Recently, Pr. Sekulic published a topical and thought-provoking article on the future of the hospitality industry,”Will hotel rooms share the fate of CDs and DVDs?”. The main takeaway of his piece is that hotels face a life-threatening competitor that might forever change the industry landscape, at least the landscape as we know it today. To add a twist, competition is coming from an unanticipated adversary: companies exploiting the growing (and hence attractive) world of collaborative consumption. These are for-profit firms that generate the bulk of their revenues from exploiting online, peer-to-peer marketplaces of bed-sharing. Although it is not the only firm profiting from a trend directly tied to millennials, Professor Sekulic rightly focuses our attention on Airbnb, the largest hospitality firm in the world (in terms of number of rooms).
The sharing economy caters to less planned, cheaper and more youthful forms of vacationing. But it is not just about cool, low-cost holidays. Intermediary channels offer the immediateness of private transactions. No wasting time, no paperwork, no hassle. Plus, online reputation systems create a sense of trust and security, while shortening the distance between clients and providers. Also matters of personal safety are at stake. At the turn of the century, globalization gave us real-time access to all sorts of natural and human-caused catastrophes making travelers, in turn, experience a permanent state-of-panic. Travelers value the feeling of trust that ‘authentic’ proximity seems to bring. Likewise, companies like Airbnb promise a customized, more authentic, sustainable, and fun lodging experience that is also cheaper and safer than any hotel would dare to offer. According to Pr. Sekulic, this business model jeopardizes the industry and millions of jobs.
Is it a realistic concern?
Online intermediary firms are examples of disruptive innovations and, hence, it would not be wise to deny their ability in shaping the present and the future of the industry. Disruptive innovation occurs when a firm breaks the established industry’s rules by minimizing costs and lowering service price, to the point of leaving traditionally well-positioned firms with a dilemma: reinvent their service offering or perish.
Examples of such disruptive innovations abound. One well-known case study in business schools is the arrival of low-cost entrants in the airline industry. When newcomers such as Southwest Airlines or Ryanair entered the market, the entire industry was forced to rethink its business model. The gaming industry represents yet a closer parallel to hotels. Entrenched in complex regulatory processes, casinos had been a relatively quiet market until online gambling emerged and shook their very foundations with cutthroat competition.
Disruptive innovation can and must be overcome by more (and better) innovation. Traditional airline carriers faced low-cost companies by modernizing their work practices, minimizing costs, and delivering new and better services. Likewise, for traditional brick-and-mortar casinos to have the slightest chance to survive they ought to come out with novel service concepts to complement their core business model. That is, they must reinvent their service offering with innovative, appealing new services to attract potential customers and retain existing ones.
Despite all the fuss around collaborative firms, their business model is less innovative than publicized. Part of their asset-light supply paradigm, which is their competitive advantage, comes from making money from positioning themselves as intermediaries between service offering (people who own the rooms) and service demand (people who request accommodation), analogous to a “digital middleman” for the sharing economy. On closer inspection, the internet-based intermediaries’ claim that they have suddenly made it possible to connect hosts and guests all around the world is exactly what hospitality firms have been doing since the dawn of civilization.
The real challenge for traditional hotels is to accept that the very meaning of what it is to be a host, as well as the relationship between guests and hosts, may be forever changing.
What path must hotels take if they want to survive against disruptive competitors? As predictable as it may sound, they must embrace change, adaptation and innovation. To paraphrase Bill Clinton’s famous catchphrase: “It’s the innovation, stupid!”
It is only fair to ask ourselves: How is hospitality doing in terms of innovation? Hotels are among the most competitive businesses in the world. Yet, as the specialized literature shows, the hospitality industry lags behind most other services in terms of basic innovation, R&D investment, and technological developments.
Hospitality is the epitome of a labor-intensive activity. Due to the distinctive nature of its business and organization, hotels must broaden the scope of innovation to find new and sustainable sources of growth. They must depart from the more narrow and capital-intensive view of technological innovation prevalent in the manufacture industry, which stems from basic R&D and patents to generate new product and process technologies. They need to include non-technological innovations—business model innovation and organizational innovations. I draw here on the finer categorization of non-technological innovation as one that helps renewal within their core business model and internal processes.
Business model can be defined as the firm’s design or architecture of the value creation, delivery, and capture mechanisms it employs. This is the very dilemma traditional casinos are facing nowadays. Online gaming has broken into the leisure business with a disruptive approach: break up the casino monopoly of gambling by making it accessible to a global audience through Internet. With the coming of online gambling, brick and mortar casinos have to reinvent themselves or perish. To partake in the sharing economy, hotels must pursue new business opportunities arising from the overhaul of their business model. Defying conventional ways of doing business challenges the manner by which hotels address customer needs, deliver value from providing new services, entice customers to pay for value, and convert those payments to profit.
Organizational innovation involves new managerial, process-related, or structural practices destined to promote the objectives of the firm. In the airline industry, the bulk of innovations that contributed to overcome competition from low-cost competitors were related to new management practices and new work methods. There is a growing awareness in hospitality that, in order to overcome fierce competition, it is vital to redesign its work structures, to reappraise its workforce needs, to establish work rules for expanding inter-organizational relationships, and to attempt new talent management systems.
Yes, successful non-technological innovation is painful as it challenges existing practices/processes and ingrained assumptions of the status quo. At the same time, since these innovations are generally more systemic and difficult for competitors to replicate compared with technological innovations, they can be an important source of competitive advantage for hospitality firms.
Paving the way
Almost a century ago, a pioneering hotelier, César Ritz, had a simple but revolutionary idea: adjoining private restrooms to each hotel room. Simple as it may sound, that innovation changed the industry forever. Guests changed their commercial relationship with hotels as new concepts such as the service experience, upscale amenities and luxury became the quintessence of the hotel experience.
The innovative sharing economy has posed a significant threat to traditional hospitality. Let there be no doubt about it. Hotels will, however, have a say in how their future pans out. They can either feel sorry for themselves and impassively wait and hope for a more favorable outcome than the one that has befallen other sectors like the music and film industry or they can move forward and reconfigure their service offering while adapting their work methods and practices. Only by taking chances and making changes will they be able to turn the ‘good old days’ into the ‘good new days’.
About the author
Dr. Carlos Martin-Rios (PhD Rutgers University) is Assistant Professor of Organizational Innovation and Talent Management Systems at the École hôtelière de Lausanne. He performs research that aims to understand and predict the factors that determine non-technological innovation (e.g., business model innovation, organizational innovation, and management innovation), inter-firm collaborations and knowledge exchanges, and innovative talent management in knowledge-intensive service firms at large and, in particular, hospitality firms.