Wednesday, December 10, 2014

Innovation through Subtraction

About a month ago I had to visit Austin for a meeting at the University of Texas, where I went to graduate school.  This meeting coincided with a home football game, so as you can imagine, hotels were at a premium.  Not to worry, I thought, this will give me a chance to check out AirBnB.  For those of you who are already fans, enough said.  For those who aren't familiar, AirBnB is basically a service to connect the traveler (me) to people who are willing to rent rooms in their houses or their entire house or apartment for a day or longer.  As I'm a business traveler, much of my travel is typically booked into hotel chains close to downtown business centers.  I prefer big chains like Marriott and Hilton, because they are very consistent, high quality places with restaurants, gyms, and internet connections.  I also enjoy earning points to use later to travel with my family.

But on this trip the major hotels were full, so I decided to try out AirBnB, and was pleasantly surprised by my experience.  What's interesting about AirBnB, and another major industry disrupter, Uber, is the fact that they are offering a competitive service to consumers in a long established industry - hoteling for AirBnb and cab or car service for Uber.  And both have practiced innovation through subtraction.

Imagine for a moment sitting in Marriott's corporate headquarters a decade ago, thinking about new hotel offerings and concepts.  I'm willing to bet the vast majority of the discussion was focused on new hotel concepts, more interesting color schemes, how to serve business travelers more effectively.  And every discussion started with the premise that there would be a physical building placed somewhere in a city or location, whether Marriott owned the hotel or simply leased the building.  Then, along comes a startup which asks an interesting question:  how might we offer hotel services without what appears to be the most important ingredient, the building?  How could we offer hotel services without a hotel?  Do you think the majors asked themselves this question?

This is innovation through subtraction, and it is disrupting two mainline industries right before our noses.  Hotel chains are panicking, as are municipal taxi services, because new entrants are overcoming what appeared to be high entry barriers and are reworking business models.  In both cases, the new entrants asked themselves:  how might we offer the same service, but without what appears to be a key, or the key ingredient in the solution?  Who every thought of running a hotel without a building?

But, as in all interesting and relatively disruptive instances, there's more to the story.  Traditional hotel chains can't afford to place more than a handful of physical hotels in a city, and these are usually clumped in one of three places:  downtown business centers, near airports or transit hubs, and out by the interstate exits.  AirBnB can "place" you in almost any corner of town where there's a person willing to rent you a room.  The range of choices is almost endless.  So too is the range of accomodations.  With Marriott in Austin I could stay downtown in a classic Marriott or in a Courtyard, or out by the interstate in a Courtyard or Fairfield.  These are known and trusted brands, but the range of options is limited.  With AirBnB I could choose a mattress on the floor in a room near the university (not my choice, but hey who knows?) or a penthouse near downtown, or an entire house in my old neighborhood north of downtown.  I could choose from a plethora of choices based on location and style of dwelling.  AirBnb is also a great marginal play, because as hotels fill up, they can't add more rooms, but as the price of a night's stay rises, more and more people may open up their homes to out of town guests.  There's flexibility and choice for the AirBnB host as well.  There's another factor at play here as well.  As AirBnB doesn't own the buildings or lease them, they have far less overhead, and far less worry about real estate and maintenance.  This makes it possible to generate far more profits on an equivalent night's stay.  By taking out the "given" - the hotel - they also removed one of the largest costs and largest management headaches of the hoteling industry.  Further, they don't have to employ thousands of people at a hotel site.  The host is responsible for maintenance, cleaning and so forth, so AirBnB can provide an equivalent number of "bed-nights" as a major hotel chain with a tiny fraction of the staff.

Imagine generating ideas in any established industry and trying to image offering your product or service but first removing or eliminating a critical component.  I seriously doubt that Marriott or Hilton folks sat around thinking about "hotel" services without a building.  That would have been strange or unusual, but that's how disruption occurs.  What the industry considers a "must have" or a given, the upstarts figure out how to do without.  What's even more interesting is that the upstarts still need a lot of the capabilities the hotel chains have.  They've got to be able to take reservations, or at least connect you with the property owners.  They've got to be able to show available inventory in a specific city and what's available on the dates you want to travel.  Imagine if Marriott or Hilton, noticing AirBnB growing rapidly had said:  we'll provide you with all the "back office" capabilities you need to scale up.  Then the chains could have played both sides of the fence and made money on their established hotels and brands and cashed in on what was going to be a competitor anyway.

Far too many innovation programs begin with these "fixed" assumptions. Hotel service requires us to build a hotel.  Taxi service requires a medallion.  Yet upstarts found very successful ways around these "requirements" that the industry considered must haves.  What are the "requirements" in your industry that you believe are immutable?  Can you imagine starting a brainstorming or innovation activity by imagining how to deliver the same service without a key component or ingredient?  What are the factors that lock you into the same recurring patterns, your starting premises, that disrupters are just waiting to overturn?  Could Marriott or Hilton have created AirBnB?  Sure, what's more, they already had software and management capability to do everything that AirBnB did.  They just never looked at the overnight stay as anything other than in a branded building.  And all it took to create a business worth billions is to ask:  how might we subtract the building from the hotel service?

If you don't practice innovation through subtraction, you better believe that someone in your industry, or some disrupter or entrepreneur is doing it right now.  Every industry is subject to innovation through subtraction.  The incumbents are often "locked in" believing their investments will be a high barrier to entry, when in fact they often become the boat anchors that drag them down when the "requirements" are demonstrated to be optional.
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posted by Jeffrey Phillips at 5:50 AM


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