202410-MGT4600-070 DB 3 External Analysis -Disrupting Industry Structure Discussion Topic Competing within a well-established and deep-pocketed industry seems impossible. There are numerous factors to consider and the risks may be broad

and deep. Read the Ch. 3 Case Part I and Part II on Airbnb. Instructions: (word max. 500) Briefly describe the external hotel environment (use the PESTEL Framework-Political, Economic, Sociocultural, Technological, Ecological and Legal impacts). Consider the industry giants including Marriott, Hilton, Ritz Carlton, Doubletree, Hyatt, etc. Why did the Airbnb strategists think they could break into this market? What part of the PESTEL framework might provide some hints or answers? And, importantly, do you see any factors (personalities or insights) that were unique to these leaders that may have contributed to their success?/n 3.5 Implications for Strategic Leaders At the start of the strategic management process, strategic leaders must conduct a thorough analysis of the firm's external environment to identify threats and opportunities. The first step is to apply a PESTEL analysis to scan, monitor, and evaluate changes and trends in the firm's macroenvironment. This versatile framework allows strategic leaders to track important trends and developments based on the sources of the external factors: political, economic, sociocultural, technological, ecological, and legal. When performing a PESTEL analysis, the guiding consideration should be the question of how the identified external factors affect the firm's industry environment. Exhibit 3.1 identifies external factors based on the proximity of these external factors, gradually moving from the general environment to the task environment. The next layer to understand is the industry. Applying Porter's five forces model allows strategic leaders to understand an industry's profit potential, which helps them determine how to carve out a strategic position that makes gaining and sustaining a competitive advantage more likely. Follow these steps to apply the five forces model: 50 1. Define the relevant industry. In the five forces model, industry boundaries are specified by identifying a group of incumbent companies that face more or less the same suppliers and buyers. This group of competitors is likely to be an industry if it faces the same entry barriers and a similar threat from substitutes. In this model, therefore, an industry is defined by commonality and overlap in the five forces that shape competition. 2. Identify the key players in each of the five forces and attempt to group them into different categories. This step aids in assessing the relative strength of each force. For example, although the makers of jet engines (GE, Rolls-Royce, Pratt & Whitney) and local catering services are all suppliers to airlines, their strengths vary widely. Segmenting different players within each force allows you to assess each force at a fine-grained level. 3. Determine the underlying drivers of each force. Which forces are strong, which forces are weak, and why? Continuing with the airline example, the supplier power of jet engine manufacturers is strong because they supply a mission-critical, highly differentiated product for airlines. Moreover, there are only a few suppliers of jet engines worldwide and no viable substitutes. Page 121 4. Assess the overall industry structure. What is the industry's profit potential, and which forces directly influence that potential? Not all forces are likely to have an equal effect. Focus on the most important forces that drive industry profitability. Ĝ Since Airbnb began operations, it has faced evolving regulatory issues that affect the short-term rental and home- sharing business. City councils, homeowners, and homeowners' associations have proposed or enacted regulations to hamstring Airbnb. Such rules find their manifestations in local ordinances, lease agreements, insurance policies, and/or mortgage agreements to limit hosts' ability to share their spaces using Airbnb and other short-term rental platforms. For example, some condo homeowner associations in popular U.S. cities limit how many units can be used for short-term rentals, if any. In Europe, a group of mayors representing 22 cities (including Amsterdam, Barcelona, and London) has met with the European Commission (the executive branch of the European Union) to seek increased regulatory control over short-term rental platforms. As a result of these moves, Airbnb and its hosts are at risk of incurring significant penalties. In addition, established companies with superior brand recognition launched retaliatory competitive moves in response to Airbnb's disruption of the industry. Competitors are beginning to adopt elements of Airbnb's business model. Numerous competing companies now offer homes for booking online, and Airbnb hosts frequently offer their properties on multiple platforms. Moreover, Google's ability to promote its travel and vacation rental ads more prominently in search results negatively affects Airbnb's traffic. Success breeds imitation: Airbnb's list of competitors is growing to include online travel agencies, search engines such as Google, category-focused metasearch sites (such as Kayak, Tripadvisor, and Trivago), hotel chains, and Chinese short-term rental companies (such as Tujia). Yet despite all these challenges, Airbnb's pandemic pivot paid off. In 2021, the company reported record revenues. Growth in bookings was strongest for overnight stays in non-urban areas. And, as work from home becomes the new normal for many, Airbnb's guests are staying longer. Indeed, long-term stays of 28 nights or more are its fastest-growing segment, already accounting for 20% of all nights booked. 5 52 Questions 1. Why do PESTEL factors have such a substantial impact on the future of a business? Identify key PESTEL factors for Airbnb, and explain why they can have a significant impact (positive or negative) on the firm's business. A. What activities might Airbnb include in a nonmarket strategy to respond to and shape its regulatory environment? B. How can awareness of PESTEL factors guide the internal actions that a firm decides to undertake? How might strategic leaders learn from Airbnb's example? 2. How could an internet startup disrupt the hospitality industry long dominated by Marriott and Hilton, which took decades to become successful worldwide chains? Explain using the Entry Choices framework (see Section 3.3). 3. Evaluate the actions that Airbnb took in response to the global pandemic. Would you have recommended other activities? If so, which specific activities would you have recommended? If not, why not? CHAPTERCASE 3 Part II Even though Airbnb is one of the most valuable startups globally and offers more accommodations than the three largest hotel chains (Marriott, Hilton, and Intercontinental) combined, not all has been smooth sailing. External environmental factors discussed in this chapter present significant challenges for Airbnb. Economic, political, and legal factors required tremendous agility from the company as it went public during a global pandemic. Although early recognition of changing travel trends helped Airbnb prevent disaster during widespread pandemic lockdowns, the pandemic's impact was non-trivial. As part of its Covid-19 pivot, Airbnb laid off a quarter of its workforce in its first round of layoffs ever. In addition, CEO Chesky cut all noncore expenditures (such as generous employee perks) and investments in future growth areas such as Airbnb Experiences, which provide a more in-depth and personalized adventure by fully immersing guests in the host's unique world and expertise. These experiences include making sushi with a famous chef, creating graffiti art, and participating in an exploratory tour of an exciting destination. Airbnb Experiences are an essential part of Chesky's stated ambition to transform Airbnb into a fully vertically integrated travel company. Experiences help to vertically integrate the company by providing tourist offerings as part of the travel destination purchase options, ensuring that money spent at the destination remains with Airbnb and hosts. More guests leave a five-star review after a stay if they have participated in an experience. Despite the lower investment in Experiences during the pandemic, Airbnb remains optimistic that Experiences will be an area of growth over the next five years. As part of the pandemic pivot, CEO Chesky also needed to delay the long-anticipated initial public offering (IPO). In December 2020, with the Nasdaq Composite 51 up almost 60% from the pandemic low in March that year, he finally took the company public. At the IPO, Airbnb's valuation was $47 billion. By early 2022, Airbnb's market cap stood at $114 billion, an appreciation of almost 60%. Yet, in the same month that Airbnb went public, it reported a record loss of $4 billion, making its total loss in 2020 higher than its losses in the previous four years combined. The final step in industry analysis is to draw a strategic group map. This exercise allows you to unearth and explain performance differences within an industry. When analyzing a firm's external environment, you need to apply the three frameworks introduced in this chapter (PESTEL, Porter's five forces, and strategic group mapping). The external environment can determine up to roughly one-half of the performance differences across firms (see Exhibit 3.2). Although working with the different models discussed in this chapter is an important step in the strategic management process, be aware that these models are not without shortcomings. First, all the models presented are static. They provide a snapshot of what is actually a moving target, and they do not allow for consideration of industry dynamics even though changes in the external environment can appear suddenly, for example, through black swan events (see Chapter 2). Industries can be revolutionized by innovation. Strategic groups can break apart or become obsolete as a result of deregulation or technological progress. To overcome the crucial shortcoming of static frameworks, strategic leaders must conduct external analyses at different points in time to gain a sense of the underlying dynamics. The frequency with which these tools need to be applied is a function of the industry's rate of change. For example, the mobile app industry is changing extremely fast, while the railroad industry operates in a less volatile environment. Second, the models presented in this chapter do not allow strategic leaders to fully understand why firms in the same industry or same strategic group perform differently. To better understand differences in firm performance, we must look inside the firm to study its resources, capabilities, and core competencies. We do so in the next chapter by moving from external analysis to internal analysis. Page 122/n CHAPTERCASE 3 Part I Airbnb's Pandemic Pivot @ We miss traveling too. -Airbnb Airbnb's strategic pivot turned the Covid-19 pandemic into an opportunity. A massive amount of real-time user data from the company's website allowed CEO Chesky to quickly notice emerging travel trends. Guests searched for local travel accommodations with remote working capabilities. As city dwellers left the crowded apartment buildings, they also booked longer stays. With ads like the one shown here, Airbnb encourages its users to think beyond renting accommodations for pandemic-related work arrangements but consider leisure travel again as Covid-restrictions have eased around the globe. Source: Airbnb, Inc. Not too long ago, it would have seemed impossible for a startup to disrupt the entire hospitality industry. The business had been long dominated by giants such as Marriott and Hilton, which took decades to become successful global brands. Yet in 2022, Airbnb had 4 million hosts in over 100,000 cities in some 220 countries offering guest stays in almost every region across the globe. Guests can make reservations for low-budget spare rooms or entire islands and castles. With its asset-light approach based on its platform strategy, Airbnb can offer more accommodations than the three biggest hotel chains combined: Marriott, Hilton, and Intercontinental. And just like global hotel chains, Airbnb uses sophisticated pricing and reservation systems for guests to find, reserve, and pay for rooms to meet their travel needs. As the pandemic spread, Airbnb quickly realized that guests were willing to pay a premium for long-term rentals with fast internet connections in desirable suburbs, rural areas, and vacation locales such as Boise (Idaho), Lake Tahoe (California), Martha's Vineyard (Massachusetts), Maui (Hawaii), Palm Beach (Florida), and San Antonio (Texas). Airbnb's superfast pivot in response to the pandemic was possible only because it uses an asset-light approach. Airbnb can match changing guest preferences (demand) with hosts (supply) on its two-sided platform in real time. In addition, given the dynamic nature of its algorithm, Airbnb can feature hosts on its site that can best address current booking needs. Airbnb was valued at a whopping $114 billion in early 2022, making it one of the world's most valuable startups. Even more stunning, Airbnb's valuation is almost double that of long-time market leader Marriott, which stood at $59 billion.³ Part II of this ChapterCase appears in Section 3.5. effusively about Airbnb. The newly designed Airbnb website facilitated about 100 rentals during the DNC. Soon after the event, however, website traffic to Airbnb's site fell back to zero. To generate some cash to continue their venture, Chesky and Gebbia decided to become cereal entrepreneurs, creating “Obama-O's: The breakfast of change" and "Cap'n McCains: A maverick in every bite," featuring illustrated images of the 2008 presidential candidates on 1,000 cereal boxes. After sending samples to their press contacts and the subsequent media coverage, the limited-edition cereal sold out quickly, providing Chesky and Gebbia with additional revenue to continue marketing Airbnb. Page 82 The fledgling venture's big break came in 2009. Y Combinator, a startup accelerator that has spawned famous tech companies such as Dropbox, Stripe, and Twitch.tv, offered Airbnb one of the few coveted spots in its program. In exchange for equity in the new venture, startup accelerators provide office space, mentoring, and networking opportunities with venture capitalists looking to fund the next "big thing." A year later, Airbnb received funding from Sequoia Capital, one of the most prestigious venture capital (VC) firms in Silicon Valley. The VC firm had already provided early-stage funding to then startups Apple, Google, Oracle, PayPal, YouTube, and WhatsApp. Although it was not a first mover in the peer-to-peer rental space, Airbnb, with Y Combinator's support, was the first to figure out that a sleek website design composed of professional photos of available rentals makes a huge difference. In addition, Airbnb developed a seamless transaction experience between hosts and guests and was able to earn a little over 10% on each transaction conducted on its site. The timing of these wins was fortuitous. The 2008-10 global financial crisis was in full swing, and people were looking for low-cost accommodations while hosts were trying to pay rent or mortgages to keep their homes. Resilience and agility have been a part of Airbnb's DNA since its initial startup during the challenging external environment of a global financial crisis. These capabilities served them well as they pivoted in response to the Covid-19 pandemic. A vast stream of user data from its site allowed CEO Chesky to quickly notice emerging travel trends, such as local travel and remote working. He also noted that guests booked trips closer to home (but not in metropolitan areas such as big cities) and with longer durations. Airbnb closely studied how consumer behaviors were evolving and became convinced that the lines between travel, leisure, and living were blurring. Applying artificial intelligence to the vast amounts of data generated on its website allowed Airbnb to pivot during the pandemic. Meanwhile, many traditional hotels were closed or operated at much lower capacity because of pandemic restrictions. In 2008, Airbnb was a fledgling startup on a shoestring budget. Today, it is a multibillion-dollar company that competes globally. The company, for instance, reached a significant milestone (in 2021) with 1 billion guest arrivals. Airbnb's success is even more stunning given the high entry barriers traditionally protecting incumbent firms. How did Airbnb disrupt the global hospitality industry? Brian Chesky and Joe Gebbia, the founders of Airbnb, were roommates in San Francisco (in 2007) struggling to make rent payments. Both were industrial designers, people who shape the form and function of everything from coffee cups to office furniture to airplane interiors. On a whim, they decided to send an e-mail to the distribution list for an upcoming industrial design conference in their hometown: "If you're heading out to the [industrial design conference] in San Francisco next week and have yet to make accommodations, well, consider networking in your jam-jams. That's right. For an affordable alternative to hotels in the city, imagine yourself in a fellow design industry person's home, fresh awake from a snooze on the ol' air mattress, chatting about the day's upcoming events over Pop Tarts and OJ."1 Three people took them up on the offer, and the two roommates made some money to subsidize their rent payments. But, more importantly, Chesky and Gebbia felt that they had stumbled upon a new business idea: Help people rent out their spare rooms. They then brought on computer scientist Nathan Blecharczyk, one of Gebbia's former roommates, to create a website where hosts and guests could meet and transact. The three co-founders named their site AirBedand Breakfast.com, later shortened to Airbnb. The three entrepreneurs tested their new site at the 2008 South by Southwest (SXSW) conference, which celebrates the convergence of the tech, film, and music industries. SXSW also serves as an informal launch pad for new ventures. Twitter, for example, was unveiled at SXSW just a year earlier to great fanfare. However, Airbnb's launch at SXSW flopped. The conference organizers had exclusive contracts with local hotels, which the Airbnb founders did not know. As a result, the conference organizers didn't drive any traffic to Airbnb's site. Undiscouraged, Airbnb decided to take advantage of the anticipated shortage of hotel rooms in Denver, Colorado, at the Democratic National Convention (DNC) in 2008. After all local hotels were booked, the founders prepared media releases with pithy titles such as "Grassroots Housing for Grassroots Campaign." This messaging resonated with Obama supporters. As a result of their shrewd guerrilla marketing,² both The New York Times and The Wall Street Journal wrote effusively about Airbnb. The newly designed Airbnb website facilitated about 100 rentals during the DNC. Soon after the