FINDING YOUR PROFIT ZONE

 Article by Herb Rubenstein, President, Sustainable Business Group

Introduction

Sustainability strategies in for-profit companies must be based on a clear understanding of the “profit zone” within a given industry. This phrase –made popular by Adrian J Slywotzky and David J Morrison in their book The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow’s Profits – identifies that within broad industry categories, some subparts of the industry are quite profitable while others are not. All organizations will be able to benefit from properly identifying profit zones, especially when deciding on which sustainability strategies to implement.

Profit Zone: Not Where You Might Think

In the late 1980s and early 1990s when IBM focused on making and selling computer hardware, the profit margins were so low that the value of the company dropped from $80 billion to $20 billion in five years. Digital, Inc. suffered a similar fate focusing on the large mainframe computer market.

The profit zone in this industry was in the software side of the market. Similarly, Coca-Cola discovered that the profit zone was not in the syrup they made, but was in the bottling, the signage and the vending machine area. Over the past decade, Coca-Cola consolidated its holdings by buying forward in the distribution chain to capture the profit zone.

Similarly, IBM has consolidated operations by moving into the software and consulting side of the computer business. The creation of the Business Intelligence Division and The Knowledge Management Institute represent IBM’s efforts to capture some of the rapidly growing market share of the large accounting/consulting firms and to capture some of the huge profits in the software industry were successful.

One company decided to terminate its relationship with a supplier of a platform on which its software was based to consolidate its operations and produce its own platform. This decision was made even though it temporarily deprived the company of many important customers who did not have equipment to use the new product. 

Although the decision was originally painful for the company, it was the result of a clear strategy to capture the profit zone within the software industry and proved to be the right decision.

Finding the profit zone within the software industry and other industries is a daunting task,  and one for which consultants are paid huge sums. Business strategists, however, must take this type of analysis into account when assisting companies in developing sustainability business strategies, especially when sustainability is defined as “high profit” by the organization.

Non-Profit Profit Zone

A similar analysis is applicable to educational institutions that focus not on profits to such a great extent, but on growth and gross revenues.
In addition, as non-profit organizations seek to find ways to cover overheads that grants do not and to stabilize income through the thick and thin of grant awards, they will need to find services they can provide and products they can sell that constitute their entry into profit zones that surround them.

Many non-profits provide training programs that are not profitable. However, there is a significant profit zone “next door” to the training program, and that is in the temporary and permanent placement business now inhabited by Manpower, Inc. and other companies.

We are personally aware of non-profits that assist their trainees in finding jobs on a regular basis and charge fees for this service. They can capture part of this profit zone that had previously been outside of their business model.

For many organizations selling some of the information they gather, such as mailing lists, books, sharing their website domain name, etc. can prove to be profitable. Non-profit organizations who find for-profit organizations with similar values may form strategic business alliances. They can leverage the organization’s brand name and reputation when the non-profit assists in the marketing of the company’s products.

A good example of this is the American Society of Association Executives’ endorsement of the Legg Mason Wood Walker investment firm’s cash management products for non-profit organizations. This type of leveraging of a non-profit organization’s asset (its name as an endorsement) requires a careful analysis of the value of the non-profits assets to the for-profit world. They must involve stakeholders early in the process to secure their input and approval.

Recently, the American Medical Association had to stop a potentially lucrative endorsement program when there was a backlash by members who did not believe that the AMA should be endorsing products for a fee.

In another example, the American Automobile Association (AAA) has started an interesting, socially useful and potentially remunerative expansion possibility. AAA has begun to offer driver education services in Maryland and charge for its driver’s education programs. The leveraging of their AAA brand and the reputation for quality that they have achieved could provide a good basis for its strategy to expand into this market which is currently very fragmented and often viewed as providing a low quality service.

In addition, with 42,000 deaths on American highways annually, AAA’s driver education program has the potential to become very large as improved driver education is obviously required in the US.

Conclusion

Each industry, either for profit or not, has a unique profit zone. Identifying what that profit zone is, and then expanding on it, is crucial in the today’s economy. Your sustainability strategies will have everything to do with where you decided to position yourself in the market based on what your most lucrative profit zone is. All organizations large and small, for profit and not for profit, will benefit from carefully analyzing their profit zone and incorporating that information into their sustainability strategies.

About the Author

Herb Rubenstein is the Executive Director of the nonprofit organization, THE LEEEGH, which stands for leadership in education, energy, environment, governance and health.  He is also the President of the Sustainable Business Group, a consulting firm to businesses, He is an adjunct professor of strategic management at the Global Energy Management Program of the University of Colorado Denver.

He is the lead author of Breakthrough, Inc.: High Growth Strategies for Entrepreneurial Organizations, lead author of Leadership Development for Educators, and the author of the American Bar Association book, Leadership for Lawyers.  He has authored over 100 articles and over 80 videos on business strategy, entrepreneurship, leadership, and improving organizations.

He can be reached at herb@sbizgroup.com or 303 910-7961. The website for the Sustainable Business Group is www.sbizgroup.com and for THE LEEEGH please see www.theleeegh.org. You can learn more about Mr. Rubenstein’s books at www.leadershipforattorneys.org, www.leadershipforeducators.org and view his videos at www.youtube.com/theleeegh and www.vimeo.com.

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