Profit Pools: A Fresh Look at Strategy
Orit Gadiesh, James L. GilbertHarvard Business Review, May-June, 1998
Presented By- NITIN KUMAR- AKASH SHARMA- HIMANSHU ATWAL
SUSTAINABILITY
BUSINESS STRATEGY
REVENUE GROWTH
PROFIT POOLS MANAGER’S APPROACH
INDUSTRY’S VALUE CHAIN
Deciding MANAGER’s STRATEGY
• Where and how is the money being made in an industry?• Whether total Revenue is a indicator of company’s growth in
true sense?• What other factors should a manager keep in mind while
deciding the growth strategy of company?• Is profit pool analysis sufficient to decide “The Company is
GROWING or NOT”?
Profit Pools (Success Potential)• “Total profits earned at all points along the industry's value
chain.”• “Any sustainable source of profit.” • This means, buying something cheaper or selling something at a
higher price than the competition (and therefore making profit).• Future Business Strategy depends on Present & Future Profit
Pools.• ‘Atom’ of Profit – Profit Pools• ‘Molecule’ of Profit – Value Chain• ‘Business Model’ – System of Profit Pools
Profit Pools (Cont.)• Assumption – Profit will Follow Revenue• Managers need to look beyond revenues to see the structure of
their industry's profit pools.
• Profit concentration vs revenue concentration.• Automobile financing is the most profitable element of the
automobile value chain.• Concessions sales are an attractive profit pool to entertainment
venues.• Profit Pool Analysis is not essential for strategy making, they
may be vital for the future survival of the company as a whole.
6
THE U.S. AUTO INDUSTRY’S PROFIT POOL25%
15
10
5
0
0100%
Share of Industry Revenue
opera
ting m
arg
in
auto manufacturing
new car dealersused car dealers
auto loans
auto insurance
aftermarket parts
20
leasing
warranty
gasolineservice 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.
source: Gadiesh and Gilbert, Harvard Business Review, May-June 1998
40%
30
20
10
0
0 100%
Share of Industry Revenue
opera
ting m
arg
in
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.
THE PC INDUSTRY’S PROFIT POOL
source: Gadiesh and Gilbert, Harvard Business Review, May-June 1998
MARUTI SUZUKI Value Chain
Profits always follow Revenue - with reference to corporate India.
THANK YOU FOR VALUABLE TIME
“THE ENGINE WHICH DRIVES ENTERPRISE IS NOT THRIFT, BUT PROFIT.”
- John Maynard: A Treatise on Money, 1930