贝恩 战略分析工具 profitpools A Fresh Look at Strategy

Profit Pools: A Fresh Look at Strategyby Orit Gadiesh and James L. GilbertReprint 98305Harvard Business ReviewMAY JUNE 1998Reprint NumberHarvardBusinessReviewCREATING CORPORATE ADVANTAGE 98303THE NECESSARY ART OF PERSUASION 98304EMPOWERMENT: 98302THE EMPERORS NEW CLOTHESSIX DANGEROUS MYTHS ABOUT PAY 98309THE ALTERNATIVE WORKPLACE: 98301CHANGING WHERE AND HOW PEOPLE WORKPROFIT POOLS: 98305A FRESH LOOK AT STRATEGYmanagers tool kitHOW TO MAP YOUR INDUSTRYS PROFIT POOL 98306HBR CASE STUDYDOES THIS COMPANY NEED A UNION? 98311ideas at workSTRATEGIC STORIES: 98310HOW 3M IS REWRITING BUSINESS PLANNINGHBR CLASSICEVOLUTION AND REVOLUTION AS 98308ORGANIZATIONS GROWBOOKS IN REVIEWOPENING THE DOORS FOR BUSINESS IN CHINA 98307DAVID J. COLLIS ANDCYNTHIA A. MONTGOMERYJAY A. CONGERCHRIS ARGYRISJEFFREY PFEFFERMAHLON APGAR, IVORIT GADIESH ANDJAMES L. GILBERTORIT GADIESH AND JAMES L. GILBERT CONSTANTINE VON HOFFMANGORDON SHAW, ROBERT BROWN,and PHILIP BROMILEYLARRY E. GREINERJEFFREY E. GARTENhroughout the early 1990s, U-Haul, Ryder,Hertz-Penske, and Budget waged a fiercelycompetitive battle in the U.S. consumer-truck-rental business. U-Haul, long the dominant player in theindustry, appeared to be at a disadvantage. With its olderfleet of trucks, it had higher maintenance costs than itsrivals, and it charged lower prices. Barely breaking evenin truck rentals, it seemed fated to fall from industryleader to industry laggard. PHOTO by brad maushart/graphistock Copyright 1998 by the President and Fellows of Harvard College. All rights reserved.Successful companies understand that profit shareis often more important than market share.P RO F I T POOLS:A FRESH LOOK AT STRATEGYBY ORIT GADIESH AND JAMES L. GILBERTTBut the numbers on the bottom line told a differ-ent story. U-Haul was actually the most profitablecompany in the industry, its 10% operating marginrunning far above the industry average of less than3%. Ultimately, in fact, the number two competi-tor, Ryder, abandoned the consumer rental busi-ness, selling off its fleet in 1996 to a consortium ofinvestors.What explains U-Hauls success? Answering thatquestion requires us to step back and examine notonly U-Hauls strategy but also its industrys profitstructure. U-Haul prevailed because it saw some-thing its competitors did not. By looking beyondthe core truck-rental business, it was able to spot a large, untapped source of profit. That source wasthe accessories business, consisting of the sale ofboxes and insurance and the rental of trailers andstorage space all the ancillary products and ser-vices consumers need to complete the job that hasonly begun when they rent a truck.The margins in truck rentals are low because customers shop aggressively for the best daily rate.Accessories are another matter altogether. Once acustomer signs a rental agreement for a truck, hispropensity to do further comparison shopping ends.He becomes, in effect, a captive of the companyfrom which hes renting the truck. Because there isvirtually no competition in this piece of the valuechain, the accessories business enjoys highly at-tractive margins. Recognizing the true profit structure of its busi-ness, U-Haul seized first-mover advantages in accessories. For example, it scooped up the cheapeststorage space in key locations before its competi-tors could react, gaining a sizable cost advantage.And, since control of the accessories business wastied directly to the volume of truck rentals, U-Hauldeliberately kept its daily rental rates low in orderto attract more and more customers to whom itcould sell more and more high-margin accessories.Its competitors, in contrast, set their prices in a waythat would maximize their returns from the coretruck-rental business.U-Hauls strategy redefined the consumer truck-rental business, giving the company control of a large share of its industrys profits. U-Haul rec-ognized that while the core rental business repre-sented the vast majority of the industrys revenuepool, accessories provided a large share of the indus-trys profit pool. By crafting a strategy to maximizeits control of the profit pool, U-Haul was eventuallyable to dictate the terms of competition within theindustry. Its rivals learned a valuable lesson thehard way: there are many different sources of profitin any business, and the company that sees whatothers do not namely, the profit pools it mightcreate or exploit will be best prepared to capture adisproportionate share of industry profits.The Profit-Pool LensA profit pool can be defined as the total profitsearned in an industry at all points along the indus-trys value chain. Although the concept is simple,the structure of a profit pool is usually quite com-plex. The pool will be deeper in some segments ofthe value chain than in others, and depths will varywithin an individual segment as well. Segmentprofitability may, for example, vary widely by cus-tomer group, product category, geographic market,or distribution channel. Moreover, the pattern ofprofit concentration in an industry is often very dif-ferent from the pattern of revenue concentration.As the U-Haul case illustrates, the shape of aprofit pool reflects the competitive dynamics of a business. Profit concentrations result from the ac-tions and interactions of companies and customers.They form in areas where barriers to competitionexist or, as in the accessories business, in areas that140harvard business review MayJune 1998profit pools: a fresh look at strategyOrit Gadiesh is the chairman of Bain & Company inBoston, Massachusetts. James L. Gilbert is a director ofthe firm.For most managers today, growth is the holy grail.When charting strategy, they focus on ways to expand revenues, believing (or at least hoping) thathigher sales will bring higher profits. The assump-tion is that a company able to capture a large pro-portion of revenues in an industry a large marketshare will reap scale efficiencies, brand aware-ness, or other advantages that will translate di-rectly into greater profits. If you can grow fasterthan your competitors, the thinking goes, profitswill surely follow.Theres one problem with this logic: its wrong.Profits dont necessarily follow revenues. Considerthe recent experience of Gucci, one of the worldstop names in luxury leather goods. In the 1980s,Gucci sought to capitalize on its prestigious brandby launching an aggressive strategy of revenuegrowth. It added a set of lower-priced canvas goodsto its product line. It pushed its goods heavily intodepartment stores and duty-free channels. And itGucci s Gulch:The Problem with Growthallowed its name to appear on a host of licenseditems such as watches, eyeglasses, and perfumes.The strategy worked sales soared but it carrieda high price: Guccis indiscriminate approach toexpanding its products and channels tarnished itssterling brand. Sales of its high-end goods fell,leading to an erosion of profitability. Although thecompany was eventually able to retrench and recover, it lost a whole generation of image-conscious shoppers in some countries.Guccis misstep highlights the problem withgrowth: the strategies businesses use to expandtheir top line often have the unintended conse-quence of eroding their bottom line. Gucci at-tempted to extend its brand to gain sales a com-mon growth strategy but ended up alienating itsmost profitable customer segments and attractingnew segments that were less profitable. It was leftwith a larger set of customers but a much lessattractive customer mix.have simply been overlooked by competitors. And,of course, profits do not tend to stay in one place,waiting to be scooped up by the next opportunist.The profit pool is not stagnant. As power shiftsamong the players in an industry the competitorsthemselves, their suppliers, and their customers the structure of the profit pool will change, oftenquickly and dramatically.Although many executives understand thesetruths intuitively, they often pursue strategies thatrun counter to them. They focus on revenue growthand market share and assume that profits will fol-low. (See the insert “Guccis Gulch: The Problemwith Growth.”) In fast-paced businesses, that strat-egy is especially dangerous: todays deep revenuepool may become tomorrows dry hole. To createstrategies that result in profitable growth everycompanys true aim it helps to begin by creating a systematic picture of the industrys profit pool.A profit-pool map answers the most basic ques-tions about an industry: Where and how is moneybeing made? The simple act of mapping can providean entirely new perspective on even the most famil-iar industry. (See our article “How to Map Your Industrys Profit Pool” in the MayJune 1998 HBR.)Consider the U.S. automotive industry, which in1996 generated revenues of about $1.1 trillion andprofits of about $44 billion. The industrys revenuesand profits are divided among many value-chain activities, including vehicle manufacturing, new andused car sales, gasoline retailing, insurance, after-sales service and parts, and lease financing. (See thechart “The U.S. Auto Industrys Profit Pool.”) Froma revenue standpoint, car manufacturers and deal-ers dominate the industry, accounting for almost60% of sales. But the profit-pool lens reveals a dif-ferent picture. Auto leasing is by far the most prof-itable activity in the value chain, and other finan-cial products, such as insurance and auto loans, alsoearn above-average returns. The core activities ofmanufacturing and distribution, on the other hand,are characterized by weak profitability they ac-count for a significantly smaller share of the profitpool than they do of the revenue pool.From the profit-pool perspective, then, the auto-motive business is as much about financial servicesas it is about the production and sale of vehicles.This fact hasnt been lost on the Big Three auto-makers, which have all moved aggressively intoauto financing. Ford, in fact, has generated nearlyhalf its profits from financing over the past tenyears, even though financing has accounted for lessthan one-fifth of the companys revenues.Mapping the profit pool not only shows the cur-rent state of an industry but also prompts some fun-damental questions about the industrys evolution:Why have profit pools formed where they have? Arethe forces that created those pools likely to change?Will new, more profitable business models emerge?Looking at the chronically low margins in automanufacturing, for example, it is not hard to tracethe root cause back to global overcapacity, a condi-tion that is not likely to go away anytime soon. Using the profit pool as a lens, a developing storyin auto distribution also begins to come into focus.Today, auto dealerships are only marginally prof-itable, with most of a dealers profits coming fromservice and repair rather than vehicle sales. But onerelatively bright spot for car dealers in recent yearshas been used cars. In 1996, the margin on used carsales was triple that earned on new car sales. Notsurprisingly, many dealers have been investingheavily in building up their used car business.Is that strategy likely to succeed? The profit poolmap prompts us to examine how some profitsources exert influence over others and shape com-petition. In this view, the high margins in leasing which have led manufacturers to push for growth inthat segment can be seen as a real threat to usedcar profits. How? In coming years, waves of leasedcars will flood used car lots, increasing supply andin turn eroding prices, margins, and dealer profits.Large car dealers that recognize this impendingharvard business review MayJune 1998141profit pools: a fresh look at strategychange are scaling back their investment in usedcar sales and exploring ways of entering the fundingside of the financing business. After all, they al-ready control the main points of customer contactand in many cases are already the conduit for loansand leasing packages. Dealers that fail to under-stand these profit-pool dynamics may well findthemselves floundering in the shallows of the pool.Turbulent IndustriesThe profit-pool lens can be particularly illuminat-ing in industries undergoing rapid structuralchange. Such change, whether triggered by deregu-lation or new technology or new competitors, always results in a shift in the distribution of prof-its along the value chain. While rapid change canopen new sources of profit, it can also close offtraditional sources. For industry leaders, the shiftcan be very dangerous, threatening their controlover the profit pool. (See the insert “Choke Pointsin the Profit Pool.”)The pharmaceuticals business provides a goodcase in point. In 1993, Merck triggered a wave of re-structuring in the industry when it acquired Medco,the largest pharmacy-benefit manager (PBM), for $6 billion. Other drug companies soon followedMercks lead. Within a year, SmithKline Beecham142harvard business review MayJune 1998profit pools: a fresh look at strategyTHE U.S. AUTO INDUSTRY S PROFIT POOLshare of industry revenue25%20auto manufacturingnew car dealersused car dealersgasolineauto insuranceservice repairaftermarket partsauto rentalleasingwarranty1510500 100%operating marginThe automotive industry encompasses manyvalue-chain activities, from the manufacture ofa car to the sale of gasoline to the provision ofvarious financial services. The way that profitsand revenues are distributed among theseactivities varies greatly. The most profitableareas of the car business are not the ones thatgenerate the biggest revenues.auto loansengraving from corbis-bettmanN 143profit pools: a fresh look at strategyChoke Points in the Pro t PoolWhen the worlds economy was based on seabornetrade, the country that held the Strait of Gibraltarwielded enormous power. Because any ship hopingto enter or leave the Mediterranean Sea had to navi-gate the strait, control of this waterway meant con-trol over the flow of revenues and profits to nationsand companies throughout Europe and Asia. Thestrait was an economic choke point that helped de-termine the shape of world commerce.Profit pools also often have choke points particular business activities that control the flowof profits throughout an industry. Choke points canarise for many different reasons: the granting of apatent for a core component of a product, the estab-lishment of an industrywide operating standardthat all companies must obey, or the consolidationof control over the customer interface, to take justthree examples. And, in turn, choke points can takemany different forms. In the airline industry, for ex-ample, the Sabre reservation system long providedAmerican Airlines with an industry choke point.And in the personal computer business, Intelsdominance of microprocessors has become an im-portant choke point.Choke points, it should be noted, do not alwaysrepresent major sources of profit in and of them-selves, but they do always hold enormous strategicimportance. A company that controls a choke pointcan influence the distribution of profits among itsdirect competitors and even among other, more dis-tant value-chain participants.Much of Microsofts business is built on the con-trol of choke points. Its Windows operating systemis a choke point for the computer industry, and itsExplorer browser is emerging as a choke point forelectronic commerce. In the early 1990s, whenMicrosoft launched its futile attempt to buy Intuit,whose Quicken software was the leading personal-finance application, it was trying to gain control ofa potential choke point for the financial services industry. If consumers shift to on-line banking andinvesting in large numbers, the company that con-trols the software gateway will control a consider-able portion of the industrys profit flows. When the banking industry saw this “disinter-mediation” scenario begin to unfold, they rallied,however fractiously, to prevent it. They not onlylobbied intensively against the merger betweenMicrosoft and Intuit, they also moved to establishtheir own software gateways. In 1994, a group ofbanks jointly purchased Meca, Intuits primarycompetitor in consumer financial-services soft-ware. Two years later, a consortium of banksteamed with IBM to form Integrion； their goal wasto develop a new Internet-based banking channel.The banks knew that they couldnt prevent the dis-tribution of financial products through home com-puters and Web sites, but they could at least guar-antee themselves equal “shelf space” in the newfinancial-services supermarket. They have, as a re-sult, limited the concentration of power in this potential profit-pool choke point.Undated engraving of the Strait of Gibraltarhad purchased Diversified Pharmaceutical Servicesand Eli Lilly had bought PCS Health Systems.In hindsight, some industry analysts have sug-gested that the pharmaceuticals giants overpaid forthe PBMs. Lilly, which paid $4 billion for a businesswith $150 million in revenues and recently took a$2 billion write-down on the acquisition, has comein for particular criticism. And it certainly makessense to question the value of these transactions ifall you look at is the cash flow generated by thePBMs. A profit-pool perspective, however, suggeststhat the drug companies actually received muchmore than their moneys worth.Traditionally, most of the profits in the pharma-ceuticals industry have been generated by two ac-tivities: developing new drugs and convincing doc-tors to prescribe them. The industrys uniquestructure resulted in an extraordinarily deep profitpool for the drugmakers. Patent protection for newdrugs effectively eliminated price competition, andbecause drug costs were largely paid by insurers,consumers were not price sensitive. Brand selec-tion, moreover, was largely up to individual physi-cians, who were directly influenced by the drugcompanies sales forces. In 1992, more than 85% ofprescription drugs were prescribed at the discretionof individual physicians.The physical distribution of drugs was a separatelayer in the value chain, but it was a low-marginbusiness. Drug distributors earned pretax operatingmargins of only about 5%, far lower than the 25%or higher margins regularly posted by the manufac-turers. Even the largest distributor, McKesson,lacked sufficient leverage with either customers orsuppliers to pose a threat to pharmaceuticals manu-facturers. With the advent of the managed care revolutionin the 1990s, however, this picture began to change.Pharmacy benefit managers companies that man-age drug benefit programs for large corporations began to move aggressively into the business. Seek-ing to control costs for their corporate clients,PBMs would, for instance, advise doctors aboutgeneric drugs that could be substituted for equiva-lent but much-higher-priced branded drugs. ThePBMs influence over the selection of drug productsand brands together with their direct access to in-formation on patients drug purchases posed a di-rect threat to the established profit structure of thepharmaceuticals industry.If the PBMs were successful in containing drugcosts, they would effectively siphon off profits fromthe drugmakers, some of which would go directlyto the clients and the rest of which the PBMs wouldretain for themselves. Wall Street clearly believedin this scenario. In the early 1990s, pharmaceutical-company stocks fell sharply, representing a loss ofmore than $100 billion in market value.Mercks strategy in acquiring Medco constituteda hedge against the possible success of the PBMs. If profits shifted away from the drugmakers and toward the PBMs, at least Merck would control a large share 25%, in fact of the new profit pool.And if the acquisition helped neutralize the PBMspower, then Merck would have protected its exist-ing profit pool. As it turns out, the latter scenarioseems to be playing out. The Medco acquisition en-couraged other drug companies to buy up the otherleading PBMs, which in turn led the U.S. FederalTrade Commission to step in and put restrictionson the PBMs influence over prescriptions.So did the drug companies pay too much for thepharmacy benefit managers? The profit-pool lenssuggests they did not. By anticipating a potentialreconfiguration of the profit pool, Merck and theother industry leaders were able to take action toinsulate themselves from the new entrants, protecttheir existing sources of profits, gain greater accessto patient information, and increase the likelihoodthat the pool would evolve in a beneficial ratherthan destructive way. The stock market certainlyseems to see the deals in this light: Mercks marketvalue has risen by $80 billion since the Medco ac-quisition, and Lillys market value has tripled overthe last three years.When Growth Isnt GoodThe leading drug companies had the resources toshift into distribution if it turned out that changesin the industrys profit pool would warrant such amove. Most companies, however, would not be ableto achieve such a dramatic shift in their value-chain positioning, no matter how attractive theprofit concentrations in other segments. The entrybarriers are often too high. Nevertheless, the profitpool still provides a valuable lens for companiesthat cannot hope to expand beyond the boundariesof their current business model. Consider the personal computer industry. Map-ping profits across the value chain shows that profitis much more highly concentrated in the micro-processor and software segments than in hardwaremanufacturing. (See the chart “The PC IndustrysProfit Pool.”) Yet few if any computer manufactur-ers can hope to shift successfully onto Intels orMicrosofts turf. The differences in required capa-bilities and competitive structure are enormous,and Microsoft and Intel have vast resources withwhich to defend themselves.144harvard business review MayJune 1998profit pools: a fresh look at strategyThat doesnt mean, however, that the computermanufacturers dont have rich profit opportunitiesof their own. In addition to looking broadly acrossall industry segments, a company can also lookdeeply into the profit pools within its own segment,searching for pockets of profit that it can either cre-ate or mine. No market, no matter how homoge-neous or narrowly defined, has a perfectly even dis-tribution of profit. There are always products,customers, regions, or channels that yield above-average returns. The companies that recognize thevariability of profit and can exploit the deepestpools will earn superior returns, even amid a sea ofseemingly identical customers and products.Look at Dell Computer Corporation. Dell com-petes in the least-attractive segment of the indus-try, the manufacturing of hardware, but from its inception in 1984 it has had a unique perspective onthe industry. It built its business on a model directsales that departed from the industry norm. Un-like other companies, Dell eliminated the middle-man standing between the company and its cus-tomers, which allowed it to keep a portion of thedealers profit pool for itself and to share the restwith customers in the form of lower prices.By the early 1990s, Dells leaders suspected thatthey would be unable to sustain the companysgrowth trajectory by relying on direct distributionalone. In pursuit of revenue growth, Dell enteredthe much larger (in revenue terms) retail channel.The growth strategy worked: Dell grew more than50% per year from 1989 to 1993. Unfortunately, thecompany stopped making money and actually suf-fered losses in 1993.harvard business review MayJune 1998145profit pools: a fresh look at strategyTHE PC INDUSTRY S PROFIT POOLshare of industry revenue40%30microprocessorsother componentspersonal computerssoftwareperipheralsservices2000operating margin10The value chain for the personal computerindustry includes six key activities； theprofitability of the activities varies widely.Manufacturers compete in the largest butleast-profitable segment of the chain.100%What went wrong? Kevin Rollins, Dells vicechairman, says that “Dell had lost its focus on themost profitable customer segments and on a distri-bution model that is at heart more efficient thanwhat the retailer can provide.”In the face of declining profitability, Dells execu-tives analyzed every piece of their business to deter-mine systematically where they were actuallymaking money. The data showed that the retailchannel was simply not profitable not for Dell andnot for most other computer companies either. Norwas there any feasible scenario under which retailwould ever yield attractive returns for Dell. Theprofit picture was always stronger under the direct-distribution model especially when supply chaincosts were factored in regardless of which cus-tomer segments were being served.In addition, Dell knew that there were great vari-ations in profitability among different segments ofits customer base. When it served customers one-on-one, it was able to monitor those variations di-rectly. But by going through indirect channels, itlost a vital conduit to its customer base. As a result,it was unable to distinguish between customers ofvarying profitability.Dell pulled out of the retail channel in 1994 anddramatically changed its approach to customers,gearing its business to serve only the most prof-itable segments, such as big companies. Today Dellregularly resegments its customer base, trackingshifts in the profit pool, and as a result is able to re-spond more quickly than competitors when attrac-tive new sources of profit emerge. “The nature ofthe profit pool for us is segment-based,” saysRollins. “We cut the market and thencut it again, looking for the most prof-itable customers to serve.”At the same time, Dell declines toparticipate in less profitable segmentsof the market. For a long time, thatmeant not tailoring any of its prod-ucts to the mass consumer market.Today, however, Dell does participatein that segment, but it uses its sophisticated under-standing of profitability to concentrate on the areaswhere the money is. Through the products it offersand the way it prices them, it attracts consumerswho are technologically more sophisticated andmore profitable and avoids entry-level buyers,who tend to be unprofitable to serve.The profit-pool approach has put Dell back on thepath of profitable growth. Dells sales tripled be-tween 1994 and 1997, and its profits soared to $747million. Its pretax margin of over 9% is more thanthree times the industry average, and it now con-trols approximately 10% of the entire profit pool forpersonal computer manufacturing. “When we talkto market analysts,” says Rollins, “we tell them wewant a bigger share of the profit pool, not more mar-ket share.”Creating and Managing a Profit PoolIn a rapidly growing industry, the profit-pool per-spective helps Dell to focus and refocus its re-sources on its best opportunities. But what aboutcompanies whose growth opportunities are scarce?Again, by helping companies to see what their rivals dont see, the profit-pool lens can inspirestrategies to create and control new profit pools,even in stagnating industries.Consider the U.S. beer industry. Twenty-fiveyears ago, Anheuser-Busch had an insight aboutmaking and marketing beer. Recognizing that agreat disparity existed between the profitability of“premium” beers and standard (or “discount”)beers both cost virtually the same to produce anddistribute, but premium brands sold for a signifi-cantly higher price the company saw that the sizeof the industrys profit pool was driven primarily bythe premium segment. It realized that if it couldachieve dominance over that segment, it wouldgain a disproportionate share of industry profits.The question then became: How do we do it? Expanding its share of the premium segment, Anheuser-Busch saw, would require a two-prongedmarketing effort. First, the company would need tolaunch a large-scale national advertising campaignto promote its superpremium “image brand,”Michelob, as well as its flagship premium brand,Budweiser. Second, it would need to carefully man-age the price difference between its premium anddiscount brands. The gap in prices would have to bewide enough to generate attractive profits but smallenough to compel discount beer drinkers to tradeup and to dissuade premium beer drinkers fromswitching down. But simply expanding its share of the premiumsegment wasnt enough. The more difficult chal-lenge lay in protecting the segments profitability.Anheuser-Busch wasnt prepared to make big in-146harvard business review MayJune 1998profit pools: a fresh look at strategyBuilding an understanding of the pro t pool puts strategic thinking on a rm footing.Although Miller and Coors increased their over-all share of the beer market during the 1980s (at theexpense of the regional brewers), their profits stag-nated. Anheuser-Busch, by contrast, enjoyed annualprofit growth of more than 15% in that decade, asits share of the premium segment grew to morethan 50%. Through its superior knowledge of theprofit pool, Anheuser-Busch succeeded in reshap-ing the industry to its own advantage.A New Set of ImperativesProfit pools can take many shapes, depending onthe economic and competitive forces at work in anindustry or industry segment. And companies canuse their understanding of the pool in many differ-ent ways: to identify new sources of profit in low-margin industries, as U-Haul has done； to chart acquisitions and expansion strategy, as Merck hasdone； to decide which customers to pursue andwhich channels to use, as Dell has done； or to guideproduct, pricing, and operating decisions, as Anheuser-Busch has done. In fact, an understandingof profit-pool dynamics can help guide importantdecisions about every facet of a companys opera-tion and strategy, leading in many cases to the devel-opment of new, more profitable business models.The profit-pool lens offers a very different per-spective on an industry, especially for companiesused to thinking in terms of revenues. Using thelens to formulate strategy may require the over-turning of old assumptions, the rethinking of olddecisions, and the pursuit of counterintuitive ini-tiatives. A company may, for example, hold off onpursuing obvious growth opportunities in favor ofconcentrating first on seemingly less exciting busi-ness segments with richer profit pools. It may shedtraditional customer groups, product lines, andeven entire businesses in order to focus on the bestprofit sources. It may deliberately reduce its profitsin one area of its business to maximize them in an-other. Even the way a company views its competi-tors may change. It may, for example, decide to co-operate with its rivals in order to block or takeadvantage of value-chain shifts that threaten an ex-isting profit pool.How a company puts its profit-pool insight towork will, of course, depend on the companys com-petitive situation, capabilities, economics, and as-pirations. Building an understanding of the profitpool does not obviate the need for good strategicthinking. What it does do is put that thinking on a firm footing.Reprint 98305 To place an order, call 1-800-988-0886.vestments to increase its share unless it could beassured that the added profits would not be eatenaway by competition. It needed, in other words, tomake the premium segment less profitable for itscompetitors, thus discouraging them from compet-ing aggressively for the segment. The only way forthe company to accomplish that goal was to build acost advantage over its rivals. If it cost others moreto produce and distribute beer, they would have lessmoney for advertising, and they would find it diffi-cult to undercut Anheuser-Buschs pricing.Anheuser-Busch found the source of its neededcost advantage by looking at another element of thevalue chain: packaging. It saw that shifting beerpackaging from bottles, the traditional favorite, tocans would produce big savings. Because cans aremore compact than bottles, they “cube out” moreefficiently that is, a lot more of them can fit into adelivery truck. A brewerys scale historically hadbeen limited by the quantity of beer that could bedistributed economically by truck. By increasingthe number of gallons a truck could distribute in asingle run, Anheuser-Busch would be able to ex-tend its breweries distribution radius, which inturn would enable the company to build largerbreweries with better economies of scale. Through promotions geared toward beer retailersand beer drinkers, Anheuser-Busch was able to encourage customers to start buying beer in cansrather than bottles. At the same time, to ensure a supply of low-price, high-quality cans, the com-pany integrated vertically into can production. Theeconomies of scale resulting from the packaging change, together with more streamlined produc-tion processes (also made possible by the shift tocans