Disruptive Business Models: Boon or Bane for Society

3 March 2017

Although less than a decade in operation, Airbnb has established itself around the world to such an extent that virtually everyone has already either used it, or knows someone, who has used it. However, it has been assailed by critics. They argue that Airbnb’s disruptive approach impacts the hotel sector which traditionally provided relatively stable employment to lower skilled workers and contributed via taxes to local and national governments. They also argue that it has contributed to the housing crisis plaguing Anglo-Saxon countries.

Airbnb is one example of disruptive business models that have come into sharp focus in recent years. However, disruption has long been a part of the business world. From the entry of McDonalds into the fast food sector to low-cost carriers like our own Ryanair into the airline sector, disruptions based on innovative business models have over time impacted industries in a myriad of ways and reshaped industry space. In many cases, the disruption created new market niches thus expanding the industry space. With the advent of McDonalds, eating out opened up to larger segments of the population while low cost airlines opened up air transportation to many for whom flying was not an affordable option. In large part, these earlier disruptors complemented the focus of incumbent players rather than necessarily displacing them.

Those disruptors also tended to have other beneficial effects. By increasing competition in the sector, incumbents were forced to adapt or exit with an overall increase in the efficiency of the sector. By making travel more affordable to the masses, the advent of low-cost airlines has proven to be a boon for tourism including here in Ireland.  Even more recently the arrival of disruptive retailers such as Aldi and Lidl into Ireland has increased competition in the grocery sector providing benefits to consumers and employment in the sector.

All of the above is not to imply that there were no losers from disruptive business models in the past. Rather it is to suggest that the plurality of direct and indirect benefits to citizens and society tended to outweigh the costs incurred.

Recent years has seen the emergence of disruptive business models based around the exploitation of Internet platforms. Such disruptive business models have driven the growth of new companies, provided benefits for consumers and improved overall economic productivity particularly with the more intensive use of resources. They have tended to spawn new ventures in established sectors that are often in direct opposition to incumbents, as exemplified by the already well established Uber and Airbnb.

Unlike established players in their respective industries, Uber and Airbnb have operated without incurring the costs of having employees and owning assets in the delivery of their offerings, be it transportation in the case of Uber or short term accommodation in the case of Airbnb. They have also sought to operate as unshackled as they possibly can from the responsibilities and regulations that established players in the industry are obliged to adhere to in relation to employees and consumers and in relation to national or local authorities. One example of the latter is the case of Airbnb and adherence to housing property regulations. Their ensuing cost advantage has led consumers to embrace their offerings. 

These disruptive business models are a driver of the gig economy whose proponents argue offer freedom and flexibility to those working in it. But there are concerns that these recent disruptive business models can also have regressive social effects, undermining job security and contributing to heightened inequality. Critics see them as driving an ever greater share of the workforce to become part of the precariat and the working poor. With 20% of the self-employed in the UK already receiving income support from the state in the form of tax credits, such an outcome creates challenges for the state and for society more generally. Furthermore with incumbents under threat from such disruptive business models, there is the possibility of a race to the bottom with more widespread deployment of similar approaches by incumbents.

While disruptive business models can drive productivity growth in the economy, the challenge for society is how the benefits of such growth are distributed. This is particularly so since these disruptive business models can be deployed to favour winner take all outcomes.  Given the potentially adverse consequences for citizens, communities and society more generally of doing so, such deployment is likely to drive further the type of political disruption that has obtained of late in the UK and the USA. Accordingly, a heavy responsibility rests with those introducing disruptive business models to seek to ensure that their potentially abundant benefits are shared by all stakeholders.

Louis Brennan  is Professor in Business Studies at the Trinity Business School. He chaired a panel discussion on this topic as part of the Trinity Global Business Forum  which took place in Trinity College on Thursday March 2, 2017.

Published in The Journal

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