The Profit Zone : How Strategic Business Design Will Lead You to Tomorrow’s Profits by Adrian J. Slywotzky and David J. Morrison is a fascinating look at the power of business models to determine the success of a business.
The Profit Zone Review
The authors, Adrian Slywotzky and David Morrison argue that the traditional sources of profit in many businesses and industries are broken.
No longer can:
- Higher market share; and
- Market growth
be assumed to “guarantee” financial success because there are many cases where high market share is unrewarded and where fast growing markets become profit traps.
What Is The Profit Zone?
The profit zone is where high profit is generated.
The profit zone used to be high market share but it’s now moved to the business using the best, most relevant profit model.
This builds on the causality argument about market share.
Is market share:
- The cause of high profitability?
- The reward for providing high value for money to customers which also ultimately drives profitability?
While high market share can provide big advantages (see the Advantage Matrix), it is the cumulative effect of many different purchase decisions.
Unfortunately market share can be delivered efficiently or inefficiently. It can be increasing (indicating a stronger competitive performance) or it can be decreasing.
Four Critical Decisions For A Business Profit Model
Winning business designs that put you in the profit zone are based around four key dimensions:
- Customer selection
- Value capture
- Differentiation / strategic control
The Structure Of The Profit Zone
The book is written in three parts:
- The theory – succeeding in the changing world of business
- The examples – the reinventors and how they succeeded – stories of how business models have been changed to move into the profit zone including Jack Welch and GE, Andrew Grove and Intel, Michael Eisner and Disney and Bill Gates and Microsoft
- The practical application of the business model thinking in the profit Zone Handbook
These three sections and the way they build upon each other makes The Profit Zone a very well thought out and crafted book.
The 22 Profit Zone Profit Models
Adrian Slywotzky and David Morrison have identified 22 profit models
- Customer Solutions – high cost investment at the start of a relationship leads to a steady stream of future profits
- Product Pyramid – many low priced, low margin products provide the gateway to high price, high profit products
- Multi-Component – operating in a low margin area is essential for success with higher margin products or channels e.g. Coke in supermarkets, fountains and vending machines
- Switchboard – the profit available from connecting buyers and sellers
- Time Profit – innovative products generate big profits based on a development gap over competitors e.g. Intel’s innovations drive the chip market
- Block Buster profits – the profits from big successes covers the costs of multiple attempts – only a few movies will be huge blockbuster successes each year
- Multiplier – multiple ways to leverage a brand, asset or skill e.g. Disney and licensing of characters
- Entrepreneurial Profit – emphasise low cost and closeness to the customer by deliberating staying small and focused
- Specialization – customers will pay premium prices for specialist knowledge and experience
- Install Base – profits on first sales are low but profit on consumables is high – printers and cartridges, shaving razors and blades
- De Facto Standard – the dominance of Microsoft with Windows and Office
- Brand – a strong brand creates a reinforcing loop of customer preference and reassurance
- Specialty – product innovation protected by patents e.g. drugs
- Local Leadership – some businesses succeed by having a dominant position locally compared to others with a similar national market share who are much more diverse.
- Transactional Scale – big profits are made on the big transactions because revenues go up faster than costs
- Value Chain -certain stages in the value chain capture the majority of the profit e.g. Windows and Intel in PC’s
- Cycle Profit – firms in cyclical industries must work with the cycle to make enough profit in the good times to build up sufficient reserves for the cyclical dip
- After-Sales Profit – the big profits come from after sales servicing and finance. I saw this when I worked for a Caterpillar distributor where margins on new equipment were tiny but substantial on parts and servicing.
- New Product Profit – profits must be made quickly on innovative products before imitation drives down margins
- Relative Market Share Profit – traditional market share advantages still exist in some markets
- Experience Curve Profit – cumulative experience drives costs
- Low Cost Business Design – focus on reducing the cost per unit through business design innovation
The best business designs include two or three of these profit models in a way that makes sense to the customers and the business.
Final Thoughts On The Profit Zone
The authors emphasise the importance of continuing to move and develop your business design as the customer needs and priorities change.
I like this strategy quote from the CEO of Hewlett-Packard
“The single biggest problem in business is staying with your previously successful business model… one year too long.” Lew Platt
I like The Profit Zone very much and the only reason why I haven’t included it in my best strategy books is because a book about cutting edge change in business models risks getting out of date. I think there’s plenty to learn from The Profit Zone which was published in 1997 but I can’t help thinking “but what would the authors be saying about business design innovations now?”
Other Strategy Books By Adrian Slywotsky
Paul Simister is a business strategy coach who helps business owners to differentiate their businesses and develop winning strategies. Get your free copy of the ebook The Six Steps Profit Formula.
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