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1、Author: Dana PeckReviewer: Michael CollinsProfit PoolsDecember1998Copyright1998Bain&Company,Inc.1CHIProfit PoolsAgendaProfitPoolsConceptApplicationsProfitPoolStepsClientExampleKeyTakeaways2CHIProfit PoolsProfitpoolsarethetotalprofitsearnedinanindustryatallpointsalongtheindustrysvaluechainPatternofpr
2、ofitconcentrationinanindustryisverydifferentfromthepatternofrevenueconcentration(seeexample)Forexample,profitsandrevenuesintheautomotiveindustrycanbedividedamongmanyvaluechainactivities-vehiclemanufacturing,newandusedcarsales,gasolineretailing,insurance,after-salesserviceandparts,andleasefinancing-a
3、lthoughcarmanufacturinganddealersaccountforalmost60%ofindustryrevenue-autoleasingandfinancingareby farthemostprofitablebusinessesWhat are Profit Pools?Profit pools answer the question: “Where and how is money being made?”Source:ProfitPools:AFreshLookatStrategy(May-June1998):OritGadieshandJamesL.Gilb
4、ert3CHIProfit PoolsWhat is Profit?Accountingprofit-representscompanysearningsasformallyreported-mostcommonlyusedasthebasicprofitmeasure-examplesincludenetincomeorearningspersharecalculationsReturnoninvestment-representscompanysearningsaftertakingintoaccountthecostofcapitalinvestedinthebusiness.Twoco
5、mmonlyusedmeasuresinclude:-ROC,accountingbasedReturnonCapital(bookvalue)-ROIC,accountingbasedReturnonInvestedCapital(bookvalue)Cash-flowcontribution-companysearningsbeforetakingfixed-assetandcapitalcostsintoaccount(e.g.EBITDA)-representstheamountofcashleftfromasaleaftersubtractingthevariablecostsass
6、ociatedwiththatsale-usedasabasisfordecision-makinginmature,highfixedcostandcyclicalindustriesProfit can be defined in one of three ways: Be aware of differences in accounting standards when evaluating companies with profits spanning different industriesSource:HowtoMapYourIndustrysProfitPool(May-June
7、1998);OritGadieshandJamesL.Gilbert4CHIProfit PoolsRevenue vs. Profit SplitTruckFinancePartsandServiceBodyManufacturingandTruckAssemblyChassisManufacturingandSalesTruckFinancePartsandServiceBodyManufacturingandTruckAssemblyChassisManufacturingandSalesRevenueSplitbyActivityProfitSplitbyActivity$3,865M
8、M$600MM0%20%40%60%80%100%PercentofTotalSource:PBIRProtheU.S.TruckBodyIndustry;R.L.PolkRegistrationDatabase;LiteratureSearch;TEMFinancials;PriorBainPLPanalysis(7/96);BainestimatesThe pattern of profit concentration in the truck manufacturing industry is very different from the pattern of revenue conc
9、entration.Truck Manufacturing Business Example5CHIProfit PoolsWhy Use Profit Pools?OfferaviewoftheunderlyingindustrystructureHelpillustratetheeconomicandcompetitiveforcesdrivingtheindustrysprofitdistributionOfferadifferentperspectiveonanindustryIllustraterelationshipbetweenprofitandrevenuesHighlight
10、spotentialwatchouts(chokepointsinthevaluechain)whichcaninfluencetheprofitflowinanindustryIllustrate the Current State of the IndustryProvide a Competitive Advantage to Your ClientHelp to Develop Innovative Strategies HelpcompaniesseewhattheirrivalsdontseeFosterthepotentialtodictatethetermsofcompetit
11、ionwithintheindustryKeepcompaniesabreastofchangesinrapidlychanging(turbulent)industries-alertpotentialshiftsinprofitdistributionalongthevaluechain-illustratepotentialchangeinprofitsourcesfromnewentrantsHelpguideimportantdecisionsaboutacompanysoperationandstrategyEncouragerethinkingolddecisionsandpur
12、suingcounterintuitiveinitiativestocreateandcontrolprofitpoolsReducethepossibilityofblindspotsinacompanysstrategicvision-reducepotentialtooverlookattractiveprofitbuildingopportunities-lessonpotentialtobecometrappedinareasofweak/fadingprofitabilityExampleapplicationsCompanies that recognize the variab
13、ility of profitability and can exploit the deepest pools will earn superior returns.Source:ProfitPools:AFreshLookatStrategy(May-June1998):OritGadieshandJamesL.Gilbert6CHIProfit PoolsHow Profit Pools Illustrate the State of the IndustryThevaryingconcentrationsofprofitalongthevaluechain(knownastheshap
14、eoftheprofitpool)reflectthecompetitivedynamicsofabusiness-profitconcentrationsresultfromtheactionsandinteractionsofcompaniesandcustomers-profitpoolsforminareaswherebarrierstocompetitionexist-profitpoolsexistinareasthathavebeenoverlookedbycompetitorsEverymarkethasanunevendistributionofprofitbetweenpr
15、oductcategories,customergroups,geographicregionsand/ordistributionchannelsProfitpoolsarenotstagnant-aspowershiftsamongtheplayersinanindustry(competitors,suppliers,andcustomers),thestructureoftheprofitpoolchangesThere are many different sources of profit in any businessProfit pools provide a means to
16、 evaluate the competitive dynamics of an industry. Source:ProfitPools:AFreshLookatStrategy(May-June1998):OritGadieshandJamesL.Gilbert7CHIProfit PoolsProfit Pool Watchouts (Computer Industry Example)Examples:Be aware of “choke points” - particular business activities that control the flow of profits
17、throughout an industry. Impact:Control of a choke point can influence the distribution of profits among competitors and more distant value-chain participantsIntelsdominanceofmicroprocessorsEstablishmentofanindustrywidestandardthatallcompaniesmustnowobeyMicrosoftsdominanceofWindowsConsolidationofcont
18、roloverthecustomerinterface*includesoperatingsystemandapplicationsoftwareSource:ProfitPools:AFreshLookatStrategy(May-June1998):OritGadieshandJamesL.GilbertMicro-processorsOtherComponentsPersonalComputersSoftware*PeripheralsServices8CHIProfit PoolsMicro-processorsOtherComponentsPersonalComputersSoft-
19、warePeripheralsServices0%10%20%30%40%OperatingMarginShareofIndustryRevenueProfit Pool Watchouts (Computer Industry Example Con.)*includesoperatingsystemandapplicationsoftwareSource:ProfitPools:AFreshLookatStrategy(May-June1998):OritGadieshandJamesL.GilbertAnalyzingtheprofitpoolhasenabledDelltobeprof
20、itableintheleastprofitablepersonalcomputerssegment(seeexample)Although choke points exist in the computer industry, it is still possible for companies to create and leverage new profit pools within this industry.PC Industry Profit Pool100%9CHIProfit Pools0%5%10%15%20%25%OperatingMarginThe automotive
21、 industry encompasses many value-chain activities. The most profitable areas of the car business are not the ones that generate the biggest revenues. AutomanufacturingNewcardealersUsedcardealersAutoloansLeasingGasolineAutoinsuranceServicerepairAftermarketpartsAutorentalShareofIndustryRevenue100%U.S.
22、 Auto Industry Example10CHIProfit PoolsKey Questions to Help Develop Innovative StrategiesWhyhaveprofitpoolsformedwheretheyhave?Aretheforcesthatcreatedthosepoolslikelytochange?Willnew,moreprofitablebusinessmodelsemerge?Howdosomeprofitsourcesexertinfluenceoverothersandshapecompetition?Howdowegainadis
23、proportionateshareofindustryprofits?Building an understanding of profit pools puts strategic thinking on a firm footing and prompts the following questions:Source:ProfitPools:AFreshLookatStrategy(May-June1998):OritGadieshandJamesL.Gilbert11CHIProfit PoolsAgendaProfitPoolsConceptApplicationsProfitPoo
24、lStepsClientExampleKeyTakeaways12CHIProfit PoolsApplications (1 of 2)AnalyzingprofitpoolsallowedU-Haultoidentifyalargeuntappedsourceofprofitinthelowmargintruckrentalbusiness-seizedthefirstmoveradvantageandenteredaccessorybusinessatalowcost-reducedprices(andprofits)incoretruckrentalbusinesstoattractc
25、ustomersforhighermarginaccessorybusinessInanticipationofapotentialreconfigurationoftheprofitpoolfrompharmacy-benefitmanagers(PBM),MerckandothersverticallyintegratedthevaluechainandacquiredPBMs-insulatedthemselvesfromnewentrantsandprotectedtheirexistingsourcesofprofits-gainedgreateraccesstopatientinf
26、ormation-increasedthelikelihoodthatthepoolwouldevolveinabeneficialratherthandestructivewayCompanies can use their understanding of profit pools in different ways:Identify New Sources of ProfitChart Acquisition and Expansion StrategiesExamplesSource:ProfitPools:AFreshLookatStrategy(May-June1998):Orit
27、GadieshandJamesL.Gilbert13CHIProfit PoolsApplications (2 of 2)DellComputerCorp.utilizestheprofitpoolapproachtoevaluatewhichcustomerstopursueandwhichchannelstouse-directsalesapproachallowsDelltokeepaportionofdealersprofitsforitselfandtosharetherestwithcustomersthroughlowerprices-regularresegmentation
28、ofcustomerbaseenablesthemtoidentifythemostprofitablecustomersandreactquicklytonewsourcesofprofitAfterrecognizingthattheindustrysprofitpoolwasdrivenbythepremiumbeersegments,AnheuserBushrefocusedtheirstrategytoexpandtheirshareofthepremiumsegment-gaineddominanceofthepremiumsegmentthroughincreasedmarket
29、ingofpremiumbrandsandbymanagingthepricedifferentialsbetweenpremiumanddiscountbrands-verticalintegrationintocanproductionraisedcompetitivebarriersaroundthepoolbycuttingmanufacturinganddistributioncostDevelop Distribution StrategyGuide Pricing, Product and Operating DecisionsThe company that sees what
30、 others do not will be best prepared to capture a disproportionate share of industry profitsSource:ProfitPools:AFreshLookatStrategy(May-June1998):OritGadieshandJamesL.Gilbert14CHIProfit PoolsAgendaProfitPoolsConceptApplicationsProfitPoolStepsClientExampleKeyTakeaways15CHIProfit PoolsMapping a Profit
31、 PoolMapping a profit pool involves four steps.Define the PoolDetermine the Size of the PoolEstimate the Distribution of ProfitsReconcile the EstimatesTasks:IdentifywhichvaluechainactivitiesinfluencetheindustrysabilitytogeneratecurrentandfutureprofitsDevelopabaselineestimateoftheprofitsgeneratedbyal
32、lprofitpoolactivitieswithinthevaluechainDeterminetheprofitsgeneratedbyeachactivitywithinthevaluechainComparetheresultsofstep2and3,andreconcilethenumbersListofvaluechainactivitiesinprofitpool(insequentialorder)Estimateoftotalprofitpools(maybearange)PointestimatesofprofitforeachvaluechainactivityFinal
33、estimatesofactivityandtotalpoolprofitsOutput:Step 1:Step 2:Step 3:Step 4:Source:HowtoMapYourIndustrysProfitPool(May-June1998);OritGadieshandJamesL.Gilbert16CHIProfit PoolsGuidelines (Defining the Pool)Defining the pool involves identifying value chain activities relevant to the business.Takeabroadvi
34、ewofthevaluechain-lookbeyondtraditionalindustrydefinitionsExaminetheindustryfrom3perspectives-client-competitors-customersTalktoindustryplayersandanalysistouncoverneworemergingbusinessmodelsDontdisaggregateactivitiesmorethannecessaryConsiderparallelsfromotherindustries-arethereactivitiesthatcouldsub
35、stituteforactivitiesinthisindustry?The way you define your profit pool is unlikely to coincide with any traditional industry definitionSource:HowtoMapYourIndustrysProfitPool(May-June1998);OritGadieshandJamesL.Gilbert17CHIProfit PoolsGuidelines (Determining the Size of the Pool)Determining the size o
36、f the pool involves developing a rough, but accurate baseline estimate based on the available data.TaketheeasiestanalyticalroutesavailableFocusonthelargestcomponentsfirst-largecompanies8startwiththebiggestplayerswhoaccountforalargeportionoftheindustrysprofits8gaugetheprofitsofthesmallerplayersbyadju
37、stingtheleadersmarginstoaccountforthesmallerplayerscompetitiveadvantagesordisadvantages8addtheprofitstogether-highvolumeproductsConsiderbuildingestimatesusingtwodifferentmethodologies(panylevelvs.productlevel)soyoucancompareanswerstoseeifyouareintheballparkrangeSource:HowtoMapYourIndustrysProfitPool
38、(May-June1998);OritGadieshandJamesL.Gilbert18CHIProfit PoolsGuidelines (Estimating the Distribution of Profits)Estimating the profits for each value chain involves creative thinking.Gowherethedatais(e.g.products,customers,channels,companies,orregions,etc.)-useproxiesifrelevantdataisunavailablePriori
39、tizefocus-lookatclienteconomics,thenlargepureplayers,largemixedplayers,thenasampleofsmallerplayers-usethe80/20rule-inmostcases20%ofthecompaniesconstitute80%oftherevenuesShiftbetweenaggregationanddisaggregationinanalysis-aggregations-useinindustrieswheremostoftheplayersfocusononevaluechainactivity“Pu
40、replayers”-disaggregation-youwillneedtodisaggregatecompanysfinancialdataiftheindustrysplayersareverticallyintegrated“mixedplayers”Source:HowtoMapYourIndustrysProfitPool(May-June1998);OritGadieshandJamesL.Gilbert19CHIProfit PoolsGuidelines (Reconciling the Estimates)Developing final estimates of acti
41、vity and total profits can be an iterative process.Comparetheestimateoftotalprofitpools(top-downapproach)withestimatescalculatedforeachvaluechainactivity(bottoms-upapproach)CheckassumptionsandcalculationsifthenumbersdontaddupCollectadditionaldataifnecessaryResolveinconsistenciesSource:HowtoMapYourIn
42、dustrysProfitPool(May-June1998);OritGadieshandJamesL.Gilbert20CHIProfit PoolsAgendaProfitPoolsConceptApplicationsProfitPoolStepsClientExampleKeyTakeaways21CHIProfit PoolsTruck Manufacturing Business ExampleActivities:Performed By:ProvidepartsfortruckchassisandbodyPerformpreventativeandemergencyservi
43、ceontruckchassisandbodyBuildtruckbodytocustomerspecsPreparebodyforandmanageassemblyprocessSellbodytocustomerDeliverintegratedunittocustomerOfferfundsasloansfortruckpurchaseArrangeloanandleasetransactionsSellchassisto/takeorderfromcustomerManageconnectionofchassisandTEM*Buildtruckchassisaccordingtocu
44、stomerspecsCollectcomponentsfrommanufacturersChassismanufacturerChassisdealerIndependentgarageorpartsstoreTEMChassisdealerChassismanufacturerTEMChassisdealerChassismanufacturerTEMChassismanufacturerChassisManufacturingChassisSalesBodyManufacturing,SalesandAssemblyParts&ServiceRetailFinanceNotes:*Tru
45、ckEquipmentManufacturersThe first step was to define the pool by identifying the value chain activities relevant to the business. Severe Service Value Chain (Defining the Pool)22CHIProfit PoolsOtherFreightlinerNavistarPeterbiltSterlingMack$500-700MM0%20%40%60%80%100%EstimatedPercentofTotalProfitPool
46、sSevere Service Vehicle Profit Pool (Determining the Size of the Pool)Source:BainanalysisEstimatedprofitsfromtop5companiesbasedon10KsandannualreportsPerformed80/20analysistodeterminetotalprofitpool-assumed20%ofthecompaniesconstituted80%oftheprofits-estimatedprofitsofremaining20smallercompaniesRealit
47、ycheckedestimateswithroughindustrycalculations-Estimatedtotalprofitpoolaround$500-$700MMbasedon:8$3.9Bindustryrevenues8assumedaveragegrossmarginsof13%-18%MethodologyTruck Manufacturing Business ExampleA rough estimate of the total profit pool was built using overall profit estimates from the top 5 c
48、ompetitors. 23CHIProfit PoolsNote:OperatingMarginusedasthemeasureofprofitabilitySource:CompanyFinancials;AnalystsReports;CompanyInterviewsTotalIndustryMcNeilusHeilLeachKnapheideOmaha Vactor Ottawa Advance RestofIndustry7.1%12.0%9.0%9.0%8.6%8.2%6.6%5.8%3.0%3.9%0%3%5%8%10%13%OperatingMarginsforBodyCom
49、paniesProfit estimates were generated for each activity based on the operating margins of the top industry players.Truck Manufacturing Business ExampleExample Activity: Body ManufacturingBody Company Margins (Determining the Distribution of Profits for an Activity within a Value Chain)24CHIProfit Po
50、olsOtherFreightlinerNavistarPeterbiltSterlingMackTruckFinanceBodyManufacturingandTruckAssemblyPartsandServiceChassisManufacturingandSalesTopDownBottomsUp$500-$700MM$600MM0%20%40%60%80%100%EstimatedPercentofTotalProfitPoolsSevere Service Vehicle Profit Pool (Reconciling the Estimates)Source:Bainanaly
51、sisChassis+Parts&Services+BodyManufacturing+FinancetherangeapproximatedinthetopdownapproachFinalestimatesforeachvaluechainactivityiswithintherangeofouroriginaltotalprofitpoolestimateTruck Manufacturing Business ExampleTotal profit estimates from the top down approach were compared to those from the
52、bottoms up approach.25CHIProfit PoolsOtherGeneralMotorsVolvoKenworthFreightlinerNavistarPeterbiltSterlingMackChassisDealersOtherOttawaAdvanceMixerVactorOmahaStahlLeachKnapheideMcNeilusHeilChassisDealersChassisManufacturersChassisDealersChassisManufacturingChassisSalesBodyManufacturing,SalesandAssemb
53、lyTruckFinancePartsService$305MM$35MM $60MM $55MM $85MM $60MMTotalEBIT=$600MM0%20%40%60%80%100%PercentofTotalContributioninEachActivityOnce the estimates were reconciled, the final profit map enabled the client to see which segments were the most profitable and which controlled the majority of profi
54、t pool.EstimatedMargin:12.3%1.4%7.1%24.6%11.2%Truck Manufacturing Business Example35.0%Source:PBIRProtheU.S.TruckBodyIndustry;R.L.PolkRegistrationDatabase;LiteratureSearch;TEMFinancials;PriorBainPLPanalysis(7/96);BainestimatesSevere Service Vehicle Profit Map (1997)26CHIProfit PoolsDealerownershipwo
55、uldcreateaccesstohighmarginactivitiesChassismanufacturingandaftermarketpartsaremostprofitableactivitiesHighfragmentationandlowprofitabilitymakebodymanufacturingunattractiveBodyjointventuresattractiveifleadtogreaterchassisoraftermarketshareDealerscontrolaccesstohighmarginfinanceandpartsandserviceForw
56、ardintegrationintobodieshasnotoccurredClientshouldfocusongainingshareinchassismanufacturingand/orcapturingagreaterpercentageoftruckfinanceandpartsandserviceThe profit map helped the client evaluate potential markets and their forward integration strategy. Truck Manufacturing Business ExampleProfit P
57、ool Summary27CHIProfit PoolsAgendaProfitPoolsConceptApplicationsProfitPoolStepsClientExampleKeyTakeaways28CHIProfit PoolsProfitpoolsarethetotalprofitsearnedinanindustryatallpointsalongtheindustrysvaluechainCompaniesthatrecognizethevariabilityofprofitabilityandcanexploitthedeepestpoolswillearnsuperio
58、rreturnsBuildinganunderstandingofprofitpoolsputsstrategicthinkingonfirmfootingillustratesthecurrentstateoftheindustryprovidesacompetitiveadvantagetotheclienthelpsdevelopinnovativestrategiesTherearemanydifferentsourcesofprofitinanybusinessControlofachokepointscaninfluencethedistributionofprofitsamong
59、competitorsandmoredistantvaluechainparticipantsProfit Pools ConceptKey Takeaways (1 of 2)29CHIProfit PoolsProfit Pool StepsKey Success FactorsKeysuccessfactorsinclude:takingabroadviewofthevaluechain,examiningtheindustryfromdifferentperspectives,buildingestimatesfrommultipleperspectives,prioritizingf
60、ocustolookatthelargestandeasiestcomponentsfirst,lookingatrelevantinternalandexternalcomparables,gatheringandanalyzingdata,andcreativethinkingTherearefourstepsindevelopingaprofitmap:DefinethepoolDeterminethesizeofthepoolEstimatethedistributionofprofitsReconciletheestimatesKey Takeaways (2 of 2)30CHIProfit PoolsTakeaway SlidesProfit Pool ConceptProfit Pool UsesProfit Pool StepsProfit Pool Map31
