October 2005


Transaction Scale Profit talks about the importance of big transactions which result because of big relationships.
Trasnsaction
Value Chain Position Profit :If one observes the user experience from the product / service and traces back the value added by each player in the making of the product , it is clear that there is generally a lumpy distribution of profit at one place, an enormous concentration of profit and power at a few points. These are called control points in the value chain . Whenever one analyzes a business , it is important to note the pre existing control points, radical shifts that have happened among control points and future shifts in control points , so that one can clearly see the profit potential.
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My weekend essentially involved reading the various profit models that Adrian Slywotzky had put forth in his best selling book. It clearly mentions that not more than one model needs to be digested in a week.

What is Local leadership profit ? This involves firms taking up strategies that clearly leverage the leadership position at the regional level and then scale up in a tactical way. A few examples to kick off the understanding are walmart, starbucks who started in a small location, built up the leadership at each of their respective locations and then used it as a weapon to expand to other locations. At the same time, there are umpteen examples of local leaders who find it difficult to scale. What could be the reason ? Is it purely a matter of luck, or are there are operational issues, strategic issues that entail the success of a small local leader firm to take on the world ? Let’s explore

What’s necessary to build a Local business in the first place?

  • A strong demand for the product / service at the   local level , where there are considerable entry barriers for any outsider to   replicate the biz and run away with the profits
  • Sustainable value / rather than filling a one   time need
  • A marketing strategy to introduce the product /   service to the local population
  • Willingness to completely focus on the customer   at the regional level

What’s necessary to hold on to the Local business leadership position and scale it (more importantly) ? To answer this question , one must read closely 2 books atleast, Made in America by Sam Walton & Pour your heart in to it by Howard Schultz.

The other profit models which I have not blogged about, but are equally important to understand are

Entrepreneur Profit Model :
Extraordinary expense management

Specialist Profit :
Lower cost through better knowledge, Better price through reputation, shorter selling cycle, More rapid and universal penetration, Windfall profits because of the replication of high-valu, high margin answers

Installed Base Profit:
Install a set of hardware components and generate margins on the software/services part

DeFacto Standard Profit:
Be the standard in the market and soon a lot of ancillary players will start supporting the standard which inturn brings an increase in the sales of standard product

Brand Profit:
Higher margins through good brand image

Specialist.jpg
Specialist profit deals with those firms who concentrate on specialist products and focus on the implementation of the products . These are characterized by high margins , niche segment specific, high risk associated with the failure to address the right need /want of the customer. The difference between this and Blockbuster model is that in the latter, there is huge amount of cost that is involved in going after the product and it the blockbuster product is not a niche product but a product that is aimed to cater to a large set of customers, which inevitably means a brilliant marketing campaign

Specialist profit models apply to Pharma companies,dye businesses, speciality food business, niche paper business – In summary we can say that any high margin, niche target segment , has some patent with it, can be termed as specialist profit

My weekend essentially involved reading the various profit models that Adrian Slywotzky had put forth in his best selling book. It clearly mentions that not more than one model needs to be digested in a week.

What is Local leadership profit ? This involves firms taking up strategies that clearly leverage the leadership position at the regional level and then scale up in a tactical way. A few examples to kick off the understanding are walmart, starbucks who started in a small location, built up the leadership at each of their respective locations and then used it as a weapon to expand to other locations. At the same time, there are umpteen examples of local leaders who find it difficult to scale. What could be the reason ? Is it purely a matter of luck, or are there are operational issues, strategic issues that entail the success of a small local leader firm to take on the world ? Let’s explore

What’s necessary to build a Local business in the first place?

  • A strong demand for the product / service at the   local level , where there are considerable entry barriers for any outsider to   replicate the biz and run away with the profits
  • Sustainable value / rather than filling a one   time need
  • A marketing strategy to introduce the product /   service to the local population
  • Willingness to completely focus on the customer   at the regional level

What’s necessary to hold on to the Local business leadership position and scale it (more importantly) ? To answer this question , one must read closely 2 books atleast, Made in America by Sam Walton & Pour your heart in to it by Howard Schultz.

The other profit models which I have not blogged about, but are equally important to understand are

Entrepreneur Profit Model :
Extraordinary expense management

Specialist Profit :
Lower cost through better knowledge, Better price through reputation, shorter selling cycle, More rapid and universal penetration, Windfall profits because of the replication of high-valu, high margin answers

Installed Base Profit:
Install a set of hardware components and generate margins on the software/services part

DeFacto Standard Profit:
Be the standard in the market and soon a lot of ancillary players will start supporting the standard which inturn brings an increase in the sales of standard product

Brand Profit:
Higher margins through good brand image

Specialist.jpg
Specialist profit deals with those firms who concentrate on specialist products and focus on the implementation of the products . These are characterized by high margins , niche segment specific, high risk associated with the failure to address the right need /want of the customer. The difference between this and Blockbuster model is that in the latter, there is huge amount of cost that is involved in going after the product and it the blockbuster product is not a niche product but a product that is aimed to cater to a large set of customers, which inevitably means a brilliant marketing campaign

Specialist profit models apply to Pharma companies,dye businesses, speciality food business, niche paper business – In summary we can say that any high margin, niche target segment , has some patent with it, can be termed as specialist profit

InnumeracyInnumeracy , a book that was referred by Zhao, the fictional teacher in " The art of profitability ". It deals with the lack of a specific set of skills among a lot of people, the lack of a sense of numerical proportion and an appreciation for the irreducible probabilistic nature of the world.

In a sense, the book makes readers aware of a lot of common fallacies that pervade our world view and consequently, our thinking . Innumeracy , in authors words, is the inability to deal comfortable with the fundamental notion of number and chance.
John Allen Paulos urges the readers to develop the skills of estimation by posing few interesting questions like :

  • How many trucks would be needed to displace Mount Fiju / Himalayas completely, considering that there is a truck available to remove the rubble every 15 minutes ?
  • How large should be a container be , in order to fill the blood of the entire humanity ?
  • In any random selection of people of more than 23 people in a room , what is the probability of 2 people having the same birthday? answer to this is pretty surprising
  • Human hair grows at what speed ? in miles/hours
  • How many cigarattes are smoked in a day in US/India ?

In all these questions, it is not important to know the answers to the precise decimal point. However the answers to any of these questions involves getting some basic estimates about various things right ? Now one might be wondering the reason for thinking about these questions.The reason is that it gives one a healthy sense of handling big numbers. Now why should one get a healthy sense of big numbers ? Because , getting a sense of large numbers is a must to get a sense of context and its chance of occurring.

Be it while conducting a business transaction, or reading a newspaper clipping, having a healthy sense of big numbers helps one to take better decisions and be in a better position to analyze opinions and random facts which are publicized in the media.

Apart of focusing on a number of simple mathematical concepts, here are a few learnings from the book :

  1. Law of large numbers states that in the long run, the difference between probability of some event and the relative frequency with which it occurrs approaches zero.Implies difference between 1/2 and freq of heads approaches zero
  2. Gambler’s Fallacy : Mistaken belief that because a coin has showed head several times, it is going to show tails in the next event.Hence, it is important to distinguish between Law of large numbers and gambler’s fallacy.
  3. Central Limit Theorem : Averages and Sums of non normally distributed quantities will neverthless have a normal distribution
  4. Type I and Type II errors : Type I is when true null hypo is rejected, Type II is when true alternate hypo is rejected. Here are a few good examples to understand the above errors : When money is distributed , the stereotypicl liberal tries hard to avoid Type I errors (deserving not receiving their share )and conservative is more concerned avoiding type II error(undeserving receiving more than share). When punishment is meted out, conservative is concerned with avoiding Type I error(deserving not receiving their due) and liberal worries about avoiding Type II (undeserving receiving undue punishment)
  5. Broad base fallacy : Strategy of quoting the absolute number rather than the probability of some rare phenomenon whose underlying base population is large – for example : Holiday Carnage kills 500 over 4 day weekend !!! -(This is no of people killed in any four day period)

    Overall , a brilliant account of examples and principles which help us view the word in a numerical sense . I was so excited and kicked about the way the principles were presented, that I just rushed to the book store to gulp the sequel to this book , a review on the same will be posted soon…Right now, I am off to dive deep in to the sequel " Beyond Numeracy"

Links : Innumeracy   

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