Profit Patterns: 30 Ways to Anticipate and Profit
from Strategic Forces Reshaping Your Business

Author: Slywotzky, Morrison, Moser, Mundt and Quella
Publisher: Random House, 1999

Comments:

  • The authors are all members of Mercer Management Consulting.
  • The lead author, Adrian Slywotzky, was recently named by the U.S. Journal of Business Strategy to a list of the top 24 business strategists of the 20th Century.
  • The book is an excellent read. It blends the right amount of real world examples with very direct ideas. At the back of the book, they have included a hold-your-hand guide to identifying profit patterns in your own business.

Synopsis:

Historically, market share was the main determinant of success. Market share may still be important, but in the present business world, great business design includes:

  • High customer relevance
  • Terrific value capture mechanisms
  • Internally consistent strategy re scope
  • Great emphasis on differentiation
  • Organizational design to support the business design

Today’s goal is to provide solutions. A business needs to seek the mindshare of customers, investors and potential employees.

Being first in and first to win creates an accelerating financial position.

Keeping an eye on the market horizon is more important than before. In a slower paced time, planning and investment in an industry was rhythmic. Now, planning must be continuous: strategic anticipation.

1. In a no-profit industry, the good years cancel out the bad years, leaving no return over time. This is a mature competitive industry without differentiation beyond price. This condition sustains through justification and hope of the players in it. There is always some explanation of why the good times are just around the corner. Non-industry players who have related products/services and decide to expand along the value chain can bust this kind of industry apart. The good customers may forsake the old players in search of higher value, if not lower price.

2. Business design innovation can move a player out of this position. By segmenting customers who seek price principally versus those who can be sold on higher value. Build a business design to meet their needs.

3. Convergence is the phenomenon described in 1), eg the modern financial services industry. This complicates the radar screen to watch the competitive horizon. It is difficult to fight this war because you must meet the new market by expanding your deliveries, and this takes you outside your expertise. Convergence occurs in three ways:

  • Suppliers expand up or down the supply chain
  • Substitute products
  • Convergence is product bundling

The strategies in supplier convergence are, first, to successfully promote your product offerings; second, to emphasize the portions of the chain which command the highest perceived value and; third, to upgrade your delivery of the lower value stuff. Convergence requires gaining access to the other aspect(s) of the bundled product. This usually involves mergers/acquisitions. It is wise to jump on the convergence wagon early, when the marriage choices are greatest.

4. Getting caught in the middle: if your positioning was in the middle of price/value, you may suffer in the global economy. The authors suggest that there are two winning foci:

  • Superior customer level customization
  • Superior solutions

Both require information management. The former in gleaning your customers’ priorities and the latter, their processes. This tends to point squarely at the sales force, who, traditionally have been adept at explaining your product and its value over the competitors’ ones, and then, hopefully, booking orders. But they have not been trained to act as active middlemen in the information exchange process to deliver customer value instead of product value.

Information management is but one of the key factors here. A complete overhaul of products, product designs, compensation systems and culture may also be required.

5. Ownership of industry standards: Can you do this alone? Is it attainable in partnership? Do you need to sell it by leapfrogging up the chain, eg “Intel Inside”? If you can’t, can you protect yourself from someone who does?

6. Significant technology breakthroughs change the landscape: Can you profit from this? Are you exposed to this?

7. Vertical integration was the winning strategy in the past… now it may be deintegration. See the stock market valuations of conglomerates today, who complain that the market doesn’t understand the value in the sum of the parts… a sort of negative gestalt. Outsourcing reversed the trend and allowed companies to be very good at certain aspects of the chain and sub out the rest. The key here is to recognize where the most important aspects of the value chain reside and position there because value and opportunity are not distributed evenly along the chain.

8. Value chain squeeze: you can get squeezed out of the middle between your customers and suppliers. Defensive strategies include additional positioning linearly up or down the chain, hopping the chain, or assisting new players to compete in the neighbouring chain link sub-markets.

9. Strengthening the weak link: your position in the value chain may suffer from poor delivery further back the chain. One answer is to move back into that business, but another is to assist to shore up those suppliers. … strategic partnering. The requirement of ISO registration is an example.

10. Re-integration: Contrary to #7, in some situations today, integration, rather than de-integration, is the right strategy. Again, this involves assessing the profitable and key points along the chain and establishing position there. If practical, it may be cheaper to achieve this through minority positions than direct acquisition. Today, the more common direction is UP the chain, closer to the end user.

The authors suggest that today companies typically manage both intangibles (intellectual capital) and hard assets. In the future, there may develop a split of managing one or the other. The operating leverage for the former is greater. Like a “conglomerate”, the share price today becomes a muddled “average” of the two leverages. A “pure play” in intangibles may allow the share price to rise more freely. This has broad strategic implications for the company – emphasis on; acquiring people and their skills and also on keeping them (compensation systems); R&D; product design, customer needs intelligence.

11. Profit shift: the age-old 80/20 rule remains relevant. Many companies take whatever business crosses their radar screen. But a detailed cost analysis may show that the bottom segment of your customer base is not profitable at the margin. A good information system is needed to execute this strategy. In the short run, in a state of excess capacity, any customer may be a good one; however, in the long run, all customers should produce good margin. The phenomenon can develop over time because equal levels of service are given to all accounts. One answer is to resegment continuously and deliver a different package of value to each segment, commensurate with its margin. A second strategy is to work on the bottom level customers through changes in terms and conditions to bring up their profitability. Thirdly, be prepared to walk away from the bottom segment of your customer base. A corollary to this pertains to the acquisition of future customers: you need to target your customer-seeking energies to yield desirable new business.

12. Micro-segmentation: it may be possible to split an existing segment into smaller slivers by distinguishing the needs of different customer groups. As a whole, the market can enlarge as a reward for delivering better value to those who will pay for it. This is facilitated in a market with heterogeneous, sophisticated customers.

13. Power shift: relative power along the chain gravitates to a direct customer. You no longer hold the dominant position in the chain. Responses include; product innovation, leapfrog the customer and sell their customer (“Intel Inside”), buy your customer.

14. Re-define your customers: if your existing market is saturated or too competitive, seek new customers, eg technophiles vs status buyers. Realignment of your marketing or product redesign can open new doors, eg luxury boxes at sports arenas. Seek out customer influencers instead of customers, eg product reviewers in the press. Within your existing customer base, move higher up the internal decision-making chain to influence those lower down making the day-to-day purchases.

15. Multiplication of channels: This has occurred in the response to end user demands to be able to buy when and where they want, eg the internet This disrupts the traditional profit distribution along the chain. If you are in the middle of the chain, establish links to the new distribution channels. If you are positioned at the beginning, establish yourself with the breadth of new channels early.

16. Channel concentration: again, the opposite of the former phenomenon may be right for your industry. Malls killed small street shopkeepers. Super stores attacked malls. The delivery in these cases was customer ease. A related phenomenon is to identify captive customer situations, eg the growth in retail outlets in airports, capturing impulse buying with no other alternatives. This is the opposite of the Field of Dreams axiom: Build it and they will come. This says: observe where they are coming to, and build it!

17. Channel compression: too many players along the channel can lead to high costs/prices and not delivering value to the end user. It may be appropriate to re-invent the chain by overstepping some players, who likely will disintegrate if you are right. The internet will test this strategy in many industries in the coming years. If you are placed along the chain at risk of being overstepped, you need to reassess your value added through product redesign. Another strategy is to seek stronger control of the end user. Can you realign with another supplier back the chain?

18. Re-intermediation: victims of channel compression can find new life in a different role. Along with the benefits of channel compression come costs. The distribution system tends to be transaction-processing oriented. This may satisfy certain market segments, but others may be dissatisfied and seek higher value. The travel industry may be re-defining itself in this fashion presently. Compression may create a confusing, impersonal matching process of buyers and sellers. This creates new opportunities to be a matchmaker, or “switchboard”, to simplify the buying process. There will only be so much room for switchboard players in a market, so you better get in early and well. Again, the internet will bear on this strategy.

19. Branding: creates differentiation in the customers’ minds, which simplifies the buying decision. Branding is not a new strategy, but it merits review in today’s world where branding opportunities are overlooked. Awareness is not branding; it is the first step towards it. The key is to understand your customers and what appeals to their loyalty to view your product as something more than a commodity. Strategies could include; creating a “user cult”, eg Harley motorcycle clubs; personification of the brand through high profile spokesperson; emotive appeal in marketing.

20. Build blockbusters: huge successes can be very profitable, eg in the entertainment and pharmaceutical industries. These may have spill-over affects to lesser offerings. This is a difficult strategy to execute successfully long term. R&D and product redesign are foremost. With this comes the need to acquire talent.

21. Profit multiplication: profit levers several times from one product, eg The Lion King becoming a movie, a video, a musical, clothes, toys, an ice-show etc. Also, eg Bloomberg re-packaging their information services through different channels and to different users. The exercise is to identify all possible vehicles for your product or brand. The complexity is that this likely will take you into different industries and different value chains, eg entertainment distribution vs clothing/toy retail.

22. Product pyramid: build a line with similar products at different price points. The low end isn’t very profitable but establishes you with a broad base of customers and acts as a firewall from competitor attack from the bottom. The higher end products carry the better margins. This suits markets with increasing customer sophistication and income stratification. The product line may even trade under different street names, egs include Gillette and Swatch.

23. Shift from products to solutions: Simple in theory – hard in practice. Requires a different mindset within the firm. You need to understand the customer’s business as well as yours. Also, not an all-time solution, as customers’ needs will change over time, requiring new solutions. Industries which have become “commoditized” are ripe for this approach.

24. Category management: Value emanates from cost savings from inventory management and margin maximization from minimizing stock-outs. Requires strong knowledge of customer habits.

25. Convert from product-based to knowledge-based: Simply described as “shed the assets: sell the knowledge”, eg hotels don’t own properties anymore, they manage them.

26. Convert from knowledge-based to product-based: intellectual assets may be convertible into products, with a broader selling reach and operating leverage.

27. Skill shift: as the business design changes, to you must look at your people skills. If customer service becomes the cornerstone, you must have people with customer service expertise. If product redesign is critical, you need good designers. This involves training and/or bringing in new people.

28. Pyramid structure to network: you need more ears to the ground to understand customer needs and feed that back on a timely basis. Pyramid structures are too cumbersome. Creating internal networks of smaller groupings makes for faster input/response. The high talent/high impact players in your firm need to be more exposed to the outside than others. What proportion of your staff touch customers?

29. Cornerstoning: focus one doing one thing well, then identify another logically-related thing to do well. Again, easy in theory, but harder to identify what the next, best thing is. Trial-and-error is appropriate, but takes time and money.

30. Embrace the digital world: technology opens the potential for a complete redefining of customer/supplier relationships. The customer can be wired in, telling you what it wants, rather than you guessing.