PROFIT POOLS - A FRESH LOOK AT STRATEGY

In charting strategy, many managers focus on revenue growth, assuming that profits will follow. But that approach is dangerous: today's deep revenue pool may become tomorrow's dry hole. To create strategies tha t result in profitable growth, managers need to look beyond revenues t o see the shape of their industry's profit pool. The authors define an industry's profit pool as the total profits earned at all points alon g the industry's value chain. Although the concept is simple, the stru cture of a profit pool is usually quite complex. The pool will be deep er in some segments of the value chain than in others, and depths will vary within an individual segment as well. Segment profitability may, for example, vary widely by customer group, product category, geograp hic market, and distribution channel. Moreover, the pattern of profit concentration in an industry will often be very different from the pat tern of revenue concentration. The authors describe how successful com panies have gained competitive advantage by developing sophisticated p rofit-pool strategies. They explain how U-Haul identified new sources of profit in the consumer-truck-rental industry; how Merck reached bey ond its traditional value-chain role to protect its profits in the pha rmaceuticals industry; how Dell rebounded from a misguided channel dec ision by refocusing on its traditional source of profit; and how Anheu ser-Busch made a series of astute product, pricing, and operating deci sions to dominate the beer industry's profit: pool. The companies with the best understanding of their industry's profit pool, the authors a rgue, will be in the best position to thrive over the long term.