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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,*,Darral G. Clarke for BM 499,*,Profit Pools and Core Competence,Darral G Clarke,Professor of Management,The Marriott School,Brigham Young University,9/16/2024,1,Darral G. Clarke for BM 499,Profit Pools: A Fresh Look at Strategy,Orit Gadiesh and James L. Gilbert,Harvard Business Review,May-June 1998,9/16/2024,2,Darral G. Clarke for BM 499,THE PC INDUSTRYS PROFIT POOL,Value chain focus,Axes,Verticaloperating margin,Horizontalshare of industry data,40%,30,20,10,0,0,100%,share of industry revenue,microprocessors,other components,personal computers,software,peripherals,services,The value chain for 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.,9/16/2024,3,Darral G. Clarke for BM 499,The Profit Pool Lens,The profit pool is the total profit earned in an industry at all points along the industrys value chain,Segment profitability may vary by customer group, product category, geographic market, or distribution channel,Profit concentration may be very different than revenue concentration,Shape of the profit pool reflects the competitive dynamics of a business,Interactions of companies and customers,Competitive strategies of competitors,Product pools are not stagnant,9/16/2024,4,Darral G. Clarke for BM 499,THE U.S. AUTO INDUSTRYS PROFIT POOL,100%,operating margin,source:,Harvard Business Review, May-June 1998,auto rental,25%,15,10,5,0,0,share of industry revenue,auto manufacturing,new car dealers,used car dealers,auto loans,auto insurance,aftermarket parts,20,leasing,warranty,gasoline,service repair,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.,9/16/2024,5,Darral G. Clarke for BM 499,Profit Pools: Company Examples,Companies,Automakers,U-Haul,Elevators (OTIS),Harley Davidson,Polaroid,Core Business,Auto manufacturing,Truck Rental,Elevator Manufacturing,Motorcycles,Instant Photography Cameras,Sources of Highest ROI,Auto leasing, insurance,Packing materials, storage,Service,Accessories (consumer products), leasing, service, restaurants,Film,9/16/2024,6,Darral G. Clarke for BM 499,Managerial Implications,Focus on growth and market share can lead a company to focus on unprofitable segments of an industry,Todays deep revenue revenue pool may be tomorrows dry hole,.,The goal should be to focus on profitable opportunities,Industry should be considered more broadly than traditional definition,Automobile industry includes,Component manufacture and supply,New car assembly and delivery,New car warrantee and service,New car financing and insurance,Used car sales and service,9/16/2024,7,Darral G. Clarke for BM 499,Turbulent industries,Profit pools are especially important and useful in industries undergoing deregulation and/or technological change,Such changes can open new profit pool opportunities and drain old ones,Choke points may change or be eliminated,Opportunities for either forward or vertical integration may emerge,Current vertical integration may be disintermediated,9/16/2024,8,Darral G. Clarke for BM 499,Creating and managing a profit pool,Profit pool analysis may indicate new opportunities or threats,Imperatives,Be open to a new perspective on your business and industry,Developing new strategy may require overturning elements of the current strategy,Be open to reevaluate the role played by current competitors,Be vigilant to identify possibility that new entrants may seek to enter your industry with radical strategies,9/16/2024,9,Darral G. Clarke for BM 499,Looking Ahead: Profit Pools and the Five Forces,Profit pools are computed by multiplying the size of the revenue by the unit profit margin,Essentially an accounting process- no theory,Most valuable in situations in which external conditions are essential stable and/or unimportant,(Often dominated by internal data alone),The five forces tells us (which will study next),the underlying determinants that determine both the revenue size and the unit profit margin,The profit drivers which allow us to forecast the direction of change,9/16/2024,10,Darral G. Clarke for BM 499,Marakon Runners,Thomas A. Stewart,Fortune,Sept. 28, 1998,9/16/2024,11,Darral G. Clarke for BM 499,Marakon Associatess Approach to Corporate Strategy,Consultants to many large corporations,Coca Cola, HP, GM, CitiCorp, etc.,Clients have returns 3.1% higher than industry peer group,Goal is to increase shareholder value through analysis of economic profit,Deep drilling in business data to measure value creation,Product segments,Customer segments,9/16/2024,12,Darral G. Clarke for BM 499,How Strategy Happens,Learning where value is created,Waterfall charts by product and customer segments,Evaluating strategy,Industry average profit per unit,Companys profit vs industry average,Managing value,Current strategy,Change product focus,Change customer focus,9/16/2024,13,Darral G. Clarke for BM 499,Learning where value is created,Product segments,Customer segments,Profit/loss ($ per unit),Volume (units),Volume (units),0,9/16/2024,14,Darral G. Clarke for BM 499,Evaluating Strategy,Company profit per unit,Industry-average profit per unit,9/16/2024,15,Darral G. Clarke for BM 499,Managing for value,Current,strategy,Change,product,focus,Change,Customer,focus,Value,9/16/2024,16,Darral G. Clarke for BM 499,Application to our cases,Retail industry (Wal*Mart),Soft drink industry (Coca-Cola and PepsiCo),Steel (Nucor) and aluminum cans (CC&S),Hi tech (Intel, Cisco, and Dell),Video games (Nintendo),Web businesses (eBay and Yahoo!),9/16/2024,17,Darral G. Clarke for BM 499,The Core Competence of the Corporation,Prahalad, C. K. and Gary Hamel,Harvard Business Review, May-June 1990,9/16/2024,18,Darral G. Clarke for BM 499,Core Competence,A Firm is made up of resources,people, patents, brand names, plant &equipment, processes, etc,A competence is the ability to employ diverse skills and resources to perform tasks and activities.,A core competence is a broadly based and/or a broadly applied fundamental capability.,9/16/2024,19,Darral G. Clarke for BM 499,Competence and Technology,Competence is not the same as technology,Competence requires,technologies,social organization,collective learning,9/16/2024,20,Darral G. Clarke for BM 499,Core competence questions:,What are we really good at?,How can we build upon it?,What do we need to be good at?,9/16/2024,21,Darral G. Clarke for BM 499,Characteristics of Effective Competencies,Durability:,Technical equipment can be short lived. Reputation or knowledge may depreciate more slowly.,Transparency:,The more,complex,the source of competence, the harder it is to imitate it.,Transferability:,The,availability,of resources to competitors.,Replicability:,A competitors,internal ability,to replicate a competence using available resources.,9/16/2024,22,Darral G. Clarke for BM 499,Choosing Competencies,How central is this competence to our success in the market?,How long could we preserve our competitiveness in this business without this particular competence?,What future opportunities would be foreclosed if we were to lose this particular competence?,9/16/2024,23,Darral G. Clarke for BM 499,Core Competence and Core Products,9/16/2024,24,Darral G. Clarke for BM 499,A Hierarchy of Competencies,9/16/2024,25,Darral G. Clarke for BM 499,Building Strategy from Capabilities,Strategy,Capabilities,Resources,1. Identify resources, appraise,relative strengths and weaknesses. Leverage use of resources,2. Identify capabilities. What do we do,more effectively than competitors?,Identify resource inputs to capabilities.,3. Appraise rent-generating potential,resources and capabilities in terms of:,sustainable advantage, inappropriability,4. Select strategy that best exploits the,firms resources and capabilities rela-,tive to external opportunities.,5. Identify resource,gaps that need to be,filled.,Invest in replenishing,augmenting, and up-,grading the firms,resource base.,Competitive,Advantage,Source: Robert M. Grant, “The Resource-,Based Theory of Competitive Advantage,”,California Management Review, Spring,1991, page 151.,9/16/2024,26,Darral G. Clarke for BM 499,How to map your industrys profit pool,Orit Gadiesh and James L. Gilbert,Harvard Business Review,May-June 1998,9/16/2024,27,Darral G. Clarke for BM 499,A straight forward exercise with complications,Concept is straight forward,Define value chain activities,Determine their size and profitability,Application of concept is complicated,Financial data doesnt correspond to value chain activities,Company data is aggregated across businesses,Products, customer purchases, channel volumes rarely match up with boundaries of an activity,Considerable creativity is required,9/16/2024,28,Darral G. Clarke for BM 499,Four step process,Define the pool,Determine the size of the pool,Determine the distribution of profits,Reconcile the estimates,9/16/2024,29,Darral G. Clarke for BM 499,Four step process,Define the pool,Determine the size of the pool,Determine profit distribution,Reconcile the estimates,Task: determine which value-chain activity influence profits now and in the future,Develop a baseline estimate of cumulative profits generated by all profit pool activities,Develop estimate of the profits generated by each activity,Compare the outputs of steps 2 & 3,Guidelines,Take a broad view of the value chain(beyond traditional industry definition),Seek a rough but accurate estimate,Shift between aggregation and disaggregation in your analysis,If numbers dont add up,Check assumption and calculations,Examine industry from three perspective: own, other players, customers,Take easiest route: go where the data are,Do own economics first, then large pure players, large mixed, smaller,Collect additional data,Dont disaggregate more than necessary,Take at least two viewpoints: company level and product level,Use proxy measures where necessary,Resolve inconsistenciesdont ignore them,Output,Profit pool list,Estimate of total pool profits, (range),Point estimate of profits for each value chain activity,Final estimates of activity and total pool profits,9/16/2024,30,Darral G. Clarke for BM 499,What is “profit” anyway?,Can be thought of in three ways (all of which may be relevant for profit pool analysis),Accounting profit,Return on investment,Economic value added= after-tax operating profits cost of all invested capital,Cash-flow,Earnings before taking fixed-asset and capital costs into account,9/16/2024,31,Darral G. Clarke for BM 499,Example: Credit cards at RegionBank,Acquisition,Funding,Servicing,$80,value of a subscriber,$279,average annual revenues per subscriber,$60,annual payment to servicer per subscriber,-$64,cost of acquiring a subscriber,-$235,average annual costs per subscriber,$50,average annual cost to servicer,$16,acquisition profit per subscriber,$44,annual funding profit per subscriber,$10,annual servicing profit per subscriber,$3.20,annual acquisition profit per subscriber amortized over 5 year average life,X260,million subscribers,X260,X260,$800,million profit,$11.4 billion profit,$2.6 billion profit,9/16/2024,32,Darral G. Clarke for BM 499,RegionBanks Profit Pool Map,100%,acquisition funding servicing,Share of industry revenue,20%,Operating margin,9/16/2024,33,Darral G. Clarke for BM 499,RegionBanks Profit Pool Mosaic,Banks,Share of industry profits,acquisition funding servicing,Share of activity profits,100%,100%,Banks,Banks,9/16/2024,34,Darral G. Clarke for BM 499,
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