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The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits

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In Part One, the authors argue that "market share is dead" as an overall strategy goal. Instead, to achieve sustained growth in profits and shareholder value, companies need a "customer-centric business design" which anticipates and addresses constantly shifting customer priorities. There is no single design which fits all circumstances. but the most effective designs will start with customer priorities.

In Part Two, the co-authors shift their attention to several "reinventors" who have achieved extraordinary success. Most are familiar: Welch, Hayek, Goizueta, Schwab, Grove, Eisner, Hatsopoulos, Barnevik, and Gates. However, and this is an excellent example of the book's unique and substantial value, Slywotzy & Morrison note that "the principles and techniques of reinveniting a company's business design to get it into the industry's profit zone...apply with equal force to small companies, to divisions of larger companies, and to the middle managers who run them. In fact, the reinventors we will be reading about in the future are already honing their skills at innovative business designs today." The authors then examine several smaller firms such as Madden Communications, Cardboard Box, Inc., and Clozaril Patient Management System.

In Part Three, the authors provide a "handbook" which explains in detail how innovation works.This book is relevant to all organizations (both for-profit and non-profit) which seek to increase their economic value. Non-profits must also make critically important decisions (such as those involving allocation of resources) if they are to achieve their objectives. The appendices provide additional guidance so that the reader can implement whichever of the book's ideas and suggestions are most relevant.

If optimizing your organization's profits is your destination, here's a map to get there.

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 those customer needs.

Traditionally, companies have focused on selling more to anyone willing to buy 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.

The authors main argument is that market share does not equate always to profits because the customers needs and priorities are changing. This observed fact means companies not responding to the customer needs and priorities will loss market share even if they currently have massive market share. Failure to hear the customer needs and priorities will lead to the lost of profits: IBM (IBM had the market share in mainframes)yet faced decreasing trends in profits. IBM moved towards customer solutions. IBM mainframe business struggled (Read Who said Elephants can't dance) - IBM moved to solutions. IBM profits increased as they responded to the customer not the fact that they acheived market share. Market share is an indicator the company is meeting the customer needs not the reason to meet the customer needs. The egg before the chicken philosophy where meeting the customer needs produces the gold egg of profits.

As with more of the same philosophy so was the advocacy. Companies continued focusing on what they did well and continue tryingtoo sell more of the same without understanding the needs and priorities of the customers; sustaining a false premise that more of an unwanted or unresponsive product will generate high profits. When companies were small, they listen to their customers; when they became a mid size companay, they struck a balance in between the company and the customer; and as a large company they mostly ignored the customer needs and a priorities and focused on company productivity. So the company eventually focused only on increasing efficiency and delivering products with the goal of gaining market share believing revenue would be generated from each unit sold. The internet and high speed communication has changed everthing. Business are becoming more digital 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?"

22 Profit Models

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)/Salesd
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 discussed, Schwabs "OneSource" switchboard model for selling mutual funds: no transaction cost and no front load. The brokerage model eliminated direct customer costs by providing zero transaction cost mutual fund and allowed the customer a cheap introduction to the market. Schwab continued to make available financial advise by agent or 3rd party financial planner and Schwab as a discount broker leveraged the single source for customers to purchase mutual funds, thus reducing confusion cause from massive variety. On the flipside, the mutual fund companies paid 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.

This outstanding book has 12 incredible questions. Answer these questions and you will be as successful as Bill Gates, Jack Welch, and Roberto Goizueta, as this incredible book points out using them as examples! Here are a few samples to whet your appetite: (1) Who are my customers? (7) What is my current business design? (12) What is my company worth? In only 15 pages, you can answer these questions for yourself. What a great deal! I think you should quickly order this book and solve these problems for yourself. You'll be amazed how much you learn.

The Profit Zone is an intriguing read. This book is the precursor to Value Nets, but is still a great read. The book starts out by getting you focused on your customer, but quickly switches gears to ensuring that you are capturing profit for the value that you are providing. If your industry is changing quickly and margins are falling this book is well worth a read!

One of the most useful sections of this book is the one covering different profit models. The book covers 22 different profit models. For example, Product Pyramid Profit, which is basically having products tailored to customers desires that cover customer income and preferences. An example of this would be GM, which sells cars, but varies features and prices (Chevy to Cadillac) to cover a range of customer incomes.

One of the revelations of this book is that many of these profit models may have a five to seven year life (or shorter). Having a range of profit models allows the reader to see how to apply several profit models or understand transitions from profit model to another.

The Profit Zone is basically broken in three sections:

The first lays out the importance of the customer and the component that make up a business model. See Value Net review for more details, but basically value proposition, scope, profit capture and strategic control.
The second section is extremely useful in that is shows business that have due to changes in their industry or customers have had to recreate their profit model. Companies such as GE, Microsoft, Charles Schwab as well as others are used as case studies in business design reinvention.
The third section is a toolkit for apply "profit zone" thinking to your business.

The Profit Zone does a great job in highlighting that business is always changing and the areas where you can make money and sustain high profits are changing with it. The profit models in this book are further developed in a follow on book called Profit Patterns. Profit Patterns greatly expands the list of profit models and looks at them in greater detail.

Why not - it is so thin that you will be arrested for indecent exposure.

The core information is very good - but that's chapters one and two - the rest is the same stuff repacked, reheated, reworked, repeated and the remainder of the book can be dispensed with.

There is significant value in the core logic and the book is probably worth that much. But do not take this on a long flight unless you want to see the movie several times as the book will not sustain you for more tham 30 minutes.

There are some wonderful ideas in the profit zone and many reminders of things we have heard about for years and often forget. For example, the real focus on the customer is critical to success and we must always identify which parts of the business generate the profits, or are THE PROFIT ZONE. I remember a study done in the 1970s which found that most of a brand's profit came from the smallest size can that the product could be purchased in. There are lots of other examples here. The author's are correct in that the most successful companies have been innovators in business design. Ten companies are profiled, althugh surprisingly, Dell Computer is not one of them, having innovated a new profitable business model based on their "Customer Initiative". The authors get into a little trouble when they try to get quantitative. The Value Growth Curves have too few points to draw useful long-term conclusions, but the Business Design Tables are interesting because they will make you think about your business structure. The two best parts of the book are the Pilot's Checklists of questions to ask yourself and Chapter 15, the "How To" section to get discussion and hopefully agreement going inside your company to find and grow THE PROFIT ZONE. For more ideas on how to develop new business models that allow you to achieve twenty times the usual benefits or get there twenty times as fast, I also recommend you read THE 2,000 PERCENT SOLUTION. THE PROFIT ZONE may just be one of your solutions.

From my personal days of retail, our motto was increase sales everything else will follow. Honestly, this is a short sided method of trying to increase profits. Slywotzky has one evaluate where is the market going, who should your customers be, where is the value migrating towards, so you can be more effective in business. Slywotzky presents a very well thought out method of looking at your business or a potential business and asking those probing questions that seperate you from your competitors.
He offers a variety of business models as well as profit models. All are valid, and hybirds are suggested, but the point is to know what you are driving towards, and develop your strategy after this. I have read many different business books, and this one has to be one of my favorite. If you enjoyed Built to Last or from Good to Great, you will like the depth this book has to offer.

There is no question that sustained profitability must be the underlying intent of any economic firm. Likewise, the "Business Design" must be aligned with this intent. However, this is only half the puzzle. How does the firm "deliver the goods." The answer takes us to its Resources and Capabilities. R&C enable Strategic Flexibility. This is not an easy topic to cover with a pedantic understanding of the economic firm. Can you imagine a U.S. Military who wanted to create "full spectrum dominance" but never spent the time, energy and money investing in superior technologies, doctrine, and soldiers? The book far misses this point.

This book really has you answer some questions about planning that could separate you from you competitors. Really helps you evaluate you and your business. Learn how to quickly evaluate and solve problems. I recommend.

If you think something is missing from the place you work, this book just may provide you with the insight and the answer.