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Profit pools: a fresh look at strategy.
1Bain and Company, Boston, MA, USA.
Harvard Business Review
|April 7, 1998
Summary
Managers should analyze industry profit pools, not just revenue, for sustainable growth. Understanding where profits concentrate across the value chain is key to strategic advantage and long-term success.
Area of Science:
- Business Strategy
- Industrial Economics
- Management
Background:
- Many managers prioritize revenue growth, assuming profitability will follow.
- This approach is risky as revenue streams can diminish, leading to unsustainable business models.
Purpose of the Study:
- To introduce the concept of an industry profit pool as a framework for strategic analysis.
- To demonstrate how understanding profit distribution across the value chain enables profitable growth.
Main Methods:
- Defining an industry's profit pool as total profits across its value chain.
- Analyzing the complex structure and varying depths of profit pools within segments.
- Examining case studies of companies employing profit-pool strategies.
Main Results:
- Profit concentration often differs significantly from revenue concentration across industries.
- Companies can gain competitive advantage by identifying and targeting deeper segments of the profit pool.
- Successful strategies involve understanding profitability by customer, product, geography, and channel.
Conclusions:
- A deep understanding of an industry's profit pool is crucial for developing effective strategies.
- Companies that master profit-pool analysis are best positioned for long-term thriving and competitive advantage.