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Profit
Pools
and
CoreCompetenceDarral
G
ClarkeProfessor
of
ManagementThe
Marriott
SchoolBrigham
Young
University2023-07-211THE
PC
INDUSTRY’S
PROFIT
POOLValue
chain
focusAxesVertical—operating
marginHorizontal—share
of
industry
data40%30201000100%microprocessorsother
componentspersonal
computersshare
of
industry
revenuesoftwareperipheralsservicesThe
valuechainfor
the
PC
industryincludessix
key
activities;
theprofitability
of
the
activities
varieswidely.
Manufacturers
compete
inthe
largest
but
least-profitablesegment
of
the
chain.2023-07-21Darral
G.
Clarke
for
BM
4993The
Profit
Pool
Lens2023-07-21Darral
G.
Clarke
for
BM
4994
The
profit
pool
is
the
total
profit
earned
in
anindustry
at
all
points
along
the
industry’s
valuechain
Segment
profitability
may
vary
by
customer
group,product
category,
geographic
market,
or
distributionchannel
Profit
concentration
may
be
very
different
thanrevenue
concentration
Shape
of
the
profit
pool
reflects
the
competitivedynamics
of
a
businessInteractions
of
companies
and
customersCompetitive
strategies
of
competitorsProduct
pools
are
not
stagnantTHE
U.S.
AUTO
INDUSTRY’S
PROFIT
POOL100%source:
Harvard
Business
Review,
May-June
1998auto
rental25%rating
margi1n510500share
of
industry
revenueauto
manufacturingnew
cardealersused
car
dealersauto
insuranceaftermarket
parts20auto
loansleasingwarrantygasolineservicerepairThe
automotive
industry
encompassesmany
value-chain
activities.
The
way
thatprofits
and
revenues
are
distributedamong
these
activities
varies
greatly.
Themost
profitable
areas
of
the
car
businessare
not
theones
that
generatethe
biggestrevenues.2023-07-21Darral
G.
Clarke
for
BM
4995Profit
Pools:
CompanyExamples2023-07-21Darral
G.
Clarke
for
BM
4996Companies
AutomakersU-HaulElevators(OTIS)HarleyDavidsonPolaroidCore
Business
Auto
manufacturingTruck
RentalElevator
ManufacturingMotorcyclesInstant
PhotographyCamerasSources
of
Highest
ROI
Auto
leasing,
insurancePacking
materials,
storageServiceAccessories
(consumerproducts),
leasing,
service,restaurantsFilmManagerial
Implications2023-07-21Darral
G.
Clarke
for
BM
4997
Focus
on
growth
and
market
share
can
lead
a
company
tofocus
on
unprofitable
segments
of
an
industry
Today’s
deep
revenue
revenue
pool
may
be
tomorrow’s
dryhole.The
goal
should
be
to
focus
on
profitable
opportunities
Industry
should
be
considered
more
broadly
thantraditionaldefinitionAutomobile
industry
includesComponent
manufacture
and
supplyNew
car
assembly
and
deliveryNew
car
warrantee
and
serviceNew
car
financing
and
insuranceUsed
car
sales
and
serviceTurbulent
industries2023-07-21Darral
G.
Clarke
for
BM
4998
Profit
pools
are
especially
important
anduseful
in
industries
undergoingderegulation
and/or
technological
change
Such
changes
can
open
new
profit
poolopportunities
and
drain
old
onesChoke
points
may
change
or
be
eliminated
Opportunities
for
either
forward
orvertical
integration
may
emerge
Current
vertical
integration
may
bedisintermediatedCreating
and
managing
aprofit
pool2023-07-21Darral
G.
Clarke
for
BM
4999
Profit
pool
analysis
may
indicate
newopportunities
or
threatsImperatives
Be
open
to
a
new
perspective
on
your
business
andindustry
Developing
new
strategy
may
require
overturningelements
of
the
current
strategy
Be
open
to
reevaluate
therole
played
by
currentcompetitors
Be
vigilant
to
identify
possibility
that
new
entrants
mayseek
to
enter
your
industry
with
radicalstrategiesLooking
Ahead:
Profit
Poolsand
the
Five
Forces2023-07-21Darral
G.
Clarke
for
BM
49910
Profit
pools
are
computed
by
multiplying
the
sizeof
the
revenue
by
the
unit
profit
marginEssentially
an
accounting
process--
no
theory
Most
valuable
in
situations
in
which
external
conditionsare
essential
stable
and/or
unimportant(Often
dominated
by
internal
data
alone)The
five
forces
tells
us
(which
will
studynext)
the
underlying
determinants
that
determine
both
therevenue
size
and
the
unit
profit
margin
The
profit
drivers
which
allow
us
to
forecast
thedirection
of
changeMarakon
RunnersThomas
A.
StewartFortuneSept.
28,
19982023-07-2111Marakon
Associates’s
Approach
toCorporate
Strategy2023-07-21Darral
G.
Clarke
for
BM
49912Consultants
to
many
large
corporationsCocaCola,
HP,
GM,
CitiCorp,
etc.
Clients
have
returns
3.1%
higher
thanindustry
peer
group
Goal
is
to
increase
shareholder
valuethrough
analysis
of
economic
profit
Deep
drilling
in
business
data
to
measurevalue
creationProduct
segmentsCustomer
segmentsHow
Strategy
Happens2023-07-21Darral
G.
Clarke
for
BM
49913Learning
wherevalue
is
created
Waterfall
charts
by
product
and
customersegmentsEvaluating
strategyIndustry
average
profit
per
unitCompany’s
profit
vs
industry
averageManaging
valueCurrent
strategyChange
product
focusChange
customer
focusLearning
where
value
is
createdProduct
segmentsCustomer
segmentsVolume
(units)2023-07-21Darral
G.
Clarke
for
BM
49914Volume
(units)oss
($
0per
unit)Evaluating
StrategyCompany
profit
per
unitIndustry-average
profit
per
unit2023-07-21Darral
G.
Clarke
for
BM
49915Managing
for
valueCurrentstrategy2023-07-21Darral
G.
Clarke
for
BM
49916ChangeproductfocusChangeCustomerfocusValueApplication
to
our
cases2023-07-21Darral
G.
Clarke
for
BM
49917Retail
industry
(Wal*Mart)
Soft
drink
industry
(Coca-Cola
andPepsiCo)Steel
(Nucor)
and
aluminum
cans
(CC&S)Hi
tech
(Intel,
Cisco,
and
Dell)Video
games
(Nintendo)Web
businesses
(eBay
and
Yahoo!)The
Core
Competence
of
theCorporation2023-07-2118Prahalad,
C.
K.
and
GaryHamelHarvard
Business
Review,May-June
1990Core
Competence2023-07-21Darral
G.
Clarke
for
BM
49919A
Firm
is
made
up
of
resources
people,
patents,
brand
names,
plant&equipment,
processes,
etc
A
competence
is
the
ability
to
employdiverse
skills
and
resources
to
performtasks
and
activities.
A
core
competence
is
a
broadly
based
and/or
a
broadly
applied
fundamental
capability.Competence
and
Technology2023-07-21Darral
G.
Clarke
for
BM
49920
Competence
is
not
the
same
astechnologyCompetence
requirestechnologiessocial
organizationcollective
learningCore
competence
questions:2023-07-21Darral
G.
Clarke
for
BM
49921What
are
we
really
good
at?How
can
we
build
upon
it?What
do
we
need
to
be
good
at?Characteristics
of
EffectiveCompetencies2023-07-21Darral
G.
Clarke
for
BM
49922
Durability:
Technical
equipment
can
be
shortlived.
Reputationor
knowledge
may
depreciatemore
slowly.Transparency:The
more
complex
the
source
ofcompetence,
the
harder
it
is
to
imitate
it.The
availability
of
resources
toTransferability:competitors.Replicability:A
competitor’s
internal
ability
toreplicate
a
competence
using
available
resources.Choosing
Competencies2023-07-21Darral
G.
Clarke
for
BM
49923
How
central
is
this
competence
to
oursuccess
in
the
market?
How
long
could
we
preserve
ourcompetitiveness
in
this
business
withoutthis
particular
competence?
What
future
opportunities
would
beforeclosed
if
we
were
to
lose
thisparticular
competence?Core
Competence
and
CoreProducts2023-07-21Darral
G.
Clarke
for
BM
49924A
Hierarchy
of
Competencies2023-07-21Darral
G.
Clarke
for
BM
49925Building
Strategy
fromCapabilitiesStrategyCapabilitiesResources1.
Identify
resources,
appraiserelativestrengths
and
weaknesses.Leverage
use
of
resources2.
Identify
capabilities.
What
do
we
domore
effectively
than
competitors?Identify
resource
inputs
to
capabilities.3.
Appraise
rent-generating
potentialresources
andcapabilitiesin
terms
of:sustainable
advantage,
inappropriability4.
Select
strategy
that
best
exploits
thefirm’s
resources
and
capabilities
rela-tive
to
external
opportunities.5.
Identify
resourcegaps
that
need
to
befilled.Invest
in
replenishing,augmenting,
and
up-grading
the
firm’sresource
base.CompetitiveAdvantageSource:
Robert
M.
Grant,
“The
Resource-Based
Theory
of
Competitive
Advantage,”California
Management
Review,
Spring,1991,
page
151.2023-07-21Darral
G.
Clarke
for
BM
49926How
to
map
your
industry’sprofit
poolOrit
Gadiesh
and
James
L.
GilbertHarvard
Business
ReviewMay-June19982023-07-2127A
straight
forward
exercisewith
complications2023-07-21Darral
G.
Clarke
for
BM
49928Concept
is
straight
forwardDefine
value
chain
activitiesDetermine
their
size
and
profitabilityApplication
of
concept
is
complicated
Financial
data
doesn’t
correspond
to
value
chainactivitiesCompany
data
is
aggregated
across
businesses
Products,
customer
purchases,
channel
volumes
rarelymatch
up
with
boundaries
of
an
activityConsiderable
creativityis
requiredFour
step
process2023-07-21Darral
G.
Clarke
for
BM
49929Define
the
poolDetermine
the
size
of
the
poolDetermine
the
distribution
of
profitsReconcile
the
estimatesFour
step
processDefine
the
pool2023-07-21Darral
G.
Clarke
for
BM
49930Determine
thesizeof
the
poolDetermine
profitdistributionReconcile
theestimatesTask:
determine
whichvalue-chain
activityinfluence
profits
now
and
in
thefutureDevelop
a
baselineestimate
of
cumulativeprofits
generated
by
allprofit
pool
activitiesDevelop
estimate
of
theprofits
generated
byeach
activityCompare
the
outputs
ofsteps2
&
3GuidelinesTake
a
broad
view
of
thevaluechain(beyondtraditional
industrydefinition)Seek
a
rough
butaccurate
estimateShift
betweenaggregation
anddisaggregation
in
youranalysisIf
numbers
don’t
addup,Check
assumptionand
calculationsExamine
industry
fromthreeperspective:own,other
players,
customersTake
easiest
route:
gowhere
the
data
areDo
own
economics
first,then
large
pure
players,large
mixed,
smallerCollect
additional
dataDon’t
disaggregate
morethan
necessaryTake
at
least
twoviewpoints:
companylevel
and
product
levelUse
proxy
measureswhere
necessaryResolveinconsistencies—don’t
ignore
themOutputProfit
pool
listEstimate
of
total
poolprofits,
(range)Pointestimate
of
profitsfor
each
value
chainactivityFinal
estimates
ofactivity
and
total
poolprofitsWhat
is
“profit”
anyway?2023-07-21Darral
G.
Clarke
for
BM
49931
Can
be
thoughtof
in
three
ways
(all
ofwhich
may
be
relevant
for
profit
poolanalysis)Acc
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