Monday, June 21, 2010

Strategic Planning Analogy #333: Ownership

Back when I was getting my MBA, one of the things I was taught was how to do the classic “Rent versus Buy” analysis. The idea is to track the costs over the lifetime of an asset to see if it is cheaper to rent the asset or buy it.

I was so excited about learning this new tool that I immediately wanted to apply this knowledge to the company I was working for part-time while getting my MBA. I did a quick analysis of whether this company should rent or buy its trucks. I was eager to share my results with company management.

Unfortunately, company management was not as excited about by the analysis as I was. Apparently, they had already been doing an analysis of their own, called “Reinvest versus Liquidate.” They had come to the conclusion that they were going to wind down the business instead of reinvesting in it. Thus, an analysis about renting versus buying future trucks was worthless, since they were not going to be needing any additional trucks in a wind down.

This taught me an important lesson: If you don’t have a great long-term strategy, a lot of the day to day decisions lose their importance. Maybe that’s why I’ve spent most of my career trying to help firms find that long-term strategy instead of helping them with “Rent versus Buy” decisions.

Most of the time, we see the “Rent versus Buy” decision as a minor tactic. It is usually not the key to our core business model. Instead, it is just a tool to find the cheapest way accomplish our business model. If the business model is failing, like in my story, “Rent versus Buy” is not seen as powerful enough to stop the failing business model.

However, what if we elevated “Rent versus Buy” to become the core differentiation in our business model? Would it be possible to create a new, more powerful business model based upon assumptions around ownership? Could a creative new approach to ownership create a business model so innovative that a whole new industry is born? Could this help save companies from liquidation?

I think so.

This is another blog in my occasional series on innovative business models. In the past, we’ve looked at innovation by adding or taking out intermediaries, in bundling/unbundling, changing access, and in changing how a problem gets solved. In this blog, we will look at innovation by changing ownership.

Everything has to be owned by somebody (or somebodies). For many items, ownership transfers to the buyer at the point of the transaction. For example, if I go to a car dealership and purchase a car, the ownership of that car transfers to me.

For other items, ownership does not transfer at the point of the transaction. Instead, the “purchaser” is only leasing use of the property. For example, an owner of an apartment building maintains ownership of the property and makes money by renting out the apartments.

Other times, a third party takes ownership. For example, a manufacturer may sell an item to a third party finance company who then leases the property to a user.

The point here is that you get a different business model depending on whether ownership is located with the product/service provider, the product/service user, or a third party. If you want to create a new business model innovation, consider shifting from a traditional ownership model to a different one.

1) Shifting From Traditionally Rented to Owned
Let’s look at a few industries that have traditionally used a lease business (provider-owner) model to see what happens when you shift to a user-owner model. For example, apartment buildings were traditionally a provider-owner business. The owner of the building remained the owner. The users of the building rented their space from the owner (never took ownership). But what if the users did take ownership? When this happened, a whole new exciting industry was created, called “condominiums.”

And how about vacations? Traditionally, when you went to a vacation spot, you rented your accommodations from a Hotel, Inn, Bed & Breakfast, or other such facility. But what if you could own that accommodation? Some entrepreneurs tried that and created a new business model, the “timeshare” vacation, where you own a week’s worth of a vacation property, which can be traded for vacation spots all over the world.

This timeshare model has spread to other industries where other business models had previously been dominant, such as commercial jets (NetJets) and boats. Either you went from renting to partial owning, or from full owning to partial owning.

Before the breakup of the telephone utility in the United States, every telephone in the country was owned by the telephone utilities. Customers rented them as part of their monthly utility bill. Now, customers own their own phones. This revolutionized the telephone manufacturing business.

When movie studios first started allowing customers to view video tapes of their movies in people’s homes, a rental model was chosen, spawning firms like Blockbuster. Then the studios lowered the price, so that consumers started buying and owning the movies, benefitting firms like Wal-Mart. Now, in the age of digital streaming of movies, we’re moving back to a rental model.

The point is that you may be able to revolutionize an industry by finding something which is traditionally rented and find a way to transfer ownership to the user.

2) Shifting From Traditionally Owned to Rented
This same principle also works in reverse, where something typically owned by the user is shifted to a rental model. For example, instead of owning your furniture and appliances, you can rent them. Firms like Cort will gladly rent you whatever furniture you need, for home or office. Other firms, like Aarons or Rent-A-Center, use a hybrid rent-to-own model for furniture and appliances.

What about clothing? There are a number of firms specializing in renting out designer clothing and accessories via the internet, including firms such as Wear Today Gone Tomorrow, Rent Me a Handbag, and From Bags to Riches. In New York City, there are designer clothing rental shops, such as Albright and Ilus.

People may have been comfortable renting cars for a short period when away from home, but tended to want long-term ownership or a long-term lease on a car for home-town use. Now, however, there are firms such as ZipCar which will rent you a car for a few hours or a day right in your own home town in a very convenient manner. This is causing many urbanites to abandon car ownership, just renting cars for those occasions when mass transit is inappropriate. Customers claim to save money and help the environment. A new industry is born!

Again, look at industries where users traditionally own the product and consider how you could reinvent the industry by converting to a rental model. You may create the next ZipCar.

3) Other Interesting Ownership Changes
Governments have traditionally been responsible for providing its citizens with a number of services, such a prisons and highways. However, even though the government is responsible for providing the service does not mean they have to own the service. Lots of government services, like toll roads and prisons are now owned or operated by non-government third parties. There may be many other government responsibilities that can be done by independent third parties.

Outsourcing can be applied to a lot of areas. This shifts ownership to others, rather than to yourself. Are there new frontiers in outsourcing yet to be developed?

And what about cooperatives? Group ownership of property may be better than owning it all by yourself.

And maybe you can split a single transaction into two. For example, one business model being considered in the electric car industry is one where you would buy the car, but rent the very expensive battery inside the car.

One component of a business model is who retains ownership. It could be the provider (who rents), the user (who buys), or a third party (who facilitates). One can invent exciting new business innovations by merely changing the traditional ownership pattern in an industry business model. Maybe such an opportunity exists in your business.

My initial excitement about “Rent versus Buy” was quickly deflated in the story. However, if you look at ownership issues as the opportunity to potentially reinvent an industry, there is plenty of reason to get excited again.

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