This document summarizes key concepts from the article "Profit Pools: A Fresh Look at Strategy" by Orit Gadiesh and James L. Gilbert. It defines profit pools as any sustainable source of profit within an industry's value chain. While managers often focus on revenue growth, the authors argue it is important to examine where profits are actually being made within an industry. Profit concentration does not always match revenue concentration. The document illustrates this concept using examples from the US auto and PC industries, showing the most profitable elements of each value chain are not necessarily those with the largest revenues. It stresses the importance of profit pool analysis for developing future business strategy and survival.

1. Profit Pools:
A Fresh Look at Strategy
Orit Gadiesh, James L. Gilbert
Harvard Business Review, May-June, 1998
Presented By
- NITIN KUMAR
- AKASH SHARMA
- HIMANSHU ATWAL

2. REVENUE
GROWTH
BUSINESS
STRATEGY
PROFIT POOLS
INDUSTRY’S
VALUE CHAIN
MANAGER’S
APPROACH
SUSTAINABILITY

3. Deciding MANAGER’s
STRATEGY
• Where and how is the money being made in an industry?
• Whether total Revenue is a indicator of company’s growth in
true sense?
• What other factors should a manager keep in mind while
deciding the growth strategy of company?
• Is profit pool analysis sufficient to decide “The Company is
GROWING or NOT”?

4. Profit Pools (Success Potential)
• “Total profits earned at all points along the industry's value
chain.”
• “Any sustainable source of profit.”
• This means, buying something cheaper or selling something at a
higher price than the competition (and therefore making profit).
• Future Business Strategy depends on Present & Future Profit
Pools.
• ‘Atom’ of Profit – Profit Pools
• ‘Molecule’ of Profit – Value Chain
• ‘Business Model’ – System of Profit Pools

5. Profit Pools (Cont.)
• Assumption – Profit will Follow Revenue
• Managers need to look beyond revenues to see the structure of
their industry's profit pools.
• Profit concentration vs revenue concentration.
• Automobile financing is the most profitable element of the
automobile value chain.
• Concessions sales are an attractive profit pool to entertainment
venues.
• Profit Pool Analysis is not essential for strategy making, they
may be vital for the future survival of the company as a whole.

6. THE U.S. AUTO INDUSTRY’S PROFIT POOL
25%
20
The automotive industry encompasses
many value-chain activities. The way that
profits and revenues are distributed
among these activities varies greatly. The
most profitable areas of the car business
are not the ones that generate the biggest
revenues.
operating margin
6
15
10
5
0
0
auto loans
new car dealers
used car dealers
leasing
warranty
auto manufacturing
Share of Industry Revenue
source: Gadiesh and Gilbert, Harvard Business Review, May-June 1998
100%
gasoline
auto insurance
service repair
auto rental
aftermarket parts

7. THE PC INDUSTRY’S PROFIT POOL
40%
The value chain for the PC industry
includes six key activities; the
profitability of the activities varies
widely. Manufacturers compete in
the largest but least-profitable
segment of the chain.
operating margin
30
20
10
0
0
other
components
microprocessors
personal
computers
Share of Industry Revenue
source: Gadiesh and Gilbert, Harvard Business Review, May-June 1998
peripherals
software
100%
services

8. MARUTI SUZUKI Value Chain

10. Profits always follow Revenue - with
reference to corporate India.

11. - John Maynard: A Treatise on Money, 1930