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TECH TALK: Good Books: The Art of Profitability (Part 2)

June 8th, 2004 · 1 Comment

What makes Adrian Slywotzkys The Art of Profitability a good read is its conversational style, contemporary business examples and the simple graphics which illustrate each of the business models. What is a business model? Slywotzky says: A business model is the answer to a few questions. What is my unique value proposition? Who are my customers? How do I make money? What is my strategic control and how do I protect it?

The focus of the book is on addressing some key questions about profit models, each of which hinges on fully understanding the customer:

  • Which of these profit models are at work in my business? Can I identify others?
  • How does profit happen in my competitors businesses?
  • What can I do in the next ninety days to intensity my organizations focus on profitability?
  • Which profit models would enable us to maximise profit this year?
  • Is my organization aligned to capitalize on the profit models in my business?

  • Slywotzky was interviewed by the CEO Fresher about the book. Here are some excerpts from the interview:

    What exactly is a profit model?

    Wherever there is profit, you can find the essential forces that cause it to happen in a particular situation. Ohno at Toyota always said, “Ask ‘Why?'” five times. By the fifth time, you’ll start getting close to the real answer.” You have to treat profitability as a puzzle and find out how it can happen for your business. I’ve chosen 23 profit models for this book and used illustrations and stories to show readers how they work.

    What’s the biggest mistake that companies are making that is preventing them from making a profit?

    Profitability has to be understood by each company on its own terms. They can’t just copy a profit model that worked for another company. They have to choose the right model after carefully analyzing their business, their customers, and their competitors.

    How can a company stay profitable if their competitors keep coming in with copies of its products at lower prices?

    Several ways. Intel uses a “time profit” model. When they are first to market with a new product, profits happen in the first four or five quarters and then drop down very quickly to almost zero after that. To make a profit, Intel must work hard to maintain a two to three-year lead over its competitors. Diffusing the product as instantly as possible helps extend their period of profitability.

    Why does a company like SMH, makers of Swatch, bother selling all those low-profit margin plastic watches when the majority of their profit comes from their luxury lines of watches? Isn’t that keeping the company less profitable?

    You’re right that the plastic Swatches made by the parent company SMH have low profit margins, but actually they are just as important to SMH’s profitability as the high-margin watches. By producing the plastic watches, SMH builds a firewall against competitors who may try to produce cheaper imitations. They won’t be able to develop the economics to move up the pyramid. This is called a Pyramid Profit Model because the profit-generating watches are at the top of the pyramid and the defensive plastic watches at the bottom. It turns out that 70% to 80% of SMH’s profit is from the top of the pyramid, but the base of the pyramid is just as important.

    I can see how you can sell the same product to different levels of customers at different prices, but can you sell the same product to the same customer at different prices?

    It happens all the time. Coca-Cola, for example, sells you a soda for 8 to 10 cents per ounce in a vending machine, 10 or more cents per ounce at a restaurant, but only 2 cents per ounce at a grocery store. All of us as customers behave differently in different situations; therefore, to maintain profitability, prices should reflect different price sensitivities in different environments.

    In an interview with the Wharton Journal, Slywotzky said: Someone recently told me that if you want to understand leadership and you are in an organization, don’t look up. Look in the mirror. And so, I think the first step is to understand that anybody with the right ideas can play a leadership role. I think the second thing is to have the right content and the right agenda. And I think a fantastic way to begin is to start asking the series of questions that are posed in The Art of Profitability. 1. How does profit happen? 2. How do we get everybody in our organization to understand it and act on it? 3. What’s our next profit model? No profit model is forever. And no. 4 is the greatest achievement doesn’t happen very often but it is phenomenally valuable. It is to ask the question, can we create a unique way of being profitable? Dell has done it. Starbucks has done it. Toyota has done it. It is most important to understand how profit happens and get everybody aligned behind it. But it is exceptionally valuable to ask the question can we develop a unique profit model in our industry, so that we can compete differently from the others. And the rewards of that are just phenomenally high.

    So, read the book and operationalise the ideas embedded in there!

    Tomorrow: The Business of Software


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