The Profit Zone

 

The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits by Adrian J. Slywotzky and David J. Morrison

This is a quick read and according to me a rather good book in the quick-read-business-genre. It is divided into three parts where the first part discusses business models and how profit happens. The second part is about successful business design reinventors such as Jack Welch (GE), Nicolas G Hayek (SMH) and Roberto Goizueta (Coca-Cola). In the third part the authors summarize its customer-centric and profit-centric thinking in what they call The Profit Zone Handbook. I will only present some of the ideas from the first part which I find most useful.

The Customer and Profitability in focus
The customer-centric view is dominant in the book and the main recommendation is to truly understand the customer behavior, decision-making process, price sensitivities and preferences, and design the business model accordingly. Businesses must be designed for profitability and as the arena in which high profit is possible keeps changing, so must the business model. The main questions repeated several times are:

• Where will I be allowed to make a profit in this industry?
• How should I design my business model so that it will be profitable?

The authors define the concept of business design (but also use the term business model) as composed of four elements or dimensions that are all linked to the others:

Customer selection

• Which customers do I want to serve?
• To which customers can I add real value?
• Which customers will allow me to profit?
• Which customers do I not want to serve?

Value Capture

• How do I make a profit?
• How do I capture, as profit, a portion of the value I created for customers?
• What is my profit model?

Strategic Control

• How do I protect my profit stream?
• Why do my chosen customers buy from me?
• What makes my value proposition unique/differentiated vs. Other competitors?
• What strategic control points can counterbalance customer or competitor power?

Scope

• What activities do I perform?
• What products, services, and solutions do I want to sell?
• Which activities or functions do I want to perform in-house?
• Which ones do I want to subcontract, out-source, or work with a business partner to provide?

This is somewhat similar to my approach to business models; starting at who the value is created for, how the value is created and captured, and how the value creation and capture is controlled. The traditional way, presented in most literature about business models and in Exhibit 2.2 in the book, is to start from assets/core competencies and go through inputs/raw material, product/service offering, channels and finally the customer. The authors define their customer-centric model by starting on the customers' needs and priorities and then move in the other direction of the chain ultimately to the assets/core competencies needed to satisfy the customers' needs.

Strategic Control Point Index
As I find very little literature about business models looking at control mechanisms, I am happy to see what the authors call Strategic Control Point that is similar to my reasoning about Control Mechanisms. "Every good business design has at least one strategic control point. The best business designs have two or more."

In Exhibit 3.4 the authors present 10 different Strategic Control Points:
Own the standard, (High profit-protecting power)
Examples: Microsoft, Oracle
Manage the value chain, (High)
Examples: Intel, Coke
String of superdominant positions, (High)
Example: Coke internationally
Own the customer relationship, (High)
Examples: GE, EDS
Brand, copyright, (Medium)
Examples: countless
Two-year product development lead, (Medium)
Example: Intel
One-year product development lead, (Low)
Examples: few
Commodity with 10 to 20 percent cost advantage, (Low)
Examples: Nucor, SW air
Commodity with cost parity, (None)
Examples: countless
Commodity with cost disadvantage, (None)
Examples: countless

Identified profit models
How and why profitability occurs varies significantly from one industry or company to another. Slywotzky and Morrison have identified 22 profit models and shortly explain how profit is made in each of the models. These are:

1. Customer Solutions Profit
2. Product Pyramid Profit
3. Multicomponent Profit
4. Switchboard Profit
5. Time Profit
6. Block Buster profits
7. Multiplier Profit
8. Entrepreneur Profit
9. Specialization Profit
10. Install Base Profit
11. De Facto Standard Profit
12. Brand Profit
13. Specialty Product Profit
14. Local Leadership Profit
15. Transaction Scale Profit
16. Value Chain Position Profit
17. Cycle Profit
18. After-Sale Profit
19. New Product Profit
20. Relative Market Share Profit
21. Experience Curve Profit
22. Low Cost Business Design Profit

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