Who are your competitors, really? Dell obviously competes with Hewlett-Packard, Lenovo/IBM, and Gateway in personal computers and accessories, and it is a leader in that market. But look at the entire value chain in this business and you get a different perspective. Much of the profit in this chain flows to chip suppliers such as Intel and Advanced Micro Devices (AMD), and to software suppliers such as Microsoft. Intel and Microsoft may be Dell's partners, but they also compete for profits in the overall industry.
We call the analysis of the total profit made by you, your competitors, and other players in the value chain "profit-pool analysis." Smart general managers constantly try to protect existing pools and take over or create new profit pools. So, of course, do their competitors.
The challenge in this kind of competition is that the profit pool is always shifting. A primary reason is that customers' preferences and behaviors are always changing, either because they grow dissatisfied with what they are currently buying, or because an innovative company learns how to offer them better value. If you were to map your industry's profit pool 10 years ago, say, and compare it with a similar map today, the comparison would almost certainly show dramatic changes in the distribution of profits by competitor. A profit-pool map 5 or ten 10 from now probably won't look much like today's either. The maps would also help to explain the reasons behind the changes.
Profit pools shift, but they don't shift randomly. They shift in predictable directions as customers' tastes and behaviors change, and as other forces in the marketplace (or outside of it) exert their influence. What's more, a company's share of the profit pool is seldom exactly proportional to its share of revenue in the value chain. This counterintuitive notion has powerful implications for how you compete for profits.
To learn more about profit pools, read the Harvard Business Review articles, "How to Map Your Industry's Profit Pool" and "Profit Pools: A Fresh Look at Strategy"
Great managers anticipate profit-pool shifts and plan their strategies and tactics accordingly.
Implications for the general manager:
Read about the fourth law, Simplicity gets results
- Develop a fact-driven map of the profit pools, current and time-phased, within your industry and throughout your value chain. The map will show you who's making money in your industry, how they're making it, and how the pools are shifting.
- Analyze your industry for threats and opportunities along the four dimensions outlined in this book, and assume your competitors are doing the same. The dimensions are 1. everyday changes in customer preferences and behavior; 2. innovations from inside or outside your industry that drive customer shifts; 3. changes in bargaining power of customers and suppliers; and 4. changes in the business environment.
- Utilize the tools mentioned in this book to effectively segment your customer base, understand their specific needs, and assess both your own and your competitors' performance against those needs. Assess future growth rates of those segments and their impact on the profit pools most relevant for your business. Then develop clear actions to shore up your weaknesses and to capitalize on competitor weaknesses.
- Develop a robust strategy to optimize your share of the future profit pool, and look for other high-growth pools where you may have the capabilities you need to be successful. Assume that your competitors are doing the same.
- Be purposeful and relentless in assessing and tracking both evolving customer needs and threats from competitors and changes in the environment.