THE PROFIT ZONE
How Strategic Business Design Will Lead You to Tomorrow's Profits
By Adrian J. Slywotzky and David J. Morrison with Bob Andelman
Times Business 342pp $25
A couple of years ago, top managers rediscovered strategic business planning--this after a decade in which they were content to allow severe downsizing to produce huge gains. Not missing a beat, the book publishers have risen to the challenge, pushing out an ever-increasing stream of strategy titles. Most of these dreary tomes serve little purpose other than to cure insomnia. Far too often, authors belabor the obvious while unabashedly stroking the egos of their consultancy clients.
The Profit Zone, by Adrian J. Slywotzky and David J. Morrison with Bob Andelman, is a welcome exception. The authors' premise: "No-profit zones" are everywhere in the economy, and they are growing as products and markets become more commodity-like. These zones take the form of unprofitable customers or products, or entire business models, such as integrated steel mills or hub-and-spoke airlines. High market share cannot, the authors maintain, protect a company from profitability problems. It failed to prevent the huge losses at IBM, Digital Equipment, General Motors, U.S. Steel, or Sears. Indeed, they argue, many corporations are chasing market share in yesterday's product opportunities using yesterday's business design.
The new rules of competition, according to Slywotzky and Morrison, require managers to start by asking what's important to their customers and where the company can make new money. Then, they need to "reinvent" their businesses to create the next profit zones.
Sound like a lot of consultant-speak? Surely, we've heard versions of this before by any number of advisers eager to sell their way into your company. And in this book, consultants Slywotzky and Morrison, partners at Boston's Mercer Management Consulting Inc., make their case through a series of 12 awfully familiar case studies.
Who, after all, hasn't already read about every twist and turn by Microsoft's Bill Gates, General Electric's Jack Welch, Walt Disney's Michael Eisner, or Intel's Andy Grove? What could there possibly be left to say about these giants of the business world?
Surprise: Rarely--if ever--have any observers so skillfully dissected these executives' strategies to create lessons that can be taught to anybody. Rather than a mere recitation of decisions made, every case study includes an astute analysis of how each company has outthought and outmaneuvered the competition, regularly reinventing its business.
When GE Chairman Jack Welch foresaw that the profitability of aircraft engines and appliances was falling, he moved the company into a new profit zone--the financing, servicing, and maintenance of those products. As the value moved from products to services, GE was there to capture it. Less discerning managers might have tried simply to sell more aircraft engines or appliances in an effort to make up for lower profit margins. "Welch saw that, for any product on the market, there exists a larger economic content or equation, of which the product itself is only a subset," the authors write.
The same is true of Disney's Eisner. A decade ago, Disney captured less than 20% of what a family spent on its visit to Disney World. Today, by deftly moving the company into theme-park hotels and restaurants and by more aggressively retailing toys and other products based on its animated characters, Disney can rake in nearly 75% of the outlay. No longer merely a theme-park operator, Disney today provides complete vacation packages.
In Disney's other major business, moviemaking, Eisner created a much larger profit zone from existing assets, by more fully exploiting the value of a Mickey Mouse or a Simba, the Lion King. Every new Disney movie now becomes a merchandising event, capable of generating a soundtrack CD, a home video, a Broadway theatrical production, a theme-park ride, and a host of toys and souvenirs, all retailed through Disney's own stores. Not surprisingly, perhaps, Disney has a vice-president for corporate synergy whose job it is to maximize the value from the company's core products.
The authors also show how entrepreneur Nicolas G. Hayek brought watchmaking back to Switzerland by churning out low-cost plastic Swatch watches that are fashion statements as much as they are timepieces. Hayek's true innovation, the authors believe, is his creation of a "product pyramid" with, for example, Swatch at the low end, Pierre Balmain in the middle, and Longines at the top. Swatch serves as his "firewall brand," making it more difficult for competitors to get a toehold and use it to take away potential buyers of his more expensive offerings. That protection was overlooked by Detroit auto makers who ceded the low-end, entry-model car market to the Japanese, who later moved up the product pyramid to capture many luxury-car buyers.
For all managers, The Profit Zone provides insights and lessons aplenty. It even offers ways to trim consultant fees: Rather than hire a slew of outsiders, it suggests companies assemble their brainiest players into teams that can work through a step-by-step process included in the book's helpful, 15-page "Profit Zone Handbook." It makes practical and usable some compelling theories for how to win in today's marketplace. Your eyes won't glaze over with this title.