The World at 100% Utilizationwatch full Colossal film
It is simple math. Airbnb’s enterprise value is about $20 billion, roughly twice that of Hyatt. Even though they don’t own any hotels, they are the world’s largest provider of accommodations.
Businesses of all sorts can learn a key lesson from the “sharing economy”. In a world of hyper-competition, assets must be fully utilized. In New York, for example, the majority of Airbnb’s listings are outside the swanky Midtown Manhattan area. Airbnb exposes travelers to lesser-explored neighborhoods such as Brooklyn’s up-and-coming Bedford-Stuyvesant. On average, tourists are staying for five nights instead of the typical three spent in New York hotels. In New York’s market of short-term rentals, sharing actually creates more demand, which in turn absorbs more supply.
In any business, higher utilization translates into both higher margins and better overhead absorption. In Airbnb’s case, there are lower transaction and support costs (such as maid services). The model has proven the power of algorithms, which most efficiently matches buyers and sellers.
B2B businesses should find similar ways to introduce unused capacity to new customers. And certainly, they must find ways to leverage that scope before seeking out new business ventures that tap into new capacity. The ebb and flow of capacity is a trap for management teams. As companies reach something close to 100% utilization, they in turn take on debt to expand. They must then discount in order to fill their capacity, only to find themselves in the same vicious cycle. Even worse, salespeople will reach to sell products and services outside a core competency, which requires their companies to build capabilities they do not have.
Capacity is not just physical production space; it includes intangibles like human capital and technology required to support volume. This is one of the reasons why strategic planning is so important. Managers must consider the total cost of managing capacity when making long-term decisions.
This is also one reason why focusing on EBITDA alone (including as the driver of incentives and the like) can be limiting. EBITDA considers operating profit, but not interest spent to access new capital that may be used to buy facilities or equipment.
So, consider new ways of fully deploying your assets and achieving 100% whenever possible. Be thoughtful in your long-term planning, and clearly define the sweet spot of capacity utilization that you wish to achieve. And for God’s sake, get those salespeople selling against the capacity you already have.
For more, see our Consumer Goods, Food and Retail page.