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