business modelling

Understanding & Improving our Understanding & Improving our Business ModelBusiness Model

Key advantages ofKey advantages ofBusiness ModellingBusiness Modelling

• Focuses the definition of competitive Focuses the definition of competitive advantage on the Customer’s current & advantage on the Customer’s current & emerging prioritiesemerging priorities

• Directly links the drivers of competitive Directly links the drivers of competitive advantage to advantage to quantitativequantitative measures of measures of business performancebusiness performance

• Provides a generic framework to utilise Provides a generic framework to utilise when looking for future sources of when looking for future sources of competitive advantagecompetitive advantage

Helps us see competitive advantage more clearly

Background to the FrameworkBackground to the Framework

1960’s 1970’s 1980’s 1990’s +

““The rising tide lifts The rising tide lifts all boats”all boats”

Organisation EconomicsOrganisation Economics• Post WWII, demand out-Post WWII, demand out-

stripped supplystripped supply• Regulation, global trade Regulation, global trade

management management (protectionism) created (protectionism) created relatively stable relatively stable industriesindustries

• ““If you build it they will If you build it they will come” euphoria come” euphoria supplanted by a need for supplanted by a need for more rigorous thinkingmore rigorous thinking

• Approaches to strategy Approaches to strategy focussed on improving focussed on improving organisation structure & organisation structure & command-control command-control functionsfunctions

Business Modelling FrameworkBusiness Modelling Framework

““Scale & market share Scale & market share drive value growth”drive value growth”

Relative Supply EconomicsRelative Supply Economics• Supply and demand Supply and demand

becomes more balancedbecomes more balanced• Approaches to business Approaches to business

strategy focussed on the strategy focussed on the identification and building identification and building of structural advantageof structural advantage

• Exemplified by Exemplified by Experience curve and Experience curve and Porter’s Five Forces Porter’s Five Forces modelmodel

• Economies of scale, High Economies of scale, High market share = high market share = high profitabilityprofitability

““Become lean and Become lean and mean”mean”

Efficiency EconomicsEfficiency Economics• Global competition, lower Global competition, lower

trade barriers, de-trade barriers, de-regulations allows regulations allows capacity to exceed supplycapacity to exceed supply

• Corporate raiders and Corporate raiders and more active shareholders more active shareholders drive trend to downsizing, drive trend to downsizing, restructuring, re-restructuring, re-engineeringengineering

• Focus on core Focus on core competencies, “Stick to competencies, “Stick to the knitting”the knitting”

““Better business Better business design drives design drives profitable growth”profitable growth”

Customer EconomicsCustomer Economics• Customer needs and Customer needs and

priorities changing priorities changing rapidlyrapidly

• Information flowing more Information flowing more freely; Internet freely; Internet exacerbating situationexacerbating situation

• Markets converging, Markets converging, channels compressing, channels compressing, products to solutionsproducts to solutions

• Structural advantages Structural advantages and barriers to entry and barriers to entry becoming less easy to becoming less easy to protectprotect

Source :- Slywotzky & Morrison, The Profit Zone

What makes a better Business Model?What makes a better Business Model?

TRADITIONALTRADITIONAL• More Customers / VolumeMore Customers / Volume

• What new products can I sell What new products can I sell to increase sales and profit?to increase sales and profit?

• Where are the opportunities in Where are the opportunities in my industry to get bigger & my industry to get bigger & more efficient?more efficient?

• How do I create barriers to How do I create barriers to protect my market share?protect my market share?

BUSINESS MODELLINGBUSINESS MODELLING• More Profitable & faster More Profitable & faster

growing Customersgrowing Customers• What are my customers key What are my customers key

priorities & how can I meet priorities & how can I meet them better ?them better ?

• When I look at all the money a When I look at all the money a customer spends along the customer spends along the value chain - where’s the profit value chain - where’s the profit zone?zone?

• What mechanisms are available What mechanisms are available to keep me in the profit zone?to keep me in the profit zone?

Business Modelling tries to focus Business Modelling tries to focus on a small number of key questionson a small number of key questions• Defining the important customers?Defining the important customers?

– Who are the most profitable customers?Who are the most profitable customers?– What are their priorities / business drivers?What are their priorities / business drivers?– How are these priorities changing?How are these priorities changing?

• How do we capture the value we create in How do we capture the value we create in the form of profit?the form of profit?

• How do we protect our profit stream? How do we protect our profit stream? • How do we deliver value to these How do we deliver value to these

customers? (operating systems)customers? (operating systems)

Business Modelling FrameworkBusiness Modelling Framework

Definition of Key TermsDefinition of Key TermsBusiness Modelling FrameworkBusiness Modelling Framework

Dimension Key Issue Key Questions

Strategic Dimensions

Customer SelectionWhich customers I we chose to

deal with? (or focus on)

To which customers can I add real value? Which customers will allow me to profit?

Which customers do I want to serve?

Fundamental Assumptions about Customer Priorities

What is my fundamental assumption about what the

customer values?

What are our customers' priorities? How do we assume they will change in the future?

Profit Model / Value Capture

How do I make a Profit?

How do I provide additional value to the customer that enables me to extract a price

(or volume) premium over others in the market?

Differentiation / Strategic Control

How do I protect my profit stream?

What is my unique value proposition? Why should customers buy from me ahead of the competition? How do I conterbalance

customer or competitor power?

Scope of ActivitiesHow do I define the limitations

of our business?

Do we confine ourselves to certain products, markets or customers? What won't we make or where won't we go?


S’holder Value US$239.6 BillionSales US$90 BillionValue to Sales 2.7 x

Customer SolutionsFinancingManufactured Products & Services

Customer solutionsCustomer relationshipsCEO marketing6-Sigma Quality

Multi-component product, service,solution, and financing“Sell the whole solution”

Customers value suppliers who can deliver lower total systems costs byproviding a complete solution in areasoutside their core competencies

ConsumersManufacturersSenior Executives

1997

S’holder Value US$13.1 BillionSales US$26 BillionValue to Sales 0.5 x

Manufactured Products

BrandMarket Leaders“Be No. 1 or No 2 or exit”

Product sales“sell the box”

Customers value high quality, economical products,delivered reliably

ConsumersManufacturersEngineers

1981

OUTCOMES

SCOPE

DIFFERENTIATION / STRATEGIC CONTROL

PROFIT MODEL / VALUE CAPTURE

FUNDAMENTAL ASSUMPTIONS ABOUTCUSTOMER PRIORITIES

CUSTOMER SELECTION

Example - General ElectricExample - General ElectricBusiness Modelling FrameworkBusiness Modelling Framework

DIMENSIONS


Customer Solution ProfitCustomer Solution Profit• Know the customerKnow the customer

• Create a solution (that Create a solution (that reduces total customer reduces total customer system costs)system costs)

• Build the relationshipBuild the relationship

• May incur early lossesMay incur early losses

• But significant profits followBut significant profits follow• ExampleExample

ABB (can build & finance a power station ABB (can build & finance a power station not just supply the generators)not just supply the generators)GE (provides financing, maintenance & GE (provides financing, maintenance & scheduling services as well as selling scheduling services as well as selling locomotives)locomotives)

The Profit Zone

Product

ProductServices Options Financing

Sell the Box, or ...

Sell the Solution

Value Capture - Generic Profit ModelsValue Capture - Generic Profit Models

Time

Pro

fit


Total System EconomicsTotal System EconomicsExample : - Printing CompanyExample : - Printing Company

• This company sold mainly Point of Sale Material to big This company sold mainly Point of Sale Material to big consumer marketing companies (e.g. Coke, Frito Lay, etc.)consumer marketing companies (e.g. Coke, Frito Lay, etc.)

• Business was competitive based upon cost per item.Business was competitive based upon cost per item.• The printer investigated their customer’s real cost of putting The printer investigated their customer’s real cost of putting

POS Material in the market and found that for the average POS POS Material in the market and found that for the average POS Promotion, 40% of the printed materials never made it to a store Promotion, 40% of the printed materials never made it to a store to be displayed due to inefficient customer distribution systems to be displayed due to inefficient customer distribution systems and poor tracking.and poor tracking.

• The printer changed his business model - he now organises The printer changed his business model - he now organises distribution to the store himself and charges the customer on a distribution to the store himself and charges the customer on a cost per item displayed instead of a cost per item printed.cost per item displayed instead of a cost per item printed.

• Needless to say his new model is far more profitable.Needless to say his new model is far more profitable.



• Expense of UsageExpense of Usage• Cost of MaintenanceCost of Maintenance• Associated LabourAssociated Labour• Cost of DistributionCost of Distribution• Cost of InventoryCost of Inventory• Cost of Defects / Cost of Defects /

Returns / FailureReturns / Failure• Costs of inflexibilityCosts of inflexibility• InefficienciesInefficiencies

Big Box :• Cost of Distribution / installation• Cost of having no POS material in

the store when the promo starts• Lost Sales at store• Cost of storing / disposing of

unused POS Material

Little Box :Cost of

Printing POS Material

Processor ChipsChip setsValue Chain Management

Speed of Product DevelopmentConsumer BrandCompatibility

Chip ManufactureBrand Premium

Customers value leading edge technology with broad consumer acceptance and guaranteed compatibility

PC OEMsConsumers

1997

Memory Chips andsolutions

SCOPE

TechnologyDIFFERENTIATION / STRATEGIC CONTROL

Chip manufactureLicensing

PROFIT MODEL / VALUE CAPTURE

Customers value leading edgetechnology delivered with high quality,low cost manufacturing systems

FUNDAMENTAL ASSUMPTIONS ABOUTCUSTOMER PRIORITIES

Industrial Equipment Manufacturers

CUSTOMER SELECTION

1981

Example - IntelExample - IntelBusiness Modelling FrameworkBusiness Modelling Framework

DIMENSIONS


““Two steps ahead” ProfitTwo steps ahead” Profit

• First mover generates First mover generates excess returns before excess returns before imitators begin to erode imitators begin to erode marginsmargins

• Create and maintain a Create and maintain a lead time over the next lead time over the next competitor and a competitor and a constant stream of new constant stream of new products products

• ExampleExampleIntelIntel (focuses on being two years (focuses on being two years ahead of nearest rival’s product ahead of nearest rival’s product developments)developments)


Q2 Q4 Q6 Q8 Quarters Post Launch

$ p

er

Un

it

TheProfitZone

Cost

Price


Brand ProfitBrand Profit• Brand company expends Brand company expends

considerable marketing considerable marketing investment in building investment in building awareness, recognition & awareness, recognition & credibilitycredibility

• These “intangibles” are These “intangibles” are reinforced by customer reinforced by customer experienceexperience

• The Brand achieves a The Brand achieves a significant price premium in significant price premium in the marketplacethe marketplace

• ExamplesExamplesNike, Coca-ColaNike, Coca-Cola


Market BrandPrice Price

Pri

ce

pe

r U

nit


Value Chain Position ProfitValue Chain Position Profit

• Profit concentrates Profit concentrates itself in certain parts itself in certain parts of the value chainof the value chain

• Profit comes from Profit comes from – participating in the participating in the

more profitable value more profitable value chain segments ORchain segments OR

– capturing downstream capturing downstream margin by leveraging margin by leveraging value chain power value chain power


0 25% 50% 75% 100%Share of Industry Revenue

Op

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in0

10

%2

0%

30

%4

0%


OtherComponents

Microprocessors

PersonalComputers

Software

ServicesPeripherals

Example : The way Ford looks at it’s Value ChainExample : The way Ford looks at it’s Value Chain


Op

erat

ing

Mar

gin

05%

10%

15%

20%

Auto Manufacturing

Used Car Dealers

AutoInsurance

Service / Repair

Auto R

ental

After-marketParts

Leasing

AutoLoans

Warranty

Gasoline

New CarDealers

Notes about using the Generic Notes about using the Generic Profit ModelsProfit Models

• The models serve two purposesThe models serve two purposes– They help us understand the drivers of our current They help us understand the drivers of our current

profitabilityprofitability– They present us with alternative ways to look for future They present us with alternative ways to look for future

profitabilityprofitability

• The models illustrate where the The models illustrate where the keykey sources of sources of profit are, they don’t suggest that this is where profit are, they don’t suggest that this is where allall sales / profits should come fromsales / profits should come from

• There are few “pure” examples of any model - There are few “pure” examples of any model - most successful business use a combination of most successful business use a combination of modelsmodels

How do I assess the power of my How do I assess the power of my business model?business model?

• HypothesisHypothesisThe most powerful business models The most powerful business models deliver greater shareholder value deliver greater shareholder value

• A number of quantitative & qualitative A number of quantitative & qualitative factors are considered important ...factors are considered important ...

– Return on Sales (EBIT Margin)Return on Sales (EBIT Margin)– Profit Growth Profit Growth – Asset Efficiency (Assets / Sales) Asset Efficiency (Assets / Sales) the inverse of Asset Turnsthe inverse of Asset Turns

– The Degree of Strategic ControlThe Degree of Strategic Control

How do I assess the power of my How do I assess the power of my business model?business model?

Returnon Sales 1

40%

0%

ProfitGrowth 2

30%

0%

AssetEfficiency 1

0.1

1.0

Degree ofStrategic Control 3

10

0

ShareholderValue

to Sales 4

10X

0X

1. 1999 Actual levels have been used2. Compound annual EBITA growth 1995 to 19993. A rating based upon the strength of differentiation / sustainability4. Shareholder Value divided by Sales is used, however any valid measure of the leverage you have in shareholder value creation would suffice e.g. EV Multiple, PE Multiple, Market to Book, etc.

Intel 38%

Intel 24%

Intel 0.7

Intel 9

Intel 6x

What is a Strategic Control Point ?What is a Strategic Control Point ?

• A Strategic Control point is a mechanism A Strategic Control point is a mechanism that helps protect the profits flowing from that helps protect the profits flowing from a business model against the corrosive a business model against the corrosive effects of competition and customer powereffects of competition and customer power

• A business model without a strategic A business model without a strategic control point is like a ship with a hole in its control point is like a ship with a hole in its hull - it will sink much sooner !hull - it will sink much sooner !

• Strategic Control Point keep you in the Strategic Control Point keep you in the profit zone longerprofit zone longer

Examples of Strategic Control Examples of Strategic Control PointsPoints

Business models that have strong ...Business models that have strong ...• Brand, Copyright, PatentsBrand, Copyright, Patents• Control of Distribution / the Value ChainControl of Distribution / the Value Chain• Two year lead in product developmentTwo year lead in product development• Commodity with 10% - 20% cost Commodity with 10% - 20% cost

advantageadvantage

Assessing the strength of your Assessing the strength of your Strategic Control Point(s)Strategic Control Point(s)

• Strength is often different in different industriesStrength is often different in different industries(e.g. Brand is almost irrelevant in OE Automotive but extremely (e.g. Brand is almost irrelevant in OE Automotive but extremely relevant in carbonated beverages)relevant in carbonated beverages)

• Strength is relative to the countervailing strength Strength is relative to the countervailing strength of your competitors & customersof your competitors & customers

• It is also relative to it’s reach It is also relative to it’s reach (e.g. if your patent protected product only has application in a (e.g. if your patent protected product only has application in a very small segment of the market)very small segment of the market)

• Strength is cumulative i.e. if you have more than Strength is cumulative i.e. if you have more than one Strategic Control Point you can add their one Strategic Control Point you can add their scores togetherscores together

The TemplateThe TemplatePossession Reach

Strength vs. Competitors /

CustomersIndex Value

Do you Posses it? (Yes=1, No=0)

What %age of your Sales does it

apply to?

Countervailing strength of

Competitors / Customers

Index value for my industry

Extended Value

A B C D AxBxCxD

Commodity with cost disadvantage 1 0.0

Commodity with cost parity 2 0.0

Commodity with 10% to 20% cost advantage

3 0.0

One Year lead in Product development 4 0.0

Two Year lead in Product development 5 0.0

Strong Brand, Copyright or Patent protection

6 0.0

Own the Customer Relationship 7 0.0

String of super-dominant positions 8 0.0

Control the Value Chain / Distribution 9 0.0

Own the Industry Standard 10 0.0

0.0Total Strategic Control Rating

Strategic Control Point

ExamplesExamplesINTEL GE

Possession ReachStrength vs.


Index Value



apply to?




Extended Value

A B C D AxBxCxD




1 100% 70% 3 2.1




6 0.0

Own the Customer Relationship 1 100% 70% 7 4.9








Index Value



apply to?




Extended Value

A B C D AxBxCxD




3 0.0


Two Year lead in Product development 1 60% 40% 5 1.2


1 100% 70% 6 4.2



Control the Value Chain / Distribution 1 80% 50% 9 3.6




End of Section 1End of Section 1

Do we understand what Business Do we understand what Business Design is all about ?Design is all about ?

Going DownstreamGoing Downstream

• Going downstream involves assessing the Going downstream involves assessing the potential application of three generic profit potential application of three generic profit models …models …– Customer Solution ProfitCustomer Solution Profit– After sale / installed base profitAfter sale / installed base profit– Value chain position profitValue chain position profit







The Profit Zone

Product



Sell the Solution


Time

Pro

fit


After-Sale / Installed Base After-Sale / Installed Base ProfitProfit

• Profit on the Initial sale is Profit on the Initial sale is secondary to profits from secondary to profits from follow-on products & servicesfollow-on products & services

• In the installed base model - In the installed base model - having the base gives you having the base gives you proprietary rights to the proprietary rights to the follow-on follow-on

• In the after-sales model you In the after-sales model you focus on follow-on sales of focus on follow-on sales of yours & others base productsyours & others base products

• ExampleExampleGillette (Razor sales secondary to blade Gillette (Razor sales secondary to blade follow on sales)follow on sales)

The Profit Zone

ProductMaintenance Consumables Accessories


Hardware Consumables /Base Product Follow-on Products

Pro

fit

Ma

rgin

After-Sales Model

Installed Base Model









Op

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g M

arg

in0

5%

10

%1

5%

20

%


Auto Manufacturing

Used Car Dealers

AutoInsurance

Service / Repair

Auto R

entalAfter-

marketParts

Leasing

AutoLoans

Warranty

Gasoline

New CarDealers

Tools to assist in the processTools to assist in the process

• Total System Economics Total System Economics (Little Box / Big Box)(Little Box / Big Box)

• Value Chain AnalysisValue Chain Analysis

• Downstream Potential Tool Downstream Potential Tool (HBR Article)(HBR Article)

Total System EconomicsTotal System Economics



Big Box :The Customer’s Total Economics

Little Box :Our Product

Sales

Reducing the Customer’s Total System Economics (Big Box) creates opportunities to increase our product sales (Little Box)


• This company sold mainly Point of Sale Material to big This company sold mainly Point of Sale Material to big consumer marketing companies (e.g. Coke, Frito Lay, etc.)consumer marketing companies (e.g. Coke, Frito Lay, etc.)

• Business was competitive based upon cost per item.Business was competitive based upon cost per item.• The printer investigated their customer’s real cost of putting The printer investigated their customer’s real cost of putting

POS Material in the market and found that for the average POS POS Material in the market and found that for the average POS Promotion, 40% of the printed materials never made it to a store Promotion, 40% of the printed materials never made it to a store to be displayed due to inefficient customer distribution systems to be displayed due to inefficient customer distribution systems and poor tracking.and poor tracking.

• The printer changed his business model - he now organises The printer changed his business model - he now organises distribution to the store himself and charges the customer on a distribution to the store himself and charges the customer on a cost per item displayed instead of a cost per item printed.cost per item displayed instead of a cost per item printed.

• Needless to say his new model is far more profitable.Needless to say his new model is far more profitable.




Big Box :• Cost of Distribution / installation• Cost of having no POS material in

the store when the promo starts• Lost Sales at store• Cost of storing / disposing of

unused POS Material

Little Box :Cost of

Printing POS Material

Similar Exercise :-Similar Exercise :-What is most important to my What is most important to my customers? customers? (Customer Priorities)(Customer Priorities)

• What are the top three priorities for my What are the top three priorities for my customer’s business?customer’s business?

• Try to answer this question …Try to answer this question …– Imagine that you’re the CEO of your five most Imagine that you’re the CEO of your five most

important customersimportant customers• What would your overall objectives be?What would your overall objectives be?• What major concerns would you have?What major concerns would you have?• How could a supplier help you towards your How could a supplier help you towards your

goals?goals?

Value Chain AnalysisValue Chain AnalysisCan we draw this picture for the relevant Can we draw this picture for the relevant Customer Activities ?Customer Activities ?


Op

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5%

10

%1

5%

20

%

Auto Manufacturing Used Car

Dealers

AutoInsurance

Service / Repair

Auto R

ental

After-marketParts

Leasing

AutoLoans

Warranty

Gasoline

New CarDealers

• What are the relevant What are the relevant segments ?segments ?(Total cost of a brake job ?)(Total cost of a brake job ?)

• How do we get the How do we get the data ?data ?

Downstream Potential ToolDownstream Potential Tool

• Attractiveness of Downstream BusinessAttractiveness of Downstream Business– Ratio of Installed base to New ProductsRatio of Installed base to New Products– Product Life Cycle Spend vs. Initial Product CostProduct Life Cycle Spend vs. Initial Product Cost– Difference between downstream margin & product marginDifference between downstream margin & product margin

• Importance of Customer RelationshipsImportance of Customer Relationships– Magnitude of Product differentiationMagnitude of Product differentiation– Market share of top 5 CustomersMarket share of top 5 Customers– Share of total profit earned from Top 20% of CustomersShare of total profit earned from Top 20% of Customers

• Power of the Distribution ChannelPower of the Distribution Channel– Distribution & selling expense as a percentage of product PriceDistribution & selling expense as a percentage of product Price– Channel Concentration - Market Share of Top 5 DistributorsChannel Concentration - Market Share of Top 5 Distributors– Degree of Channel Innovation or multiplicationDegree of Channel Innovation or multiplication

How to Scope out the Downstream OpportunityHow to Scope out the Downstream Opportunity

Ratio ofInstalled Base

to New Product Sales

2 x

20 x

Ratio ofLife CycleSpend to

Our ProductCost

1 x

5 x

Significant Patent

30%

60%

10%

50%

DifferenceBetween

D’stream Margin & Our Product

Margin

-10%

+10%

10%

50%

20%

30%

Stable &Monolithic

Dynamic &Multiplying

Unattractiveor Unimportant

Focus on Traditional

Mfg Strategies

Potentiallytroublesome

Monitor &Experiment

Attractive&

Imperative

Magnitude Of DownstremProduct-basedDifferentiation

MarketShare of

Top 5Customers

Share of TotalProfit earned

from the top 20%of Customers

Distribution &Selling Costs

as a Percentageof Product Price

ChannelConcentration

Share of Top 5

Distributors

Degree ofChannel

Multiplication

StrongBrand

Technology orPerformance

Lead

20% CostAdvantage

Commodity

Attractiveness of Downstream Business

Importance of Customer Relationships

Power of theDistribution Channel

Appendix AAppendix A

Generic Profit ModelsGeneric Profit Models

Notes about using the Generic Notes about using the Generic Profit ModelsProfit Models

• The models serve two purposesThe models serve two purposes– They help us understand the drivers of our current They help us understand the drivers of our current

profitabilityprofitability– They present us with alternative ways to look for future They present us with alternative ways to look for future

profitabilityprofitability

• The models illustrate where the The models illustrate where the keykey sources of sources of profit are, they don’t suggest that this is where profit are, they don’t suggest that this is where allall sales / profits should come fromsales / profits should come from

• There are few “pure” examples of any model - There are few “pure” examples of any model - most successful business use a combination of most successful business use a combination of modelsmodels

Notes about using the Generic Notes about using the Generic Profit Models (con’t)Profit Models (con’t)

• Following is a summary of 15 of the 21 profit Following is a summary of 15 of the 21 profit models used in the Business Modelling theory. A models used in the Business Modelling theory. A full list with more detailed descriptions and full list with more detailed descriptions and examples can be provided if required. examples can be provided if required.

Relative Market Share ProfitRelative Market Share Profit

• Companies with high Companies with high market shares are more market shares are more profitable because they profitable because they enjoy pricing enjoy pricing advantages and cost advantages and cost economies economies (manufacturing experience & (manufacturing experience & purchasing power)purchasing power)

• ExamplesExamplesProcter & Gamble, Procter & Gamble, Coles-MyerColes-Myer


Relative Market Share

Re

turn

on

Sa

les

TheProfitZone


Cycle ProfitCycle Profit

• Firm profitability is a Firm profitability is a function of position in function of position in the cyclethe cycle

• Maximise profit within Maximise profit within the cycle by …the cycle by …– Lowering your break-Lowering your break-

even pointeven point– Pricing within the cyclePricing within the cycle

• ExampleExampleDow ChemicalsDow Chemicals (leads price (leads price increases as capacity tightens and increases as capacity tightens and lags decreases as capacity lags decreases as capacity declines)declines)


Capacity Utilisation

$ p

er

Un

it

TheProfitZone

Cost

Price


Brand ProfitBrand Profit• Brand company expends Brand company expends

considerable marketing considerable marketing investment in building investment in building awareness, recognition & awareness, recognition & credibilitycredibility

• These “intangibles” are These “intangibles” are reinforced by customer reinforced by customer experienceexperience

• The Brand achieves a The Brand achieves a significant price premium in significant price premium in the marketplacethe marketplace

• ExamplesExamplesNike, Coca-ColaNike, Coca-Cola


Market BrandPrice Price

Pri

ce

pe

r U

nit


Product Pyramid ProfitProduct Pyramid Profit• Multi-tiered brandingMulti-tiered branding• Most of the Profit is Most of the Profit is

made at the top made at the top segments of the segments of the pyramidpyramid

• Base brands protect top Base brands protect top tier brands tier brands

• ExampleExampleSMHSMH (watch makers who derive (watch makers who derive more than half their profit from more than half their profit from Omega, Longines, Blancpain & Rado Omega, Longines, Blancpain & Rado brands but also have brands like brands but also have brands like Swatch, Tissot, etc.)Swatch, Tissot, etc.)


Volume

Pri

ce


The ProfitZone







The Profit Zone

Product



Sell the Solution


Time

Pro

fit


After-Sale / Installed Base After-Sale / Installed Base ProfitProfit

• Profit on the Initial sale is Profit on the Initial sale is secondary to profits from secondary to profits from follow-on products & servicesfollow-on products & services

• In the installed base model - In the installed base model - having the base gives you having the base gives you proprietary rights to the proprietary rights to the follow-on follow-on

• In the after-sales model you In the after-sales model you focus on follow-on sales of focus on follow-on sales of yours & others base productsyours & others base products

• ExampleExampleGillette (Razor sales secondary to blade Gillette (Razor sales secondary to blade follow on sales)follow on sales)

The Profit Zone

ProductMaintenance Consumables Accessories


Hardware Consumables /Base Product Follow-on Products

Pro

fit

Ma

rgin

After-Sales Model

Installed Base Model


New Product ProfitNew Product Profit• New product profits are a New product profits are a

function of newness and growthfunction of newness and growth• New products produce high New products produce high

margins, which reduces as the margins, which reduces as the products matureproducts mature

• Profitability is driven by Profitability is driven by investing to lead the next investing to lead the next generation of products in your generation of products in your industryindustry

• ExampleExampleCompaqCompaq (it’s investment in servers gives it (it’s investment in servers gives it a high margin base while PC profits are a high margin base while PC profits are declining and Laptops are gradually reaching declining and Laptops are gradually reaching maturity) maturity)


Time

To

tal

Sa

les

$

The ProfitZone


““Two steps ahead” ProfitTwo steps ahead” Profit

• First mover generates First mover generates excess returns before excess returns before imitators begin to erode imitators begin to erode marginsmargins

• Create and maintain a Create and maintain a lead time over the next lead time over the next competitor and a competitor and a constant stream of new constant stream of new products products

• ExampleExampleIntelIntel (focuses on being two years (focuses on being two years ahead of nearest rival’s product ahead of nearest rival’s product developments)developments)


Q2 Q4 Q6 Q8 Quarters Post Launch

$ p

er

Un

it

TheProfitZone

Cost

Price


Protectable Intellectual Protectable Intellectual Property ProfitProperty Profit

• Profit comes from increasing Profit comes from increasing proportion of sales coming proportion of sales coming from patentable productsfrom patentable products

• Key driver of profitability is Key driver of profitability is the astute selection of R&D the astute selection of R&D projects to generate projects to generate tomorrow's productstomorrow's products

• ExamplesExamplesMerck, 3MMerck, 3M


Five Years TodayAgo

Re

ve

nu

e


CommodityProducts

ProtectableIP

Products

CommodityProducts

ProtectableIP

Products

Local Leadership ProfitLocal Leadership Profit

• Profitability is a Profitability is a function of local function of local market strengthmarket strength

• Cost structure is local Cost structure is local in naturein nature

• Profitability supports Profitability supports growth, not the other growth, not the other way around way around

• ExampleExampleWal-martWal-mart (established stores (established stores county by county and focussed on county by county and focussed on achieving local dominance) achieving local dominance)


Local Market Share

Pro

fita

bil

ity

by

Re

gio

n0

The ProfitZone









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5%

10

%1

5%

20

%


Auto Manufacturing

Used Car Dealers

AutoInsurance

Service / Repair

Auto R

entalAfter-

marketParts

Leasing

AutoLoans

Warranty

Gasoline

New CarDealers

Low-Cost Business Low-Cost Business Design ProfitDesign Profit

• New entrant trumps the New entrant trumps the incumbent's low cost (through incumbent's low cost (through experience) business model experience) business model with a new model that with a new model that – Uses new technology to Uses new technology to

produce cheaperproduce cheaper– Uses different go-to-market or Uses different go-to-market or

fulfilment systems to deliver fulfilment systems to deliver better customer valuebetter customer value

– Deletes unnecessary or Deletes unnecessary or obsolete features from product obsolete features from product offer offer

• ExamplesExamplesDell in computing, Nucor in Dell in computing, Nucor in steelsteel


Conventional Low Cost Business Business Design Design

Co

st

pe

r U

nit


Switchboard ProfitSwitchboard Profit• In marketsIn markets characterised by characterised by

multiple sellers communicating multiple sellers communicating with multiple buyers, with each with multiple buyers, with each incurring high costs in doing so, incurring high costs in doing so, a switchboard can provide a a switchboard can provide a valuable servicevaluable service

• A switchboard becomes the A switchboard becomes the single point of communication, single point of communication, reducing the costs of buyers &reducing the costs of buyers &sellers sellers

• It profits through advertising and/or transaction feesIt profits through advertising and/or transaction fees• The increase in available information often reduces the premium sellers gain in The increase in available information often reduces the premium sellers gain in

selling to uninformed buyersselling to uninformed buyers• ExamplesExamples

Schwab (investments), Auto-by-tel (on-line car sales), Schwab (investments), Auto-by-tel (on-line car sales), ChemConnect (chemical trading on-line)ChemConnect (chemical trading on-line)



Intermediary(Switchboard)

The ProfitZone

Buyers Sellers

Appendix BAppendix B

Generic Frameworks for Generic Frameworks for Differentiation / Strategic ControlDifferentiation / Strategic Control

What is a Strategic Control Point ?What is a Strategic Control Point ?

• A Strategic Control point is a mechanism A Strategic Control point is a mechanism that helps protect the profits flowing from that helps protect the profits flowing from a business model against the corrosive a business model against the corrosive effects of competition and customer powereffects of competition and customer power

• A business model without a strategic A business model without a strategic control point is like a ship with a hole in its control point is like a ship with a hole in its hull - it will sink much sooner !hull - it will sink much sooner !

• Strategic Control Point keep you in the Strategic Control Point keep you in the profit zone longerprofit zone longer

Examples of Strategic Control Examples of Strategic Control PointsPoints

Business models that have strong ...Business models that have strong ...• Brand, Copyright, PatentsBrand, Copyright, Patents• Control of Distribution / the Value ChainControl of Distribution / the Value Chain• Two year lead in product developmentTwo year lead in product development• Commodity with 10% - 20% cost Commodity with 10% - 20% cost

advantageadvantage

Assessing the strength of your Assessing the strength of your Strategic Control Point(s)Strategic Control Point(s)

• Strength is often different in different industriesStrength is often different in different industries(e.g. Brand is almost irrelevant in OE Automotive but extremely (e.g. Brand is almost irrelevant in OE Automotive but extremely relevant in carbonated beverages)relevant in carbonated beverages)

• Strength is relative to the countervailing strength Strength is relative to the countervailing strength of your competitors & customersof your competitors & customers

• It is also relative to it’s reach It is also relative to it’s reach (e.g. if your have patent protected product only has application in (e.g. if your have patent protected product only has application in a very small segment of the market)a very small segment of the market)

• Strength is cumulative i.e. if you have more than Strength is cumulative i.e. if you have more than one Strategic Control Point you can add their one Strategic Control Point you can add their scores togetherscores together

The TemplateThe TemplatePossession Reach

Strength vs. Competitors /

CustomersIndex Value



apply to?




Extended Value

A B C D AxBxCxD




3 0.0




6 0.0







ExamplesExamplesINTEL GE



Index Value



apply to?




Extended Value

A B C D AxBxCxD




1 100% 70% 3 2.1




6 0.0

Own the Customer Relationship 1 100% 70% 7 4.9








Index Value



apply to?




Extended Value

A B C D AxBxCxD




3 0.0


Two Year lead in Product development 1 60% 40% 5 1.2


1 100% 70% 6 4.2



Control the Value Chain / Distribution 1 80% 50% 9 3.6




business modelling

Business

customers priorities

profitable customers

customers volume

important customers

priorities business

customers key sell

business regulations

better business model