311281052IBUS6012CriticalReflection3S22012.docx

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Ridwan Ahmed, SID 311281052

9 August 2012, Critical Reflection 3

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Reading

(1)

Profit Pools: A Fresh Look at Strategy, (Gadiesh & Gilbert, 1998)

(2)

How to Map Your Industrys Profit Pool, (Gadiesh & Gilbert, 1998)

Main themes

According to Gadiesh and Gilbert, profit is not all about growth and large revenues, but about the

margins that are achieved(Gadiesh and Gilbert, 1998b). So for a company to successfully out

compete other players in the industry it has to find or create a profit pool, which is the aggregate of

profits in that segment or activity, and exploit it until the pool runs dry or other players move

in(Gadiesh and Gilbert, 1998b). One example given in the article is U-Haul, which I think is very

similar to the razor-razor blade model of sales(Bynum, 2009). Once the customer has bought the

razor for cheap, the company can then charge higher margins on razor blades which need changing

after a given number of use.

Pools can dry up, move, become too competitive, and as such any company who finds a pristine

profit pool needs to guard it through use of proprietary technology, entry barriers, or even by allying

with competitors(Gadiesh and Gilbert, 1998b).

The second article is by the same authors, the reason being that article provides the mechanism to

identify and measure the profit pool that is so discussed in the first article. Only through careful

analysis of the industry, then each segment and activity and extrapolating the data can we get an

understanding of which activity provides the highest margin and focus on it(Gadiesh and Gilbert,

1998a).

Reflection

This was a particularly interesting article as it showed me that profit can often be made from

unexpected sources. Such as financing activities for Ford, and insurance and boxes for U-Haul,

finding the niche profit pool is vital to sustaining growth, and not just physical growth of the

company(Gadiesh and Gilbert, 1998b). The process of identifying the pool was also very interesting,

something that can be done without excess effort, but has the potential to provide a very clear

picture of which activities may end up being the cash cow for the company and industry as a

whole(Gadiesh and Gilbert, 1998a).


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Case Application

As seen in our presentation, we actually pointed towards the razor-razor blade model as something

Nokia can implement, by producing low-margin cheap baseline phones. Additional feature add-ons

can be attached to enhance capabilities, on which Nokia would make the most profit. This is all to

capture the bottom of the pyramid market, the low income earners in India whom most companies

ignore. They are the pool that we want to tap into with Nokia, and in turn capture a gigantic market.

Personal Application

The process of identifying and quantifying the profit pool for an activity is of particular interest to me

as something I would be using from now on. This can be an invaluable tool for me if I want to work in

business development and strategy, allowing me to pinpoint the highest profit generating activity, or

identifying a potential profit pool.


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3

Reading

(1)

Business: The bottom of the pyramid, (TheEconomist, 2011)

(2)

Income and Expenditure: India, (Euromonitor, 2011)

Main themes

According to the article published on The Economist Schumpeter blog, the business world was in an

uproar after C.K. Prahalad brought the idea of the fortune to be found at the bottom of the

pyramid(TheEconomist, 2011). He described how in India and other developing markets a large

portion of the market was being neglected, waiting to be catered to. This saw a flurry of interest in

moving into that market, and other such in developing countries by companies such as Tata with

their Nano car and Chinese firms(TheEconomist, 2011).

But the author argues that it is not only countries like India that have the bottom portion being

neglected, but also developed countries such as the USA where the middle class is suffering and 40

million people live below the poverty line(TheEconomist, 2011). This again is a market that can be

captured with tailored products and services, such as Aldi is doing with their small shops and

cheaper non-brand products. Even McDonalds is now selling healthy menus, including coffee which

is competing with the pricier Starbucks variant(TheEconomist, 2011).

The other paper by Euromonitor International is a study on the income and expenditure of the

Indian population. They conclude that even if these people at the bottom of pyramid with their

limited income are a high volume, brand aware market who can be targeted with tailored products

and services(Euromonitor, 2011).

Reflection

We tend to think of potential markets as high spenders and large margins all the time, which tends

to ignore the significant populace who live near or below the poverty line. The bottom of the

pyramid segment has to be addressed, and those who reach them first will not only capture that

market, but also when the economy prospers will have a loyal following of customers already aware

of the brand and willing to upgrade.

Case Application

This was our other vital strategy, which is to penetrate the rural and low-income Indian market with

our cheaper customizable phones with features that would more suit their needs such as longer


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battery life, potentially solar rechargeable. With market penetration figures of 38.6% in India, we see

an untapped pool of profit waiting to be captured(Euromonitor, 2010).

Personal Application

Knowing such markets even exist and that they have the potential to generate enormous returns is a

great first step to being someone who can look at a company, look at the product, and find the right

customers at the right price. It also allows me to look into new markets I did not know existed and

help design products and services that would best suit their needs.

References

BYNUM, J. 2009. What is the Razor/Razorblade model? [Online]. Investopedia.com: Investopedia.

Available:http://www.investopedia.com/ask/answers/08/razor-blade-

model.asp#axzz26H6sT2hC[Accessed 10th September 2012].

EUROMONITOR 2010. Regional Focus: Asia Pacific - the world's largest mobile phone market.

Euromonitor International. 10 March 2010 ed. GMID: GMID.

EUROMONITOR 2011. Income and Expenditure: India. Euromonitor International. 21 June 2011 ed.

GMID: GMID.

GADIESH, O. & GILBERT, J. L. 1998a. How to map your industry's profit pool. Harvard Business

Review,76,149-162.

GADIESH, O. & GILBERT, J. L. 1998b. Profit pools: A fresh look at strategy. Harvard Business Review,

76,139-147.

THEECONOMIST. 2011. Business: The bottom of the pyramid; Schumpeter [Online]. London: The

Economist Intelligence Unit. Available:

http://ezproxy.library.usyd.edu.au/login?url=http://search.proquest.com/docview/8737200

60?accountid=14757[Accessed 11th September 2012].
http://www.investopedia.com/ask/answers/08/razor-blade-model.asp#axzz26H6sT2hChttp://www.investopedia.com/ask/answers/08/razor-blade-model.asp#axzz26H6sT2hChttp://www.investopedia.com/ask/answers/08/razor-blade-model.asp#axzz26H6sT2hChttp://www.investopedia.com/ask/answers/08/razor-blade-model.asp#axzz26H6sT2hChttp://ezproxy.library.usyd.edu.au/login?url=http://search.proquest.com/docview/873720060?accountid=14757http://ezproxy.library.usyd.edu.au/login?url=http://search.proquest.com/docview/873720060?accountid=14757http://ezproxy.library.usyd.edu.au/login?url=http://search.proquest.com/docview/873720060?accountid=14757http://ezproxy.library.usyd.edu.au/login?url=http://search.proquest.com/docview/873720060?accountid=14757http://ezproxy.library.usyd.edu.au/login?url=http://search.proquest.com/docview/873720060?accountid=14757http://www.investopedia.com/ask/answers/08/razor-blade-model.asp#axzz26H6sT2hChttp://www.investopedia.com/ask/answers/08/razor-blade-model.asp#axzz26H6sT2hC

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