The Art Of Profitability

Good Books/New Business Models: (via Emergic) I enjoyed reading Adrian Slywotzky’s The Art of Profitability. It's the pocket Bible on how to grow profits. Adrian shows 23 business models. I liked the conversational format (between an extraordinary teacher (David Zhao) and a senior executive (Steve, from a company called Delmore) ); it was fun reading + it packs a lot of thought into its chapters. Like the Bible concept, the author recommends to read one chapter a month, and then play with the ideas discussed. It's theory + practice + if executed/delivered properly = near success to success. It's a good book + fun tweaking with the concept (s).

From the book’s description:
What do Barbie dolls, Nokia phones, and American Express credit cards have in common? They all represent a powerful business model called pyramid profit. How about Intel, Microsoft, and Stephen King? They all exploit another model called value chain position profit. The Art of Profitability reveals the invisible but important governing principles that can mean the difference between business failure and success. Writing with wit and provocative insight, bestselling author Adrian Slywotzy tells the story of eccentric strategy teacher David Zhao and his young student. Each of the book's twenty-three chapters presents a lesson from the exuberant and always challenging master-and a profit paradigm that will open your mind to the many ways to make profit happen. You'll understand-from a different perspective-how your company and your competitors generate profit...which business models can be best applied to your profit-making strategy...what specific actions your organization can take in the next ninety days to improve its bottom line...and more. With scores of examples from today's global marketplace, a weekly assignment, and an eclectic business reading list ranging from Obvious Adams to Einstein's Dreams, THE ART OF PROFITABILITY invites anyone in business to engage in the lively exchange between mentor and protege. Enter the classroom. Discover the art. And learn which form of profitability will help your company succeed today and grow tomorrow.

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.