Commentary: Profitability, at times, may seem to be elusive. Professionals, business artisans, become caught up in planning the operations and financials. Business models and plans are created. Cool ideas surface and a euphoria grips everyone as the attention increases on these efforts. Somehow the organization finds itself focused on activities that do not derive the revenues streams originally thought. Revenue begins to slump and the organizations spins to generate solutions that become marginal at producing improvements. Cost increase forcing unpopular decisions. The underlying question is how can an organization shift into high gear driving resultant profitability?
This post has received over 500 reads. Please feel free to send me an email with your thoughts. James.bogden@gmail.com.
This post has received over 500 reads. Please feel free to send me an email with your thoughts. James.bogden@gmail.com.
Readers may desire to also read the post on Making Money With Social Media
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We will begin at the top. There are many philosophies and thoughts on this subject. For this discussion, the CEO's principle focus is looking outward from an organization developing vision, strategies, and exploiting cheap sources of capital to facilitate strategic money making projects. A business's organizational leadership then seeks tactical advantage in a variety of ways to implement these strategic projects. These tactical advantages may include disruptive technologies, hedging markets, price switching, controlling the supply points to name a few. The following discussion will illustrate how these and other tactics work in favor of or define the Profit model. I will also discuss how projects may be affected by the models.
PROFIT MODELS
Adrienne Slywotzky, the author, presents his thoughts on profit models in a story line dialogue style giving examples and discussing solutions to challenging questions. He claims these are the only ways a business makes money. Understanding these models and which apply can propel a business further. I summarized this dialogue into a list that follows. Each explanation will be brief in order to keep this post to a reasonable size. The book is referenced and will provide greater understanding if you so desire.
1. Customer Solution Profit: This model will always apply without regard to other models employed as it applies to all business. It is typically characteristic of professional service consulting such as engineering, legal, accounting, software development, and other like disciplines. The consultant becomes intimately familiar with the client and their operations. Then they provide highly customized services or products. Comment: Projects under this model are labor and capital intensive in the first third and tend to taper off as the project matures into the second and third phases. Often this model's deliverables are stabilized then moved into a production or operational and maintenance life cycle phases. This kind of project is usually a one time effort overall.
2. Pyramid Profit: Under this model, stratified product/service lines have low priced marginally profitable firewall products/services guarding high dollar cash cows. This creates a barrier to market entry. For example, low priced barbie dolls flood the market and are toys for young girls. Then higher end dolls are released costing over 500% more for an adult market. Comment: Project managers working on pyramid profit models may be focused on one segment of this model. Project objectives should focus on supporting the other segments as well as the overall strategy.
3. Multi-Component Profit: Base products in this model spawn other purchases where profit is derived. For example, buying a car or home then accessorizing it. The old stereo systems operated under this model having integrable components.
4. Switchboard Profit: One stop packaged complimentary product/services often combined with controlling mass causing limited competition. The market has to turn to one vendor. Comment: This is indicative of the oligopoly and monopoly phenomenon. However, this can result from limited players in a specific market too. Microsoft and Apple operating systems are on this model. Project managers may find themself closely coupled to one product line with austere limits on work around solutions as the product is closely coupled or integrated with the switchboard.
5. Time Profit: This is characterized by the volume of effort per unit of time as well as the amount of time profitability is possible. A test question is does a mountain need to be moved or a small pile shoveled? The bigger question is can money be made before obsolescence or margins fall away? The model has very short life cycle products typically. Comment: An example of time profit is the microprocessor industry. Some financial thinkers who operate on durable competitive advantage would consider companies like Intel or AMD very risky with large recurring research and development budgets and a short window to recoup costs. Companies like RONCO and other 'As seen On TV' products are less risky with low investments, short profit intervals as short as 30 days, and wide market appeal. Project managers may be involved in product development and market cycles that are recurring as short as every 60 days.
6. Block Buster Profit: This model requires strong team of interdisciplinary experts positioned to take the market. Investments are usually very high and speculative. For example movie making which is considered to be speculative investment given its high risk and uncertain market response. Comment: The industry has sought to make the process turnkey by identifying successful patterns and story lines then vary the characters, settings, and themes. Project managers may be focused at different levels of the production process.
7. Quality Profit: This model is focused on increasing the margin by designing quality into the process that eliminates steps, trims costs, and improves customer satisfaction through greater durability. Comment: Organizations have looked to operations management standards and methodologies such ISO, TQM, lean, and Six Sigma to achieve the desired results in quality projects. Project managers operating in this model must shift from a PMI methodology which has a start and end date to a Continuous improvement methodology. Although many of the PMI processes still apply and the continuous improvement projects can have a start and end date.
8. Field Force Morale Profit: This is a managed sales force who are focused and knowledgeable having strong performance based pay. Typically, sales or marketing projects have focused markets with achievable goals. Product/service markups are exceptional large. For example, the jewelry industry.
9. Profit Multiplier/Enhancer Profit: Products/services are spun off to many similar but off markets that improves economies of scale and odds of success. Products/services that are profit multipliers often are not profitable on their own but when combined with other products or services have the effect of increasing profits greater than the sum of individual products/services. Profit enhancers often are not profitable on their own either but when combined with switchboard products and services as well as other niche products or services that are profitable the combination has a summing effect on profits.
10. Specialist Profit: This is a profit zone that is highly targeted, focused, or unique that is exploited for profit because of specialized knowledge. This requires high market recognition for talent. Some of common characteristics are lower cost through better knowledge; better price through unique design / better offering; improves or shortens selling cycle; rapid penetration due to wired effect; windfall profits due to replication of specialized knowledge (high value answers) through out the marketplace.
11. Entrepreneurial Profit: This model relies on frugality or common sense profit seeking activity. This is the ability to put into practice good ideas or leverage off what works then make better. Usually high pressure and engaged workforce. There is a sense of thrill. These projects are highly focused having specified objectives with planned egress or alternatives to adjust to risk. Comment: Often entrepreneurial project managers have to make gut decisions and possess excellent negotiating skills.
12. Installed Base Profit: This model creates demand and continuing demand for products and services. Entry or installed base products have a high price, many choices on initial purchase and low price, no choice on consumables. For example, furnace-filters; vacuum-bag; printer-ink. Comment: Project managers involved in this kind of profit model are engaged mostly on the design, development and implementation of the base before handing off the project to operations to track the projects performance.
13. Brand Profit: This model is based on assumptions, cumulative impact (history), and the triumph of irrational behavior for profit in a hyper-rational market. In other words, the buyer purchases something for irrational reasons and the producer profits from this conduct. The irrational behavior affects product pricing which is founded on reputation, image, prestige, etc… Although, often the quality, design, materials, and manufacturing processes are nearly identical. For example beer such as Michelob (after work professional), Budweiser (blue collar), and Iron City (low income) are chemical identical but exude different prestige. Bottom line is that advertising spending drives market share. High share early on means higher shares in the future. Examples of this are cigarettes and credit cards in youth expands life time market / profits. “Shared Determining Segment”, SDS, is critical to building brand and hyper methods exist for building brand that center on more efficient ways of investing marketing dollars. For example, better channel positions, message, in general better focus. Comment: Project managers involved in Brand Profit generally are involved in marketing studies and campaigns. The work packages seek to brand the product or service by conducting 360 sixty degree marketing campaigns or perhaps commercials that seek to grab attention through clever humorous snippets as at the Superbowl half time show.
14. Specialty Product Profit: High, double and triple figure with margins based on discovery and risk. Requires ongoing / sufficiently numerous discoveries to remain profitable. Less than 20% of the discoveries come from commodity products and over 80% of the discoveries are from uniquely patented specialty products. Products usually have a short life cycle before shifting to a life cycle maintenance program having single digit margins. This is different from blockbuster profit model which requires wide market share. Specialty product model focuses on a narrow market niche. Comment: For example, the topsy tail hair accessory sold $100 million in one year before the market was saturated. This can be coupled with the Time Profit model. For example, many of RONCO's products solve a unique or special problem.
15. Local Leadership Profit: Given a national or international presence, local leadership tailors pricing/services/products to local market. Starbucks focused on cities while Walmart focused on counties using the same model.
16. Value Chain Position Profit: Power is concentrated in a few players in value train. Pre-existing control points do not exist. Control points are based on or the trajectory of relative value added. A radical shift in control points usually occurs due to changes in technology. Comment: For example, the emergence of a disruptive technology would yield power to the one who exploits it first.
17. Cycle Profit: This model is most commonly viewed incorrectly as it is centered on the supply and demand concepts of supply side macro economics. The bottom line is that companies should realize and know the economic, seasonality, and trend cycles of their niche. Comment: Designing operations to drive the break even points to match or occur below the low side of the trends, seasonality, or economic cycles companies can remain profitable in the worst of times. I'll demonstrate using using the current circumstances and one viewpoint. Beginning in the late 1990's the economy began experiencing an 80 year cycle of transitioning economies marked by a boom, bust, and war. The 'Dot Com' boom was followed by a bust that began to show signs in 2006. This cycling was anticipated and discussed in a variety of marketing and political works as early as 1990. For example, in 1998 Harry S Dent discussed long term economic and political trends in his book "The Roaring 2000's". In the 1992 book "The Clash of Civilizations", Samuel Huntington discussed how economically coupled nations and those left out would lead to conflict. Jessica Stern gives a case in her 2003 book "Terror in the Name of God" that severe economic differentials between the nation of Israel and the Palestinian settlements have created hopelessness that has resulted in conflict. One political thought is an effort to elevate the economy with these despondent people in order to bring dignity to thier lives. The business minded will anticipate these long standing cycles and design for them. In terms of project management, the cycle is a project that should have specific objectives and outcomes for the business.
18. Experience Curve Profit: This model has the cost falling with increases in cumulative production experience. A company can become more profitable without increases in revenue simply because the resultant direct and indirect cost fall. Close to market share profit model where economies of scale reduce cost versus the Experience Curve Profit where managing/reducing operating cost increase profits. Although both benefit from having a large market share.
19. Low Cost Business Design Profit: Often this model is part of a larger scheme and compliments other models by trading off a peripheral vision with a focused vision because a different thought process is required in the life cycle of a product. Early on other profit models may be stronger to employ but as a product matures the organization must restructure its profit model in order to remain competitive. This model centers on anticipation versus reaction since patterns tend to cyclically repeat. It looks to optimize cost by designing in trends, seasonality, and recessionary times as well as product/service maturity cycles.
20. Relative market Share: Traditional method of creating profitability. The company obtains the largest share of the market possible. This is accomplished different ways such as product/brand saturation, creating barriers to entry, and controlling the supply points.
21. Transaction Scale Profit: Profit is based of size of the transactions. High volume and low dollar equates to big profits. Staff should concentrate efforts and seek the big accounts. Often they may turn away small work when seeking the big job. This is usually based on great relationships and can take long periods of time. For example, Walmart purchases extremely large amounts of product at very low prices. Because of Walmarts dominant position they often command the relationship, pricing, and other details to its advantage.
22. New Product Profit: This model is based on planned obsolescence and the product life cycle curve. Profitability is created in the first half of the life cycle given a few basic rules. 1. Over invest in the first half of the cycle by 3x. 2. Then under-invest in the later half of the cycle by 3x. 3. In fact, begin to divest. The leadership must admit reality and that the parabola is real, scout for the inflection point, and then ready for the next wave of hits. Comment: For example, many manufacturers attempt to invigorate mature products with the "New and Improved" or "20% More" tactics.
23. Defacto Standard Profit: Profitability is derived from being the market leader and setting the standard. Advertising and marketing cost are reduced because of high market recognition that demands the use of one product over the others. For example, Microsoft’s operating system is the driven standard.
24. After Sale Profit: This model has price sensitivity based on the initial ticket price. High cost ticket items equate to slim margins and increasing price sensitivity. Low cost ticket items equate to wide margins and decreasing price sensitivity. The one exception to this model is when demand is high then price sensitivity becomes negligible. In this model the manufacturer locks in profitability by closing the initial sale with low margins or even at a loss knowing that the purchaser must come to him later for follow on support, services, and products where profit is derived. For example, auto sales; accessories, repair parts, and service often accompany the sale. The customer often fails to realize the real cost associated with the purchase and buys based on a lack of information or on emotion.
25. Digital profit: This profit model often associates information with profitability. Moving from conventional operations, known as brick-and-mortar, to virtual operations can reduce cost by 100 fold and increase profitability by 10 percentage points. This model does not work well on its own. A solid business plan must be in place coupling to other profit models. Comment: The three different successful types of digital profit models are Amazon, EBay, and Eddie Bauer. Amazon developed as an aggregator of products. Ebay is an online auction house that went from the digital to brick and mortar. Eddie Bauer successfully coupled manufacturing schedules with online sales. Other emerging model types may include information mediaries like Google and social networking such as Facebook and Linkedin. Although, EBay's model is a social networking model based on thesis published in the "Cluetrain Manifesto" (The Book is now offered for free.)
Commentary: Profitability is a challenge and impacts every aspect of an operation. The business minded must keep a constant vigil. In terms of project management, many of the models dove tail into project managment paradigms with the two major methodologies as PMI's and continuous improvement. Practices overlap between the two methodologies. However, the project manager in both respects must wear an entrepenurial hat. Understanding how a business makes money can strengthen a project managers efforts immensely. Especially, as the project manager moves more into strategic and C-level projects.
Commentary: Profitability is a challenge and impacts every aspect of an operation. The business minded must keep a constant vigil. In terms of project management, many of the models dove tail into project managment paradigms with the two major methodologies as PMI's and continuous improvement. Practices overlap between the two methodologies. However, the project manager in both respects must wear an entrepenurial hat. Understanding how a business makes money can strengthen a project managers efforts immensely. Especially, as the project manager moves more into strategic and C-level projects.
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