Disruption the new economic reality 2 · 2018. 7. 26. · disruption are subject to change and nowhere is this better illustrated than with the rise of Tesla which disrupted the automotive

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DISRUPTION: The new economic reality

Prepared by Nisaar Mahomed, September 2016

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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

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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

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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

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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

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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

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Especially when digital and cellphone cameras made film redundant

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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

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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

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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

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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)

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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

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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

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Downes and Nunes (2013)

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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)

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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

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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

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Downes and Nunes

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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

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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

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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/

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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-

15

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