“Profit Pools” BM499 Strategic Management David J. Bryce September 12, 2002

Definitions: Value Chain “Industry Value Chain” “Industry Value Chain” Sometimes called a “supply chain,” it consists of all of the activities, locations, and companies involved in converting raw materials into specific finished goods. Sometimes called a “supply chain,” it consists of all of the activities, locations, and companies involved in converting raw materials into specific finished goods.

Definitions: Value Chain Firm Value Chain, or just “Value Chain” Firm Value Chain, or just “Value Chain” It consists of all of the activities performed by a specific company in acquiring and converting raw materials into specific finished goods and delivering them to its customers It consists of all of the activities performed by a specific company in acquiring and converting raw materials into specific finished goods and delivering them to its customers E.g. Designing, producing, marketing, delivering, or supporting the firm’s product E.g. Designing, producing, marketing, delivering, or supporting the firm’s product

Generic Value Chain Adapted from M. Porter, “Competitive Advantage,” Support Activities margin Inbound Logistics Operations Outbound Logistics Marketing & Sales Service Firm Infrastructure Human Resource Management Technology Development Procurement

Why Look at the Value Chain? Helpful for analyzing sources of competitive advantage Helpful for analyzing sources of competitive advantage Helps to disaggregate a business into strategically relevant activities Helps to disaggregate a business into strategically relevant activities To understand the behavior of costs To understand the behavior of costs To understand potential sources of differentiation To understand potential sources of differentiation A firm gains competitive advantage by performing these strategically important activities more cheaply or better than the competition A firm gains competitive advantage by performing these strategically important activities more cheaply or better than the competition Adapted from M. Porter, “Competitive Advantage,” 1984.

THE PC INDUSTRY’S PROFIT POOL 40% % Share of Industry Revenue operating margin microprocessors other components personal computers software peripherals services The value chain in the PC industry includes six key activities; the profitability of the activities varies widely. Manufacturers compete in the largest but least-profitable segment of the chain. source: Harvard Business Review, May-June 1998

THE U.S. AUTO INDUSTRY’S PROFIT POOL 25% % Share of Industry Revenue operating margin auto manufacturing new car dealers used car dealers auto loans auto insurance aftermarket parts source: Harvard Business Review, May-June leasing warranty gasoline service repair auto rental The automotive industry encompasses many value-chain activities. The way that profits and revenues are distributed among these activities varies greatly. The most profitable areas of the car business are not the ones that generate the biggest revenues.

Profit Pools: Company Examples Companies Automakers U-Haul Elevators (OTIS) Iomega Polaroid Core Business Auto manufacturing Truck Rental Elevator Manufacturing Zip Drives Instant Photography Cameras Sources of Highest ROI Leasing, insurance, service. Packing materials, storage Service Zip Disks; Storage Film