LECTURE THREE: VALUE MIGRATION AND PROFIT POOLS Subject 1. Value Creation 2. Value Migration 3.

The Transitional Stages of Competitiveness 4. Profit Zones / Profit Pools 5. Summar ". #is$ussion %uestions !. &eferen$es / &ea'ing (ist Page 2 3 4 5 ! ! !

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1. Value C eat!"# )alters *2++2, suggests that the organisation-s value $hain .e$ome merge' /ith those of other value $hain mem.ers. 0n important feature is the role of information management that provi'es a $oor'inating a$tivit . 1ther authors have ma'e $ontri.utions. 1f parti$ular interest is that of 2orman an' &amire3 *1443, /ho suggest 5strateg is the art of $reating value6the /a a $ompan 'efines its .usiness an' lin7s together /ith onl t/o resour$es that reall matter in to'a -s e$onom 8 7no/le'ge an' relationships on an organisation-s $ompeten$ies an' $ustomers9. The see the value $hain as an anal ti$al tool that fa$ilitates strateg 56strateg is primaril the art of positioning a $ompan in the right pla$e on the right value $hain : the right .usiness; the right pro'u$ts an' mar7et segments; the right value<a''ing a$tivities9. The go on to a''8 5Their fo$us of strategi$ anal sis is not the $ompan or even the in'ustr ; .ut the value $reating s stem itself; /ithin /hi$h 'ifferent e$onomi$ a$tors : suppliers; .usiness partners; allies; $ustomers : /or7 together to $o<pro'u$e value. Their 7e strategi$ tas7 is the re$onfiguration of a$tors in or'er to mo.ilise the $reation of value in ne/ forms an' . ne/ pla ers6their un'erl ing strategi$ goal is to $reate an ever improving fit .et/een $ompeten$ies an' $ustomers9. The value $hain has an e=pan'e' role. >t .e$omes an integral $omponent in the strateg pro$ess 56the evaluation of the $ompan -s $ore $ompeten$e an' it-s fit in the overall $reation of value9. The ?uestions to .e as7e' are8 )hat is the $om.ination of value 'rivers re?uire' . the target $ustomer group@ )hat are the impli$ations of 'ifferent 'e$isions@ )hat are the impli$ations for $osts8 'o e$onomies of s$ale or s$ope e=ist@ 0re there opportunities for tra'e<offs to o$$ur .et/een the value $reation s stem partners@ )alters *2++2, also suggests 5it has .een suggeste' that man arguments a.out $reating value are onl a.out $ustomer satisfa$tion an' assume profit ma .e ta7en for grante'. Ao/ever; $ompanies nee' to thin7 a.out their $omparative a'vantages in the value $hain even .efore the start thin7ing a.out ho/ to re$onfigure it for their $ustomers. >f the 'i' not; the are not ma7ing strateg B the are simpl engaging in .usiness pro$ess re<engineering9.

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$. Value M!g at!"# )alters *2++2, suggests value migration o$$urs as .oth e$onomi$ an' sharehol'er value flo/s a/a from o.soles$ent *an' o.solete, .usiness mo'els. Sl /ot37 *144", $ite' in )alters *2++2, argue that ne/ mo'els offer the same .enefits to $ustomers .ut at lo/er $ost . $hanging the mo'el stru$ture. This $hange often results in a restru$turing of profit sharing throughout the .usiness mo'el. Cren *2++1, ?uotes Shremp *CD1; #aimler Chr sler, /ho e=presses the vie/8 56/ithin 1+ ears the pri$e of a $ar /ill represent onl a ?uarter of the total value provi'e' to a $ustomer /ith the .alan$e $onsume' in maintenan$e; finan$e an' other servi$es9. Sheeh ; Era$e an' Fra3ier *144", sho/ that value shifts over time. 1ver the $ourse of the pro'u$t life$ $le value pours into the in'ustr 'uring the intro'u$tion an' gro/th stages. #uring the sha7eout stage; some value is lost; ho/ever it is maintaine' over the longer term through .etter $ompetition. #uring the maturit an' 'e$line stages; value lea7s out of the in'ustr as the nee' for that pro'u$t has sin$e shifte' to another more suita.le pro'u$t or in'ustr . D=$hange value is usuall at its lo/est 'uring the later t/o stages of the pro'u$t life$ $le; sin$e pro'u$ers are tr ing to e=it the in'ustr .

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Sour$e8 )alters *2++2, 144+s 2+++ Pro'u$t fun$tions $osts %ualit innovation Time to mar7et Fle=i.ilit Servi$e Mass 'ifferentiation Mass $ustomisation Value / pri$e

14!+s

Pro'u$t Chara$teristi$s

%. T&e T a#'!t!"#al Stage' "( C")*et!t!+e#e''

Competitive 2e$essities

Pro'u$t fun$tions $osts %ualit innovation Time to mar7et Fle=i.ilit Servi$e

Competitive 0'vantage

Mass 'ifferentiation Mass $ustomisation Value / pri$e

Prosumerism Co<pro'u$tivit Co<option Co<spe$ialisation Strategi$ operations8 virtual $ommunities an' value $hains

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-. P "(!t ."#e' / P "(!t P""l'

Ma 2et!#g

L"g!'t!c'

Servi$e

P "cu e)e#t

Sour$e8 0'apte' from )alters *2++2,; Ga'iesh an' Gil.ert *144H, an' Sl /ot37 an' Morrison *144!, >t is reasona.le to suggest that profita.ilit 'uring ea$h stage of the value $hain 'iffers. Ga'iesh an' Gil.ert *144H, offer the $on$ept of a IProfit Pool-. Ease' upon the notion that 5Su$$essful $ompanies un'erstan' that profit share is more important
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Cu't")e a#1 Sta2e&"l1e E3*ectat!"#'

De'!g# a#1 De+el"*)e#t

P "1uct!"#

JProfit Zones

Value Del!+e 0

than mar7et share9; a profit pool is 'efine' as the total profits earne' in an in'ustr at all points along the in'ustr -s value $hain. The pool ma .e I'eeper- in some segments of the value $hain than in others an' variations ma .e 'ue to the $ustomer; pro'u$t an' 'istri.ution $hannel 'ifferen$es; or perhaps there ma .e geographi$al reasons. Sl /ot37 et al *144!, e$hoes this rationale . 'esigning a profit<$entri$ .usiness. The authors argue that $ompanies shoul' pursue long<term profita.ilit . un'erstan'ing the $ustomer. Companies shoul' .e as7ing ?uestions su$h as8 5)here /ill > .e allo/e' to ma7e a profit in this in'ustr @B an'; Ao/ shoul' > 'esign m .usiness mo'el so that it /ill .e profita.le@9 Ga'iesh an' Gil.ert *144H, 'efine the follo/ing approa$h to i'entif ing an' mapping profit pools8 #efine the pool8 'etermine /hi$h value $hain a$tivities influen$e the organisation-s a.ilit to generate profits; no/ an' in the future. #etermine the si3e of the pool8 'evelop a .aseline estimate of the $umulative profits generate' . all profit pool a$tivities. &e$on$ile the estimates8 $ompare the outputs of steps one an' t/o an' re$on$ile /here ne$essar . Profit pools $an .e use' to i'entif stru$tural options an' to ?uestion them in terms of optimal sta7ehol'er value 'eliver . 0''itionall ; /e $an i'entif tren's; esta.lish s$enarios an' i'entif /here relationship strategies an' stru$tures nee' to .e $hange' an' to i'entif the finan$ial impli$ations of ea$h of the options.

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4. Su))a 0 The 7e to e=e$uting su$$essful strateg is in un'erstan'ing the future an' ta7ing the appropriate a$tions to profit from this un'erstan'ing. The notion of value migration suggests that $onsumer nee's $hange /ith time an' that $ompanies /ho /ish to sta via.le have to anti$ipate these shifts an' a$t a$$or'ingl . 0long /ith these shifts $ome $hanges to the profit profile of the value $hain. Profit pools $an .e 'ire$tl or in'ire$tl relate' to the value that $onsumers pla$e on an in'ivi'ual value<a''ing a$tivit . Cann $ompanies /ill un'erstan' this important 'ifferen$e an' su$$essfull e=ploit profit pools /hile maintaining their lin7 /ith $ustomer value 'rivers. 5. D!'cu''!"# 6ue't!"#' 1. )h are value shifts/ value migration su$h a $riti$al issue for managers to un'erstan'@ Cse e=amples in our ans/er. 2. Ao/ $an $ompanies ta7e a'vantage of profit pools /ithout loosing tou$h /ith $ustomers@ 3. Csing Ga'iesh an' Gil.erts- metho'; plot in'ustr profit pools for the in'ustr ou /or7 in. 7. Re(e e#ce'/ Rea1!#g )alters; #.; 2++2; 51perations Strateg 9; Palgrave Ma$millan. Sheeh ; E.; Era$e ; A. an' Fra3ier; &.; 144"; 5)inning the &a$e for Value : Strategies to Create Competitive 0'vantage in the Dmerging 0ge of 0.un'an$e9; 0meri$an Mar7eting 0sso$iation. Sl /ot37 ; 0. K.; an' Morrison; #. K.; 144!; 5The Profit Zone : Ao/ Strategi$ Eusiness #esign /ill lea' ou to Tomorro/-s Profits9; 0llen an' Cn/in. Ga'iesh; 1.; an' Gil.ert; K. (.; ma / Kune 144H; 5Ao/ to Map Lour >n'ustr -s Profit Pool9; Aarvar' Eusiness &evie/.

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