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1
DISRUPTION: The new economic reality
Prepared by Nisaar Mahomed, September 2016
2
TABLE OF CONTENTS
Introduction 3
What is Disruption 4
Roots of Disruption 5
Two kinds of Disruption 6
Identifying Disruption 8
Disruption and innovation 13
Disruption from another angle 15
Tesla 15
Airbnb 16
Uber 17
Conclusion 17
References 19
3
INTRODUCTION
Over the past decade the world has witnessed a revolution of sorts brought upon by rapid
innovation that has irrevocably altered the face of business, our social behaviour and even the way
entire industrial sectors are organised. In turning traditional growth models upside down, this
process has also changed the way we perceive innovation, technology and business generally.
Termed Disruption or Disruptive Innovation, this trend describes the way a new product or service
transforms an existing market — and eventually replaces and redefines the status quo — by
introducing simplicity, convenience and affordability. Invariably led by entrepreneurs this results in
the “creation of a new market and value network, upending an existing market and value network
and displacing an earlier technology or process”1 In the early years disruption was seen as an
interruption of the normal course of things but having become so ubiquitous and commonplace, it is
now a daily reality that we can scarcely do without. Examples of disruption abound and includes
Amazon, personal computers, Wikipedia, Google, Uber, Airbnb, the iPod to name but a few and the
list gets longer each day. Recent innovations include smartphones which do banking, stream music
and videos, and added to are innovations like WhatsApp, a free data and voice messaging service,
which allows users to make voice calls – at a minimal data cost- could in all likelihood supplant the
traditional voice service offered by mobile service operators, many of which have been in operation
for decades.
This rate of disruption is accelerating and established industry leaders are disappearing faster at an
alarming rate. Perhaps the best example of this is rapid decline of the average lifespan of a Fortune
500 company; in 1958 it was 61 years, by 1980 this has decreased to25 and further still to 18 in
2011. Currently the predictions are that this will drop even further to 6 years by 2020.2 As an IPA it is
important that we equip ourselves to better understand the way modern industries work and the
forces that impact upon them especially if we’re supposed to attract these very same industries to
our shores. The world around us is changing fast and we need to understand the different levers of
change in order to capitalise on this. It has now become the standard and it is this process, one
which starts innocently and is full of quirky novelties and which rapidly overtakes entire systems,
which has come to define disruption. The common theme amongst most disruptive companies is
1 Allardice, D (2015) pg 21
2 http://www.business2community.com/business-innovation/leapfrog-disruptive-innovation-01533710#PS6Gkkk1830f06CE.99T
4
that they create business, products and services which are better and often less expensive3 and
more creative and useful than those which they replace.
WHAT IS DISRUPTION?
The business world first came across Disruption as a concept due to the work primarily of Clayton
Christenson, who together with Joseph Bower, in 1995, coined the term and also provided clues on
how to identify those start ups that utilise various innovations, to move upmarket to absorb higher
end customers, eventually displacing established competitors. It is however not always the case that
disruptors start with an inferior, lower priced alternative in order to penetrate the market. This was
not the case in digital navigation where apps on iOS and Android operating systems have displaced
stand alone devices like TomTom, Garmin and Magellan.4 It seems that even the rules governing
disruption are subject to change and nowhere is this better illustrated than with the rise of Tesla
which disrupted the automotive market by entering it with an upmarket, highly engineered car that
was aimed at a significant slice of the affluent market.
Disruption is identified most commonly by its ability to displace an existing market, industry or
technology and by so doing it produces something new, often more expensive but certainly more
efficient. The iPod not only decimated the traditional CD industry it also cast a new spotlight on how
music is made, promoted and sold via the internet, where a computer rather than the record store
became the locus of activity. The iPod and computer has become the principal vehicle through which
music is consumed over the last two decades.5 The common understanding of disruption is that it is
a process wherein smaller, innovative companies successfully challenge established incumbent
businesses. What happens is that larger more established companies begin to focus on improving
their products and services for their most demanding customers and in the process they overlook
customers who may not be able to afford high quality services. Into this vacuum a disruptive
innovation then emerges which offers a product that appeals to those that are overlooked.6
(Christensen, 2015:2). These neglected segments are then prone to overtures from upstart
companies who promise cheaper functionality. This results in impressive sales, from a new,
enthusiastic customer base, often on the back of a marketing campaign which promises that this
3 This does not apply to Tesla which disrupted the market with high end, sophisticated cars and now batteries.
4 Downes and Nunes (2013) Big bang disruption in Harvard Business Review
5 Unsurprisingly this was made possible by Apple, a company which first started out by making computers and to see how widespread and
disruptive this has been readers of this article should ask themselves when was the last time they actually bought a CD. 6 Forbes (pg2) Disruption vs innovation
5
new product can perform a multiplicity of functions (e.g. a television that curves, or has an
exceptionally high resolution and can play pirated movies through a usb port)7 and during this period
Disruptive companies grow rapidly. The incumbents appear disinterested in the new entrants, often
regarding the new innovations as gimmicks. Their complacency prevents them from recognising the
threat from these start ups. A gap opens up in the market and this is filled by new entrants who, by
now having moved upmarket, begin capturing more of the incumbents’ mainstream affluent
market.8 Disruption occurs when mainstream customers begin to adopt the entrants’ offerings. In
some cases the incumbent disappears completely and more often than not, the disruptor ends up
reshaping an entire industry.9
ROOTS OF DISRUPTION
Disruption, both at the industrial and the sectoral level, is not a new phenomenon and its lineage
can be traced to the industrial revolution. Various inter industry technologies and inventions in the
18th
century sped up the mechanisation process. Starting with the development of the spinning
jenny which mechanised the spinning of yarn, this led to the steam engine which ensured that
fabrics could be produced cheaper and faster, while sulphuric acid which emanated from steam
powered lead foundries made possible the chemical bleaching of cloth. These disruptive innovations
gave birth to the modern industrial revolution and ensured that woollen cloth manufacturers and
printers feared this burgeoning cotton industry would ultimately consume their own.10
Modern Disruption
The trend in modern disruption has been quite different from that experienced during the industrial
revolution. In many instances users made the switch within a matter of weeks and the customers in
every segment were able to defect almost simultaneously. The conventional business paradigm
normally sees mature products being wiped out by new technologies. However, the new trend has
seen entire product lines, often whole markets, either created or destroyed overnight. These Big
Bang disruptions are unintentional and do not subscribe to normal patterns of market adoption. Big
bang disruptions are not only cheaper than established offerings but their very inventiveness allows
7 Interestingly, this same TV probably will become obsolete in two years and replacement parts will become hard to find within three
years. 8 Apple’s latterday dominance (iPod) resulted in the global displacement of record companies and record stores.
9 A mere five years ago Garmins and Tom Toms were ubiquitous and everywhere, but today, mobile phone-based apps have rendered
them virtually useless. Also http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-15 10
Krogman, H Introduction to disruption in http://www.tutwaconsulting.com/introduction-to-disruption
6
a better and faster integration with other products and services. These disruptive practices also
ensure that many companies, having fallen victim to a previous disruption, survives by diversifying
into other types of businesses. Perhaps the best example of this is Fujifilm which barely survived the
Disruption that plagued the camera film business11
but was also to transform itself using
nanotechnology to diversify into the manufacture of flat screen TVs. TomTom, once a market leader
in automotive navigation systems, was quickly disrupted and lost market share to cellular phone-
based apps but recovered by quickly signing a deal with Apple to provide mobile mapping services.
Amazon, which was one of the earliest disruptors, also transformed itself in order to stay ahead of
the curve. It has moved from being a technology platform to one which utilises its e-business and
software utilisation expertise in order to forge countless collaborative partnerships thus ensuring
that it sells almost everything and not just books, dvds and CDs. In the process it has leased its core
technology to third-party resellers and through cloud computing to unrelated business that
outsources their hardware and software needs to Amazon. It is patently clear that while innovations
produce disruptions to the status quo in the short term, there is some evidence it does nevertheless
produce some improvements in economic and social well being for the bulk of the populace where
such disruptions occur. A cursory look at the effects of the smart phone on the banking, transport
and retail industries illustrates its disruptive effect on these and other industries.
TWO KINDS OF DISPRUPTION
By all accounts there are two types of disruption, both of which have different measures of success.
New Market disruption
This occurs when a product fits a new or emerging market that is not served by existing incumbent in
the industry. In many instances it could be cheaper and more readily available either geographically
or demographically. Similarly, customers are unable to access the existing product but appear willing
to use the new one. When Ryanair and EasyJet appeared, they offered routes that no-one else did
and at much cheaper rates, thereby appealing to budget travellers, especially in Europe.
Inadvertently, they were able to compete with traditional train and bus routes while opening up
11
Especially when digital and cellphone cameras made film redundant
7
smaller regional airports and surrounding towns to the influx of new tourists.12
By the time
traditional carriers such as Lufthansa and LKM realised what was happening, these new entrants had
already captured a sizable chunk of the tourist market. High end disruption produces innovation that
leapfrog their competitors making it difficult for them to imitate rapidly. They outperform existing
products which sell for a premium price rather than at a discount and in the process they target the
incumbent’s most profitable customers. In essence they seduce the least price sensitive buyers
firstly, capture that market before attracting the mainstream and this is probably better summed up
in the figure below.
Figure 1: New market and high end disruption
Source:Traynor. https://blog.intercom.com/what-everyone-needs-to-know-about-disruption/
Low end disruption
This happens when the disruptor initially serves the least profitable customer who is not willing to
pay a premium for enhancements in product functionality. In this instance the product steals the
cheapest customers from an existing market and this is invariably accomplished by designing a
business model that works with a lower cost offering. While it is undeniable that the product is of a
lower quality, those customers that switch over are not particularly concerned about it. The
12
Budget travel has been around for a long time; what made this unique was the use of small regional airports that opened up entirely
new tourist destinations.
disruption occurs when the low value customers switch their allegiance and leave the incumbent. A
good example of this is the Flip digital camera which was bought for $590 million by Cisco and which
initially stole customers from digital camera companies but within two years it c
competition experienced by the free camera found on iPhones and on Android phone.
Figure 2: Low end disruption
Source; https://en.wikipedia.org/wiki/Disruptive_innovation
Besides this, disruption also manifests itself in other ways. It is now commonplace for mature
products to have ever shorter product life cycles whereafter they are replaced by new technologies.
Big bang disruptions don’t follow the usual pattern of customer adoption. Instead they are also
perfected with very few trial users and are then embraced
targeted market. The end result is that whole sectors
IDENTIFYING DISRUPTION
There are a few common threads that help to identify Disruption.
Rapid advance
8
e low value customers switch their allegiance and leave the incumbent. A
good example of this is the Flip digital camera which was bought for $590 million by Cisco and which
initially stole customers from digital camera companies but within two years it closed due to the
competition experienced by the free camera found on iPhones and on Android phone.
https://en.wikipedia.org/wiki/Disruptive_innovation
this, disruption also manifests itself in other ways. It is now commonplace for mature
products to have ever shorter product life cycles whereafter they are replaced by new technologies.
disruptions don’t follow the usual pattern of customer adoption. Instead they are also
perfected with very few trial users and are then embraced very quickly by large segments of the
targeted market. The end result is that whole sectors are changed.
There are a few common threads that help to identify Disruption.
e low value customers switch their allegiance and leave the incumbent. A
good example of this is the Flip digital camera which was bought for $590 million by Cisco and which
losed due to the
competition experienced by the free camera found on iPhones and on Android phone.
this, disruption also manifests itself in other ways. It is now commonplace for mature
products to have ever shorter product life cycles whereafter they are replaced by new technologies.
disruptions don’t follow the usual pattern of customer adoption. Instead they are also
very quickly by large segments of the
9
Disruptive technologies demonstrate rapid rate of change in terms of price and performance relative
to substitutes and even the incumbents. Alternatively they experience breakthroughs that drive
accelerated rates of change. The speed of Disruptive activity and the pace of change can be
debilitating. As indicated earlier, Flip dominated its particular market for less than 2 years before
crumbling. In 2007 Garmin and TomTom had a combined worth of $38 billion and 12 months later,
they had lost 75% of their market capitalisation due mainly to the rapid advance of the iPhone
inbuilt satellite navigation technology which in turn has been copied by most Android
smartphones.13 In a world dominated by Facebook, Twitter and Tumblr, the internet ensures that
products reach a global audience much quicker than was possible before.14 In many cases
disruptive innovation turns nonconsumers into consumers by establishing a base in a new-market
foothold.
The scope of impact is broad
The technologies which fall within this description must have a broad reach. The arrival of the
mobile internet has touched the way the entire planet operates, even affecting the lives of those
that initially did not have access to it. The subsequent Internet of Things technology can embed
intelligence in billions of objects and devices around the world, thereby affecting the health, safety
and productivity of large swathes of the planet. A simple example for the potential of Disruption
should suffice: the operating costs of key affected industries such as manufacturing, health care and
mining is roughly $36 trillion and with close onto 4.3 billion people still needing to be connected to
the mobile internet and with a GDP related to the internet of close onto $1.7 trillion, the possibilities
are enormous15
Significant economic value is affected
In order for an economically disruptive technology to have any impact it has to create massive
economic impact and this implies that profit pools must be disrupted, there must be additions to
GDP while capital investments might be severely compromised. Some examples here include
13
Traynor, D What everyone needs to know about disruption pg 4 14
Within 24 hours of being launched, the game Angry Birds was downloaded over a million times, a seven months later, that figure had
reached 200 million. 15
McKinsey Global Institute (2013)
10
advanced robotics which could affect $6.3 trillion in labour costs (19% of global employment costs),
while global enterprise IT spend attributed to cloud technology is $3 trillion. Furthermore, it is three
times more costly to own a server than to rent in the cloud.16
This is turn opens up the market to a
range of new innovative pay-as-you-go services. The cloud has facilitated the phenomenal growth of
Internet-based services that includes search and streaming media to offline storage of personal data
and background processing capabilities.
Economic impact is disruptive
A disruptive technology can dramatically alter the status quo, transforming how people live and
work it can create new growth opportunities and alter the comparative advantage of nations. Some
examples include next generation genomics which will change how doctors diagnose and treat
cancer and other life threatening diseases which in turn will extend lives. There are close onto 26
million deaths annually from cancer, cardiovascular disease and type 2 diabetes and with the
attendant $6.5trillion global health care costs. The human genome took 13 years and cost $2.7
billion but today, rapid sequencing and advanced computing power allows this to happen within a
fraction of that time and cost.
On the energy front this is most pronounced with regards energy storage,17
which dramatically
changes how, where and when we use energy while advanced gas exploration has the potential to
shift value across energy markets and regions. Nowhere is this most pronounced than in South Africa
where energy storage could allow renewable energy to dramatically alter access to energy,
especially amongst those that are currently without, while gas finds off the Mozambican coast, not
only threatens Eskom’s entire business model (electricity through coal) but also signals that
country’s intention to become the new economic powerhouse in the region.18
Unencumbered development
When in 2007 Twitter was launched at the South by Southwest Conference, its developers were
keen to test sending messages to multiple users simultaneously. They quickly realised that no new
technology was needed in order to perform this task. In under a decade, it has destabilised most
16
McKinsey Global Institute (2013) pg 5 17
The estimated value of households without electricity stands currently at $100 billion. 18
McKinsey Global Institute (2013) Disruptive technologies: Advances that will transform life, business and the global economy
11
sectors from the news and information ecosystems to unpopular governments and has 200 million
active users and half a billion tweets per day.19
It is important to note that this and other disruptors
such as Netflix and Skye all emerged out of readily available components that were either free or
cost very little, such as home internet connections and non-proprietary audio and video
compression protocols. Once launched, these innovations challenged the voice services of cable and
phone companies.
Unconstrained growth
Another feature is that disruptions invariably destroy or collapse the product life cycle as we know
them. No longer are there those discreet segments where innovators are followed by early adopters,
and so on. Now there are simply two segments; trial users and everyone else, and the product cycle
is characterised as development, deployment and replacement. Even where innovators apparently
fail at some quest, this simply feeds consumer expectations for something better. The illustration
below shows how this differs from conventional patterns of customer adoption where new products
first gain popularity in five target market segments. With disruption, the new products are embraced
quickly by the vast majority of the market.
Figure 3 Disruption vs traditional model of customer adoption
Source: Downes and Nunes (2013) https://hbr.org/2013/03/big-bang-disruption
19
Downes and Nunes (2013)
12
Nowhere is this better illustrated than with file sharing service Napster, which, in 2001 was
eliminated legally through litigation. However, this was not the end of the story because that very
same year Apple launched iTunes, a product which understood the music market (i.e. consumers)
better than record industry executives who had been at it for decades. Consequently iTunes has
completely secured market dominance over the music industry’s ongoing reinvention. Consider also
Kindle, which launched in 2007 to trivial sales, but which now ensures that e-books account for 20%
of all books revenue. This happened mainly because Amazon pounced when the right combination
of technologies were ready for mainstream use and it then leveraged its brand and impressive
customer network onto a system which already had a phenomenally huge catalogue of books.
Today, Kindle has completely disrupted almost every component of the publishing supply chain.
Undisciplined strategy
Disruptors seemingly don’t heed the rules of competitive strategy which argues that successful
businesses should orientate strategic goals along one of three disciplines, namely low cost, constant
innovation and customised offerings, a mantra also endorsed by Michael Porter. However,
Disrupters simply compete with mainstream products on all three value disciplines from the offset
and invariably enter the market with better performance at a lower cost and with far greater
customization. In order to understand how this is achieved one needs to look at the three major
costs in a product or service, namely parts and manufacturing, the embedded technologies and
intellectual property and the share of development costs. Now, by continually lowering all three
simultaneously and taking into account the rapid advances of technology, it is possible to sell new
products more cheaply than the products which they replace. Is so doing, inventions that were
novelties a few years ago have now become commonplace; a simple example here will suffice; usb
slots have begun to replace CD shuttles in almost all new car models, rendering that entire sub
sector (car CD players) irrelevant. Another one is portable navigation tools. After years of rapid
growth, the GPS device industry has shrunk, with Garmin lost 70% and TomTom 85%20 of their
market capitalisation within two years of navigation apps being introduced and offered freely on
cellphones.21
20
TomTom has survived by collaborating with Apple to provide mobile mapping services. 21
Downes and Nunes (2013)
13
DISRUPTION AND INNOVATION
A common misperception is to assume that all innovators in the business world are disruptors but in
fact this is not always the case. In much the same way that a square is a rectangle but not all
rectangles are squares, so too disruptors are by their very nature innovators but not all innovators
are disruptors.22
This simple analogy goes a long way towards explaining the complex relationship
between these two. Disruptors are essentially innovations that create new markets by discovering
new categories of customers and this is often achieved by harnessing new techniques and
developing new business models. Innovation on the other hand is simply an improvement of an
existing product.23 They do not displace existing markets or technology. In their initial stages
disruptive businesses exhibit a combination of these characteristics; lower gross margins, smaller
target markets and seemingly simpler products. This simplicity often masks the sophistication that
goes into their design. When initially released, the iPod, especially when compared to sophisticated
CD players, while being simple to operate, was scorned by music aficionados. Its key selling points
were its portability, simple design and its ability to store large amounts of music that was then easily
accessible appealed to those on limited budgets and who were not particularly interested in sound
quality. More significantly though was the creation of iTunes in 2001 which together with the iPod,
both products of Apple, a computer company, disrupted the music industry to the point where it
now is a dominant force in the digital music industry.
However, this particular disruption has to be seen within the context of the role which personal
computers played. While early versions of Apple personal computers were initially regarded as toys
for children, most adults liked them because of their innovative design (the mouse was derived from
the ball used in roll-on deodorant), their affordability (when compared to prohibitively expensive
minicomputers) and finally, their versatility. Over time, the innovations improved and the smaller
computers soon began to compete with the minicomputers in terms of speed, efficiency and
functionality. Very soon these computers became affordable and fashionable and once mass
penetration had been achieved they eliminated the existing mini-computer industry.24
22
http://www.forbes.com/sites/carolinehoward/2013/03/27you-say-innovator-i-say-disruptor-what’s the difference/ 23
http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-15 24
http://www.christensoninstitute.org/key-concepts/disruptive-innovation-2/#sthash.WMrJyGX.dpuf
14
The table below provides a snapshot of disruptors and those market segments that have been
affected by them
Disruptor Disruptee
Personal computers mainframe computers
Cellular phones fixed line telephones
Air bnb hotels
Uber traditional taxis
Community colleges traditional four year university degrees
Retail medical clinics (Dischem/Clicks) traditional doctor’s offices
Wikipedia/google encyclopaedia
iPod/iTunes CD player
eBay/Amazon local stores
Skype long distance calls
Netflix cinemas/video rental stores
Pinball and gaming25
To get a better understanding of how Disruption actually works and to learn from its effects, there is
no better place to start than the Pinball industry. After enduring decades of prohibition, this
industry emerged stronger in the 1970s and was found in almost every tea room and gaming arcade
across the globe. This growth was accompanied by major changes: electronic components replaced
mechanical ones while the stand-alone arcades where these machines were based, emerged to
satisfy the demand for mass entertainment. However arcade video games, which in the 1970’s
began to slowly eat into the pinball market, and this started with Space invaders (1978) that
appealed to a new and different group. Initially Space Invaders and Pac-Man seemed to assist the
25
Downes and Nunes
15
growth of pinball business which in 1993 saw machine sales reach an all time high and they were
retailing for $7500. The next year, this market crashed when Sony released Playstation which
retailed for $299 and sold millions of units. Pinball sales dropped and within a short space of time
there was only one manufacturer, the rest had all been liquidated. There’s an interesting side story
to this; one of the biggest pinball manufacturers, Williams Electronics, avoided liquidation, by quickly
changing tack, adopted the new technology, which was then applied to a new business and started
producing high tech video slot machines.
Disruption from another angle:
The auto industry and Tesla26
Regarded as the world’s most innovative company, Tesla has not only taken the creative crown from
Apple but it has shaken up all the industries that it has been involved in, from automobiles to
recently, renewable energy. Eschewing the path taken by classic disruptive innovations such as the
steel mini-mills, personal computers, and cheap Japanese car imports, Tesla did not go after the low
end, price sensitive , customers first with cheaper, inferior technology27
Neither did it pursue people
that were not interested in driving cars. It has pursued the high end route and since its 2010 IPO, its
shares have soared 15 fold, giving the company a current market capitalisation of $33 billion. Since
2010 Tesla has raised $5.3 billion in equity and debt and this newcomer in the auto business, one
that specifically manufactures electric vehicles has irrevocably changed the world of motoring even
though their market share of the industry currently stands at 0.06%.28 Not only has Tesla produced
the world’s fastest and safest four door production car, Consumer Reports has voted it the best
overall car on the planet for two consecutive years. There are many ways that Tesla has captivated
the auto world. Firstly the motor and gearbox are much smaller than the traditional combustion
engine drivetrain and it makes its own battery packs, motors and plastic steering wheel casings. The
Tesla process pivots on a single purpose, speed and even the car is designed for speed of learning
with customers connected to Tesla via the car’s inbuilt 4G wireless connection which transmits
usage data to the manufacturer in real time and fixes are released overnight via software download.
26
Elon Musk the owner of Tesla is also responsible for Paypal, SpaceX and now the PowerWall, a battery that can store enough energy to
keep a fridge running for 600 hours. 27
Dyer, Gregersen and Furr (2015) p18 28
Dyer, Gregersen and Furr (2015) pg 19
16
What is happening at Tesla is symptomatic of the much larger shifts occurring in the automotive
industry generally. In 2015 when Apple announced that it intended developing a car, it represented
a culmination of a series of events wherein the two dominant operating systems, Apple’s iOS and
Android created in car systems that produced two distinct camps. Apple’s system has been aligned
with Mercedes-Benz, Nissan, BMW, Chevrolet, Jaguar and Ferrari while Androids, supporters
includes Audi, Honda, Kia and General Motors. Taken to its logical conclusion, the implication is that
currently with the fashion for the interconnectedness of everything, especially via web based
applications and apps, there is every possibility that the operating systems of smartphones and
home appliances will in some way determine the car choices.29 A good illustration of this is the fact
that many car companies have relocated to Silicon Valley to derive added benefits from being closer
to the global tech epicentre. The car-tech link is also important for another reason; In the US drivers
licence ownership has declined by 20% over the past 10 years and many millennials, are questioning
to need to own cars especially since the rise of Uber, car sharing schemes and sophisticated public
transport systems in most urban metros across the globe, has changed the image of cars as status
symbols. Furthermore vehicle ownership and its attendant costs such as registration, insurance,
maintenance and fuel has dented car sales to the point where, car manufacturers are contemplating
the future where ever larger numbers of cars would be used but not privately owned. Currently 25%
of the cost of building a car is related to software and consequently the future value of cars will
reside more in the technology than in the metal, thereby reversing a production paradigm that has
existed for decades.
Airbnb
During 2004, in just under a year Airbnb’s stock of available rooms rose from 300 000 to over 1
million instantly making it the biggest provider of rooms on the planet, and placing it ahead of
established brands like InterContinental Hotels Group (IHG), the Hilton and Marriot. Even though it
is a small player in terms of actual guest bookings,30 the 343% growth in unique visitors to its
website since its birth in 2008, is indicative of its potential to book more rooms than the world’s
largest hotel chains. It currently connects people in 34 000 cities/towns and 190 countries and
affords property owners the opportunity to monetize their extra space.31
Even though it can be
argued that Airbnb is not new, what is innovative is the technological platform which supports and
29
Chang, D (2015) What’s driving the automotive industry Disruption 30
In 2014 it sold 37 million room nights compared to 177 million of IHG (Allardice;2015,22) 31
https://www.airbnb.com/about/about-us
17
underpins it, namely the highly functional website that bridges supply and demand for a nominal
fee. The collaborative online platforms which this spawns, ensures a steady revenue stream for
homeowners.
The business model is relatively simple; Airbnb assumes a 3% cut off each booking together with a 6-
12% service fee from guests. In 2015 it anticipated revenues of $850 million which is triple the $250
million that was recorded in 2013 while its anticipated 2020 revenues are expected to be $10 billion.
To give an indication of the extent of its penetration of the hospitality sector, Marriot manages 4000
hotels and in 2014 had $13.8 billion in revenue.32
Uber
In just seven years Uber’s valuation has gone from virtually nothing to $68 billion. It is often
forgotten that first and foremost Uber is a technology company wherein riders are connected with
drivers using a free smartphone app. It is not a transportation company nor does it employ any
drivers or own any vehicles. The Uber app lets users request a ride and a driver-contractor is routed
to pick them up, with Uber always deriving a slice of the fare. The Uber global network encompasses
300 cities in 60 countries and across 6 continents and operates in areas covering between 30 to 50
million people. A recent article estimated that Uber gives about 3 to 5 million rides per year.33
It
launched in South Africa in August 2013,and very quickly reduced the average arrival time of drivers
from around 14 minutes to less than 5 minutes and its paper valuation is now higher than
household-name companies such as Delta, Viacom, Kellogg, and Kraft foods.34
CONCLUSION
There is evidence of disruption technology all around us. Smart and electric cars seem to be on the
verge of some disruptive intervention and all that is required is a convergence of technologies,
including faster charging and dependable batteries. To a large extent these advances and changes
were due to the launch of ultrafast mobile; the rapid constant data transfer that defined 3G meant
that everything could be accessed from everywhere. And this in turn led to the creation of Uber,
32
Winkler, R and Macmillan,D (2015) http://www.wsj.com/articles/the-secret-math-of-airbnbs-24-billion-valuation-1434568517 33
http://fortune.com/2014/12/04/uber-valuation-40-billion-fortune-500/ 34
http://www.forbes.com/profile/travis-kalanick/
18
WhatsApp and Instagram. With the advent of 4G, the atomic unit of the web was changed from
images to videos and gave birth not only to Snapchat but also ensured that at its peak, close onto 8
billion Facebook views were made possible per day. Likewise Tinder benefited greatly from the
advances made possible under 4G. It is estimated that by 2020, 5G, when launched will produce
broadband speeds that will eclipse its predecessors and will in turn unleash waves of innovation that
will disrupt every facet of industry. This new ultrafast high speed connectivity will provide a platform
for services and businesses and in the process initiate a whole new wave of disruption.
There is however a counterweight to most of the positive news associated with disruption. The
unexpected spillovers that emanate from disruptive technologies often lead to advances in other
industries. The best example for this is how smartphones have revolutionised bookstores,
entertainment, the transport and banking industries. However, these disruptions also affect, in many
instances, very directly, employment patterns and opportunities. It is therefore a concern that while
we have the resources to sustain ourselves longer than ever before our utility in an ever evolving
economy is beginning to decrease.
It is imperative that we recognise the value of economic Disruptors. Firstly, these provide signposts
to new growth areas of the economy and our acknowledgement thereof will help us to put in place
plans to attract them to our shores. Secondly their presence provides signals to potential investors
which we need to recognise, harness and leverage. But most importantly, as an IPA we have to
cognisant of these trends and development as we cannot afford to turn away entrepreneurs like
Jobs (Apple), Elon Musk (Tesla) or Kalanick (uber) simply because we’re unaware of the importance
of their innovations. Recent reports suggesting that Trade and Industry minister, Rob Davies was
engaged in discussions trying to entice Musk to South Africa to set up his manufacturing plant here,
was met with wry smiles by many commentators since Musk, a South African by birth, left this
country many years ago to forge a career abroad. We cannot afford to miss out on the next
generation of Disruptors.
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REFERENCES
1. Allardice, D (2015) Adapt or its Uber in Wanted
2. Chang, D (2015) What’s driving the automotive industry Disruption
3. Downes and Nunes (2013) Big bang disruption in Harvard Business Review
4. Dyer, Gregersen and Furr (2015) Tesla’s Secret Formula in Africa Forbes
5. http://fortune.com/2014/12/04/uber-valuation-40-billion-fortune-500/
6. http://www.business2community.com/business-innovation/leapfrog-disruptive-
innovation-01533710#PS6Gkkk1830f06CE.99T
7. http://www.christensoninstitute.org/key-concepts/disruptive-innovation-
2/#sthash.WMrJyGX.dpuf
8. http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-
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9. http://www.economist.com/blogs/economist-explains/2015/01/economist-explains-
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10. http://www.forbes.com/profile/travis-kalanick/
11. http://www.forbes.com/sites/carolinehoward/2013/03/27you-say-innovator-i-say-
disruptor-what’s the difference/
12. https://www.airbnb.com/about/about-us
13. Krogman, H Introduction to disruption in
http://www.tutwaconsulting.com/introduction-to-disruption
14. McKinsey Global Institute (2013) Disruptive technologies: Advances that will
transform life, business and the global economy
15. Traynor, D What everyone needs to know about disruption pg 4
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16. Winkler, R and Macmillan,D (2015) http://www.wsj.com/articles/the-secret-math-
of-airbnbs-24-billion-valuation-1434568517