A Fresh Look at Strategy Management Analysis Summer 2001 Profit Pools A Fresh Look at Strategy Management Analysis Summer 2001

Industry Profit Structure Recognize that there are many sources of profit in most industries Identify untapped sources of profit, not revenue Try to achieve first-mover advantages Capture disproportionate share of industry’s profits

Profit Pool Lens Total profits earned in an industry at all points along the industry’s value chain Structure of profit pool is usually complex Depth of pool can differ by segment Segment profitability can vary by Customer group Product category Geographic market Distribution channel

Profit Pool Lens Pattern of profit concentration different from revenue concentration pattern Shape of profit pool reflects competitive dynamics of the industry Profit pool is not stagnant – structure changes

Map the Profit Pool Where and how is money being made in the industry? Which value chain activities are the most profitable? Where are the differences in the patterns of revenue and profit concentration? How will the profit pool picture evolve? How do some profit sources exert influence over others and shape competition?

Map the Profit Pool Why have profit pools formed where they have? Are the forces that created those pools likely to change? Will new, more profitable business models emerge?

Turbulent Industries Rapid structural changes cause shift in distribution of profits along value chain Deregulation New technology Global competition Mergers and acquisitions - consolidation Shift can create “choke points” for industry leaders – control the flow of profits Try to anticipate structural changes and profit pool shifts

Lessons From Dell Computer Recognize variability in profitability among different segments of customer base Monitor these variations closely Identify and focus on most profitable customer segments Decline to participate in less profitable segments of the market

Stagnant Industries Even stagnant industries have profit pools Expand into most profitable segments Protect the segment’s profitability Make the segment LESS profitable for competitors – discourage competition Build a cost advantage over rivals Examine every value chain activity for cost advantages Build barriers to entry

Summary Use profit pool lens to Identify sources of profit in low margin industries Chart acquisitions and expansion strategy Decide which customers to pursue and which distribution channels to use Guide product, pricing, and operating decisions Develop new, more profitable business models