ProfitPoolsandCoreCompetence DarralGClarkeProfessorofManagementTheMarriottSchoolBrighamYoungUniversity ProfitPools AFreshLookatStrategy OritGadieshandJamesL GilbertHarvardBusinessReviewMay June1998 THEPCINDUSTRY SPROFITPOOL ValuechainfocusAxesVertical operatingmarginHorizontal shareofindustrydata TheProfitPoolLens Theprofitpoolisthetotalprofitearnedinanindustryatallpointsalongtheindustry svaluechainSegmentprofitabilitymayvarybycustomergroup productcategory geographicmarket ordistributionchannelProfitconcentrationmaybeverydifferentthanrevenueconcentrationShapeoftheprofitpoolreflectsthecompetitivedynamicsofabusinessInteractionsofcompaniesandcustomersCompetitivestrategiesofcompetitorsProductpoolsarenotstagnant THEU S AUTOINDUSTRY SPROFITPOOL 100 operatingmargin source HarvardBusinessReview May June1998 autorental ProfitPools CompanyExamples CompaniesAutomakersU HaulElevators OTIS HarleyDavidsonPolaroid CoreBusinessAutomanufacturingTruckRentalElevatorManufacturingMotorcyclesInstantPhotographyCameras SourcesofHighestROIAutoleasing insurancePackingmaterials storageServiceAccessories consumerproducts leasing service restaurantsFilm ManagerialImplications FocusongrowthandmarketsharecanleadacompanytofocusonunprofitablesegmentsofanindustryToday sdeeprevenuerevenuepoolmaybetomorrow sdryhole ThegoalshouldbetofocusonprofitableopportunitiesIndustryshouldbeconsideredmorebroadlythantraditionaldefinitionAutomobileindustryincludesComponentmanufactureandsupplyNewcarassemblyanddeliveryNewcarwarranteeandserviceNewcarfinancingandinsuranceUsedcarsalesandservice Turbulentindustries Profitpoolsareespeciallyimportantandusefulinindustriesundergoingderegulationand ortechnologicalchangeSuchchangescanopennewprofitpoolopportunitiesanddrainoldonesChokepointsmaychangeorbeeliminatedOpportunitiesforeitherforwardorverticalintegrationmayemergeCurrentverticalintegrationmaybedisintermediated Creatingandmanagingaprofitpool ProfitpoolanalysismayindicatenewopportunitiesorthreatsImperativesBeopentoanewperspectiveonyourbusinessandindustryDevelopingnewstrategymayrequireoverturningelementsofthecurrentstrategyBeopentoreevaluatetheroleplayedbycurrentcompetitorsBevigilanttoidentifypossibilitythatnewentrantsmayseektoenteryourindustrywithradicalstrategies LookingAhead ProfitPoolsandtheFiveForces ProfitpoolsarecomputedbymultiplyingthesizeoftherevenuebytheunitprofitmarginEssentiallyanaccountingprocess notheoryMostvaluableinsituationsinwhichexternalconditionsareessentialstableand orunimportant Oftendominatedbyinternaldataalone Thefiveforcestellsus whichwillstudynext theunderlyingdeterminantsthatdetermineboththerevenuesizeandtheunitprofitmarginTheprofitdriverswhichallowustoforecastthedirectionofchange MarakonRunners ThomasA StewartFortuneSept 28 1998 MarakonAssociates sApproachtoCorporateStrategy ConsultantstomanylargecorporationsCocaCola HP GM CitiCorp etc Clientshavereturns3 1 higherthanindustrypeergroupGoalistoincreaseshareholdervaluethroughanalysisofeconomicprofitDeepdrillinginbusinessdatatomeasurevaluecreationProductsegmentsCustomersegments HowStrategyHappens LearningwherevalueiscreatedWaterfallchartsbyproductandcustomersegmentsEvaluatingstrategyIndustryaverageprofitperunitCompany sprofitvsindustryaverageManagingvalueCurrentstrategyChangeproductfocusChangecustomerfocus Learningwherevalueiscreated EvaluatingStrategy Managingforvalue Currentstrategy Changeproductfocus ChangeCustomerfocus Value Applicationtoourcases Retailindustry Wal Mart Softdrinkindustry Coca ColaandPepsiCo Steel Nucor andaluminumcans CC S Hitech Intel Cisco andDell Videogames Nintendo Webbusinesses eBayandYahoo TheCoreCompetenceoftheCorporation Prahalad C K andGaryHamelHarvardBusinessReview May June1990 CoreCompetence AFirmismadeupofresourcespeople patents brandnames plant equipment processes etcAcompetenceistheabilitytoemploydiverseskillsandresourcestoperformtasksandactivities Acorecompetenceisabroadlybasedand orabroadlyappliedfundamentalcapability CompetenceandTechnology CompetenceisnotthesameastechnologyCompetencerequirestechnologiessocialorganizationcollectivelearning Corecompetencequestions Whatarewereallygoodat Howcanwebuilduponit Whatdoweneedtobegoodat CharacteristicsofEffectiveCompetencies Durability Technicalequipmentcanbeshortlived Reputationorknowledgemaydepreciatemoreslowly Transparency Themorecomplexthesourceofcompetence theharderitistoimitateit Transferability Theavailabilityofresourcestocompetitors Replicability Acompetitor sinternalabilitytoreplicateacompetenceusingavailableresources ChoosingCompetencies Howcentralisthiscompetencetooursuccessinthemarket Howlongcouldwepreserveourcompetitivenessinthisbusinesswithoutthisparticularcompetence Whatfutureopportunitieswouldbeforeclosedifweweretolosethisparticularcompetence CoreCompetenceandCoreProducts AHierarchyofCompetencies BuildingStrategyfromCapabilities Source RobertM Grant TheResource BasedTheoryofCompetitiveAdvantage CaliforniaManagementReview Spring 1991 page151 Howtomapyourindustry sprofitpool OritGadieshandJamesL Gilber