Books : The Profit Zone : How Strategic Business Design Will Lead You to Tomorrow's Profits ( Marketing ) ( Management )

The Profit Zone

A company paradigm shift must occur before profits can happen. Management must move away from product-centric thinking and migrate to customer-centric solutions. Re-Inventors know that customer-centric solutions help identify the business design modification and enhancements to invest resource, talent, and raw materials to build. Customer expectations, beliefs, and problems are constantly changing. Companies who listen to their customers' needs and priorities are more likely to change processes to meet the customer needs.

Traditionally, companies have focused on selling more to anyone willing to buy the companies products and services. The driving belief was growth was a function of capturing larger amounts of market share. This belief is not factually true. Many companies gained significant market share only to discover, they were not growing in profits.

As so more of the same was being advocated. Companies continued focusing on what they did well and trying too sell more without understanding the needs and priorities of the customers and more of an unwanted product does not generate high profits. As companies were small they listen to their customers, a mid growth they struck a balance in between the company and the customer, and as a large company ignored the customer needs and a priorities and focus on the company productivity. Company focus increase efficiency to deliver products and thereby gain market share believing revenue would be generated for each unit sold. The Internet and high speed communication has changed everything. Businesses are becoming more digital oriented and companies are expected to respond to the customers’ needs and priorities.

The most important question to ask is "How do I get paid?" Without a clear understanding of how profit is generated and how a business must be designed, there will be no profit. Next ask: "Who are my customers? Which customers do I not want?" Next ask: who are my innermost competitors? How are they meeting the needs and priorities of customers and thus taking away business. Who are my external competitors? Competitors that are emerging with disruptive technology that will meet the silent needs of my customers." Last, "What do I need to do to gain dominance in the market space?"

Start by identifying the profit model or models that explain, "How do we make money?"

1. Customer Solutions (Invest to know the customer, create a solution, develop the relationship.

2. Product Pyramid (At the base are products and services that are low price and high volume; at the top products and services that are high price and low volume)

3. Multi-Component (Several of the components represent a disproportionate share of the profits)

4. Switchboard (Multiple sellers communicating with multiple buyers. The more buyers and sellers join the great the organization builds on itself.)

5. Time Profit (Takes advantage of uniqueness, profit margins erode as competition seeks to imitate. Time profit companies must take the lead and maintain a "two year" lead over their competitors.) Example: Intel and Microsoft

6. Block Buster profits (Revenue realized is so powerful and fast that in a quick swoop the model pays for development and marketing costs)

7. Multiplier (Strong customer brand.) Example: Disney

8. Entrepreneur Profit (Hierarchical design with multiple subsidiaries to maintain closeness with the customer)

9. Specialization (Specialist are several times more profitable than the generalist. Characterized by lower cost, higher quality, stronger reputation, shorter selling cycles, and better price realization) Example: Home Depot

10. Install Base (Initial product sales or profits are slim and profit is realized on the follow-up products and services) Examples: HP printers and Gillette Razors

11. Defacto Standard (The more players who buy that enter in the system, the more valuable the network) Example: Microsoft, Oracle, SAP, and American Airlines

12. Brand (The Company expends significant marketing investment in order to build awareness and is reinforced by customer experience. You know Brand is working when a consumer says, "I won't change because I trust AT&T".

13. Specialty (Specialty companies enjoy a higher premium for their products and services until competitors start to imitate. Examples: Merck and 3M

14. Local Leadership (Many businesses and their company economies are totally local. Risk occurs when these companies fail to recognize they are a local business model) Example: Walmart - "Carpet bombing", county by county.

15. Transactional Scale (Transactions go up but the cost to provide the transaction does not go up as quickly.) Example: Morgan Stanley

16. Value Chain (Specific activities pass through a chain of specialist offering value)

17. Cycle Profit (Industries characterized by distinct and powerful cycle. The company can not control the cycle, but it works to maximize its position within the cycles grip. As capacity tightens the companies lead price increases, as capacity loosens, its lag price declines)

18. After-Sales Profit (The company's profit does not direct come from the sale of hte product, but the after sale financing or services of the product) Example is GE capital financing of credit cards, auto loans, and insurance.

19. New Product Profit (As new products are introduced profit margins are high and growth rapid. As the product mature the profit margins fall.)

20. Relative Market Share Profit (Companies with high market share tend to be more profitable. Large companies have price advantages due to manufacturing experiences and volume economies, such as purchasing capability and economies of scale)

21. Experience Curve Profit (Experience drives down the transactional cost)

22. Low Cost Business Design (The company trives on reducing the cost per unit through cumulative experience)

1. Who are my customers?

2. How are their priorities changing?

3. Who should be my customer?

4. How can I add value to the customer?

5. How can I become the customers first choice?

6. What is my profit model?

7. What is my current business design?

8. Who are my real competitors?

9. What is my competitors business design?

10 What is my next business design?

11. What is my strategic control point?

12. What is my company worth?

a. Return on Sales= EBIT/Sales

b. Profit Growth=Projected Earnings growth (value line)

c. Asset Efficiency=(Asset-Cash and Equivalents-Account Payable)/Sales

d. Market Value=(Shares Outstanding X Share Price)/Sales

e. Strategic Control Index=

(10) Own standard
(9) Manage value chain
(8) String of superpositions
(7) Own customer relationship
(6) Brand copyright
(5) Two year product development lead
(4) One year product development lead
(3) Commodity with 10 to 20 percent cost advantage
(2) Commodity with cost parity
(1) Commodity with cost disadvantage

In the book, the author discuss Schwabs "OneSource" switchboard model for selling mutual funds: no transaction cost and no front load. The model eliminates direct costs to the customer to purchase a mutual fund and allows the customer a cheap introduction to the market. Schwab continues to make available financial advise by agent or 3rd party financial planner and Schwab as a discount broker leverages the single source for customers to purchase mutual funds, thus reducing confusion cause from massive variety. On the flipside, the mutual fund companies pays Schwab a small commission to list their mutual fund. Schwab provides the customer a single financial report and gains the brand recognition and prestige of the mutual fund company. Furthemore since OneSource is not asset intensive, Schwab does not face excessive risk and smaller profit margins. Schwab is able to defend its position from competition by providing a high volume and low priced commodity and gain more premium fees by offerring financial advise to higher paying customers.