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

2. 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

3. 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

4. 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

5. 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?

6. 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?

7. 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

8. 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

9. 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

10. 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