Harvard Book Store: Competitive Advantage Speakers: Adrian Slywotzky

Adrian Slywotzky
is the author of the acclaimed book Value Migration. His new book, written with David J. Morrison, is The Profit Zone, which offers insights and practical ideas on the toughest challenge in business -- finding the profit zone before our competitors do.

Slywotzky and Morrison are founding partners of Corporate Decisions, Inc. (CDI), a Boston-based strategy consulting firm specializing in customer and profit-centric business design for created sustained value growth.

Adrian Slywotzky spoke at our Competitive Advantage Breakfast on March 11, 1998.
Mr Slywotzky began his talk by asking the question, "Where will we be allowed to make a profit?" -- in other words, which markets are "no-profit zones," and which markets are "profit zones"? He gave several examples of industries that focus on no-profit zones, and audience members suggested others, such as: the automobile industry, agriculture, the airline industry, and the telecommunications industry. In such no-profit zones, companies must focus on a market that provides them with little profit in order to reach their biggest market segment.
Slywotzky used the example of Coca-Cola, "the world's biggest brand," to illustrate how a company can profit by identifying profit zones and no-profit zones. Coca-Cola's three major markets are vending, fountain sales, and grocery store sales. From a vending machine, Coca-Cola costs about 6-8¢ per ounce; at a fountain, it costs perhaps 10-12¢ per ounce; but at the supermarket, it costs only 2-3¢ per ounce. Yet the supermarket sector is the company's biggest market, even though it is a no-profit zone -- they choose to charge far less than they do in other markets because they know the larger quantities purchased will balance the low cost. Coca-Cola has chosen to focus on the profit zones -- the vending and fountain markets -- in which to maximize their visibility and marketing potential, rather than focusing on the no-profit zone of the supermarket sales.
Slywotzky then went on to discuss how companies who have reinvented their business processes to take advantage of profit zones do far better than comparable Fortune 500 companies or marketshare leaders in the same industry. He listed example pairs like Microsoft (market value: $170 billion) and Apple (market value: $2.3 billion), or WalMart (market value: $80.3 billion) and KMart (market value: $6.1 billion), to illustrate how the first company in each pair, having identified and targeted the profit zones in their industries, exceeded by far the profits of the second company in each pair, who had not done so. Coca-Cola, he said, outweighs Pepsi in market value because they have restructured their business to focus on the service market (distribution, bottling, etc.) rather than on the manufacturing market (ie. just being a maker of the Coca-Cola syrup). Coca-Cola has reidentified their market segment as being not only individual drinkers of soda, but the engineers, manufacturers, and factory owners who can benefit from Coca-Cola's presence in the market.
He used Intel as another example of a company who, by restructuring their business processes, is the leader in their industry: Intel's new business design is "two steps ahead," meaning that everything -- implementation, marketing, promotion -- happens within the first two to four quarters after product development. Their competitors typically take longer to move on introducing new products, and so they often don't compete effectively. Charles Schwab's business design is the switchboard model -- they perform a valued service by bringing investors and mutual fund companies together rather than leaving them to try connecting on their own. Like Coca-Cola and Intel, identifying the profit zone in their industry has made Charles Schwab a leader in their field.
Slywotzky concluded his talk by acknowledging that finding and targeting the profit zone is a new style of thought, and it takes a lot of work. He enumerated three questions that CEOs should consider when beginning this process:

What is a strategic point of view on the customer?
How does profit happen in my company?
How can I bring a strategic point of view into our business plan?
"Creativity is back in business," he said, and it is up to us to use our creativity to its full potential in seeking out the profit zones for our companies.
Return to the Competitive Advantage Breakfast Series page.