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1、Author:Dana PeckReviewer:Michael Collins,Profit Pools,December 1998,Copyright 1998 Bain&Company,Inc.,2,Agenda,Profit Pools ConceptApplicationsProfit Pool Steps Client ExampleKey Takeaways,3,Profit pools are the total profits earned in an industry at all points along the industrys value chainPattern
2、of profit concentration in an industry is very different from the pattern of revenue concentration(see example)For example,profits and revenues in the automotive industry can be divided among many value chain activities-vehicle manufacturing,new and used car sales,gasoline retailing,insurance,after-
3、sales service and parts,and lease financingalthough car manufacturing and dealers account for almost 60%of industry revenueauto leasing and financing are by far the most profitable businesses,What are Profit Pools?,Profit pools answer the question:“Where and how is money being made?”,Source:Profit P
4、ools:A Fresh Look at Strategy(May-June 1998):Orit Gadiesh and James L.Gilbert,4,What is Profit?,Accounting profit-represents companys earnings as formally reported most commonly used as the basic profit measureexamples include net income or earnings per share calculationsReturn on investment-represe
5、nts companys earnings after taking into account the cost of capital invested in the business.Two commonly used measures include:ROC,accounting based Return on Capital(book value)ROIC,accounting based Return on Invested Capital(book value)Cash-flow contribution-companys earnings before taking fixed-a
6、sset and capital costs into account(e.g.EBITDA)represents the amount of cash left from a sale after subtracting the variable costs associated with that saleused as a basis for decision-making in mature,high fixed cost and cyclical industries,Profit can be defined in one of three ways:,Be aware of di
7、fferences in accounting standards when evaluating companies with profits spanning different industries,Source:How to Map Your Industrys Profit Pool(May-June 1998);Orit Gadiesh and James L.Gilbert,5,Revenue vs.Profit Split,Truck Finance,Parts and Service,Body Manufacturing,and Truck Assembly,Chassis
8、Manufacturing,and Sales,Truck Finance,Parts and Service,Body Manufacturing,and Truck Assembly,Chassis Manufacturing,and Sales,Revenue Split by Activity,Profit Split by Activity,$3,865MM,$600MM,0%,20%,40%,60%,80%,100%,Percent of Total,Source:PBIR Profile of the U.S.Truck Body Industry;R.L.Polk Regist
9、ration Database;Literature Search;TEM Financials;Prior Bain PLP analysis(7/96);Bain estimates,The pattern of profit concentration in the truck manufacturing industry is very different from the pattern of revenue concentration.,Truck Manufacturing Business Example,6,Why Use Profit Pools?,Offer a view
10、 of the underlying industry structureHelp illustrate the economic and competitive forces driving the industrys profit distributionOffer a different perspective on an industryIllustrate relationship between profit and revenues Highlights potential watchouts(choke points in the value chain)which can i
11、nfluence the profit flow in an industry,Illustrate the Current State of the Industry,Provide a Competitive Advantage to Your Client,Help to Develop Innovative Strategies,Help companies see what their rivals dont seeFoster the potential to dictate the terms of competition within the industryKeep comp
12、anies abreast of changes in rapidly changing(turbulent)industriesalert potential shifts in profit distribution along the value chainillustrate potential change in profit sources from new entrants,Help guide important decisions about a companys operation and strategyEncourage rethinking old decisions
13、 and pursuing counterintuitive initiatives to create and control profit poolsReduce the possibility of blind spots in a companys strategic visionreduce potential to overlook attractive profit building opportunitieslesson potential to become trapped in areas of weak/fading profitabilityExample applic
14、ations,Companies that recognize the variability of profitability and can exploit the deepest pools will earn superior returns.,Source:Profit Pools:A Fresh Look at Strategy(May-June 1998):Orit Gadiesh and James L.Gilbert,7,How Profit Pools Illustrate the State of the Industry,The varying concentratio
15、ns of profit along the value chain(known as the shape of the profit pool)reflect the competitive dynamics of a businessprofit concentrations result from the actions and interactions of companies and customersprofit pools form in areas where barriers to competition exist profit pools exist in areas t
16、hat have been overlooked by competitorsEvery market has an uneven distribution of profit between product categories,customer groups,geographic regions and/or distribution channels Profit pools are not stagnantas power shifts among the players in an industry(competitors,suppliers,and customers),the s
17、tructure of the profit pool changes,There are many different sources of profit in any business,Profit pools provide a means to evaluate the competitive dynamics of an industry.,Source:Profit Pools:A Fresh Look at Strategy(May-June 1998):Orit Gadiesh and James L.Gilbert,8,Profit Pool Watchouts(Comput
18、er Industry Example),Examples:,Be aware of“choke points”-particular business activities that control the flow of profits throughout an industry.,Impact:,Control of a choke point can influence the distribution of profits among competitors and more distant value-chain participants,Intels dominance of
19、microprocessorsEstablishment of an industry wide standard that all companies must now obey,Microsofts dominance of WindowsConsolidation of control over the customer interface,*includes operating system and application softwareSource:Profit Pools:A Fresh Look at Strategy(May-June 1998):Orit Gadiesh a
20、nd James L.Gilbert,Micro-processors,Other Components,Personal Computers,Software*,Peripherals,Services,9,Micro-,processors,Other Components,Personal Computers,Soft-,ware,Peripherals,Services,0%,10%,20%,30%,40%,Operating Margin,Share of Industry Revenue,Profit Pool Watchouts(Computer Industry Example
21、 Con.),*includes operating system and application softwareSource:Profit Pools:A Fresh Look at Strategy(May-June 1998):Orit Gadiesh and James L.Gilbert,Analyzing the profit pool has enabled Dell to be profitable in the least profitable personal computers segment(see example),Although choke points exi
22、st in the computer industry,it is still possible for companies to create and leverage new profit pools within this industry.,PC Industry Profit Pool,100%,10,0%,5%,10%,15%,20%,25%,Operating Margin,The automotive industry encompasses many value-chain activities.The most profitable areas of the car bus
23、iness are not the ones that generate the biggest revenues.,Auto manufacturing,New car dealers,Used car dealers,Auto loans,Leasing,Gasoline,Auto insurance,Service repair,Aftermarket parts,Auto rental,Share of Industry Revenue,100%,U.S.Auto Industry Example,11,Key Questions to Help Develop Innovative
24、Strategies,Why have profit pools formed where they have?Are the forces that created those pools likely to change?Will new,more profitable business models emerge?How do some profit sources exert influence over others and shape competition?How do we gain a disproportionate share of industry profits?,B
25、uilding an understanding of profit pools puts strategic thinking on a firm footing and prompts the following questions:,Source:Profit Pools:A Fresh Look at Strategy(May-June 1998):Orit Gadiesh and James L.Gilbert,12,Agenda,Profit Pools ConceptApplicationsProfit Pool Steps Client ExampleKey Takeaways
26、,13,Applications(1 of 2),Analyzing profit pools allowed U-Haul to identify a large untapped source of profit in the low margin truck rental businessseized the first mover advantage and entered accessory business at a low costreduced prices(and profits)in core truck rental business to attract custome
27、rs for higher margin accessory businessIn anticipation of a potential reconfiguration of the profit pool from pharmacy-benefit managers(PBM),Merck and others vertically integrated the value chain and acquired PBMsinsulated themselves from new entrants and protected their existing sources of profitsg
28、ained greater access to patient informationincreased the likelihood that the pool would evolve in a beneficial rather than destructive way,Companies can use their understanding of profit pools in different ways:,Identify New Sources of Profit,Chart Acquisition and Expansion Strategies,Examples,Sourc
29、e:Profit Pools:A Fresh Look at Strategy(May-June 1998):Orit Gadiesh and James L.Gilbert,14,Applications(2 of 2),Dell Computer Corp.utilizes the profit pool approach to evaluate which customers to pursue and which channels to use direct sales approach allows Dell to keep a portion of dealers profits
30、for itself and to share the rest with customers through lower pricesregular resegmentation of customer base enables them to identify the most profitable customers and react quickly to new sources of profitAfter recognizing that the industrys profit pool was driven by the premium beer segments,Anheus
31、er Bush refocused their strategy to expand their share of the premium segmentgained dominance of the premium segment through increased marketing of premium brands and by managing the price differentials between premium and discount brandsvertical integration into can production raised competitive ba
32、rriers around the pool by cutting manufacturing and distribution cost,Develop Distribution Strategy,Guide Pricing,Product and Operating Decisions,The company that sees what others do not will be best prepared to capture a disproportionate share of industry profits,Source:Profit Pools:A Fresh Look at
33、 Strategy(May-June 1998):Orit Gadiesh and James L.Gilbert,15,Agenda,Profit Pools ConceptApplicationsProfit Pool Steps Client ExampleKey Takeaways,16,Mapping a Profit Pool,Mapping a profit pool involves four steps.,Define the Pool,Determine the Size of the Pool,Estimate the Distribution of Profits,Re
34、concile the Estimates,Step 1:,Step 2:,Step 3:,Step 4:,Source:How to Map Your Industrys Profit Pool(May-June 1998);Orit Gadiesh and James L.Gilbert,17,Guidelines(Defining the Pool),Defining the pool involves identifying value chain activities relevant to the business.,Take a broad view of the value c
35、hain-look beyond traditional industry definitionsExamine the industry from 3 perspectivesclientcompetitorscustomersTalk to industry players and analysis to uncover new or emerging business modelsDont disaggregate activities more than necessaryConsider parallels from other industriesare there activit
36、ies that could substitute for activities in this industry?,The way you define your profit pool is unlikely to coincide with any traditional industry definition,Source:How to Map Your Industrys Profit Pool(May-June 1998);Orit Gadiesh and James L.Gilbert,18,Guidelines(Determining the Size of the Pool)
37、,Determining the size of the pool involves developing a rough,but accurate baseline estimate based on the available data.,Take the easiest analytical routes availableFocus on the largest components firstlarge companiesstart with the biggest players who account for a large portion of the industrys pr
38、ofitsgauge the profits of the smaller players by adjusting the leaders margins to account for the smaller players competitive advantages or disadvantagesadd the profits togetherhigh volume productsConsider building estimates using two different methodologies(pany level vs.product level)so you can co
39、mpare answers to see if you are in the ball park range,Source:How to Map Your Industrys Profit Pool(May-June 1998);Orit Gadiesh and James L.Gilbert,19,Guidelines(Estimating the Distribution of Profits),Estimating the profits for each value chain involves creative thinking.,Go where the data is(e.g.p
40、roducts,customers,channels,companies,or regions,etc.)use proxies if relevant data is unavailablePrioritize focus-look at client economics,then large pure players,large mixed players,then a sample of smaller playersuse the 80/20 rule-in most cases 20%of the companies constitute 80%of the revenuesShif
41、t between aggregation and disaggregation in analysisaggregations-use in industries where most of the players focus on one value chain activity“Pure players”disaggregation-you will need to disaggregate companys financial data if the industrys players are vertically integrated“mixed players”,Source:Ho
42、w to Map Your Industrys Profit Pool(May-June 1998);Orit Gadiesh and James L.Gilbert,20,Guidelines(Reconciling the Estimates),Developing final estimates of activity and total profits can be an iterative process.,Compare the estimate of total profit pools(top-down approach)with estimates calculated fo
43、r each value chain activity(bottoms-up approach),Check assumptions and calculations if the numbers dont add up,Collect additional data if necessary,Resolve inconsistencies,Source:How to Map Your Industrys Profit Pool(May-June 1998);Orit Gadiesh and James L.Gilbert,21,Agenda,Profit Pools ConceptAppli
44、cationsProfit Pool Steps Client ExampleKey Takeaways,22,Truck Manufacturing Business Example,Activities:,Performed By:,Provide parts for truck chassis and bodyPerform preventative and emergency service on truck chassis and body,Build truck body to customer specsPrepare body for and manage assembly p
45、rocessSell body to customerDeliver integrated unit to customer,Offer funds as loans for truck purchaseArrange loan and lease transactions,Sell chassis to/take order from customerManage connection of chassis and TEM*,Build truck chassis according to customer specsCollect components from manufacturers
46、,Chassis manufacturerChassis dealerIndependent garage or parts store,TEM,Chassis dealerChassis manufacturerTEM,Chassis dealerChassis manufacturer TEM,Chassis manufacturer,Notes:*Truck Equipment Manufacturers,The first step was to define the pool by identifying the value chain activities relevant to
47、the business.,Severe Service Value Chain(Defining the Pool),23,Other,Freightliner,Navistar,Peterbilt,Sterling,Mack,$500-700MM,0%,20%,40%,60%,80%,100%,Estimated Percent of Total Profit Pools,Severe Service Vehicle Profit Pool(Determining the Size of the Pool),Source:Bain analysis,Estimated profits fr
48、om top 5 companies based on 10Ks and annual reportsPerformed 80/20 analysis to determine total profit poolassumed 20%of the companies constituted 80%of the profitsestimated profits of remaining 20 smaller companiesReality checked estimates with rough industry calculationsEstimated total profit pool
49、around$500-$700MM based on:$3.9B industry revenuesassumed average gross margins of 13%-18%,Methodology,Truck Manufacturing Business Example,A rough estimate of the total profit pool was built using overall profit estimates from the top 5 competitors.,24,Note:Operating Margin used as the measure of p
50、rofitabilitySource:Company Financials;Analysts Reports;Company Interviews,Total,Industry,McNeilus,Heil,Leach,Knapheide,Omaha,Vactor,Ottawa,Advance,Rest of,Industry,7.1%,12.0%,9.0%,9.0%,8.6%,8.2%,6.6%,5.8%,3.0%,3.9%,0%,3%,5%,8%,10%,13%,Operating Margins for Body Companies,Profit estimates were genera
