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Entrepreneurial Destruction

Case Aims: To illustrate how the emergence of the entrepreneurial Internet- based sharing economy is adversely impacting existing, long-established service businesses

Advances in computing, the advent of the Internet and the emergence of new technologies such as the smartphone can be considered the basis for the latest industrial revolution. This situation has led to the emergence of new forms of creative destruction. One form of creative destruction is being achieved by new companies engaged in what has become known as the 'sharing economy'. This involves new entrepreneurial companies such as the taxi firm Uber exploiting the technology to support Web platforms that bring together individuals who have under-utilised assets with people who would like to rent those assets in the short term (Cusumano 2015).

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Uber started life in San Francisco as a private limousine service. Then in 2010 the company launched a smartphone app that enabled potential customers to call for a ride, get a price quote and then accept or reject it. The providers of the ride are independent drivers who pay Uber a commission for being linked to customers. The regulations that apply to conventional taxi companies do not usually apply to Uber drivers, so these individuals can provide customers with lower-cost rides in smaller, less expensive cars. To expand their fleet of drivers Uber now helps individual drivers get loans to buy new cars enabling them to deliver the service. Not being required to meet certain regulations in relation to the provision of transportation services, such as insurance, training of drivers and licences, means Uber can always outcompete the existing taxi firms. This capability is understandably perceived as a source of creative destruction to the point that legal action to ban the company has been introduced in some cities across the world. Uber drivers can also decline to provide service when they do not like the requested destination. This also is a behaviour that existing taxi companies cannot exploit since they are obliged to offer standardised prices and provide service to anyone who calls (Das 2015; Gevero and Alves 2015).

Another example of the sharing economy is provided by Airbnb. This started in 2007 in San Francisco when the founders had extra rooms to rent and decided to offer a low-cost air mattress and bed and breakfast to attendees at a local conference. They created a website targeting cities with conferences and signed up people with spare rooms. Subsequently the company has expanded by offering the service to anybody looking for low-cost accommodation. By September 2014, Airbnb had expanded to 800,000 room listings in 190 countries and claims to have attracted 17 million customers. This has been achieved by a massive expansion in the company's accommodation portfolio which now ranges from cheap spare bedrooms to luxury vacation homes (Helm 2014). Not surprisingly the hotel industry has reacted strongly to this threat by demanding that city regulators take action over what may be breaches of regulations regarding private hosting and subletting (Fox 2016). There is also the potential for a major loss in tax revenues in those cities where there are a large number of hotels generating a high level of valued- added taxes. A similar problem exists at a national level because firms are required to pay corporation tax and it is possible that some Airbnb operators are not declaring this source of income to their governments (Kurtz 2014).

 
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