Author: Dana Peck Reviewer: Michael Collins,Profit Pools,December 1998,Copyright 1998 Bain Orit Gadiesh and James L. Gilbert,6,Revenue vs. Profit Split,Truck Finance,Parts and Service,Body Manufacturing,and Truck Assembly,Chassis Manufacturing,and Sales,Truck Finance,Parts and Service,Body Manufacturing,and Truck Assembly,Chassis Manufacturing,and Sales,Revenue Split by Activity,Profit Split by Activity,$3,865MM,$600MM,0%,20%,40%,60%,80%,100%,Percent of Total,Source: PBIR Profile of the U.S. Truck Body Industry; R.L. Polk Registration Database; Literature Search; TEM Financials; Prior Bain PLP analysis (7/96); Bain estimates,The pattern of profit concentration in the truck manufacturing industry is very different from the pattern of revenue concentration.,Truck Manufacturing Business Example,7,Why Use Profit Pools?,Offer a view of the underlying industry structure Help illustrate the economic and competitive forces driving the industrys profit distribution Offer a different perspective on an industry Illustrate relationship between profit and revenues Highlights potential watchouts (choke points in the value chain) which can influence the profit flow in an industry,Illustrate the Current State of the Industry,Provide a Competitive Advantage to Your Client,Help to Develop Innovative Strategies,Help companies see what their rivals dont see Foster the potential to dictate the terms of competition within the industry Keep companies abreast of changes in rapidly changing (turbulent) industries alert potential shifts in profit distribution along the value chain illustrate potential change in profit sources from new entrants,Help guide important decisions about a companys operation and strategy Encourage rethinking old decisions and pursuing counterintuitive initiatives to create and control profit pools Reduce the possibility of blind spots in a companys strategic vision reduce potential to overlook attractive profit building opportunities lesson potential to become trapped in areas of weak/ fading profitability Example applications,Companies that recognize the variability of profitability and can exploit the deepest pools will earn superior returns.,Source: Profit Pools: A Fresh Look at Strategy (May-June 1998): Orit Gadiesh and James L. Gilbert,8,How Profit Pools Illustrate the State of the Industry,The varying concentrations of profit along the value chain (known as the shape of the profit pool) reflect the competitive dynamics of a business profit concentrations result from the actions and interactions of companies and customers profit pools form in areas where barriers to competition exist profit pools exist in areas that have been overlooked by competitors Every market has an uneven distribution of profit between product categories, customer groups, geographic regions and/or distribution channels Profit pools are not stagnant as power shifts among the players in an industry (competitors, suppliers, and customers), the structure of the profit pool changes,There are many different sources of profit in any business,Profit pools provide a means to evaluate the competitive dynamics of an industry.,Source: Profit Pools: A Fresh Look at Strategy (May-June 1998): Orit Gadiesh and James L. Gilbert,9,Profit Pool Watchouts (Computer Industry Example),Examples:,Be aware of “choke points” - particular business activities that control the flow of profits throughout an industry.,Impact:,Control of a choke point can influence the distribution of profits among competitors and more distant value-chain participants,Intels dominance of microprocessors Establishment of an industry wide standard that all companies must now obey,Microsofts dominance of Windows Consolidation of control over the customer interface,*includes operating system and application software Source: Profit Pools: A Fresh Look at Strategy (May-June 1998): Orit Gadiesh and James L. Gilbert,Micro- processors,Other Components,Personal Computers,Software*,Peripherals,Services,10,Micro-,processors,Other Components,Personal Computers,Soft-,ware,Peripherals,Services,0%,10%,20%,30%,40%,Operating Margin,Share of Industry Revenue,Profit Pool Watchouts (Computer Industry Example Con.),*includes operating system and application software Source: Profit Pools: A Fresh Look at Strategy (May-June 1998): Orit Gadiesh and James L. Gilbert,Analyzing the profit pool has enabled Dell to be profitable in the least profitable personal computers segment (see example),Although choke points exist in the computer industry, it is still possible for companies to create and leverage new profit pools within this industry.,PC Industry Profit Pool,100%,11,0%,5%,10%,15%,20%,25%,Operating Margin,The automotive industry encompasses many value-chain activities. The most profitable areas of the car business are not the ones that generate the biggest revenues.,Auto manufacturing,New car dealers,Used car dealers,Auto loans,Leasing,Gasoline,Auto insurance,S