Why Good Companies Fail to Thrive in Fast-Moving Industries” that accepted principles of management are situational. I conclude by asking whether the lack of management experience among the founders may have actually facilitated the company’s success, and how companies can simultaneously benefit from using and ignoring successful principles of management.
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Founded in 2008, Airbnb is a social network marketplace that allows individuals to list and rent lodging and/or “spare spaces”, which can range from tree house, rooms, apartments to mansions and even private islands. Airbnb connects renters and travellers from around the world at any price point. With spaces for rent in more than 192 countries and 34,000 cities, it has provided lodging for over 11 million guests.

In 2012, after just four years of existence, Airbnb was valued at over $1 billion. The company is now currently in discussions with investors for financing on a valuation of approximately $10 billion, which if successful, will mean Airbnb the Hyatt and Wyndham hotel companies in value (Macmillan et al). 

How has Airbnb grown so quickly in a 6-year period that it is actually transforming the hospitality industry? A blue ocean strategy can be credited with a lot of its success.

In 2008, there were two main options for travellers, traditional lodging (hotels, hostels, bed and breakfasts) or couch surfing websites with a reputation of young backpackers looking to party in cities around the world. Airbnb positioned itself in the completely uncontested market space between these two offerings, and it did so without any technology innovation, but rather using preexisting social network capabilities in a new way.

Kim and Mauborgne state that the most defining feature of a blue ocean strategy is simultaneous pursuit of low cost and differentiation (9). Airbnb merely facilitates and secures the relationship/transaction between those listing and renting alternative lodging, rather than investing in the properties themselves. In doing so, Airbnb not only provides a unique service, it does so at low cost to the company while simultaneously providing high returns to its customers. The lister receives 90% of the sales commission, and the renter receives unique, cost-appropriate lodging in locations around the world. As a result, Airbnb quickly a network effect by amassing millions of users in a short period of time, providing current and future customers with little incentive to use any other service (“ ‘Types of Strategy’: Which fits your business?, 11).

The thought of any other company taking market share away from Airbnb in the near future seems almost impossible.

However, what I find most interesting about Airbnb is that its founders developed such a successful strategy without any significant managerial or strategic planning experience. Two out of the three founders are designers by education, the other is a computer programmer – and there is not an MBA between them.

In “Why Good Companies Fail to Thrive in Fast-Moving Industries”, Christensen argues that many of the widely accepted principles of management are not the law, but rather only appropriate in certain situations (4). No other company had entered this blue ocean because of a misconception that no one but a small portion of the population would pay money to stay in someone else’s home (Chesky). Customers said they liked staying in hotels – so why would companies invest in an alternative? Airbnb’s founders recognized a different reality, and capitalized on it.

Airbnb is a paradigm of the paradox explained by Christensen that by not listening to current market trends and customer desires, and not solely investing in innovations that will further satisfy the status quo, companies can become industry leaders. (4)

In light of Christensen’s argument, is it possible that Airbnb’s ability to create a blue ocean was in part spurred by a freedom from traditional strategic and managerial frameworks?

How can companies not be prohibited by widely accepted management and strategy principles while simultaneously reaping the benefits of a thorough understanding of strategic and management principles? Are there any specific structures that can be put in place to support such an environment? Is diversifying a company’s workforces to include non-traditional employees, such as designers, a possible solution? Or, is Airbnb merely an anomaly?  

Works Cited  

Chesky, Brian. "Silicon Valley didnt think a designer could buildbr a company says Airbnb cofounder Brian Chesky Comments." Interview by Marcus Fairs. Dezeen. 28 Jan. 2014. 16 Apr. 2014 <http://www.dezeen.com/2014/01/28/silicon-valley-didnt-think-a-designer-could-build-a-company-interview-airbnb-co-founder-brian-chesky/>.

Christensen, Clayton M. Introduction. Why Good Companies Fail to Thrive in Fast-Moving Industries. Boston: Harvard Business Review, 2006.

Kim, W. Chan, and Renée Mauborgne. "Blue Ocean Strategy." Harvard Business Review (2004).

Macmillan, Douglas, Evelyn M. Rusli, and Mike Spector. "Airbnb Is in Advanced Talks to Raise Funds at a $10 Billion Valuation." The Wall Street Journal. 21 Mar. 2014. 15 Apr. 2014 <http://online.wsj.com/news/articles/SB10001424052702303802104579451022670668410>.

"'Types of Strategy': Which Fits Your Business?" Strategy: Create and implement the best strategy for your business. Boston, MA: Harvard Business School P, 2005.

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