1/18/2019,Darral G. Clarke for BM 499,1,Profit Pools and Core Competence,Darral G Clarke Professor of Management The Marriott School Brigham Young University,1/18/2019,Darral G. Clarke for BM 499,2,Profit Pools: A Fresh Look at Strategy,Orit Gadiesh and James L. Gilbert Harvard Business Review May-June 1998,1/18/2019,Darral G. Clarke for BM 499,3,THE PC INDUSTRYS PROFIT POOL,Value chain focus Axes Verticaloperating margin Horizontalshare of industry data,1/18/2019,Darral G. Clarke for BM 499,4,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,1/18/2019,Darral G. Clarke for BM 499,5,THE U.S. AUTO INDUSTRYS PROFIT POOL,100%,operating margin,source: Harvard Business Review, May-June 1998,auto rental,1/18/2019,Darral G. Clarke for BM 499,6,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,1/18/2019,Darral G. Clarke for BM 499,7,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,1/18/2019,Darral G. Clarke for BM 499,8,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,1/18/2019,Darral G. Clarke for BM 499,9,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,1/18/2019,Darral G. Clarke for BM 499,10,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,1/18/2019,Darral G. Clarke for BM 499,11,Marakon Runners,Thomas A. Stewart Fortune Sept. 28, 1998,1/18/2019,Darral G. Clarke for BM 499,12,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,1/18/2019,Darral G. Clarke for BM 499,13,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,1/18/2019,Darral G. Clarke for BM 499,14,Learning where value is created,1/18/2019,Darral G. Clarke for BM 499,15,Evaluating Strategy,1/18/2019,Darral G. Clarke for BM 499,16,Managing for value,Current strategy,Change product focus,Change Customer focus,Value,1/18/2019,Darral G. Clarke for BM 499,17,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!),1/18/2019,Darral G. Clarke for BM 499,18,The Core Competence of the Corporation,Prahalad, C. K. and Gary Hamel Harvard Business Review, May-Jun