Profit Pools:Where is the money being

made in an industry?

Group Members

Arun Koul-10FN-026Anurag Pandey-10FN-022

Arpit Khullar-10IB-021Brijendra Dubey- 10FN-126Gaurav Sharma-10HR-012

Debanjan Das-10FN-127

Profit Pools

• Analyzing how profits are distributed among the various activities that form an industry's value chain.

• Mapping a profit pool involves defining the value chain activities and then determine their size and profitability.

Mapping profit pools: 4 steps

Step 1: Define the boundaries

Step 3:Determine the

distribution of profits in the pool

Step 4: Reconcileestimates & plan

strategy

Step 2: Determine the size of the pool

Defining the pool

• Task: Determine which value chain activities influence your ability to generate profits

• Take a BROAD view—look beyond tradition, and consider substitutes

• Examine industry from 3 perspectives: your company, your competitors, your customers

• Look for new business models and innovations

Sizing the pool

• Task: develop an estimate of cumulative volumes over the entire industry, by segment. Estimate of total pool profits, usually expressed as a range

• The goal is the comparative size of the segments, not the actual accurate volume of each segment

• Go where you can get data: Government data, Annual reports, Industry analyst reports. Government data is pretty good for comparative volumes

• Try for two levels: company level, product level

Distribution of profits

• Task: Develop estimates of the profits generated by each segment/activity

• Look at “pure players” in each segment to determine profitability

• It’s comparative profitability that matters.

• If relevant company data are unavailable, use proxies such as product-level or channel-level sales

• Think creatively

Planning strategy

• You add up the profit estimates for each activity, and you compare the total with the overall estimate of industry profits you developed earlier.

• Check all assumptions and calculations

• Collect additional data if necessary

Profit Pool: The RegionBank Case

• Hypothetical Bank based in Midwestern US• Regionally focused, vertically integrated, not online(traditional)

Threats• Changes in Financial services IndustryCompetitors• MBNA-Credit cards, Fidelity-Mutual Funds, Countrywide Mortgage-

Mortgage lendingTechnology Threats• Telephone and online banking

Worried Managers Do Profit pool Analysis find where in value chain money is made reshape strategies

Profit pool Analysis

StepsA. Determine the size of pool(Total profit of Financial Services

Industry)-by two ways1. Cumulative profit of 5 different Products(credit cards, mortgages,

deposits, mutual funds, consumer loans)2. Cumulative profit of Major Companies in each of above 5 productsBoth figures should reconcile

B. Understand the distribution of profit in 3 different value chains1. Acquisition 2. Funding 3. Servicing

Case figures

Step ATotal Industry size 60 -70 billion

Step BDistribution of Industry Profit into 3 value chains (acquisition, funding,

servicing)After further AnalysisProfit attributable to new customer acquisition $10 billion(16%)Profit attributable to funding $42.4 billion(67%)Profit attributable to servicing of Financial products $10 .4billion(17%)

Total Industry size – $62.8 billion

The credit card segment breakup into 3 value chain activities

• Just like Credit cards break-up was done for other Financial Products as well

• Mortgages• deposits • mutual funds• consumer loans

Analysis Output in Visual: Profit Pool Map

Another Form of Profit Pool Map-Mosaic(distribution of Profit among types of Companies)

Limitations of Profit Pool Maps

• They are snapshots in time

• Would help if Company can draw Profit Pools of past years and projected profit pools of future years to understand the changing trends

Profit Pools summarized

A foundation for Strategy

1. Helps know which value activities are giving maximum profit, which value activities are lagging

2. Helps know where profits are created, how they are created and who is creating them?

3. Helps know what can be the future trend

In short, helps the Management identify most critical drivers of Future Industry Profitability and hence is A device for strategy formulation