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Business Value and Revenue Management
企業價值及營收管理
Jason C. H. Chen (陳周宏 ), Ph.D.
Professor and Coordinator of MIS
Graduate School of Business, Gonzaga University
Spokane, WA 99258 USA
Editor-in-chief, International Journal of Revenue Management
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Outline of the Topic
• Business Models and Why?• Evolutions of Economy• Value Creation/Innovation
– Information Systems Strategy Model– Michael Porter’s Five-Competitive Forces Model– Red vs. Blue Ocean Strategy
• Revenue Management– Models and Applications
• Conclusion
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Source: Compustat. Grant explored ROEs for these industries for the years 1985-1997: R. M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (Oxford, U. K.: Blackwell, 2002) p. 68.
Industry Profitability, 1981-2001
Industry ROE ROA1. Pharmaceuticals 25.87% 10.27%2. Chemicals and allied products 21.70 7.883. Food and kindred products 24.78 7.254. Printing and publishing 16.30 6.685. Rubber and miscellaneous plastic 15.07 6.256. Fabricated metal products 19.00 5.587. Paper and allied products 13.77 4.708. Electronics and electrical equipment (no computers) 9.63 4.679. Nonferrous metals 10.39 4.23
10. Machinery, except electrical 15.69 3.8011. Petroleum and coal products 13.25 3.7612. Textile mill products 5.11 3.7113. Aircraft, guided missiles, and parts 14.02 3.5714. Stone, clay, and glass products 9.16 3.4415. Motor vehicles and equipment 11.91 3.1616. Iron and steel 6.40 3.1417. Airlines (transportation by air) 2.68 2.05
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Firm Profitability, 1981-2001
Source: Compustat
Firm ROA Firm ROA
Pharmaceuticals Airlines
Bristol Myers Squibb 13.71% Southwest Airlines 4.85%
Merck 13.37 AMR 1.51
Schering Plough 12.89 Delta Airlines 1.50
WYETH American Home Products 12.52 UAL 0.96
Eli Lilly 10.23 US Air 0.31
Pfizer 9.66 America West Holdings -3.27
Pharmacia & Upjohn 7.98 Continental Airlines -4.97
American Cyanamid 3.57 TWA -5.37
Northwest Airlines -3.40
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Determinants of Profitability
WHY?
Business Models
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The Evolutions of Economy
OLD Economy
Post Economy(2001-and Beyond)
NEW Economy
(1994-2000)
Product/Service Information/Internet
Knowledge
Market share Time to market/Site visitation
Wallet share/Profit
Economies of Scale/Efficiency
TechnologyImprovement/Effectiveness
Retaining customers/Win service/ Innovation
Based on
Measurementof success
Focus
N
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Essential Value Propositions for a Successful Company
• Business Model
• Core Competency
• Execution– Set corporate goals and get executive
sponsorship for the initiative
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Cooperating to Create Value
Revenue
Customer Value Relative Positioning
Competitive forces (coopetitors)
-Suppliers-Customers-Rivalry-Threat of Entry-Substitutes-Complementors
Firm’s Decisions1. Differentiation2. Low-cost3. ???
(influence)
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Business Models and Revenue Management
• The framework for making money.
• It is the set of activities which a firm performs, how it performs them, and when it performs them so as to offer its customers benefits they want and to earn a profit.
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Case Example: Wal-Mart• Analysis: Which, How, and When in Wal-
Mart’s Success– Which:
• moved into small towns that its competitors shunned
– How:• Wal-Mart saturated contiguous towns and built
distribution centers and logistics systems
– When:• First mover advantage by capturing scarce
resources, locations, and loyal employees and customers
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Business Models and Revenue Management
Industry Factors-Competitive forces
-Cooperative forces
-Industry value drivers
ProfitabilityProfitability
ACTIVITIESPositions•Customer value•Market segments•Revenue sources•Relative positioning
Resources
Costs
create andappropriate
value
Firm
(Business Model)
Form
ulat
es
Executes
Which,
How,
When
Value Chain(Business
Systems)
Value
Systems
FIRM-SPECIFIC FACTORS
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When to Perform Activities
• Two firms can perform similar activities in similar ways but still end up with business models whose profitabilities are different if the timing of when they perform the activities is different.– First-mover advantage– Windows of opportunities
• periods within which some activities are best performed
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-10 -5 0 5 100
50
100
150
200
250
300
Time of market introduction relative to competition (months)Is timing for market entry really important?
Pro
fits
rel
ativ
e to
co
mp
etit
ion
s (%
)
Relationship between profits and time of market introduction
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Revenue Management
(a.k.a. yield management)
開源或節流 ?
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Revenue Management (RM)
• RM focuses companies on revenue growth, not cost-cutting and downsizing.
• RM drives bottom-line increases through top-line improvements.
• Growth comes from the marketplace, not the workforce.
• The key to real growth is learning how to deal effectively and proactively with a constantly changing markets.
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Revenue Management (RM) vs. MIS
• MIS is to deliver – the right information, to the right people– at the right time, with the right form
• RM is to sell– the right product, to the right customer– at the right time, for the right price– Thereby maximizing revenue from a
company’s products
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Examples on Revenue Management
• A No-Tech approach to RM– Barbershop
• A Low-Tech approach to RM– Opera House
• A High-Tech approach to RM– Airlines
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Other Examples
• Hotel
• Car rental
• Golf
• Broadcasting
• Shipping
• Restaurant
• Etc.
因應競爭台鐵擬採彈性票價
How about in Taiwan?
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Some U.S. airline industry observations
• Since deregulation (1978) 137 carriers have filed for bankruptcy.
• From 95-99 (the industry’s best 5 years ever) airlines earned 3.5 cents on each dollar of sales:– The US average for all industries is around 6 cents.– From 90-99 the industry earned 1 cent per $ of sales.
• Carriers typically fill 72.4% of seats and have a break-even load of 70.4%.
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Matching supply to demand when supply is fixed
• Examples of fixed supply:– Travel industries (fixed number of seats, rooms, cars,
etc).– Advertising time (limited number of time slots).– Telecommunications bandwidth.– Size of the MBA program.– Doctor’s availability for appointments.
• Revenue management is a solution:– If adjusting supply is impossible – adjust the demand!– Segment customers into high willingness to pay and
low willingness to pay.– Limit the number of tickets sold at a low price, i.e.,
control the average price by changing the mix of customers.
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Revenue management and margin arithmetic
• Small changes in revenue can have a big impact on profit, especially for high gross margin and low net profit % industries:Percentage change in profit for different gross margins, revenue increases and net profits as a
percentage of revenue.
Gross margin 1% 2% 5% 8%
Gross margin 1% 2% 5% 8%
100% 50% 100% 250% 400% 100% 17% 33% 83% 133%90% 45% 90% 225% 360% 90% 15% 30% 75% 120%75% 38% 75% 188% 300% 75% 13% 25% 63% 100%50% 25% 50% 125% 200% 50% 8% 17% 42% 67%25% 13% 25% 63% 100% 25% 4% 8% 21% 33%15% 8% 15% 38% 60% 15% 3% 5% 13% 20%
Revenue increase
Net profit % = 2% Net profit % = 6%
Revenue increase
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Ugly reality: cancellations and no-shows• Approximately 50% of reservations get cancelled at some
point in time.
• In many cases (car rentals, hotels, full fare airline passengers) there is no penalty for cancellations.
• Problem: – the company may fail to fill the seat (room, car) if the passenger
cancels at the very last minute or does not show up.
• Solution:
– sell more seats (rooms, cars) than capacity.
• Danger:
– some customers may have to be denied a seat even though they have a confirmed reservation.
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39%
62%
86%
61%
38%
14%Business launch
Revenue Impact
Profit Impact
Launches within red oceans Launches for creating blue oceans
The Profit and Growth Consequences of Creating Blue Oceans
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Winners vs. Losers• What separates winners from losers in creating
(ultimate) strategic competitive advantage is neither bleeding-edge technology nor “timing for market entry.”
• It is from “value innovation”
FirmFirmprice
utility
cost
Innovation ValueInnovation
ValueInnovation
align
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Value Innovation
Customer Value
Costs
Value Innovation
The Simultaneous Pursuit of and Differentiation Low Cost.
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The Twenty-first Century will ...
• The twenty-first century will witness only two kinds of companies:– those that exploit Information Technology (IT)– those that are out of business
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Conclusion
• Value innovation and business models• Revenue management and overbooking give
demand flexibility where supply flexibility is not possible.
• Concept and powerful tools to improve revenue:– American Airlines estimated a benefit of $1.5B over 3
years.– National Car Rental faced liquidation in 1993 but
improved via yield management techniques.– Delta Airlines credits yield management with $300M in
additional revenue annually (about 2% of year 2000 revenue.)
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Revenue Management
• If you are interested in the issues of RM
• International Journal of Revenue Management
• http://www.inderscience.com/ijrm
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International Journal of Business and Systems Researchwww.inderscience.com/ijbsr
International Journal of Mobile Learning and Organisationwww.inderscience.com/ijmlo
http://barney.gonzaga.edu/~chen/journals.html
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The Seven Core Concepts ofRevenue Management
1. Focus on price rather than costs when balancing supply and demand.
2. Replace cost-based pricing with market-based pricing.3. Sell to segmented micro markets, not to mass market.4. Save your products for your most valuable customers.5. Make decisions based on knowledge, not supposition.6. Exploit each product’s value circle.7. Continually reevaluate your revenue opportunities.