Analyzing Costs, Procedures, Processes, And Outcomes In Human Services, Vol. 42 Book

It is about different profitability models - 23 of them. This book is written in the form of the novel through asking question by mentor and answering them by mentee. It is short read but it took me a while to chew the concepts of profit making through lot of discussions. Normaly I like to read business books as novels but in this instance it was dificult.

So this is my assessment of the book The Art of Profitabilityr by Adrian Slywotzky according to my 8 criteria:
1. Related to practice - 3 stars
2. It prevails important - 3 stars
3. I agree with the read - 4 stars
4. not difficult to read (as for non English native) - 4 stars
5. Too long (more than 500 pages) - short and concise (150-200 pages) - 4 stars
6. Boring - every sentence is interesting - 3 stars
7. Learning opportunity - 4 stars
8. Dry and uninspired style of writing - Smooth style with humouristic and fun parts - 3 stars

Total 3.5 stars

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Here are some highlights and excerpts from the book that I find worth remembering (Complete highlights and excerpts from the book you can find at ):



1. Customer Solution Profit.

▪ Once Factset identified a company as a potential customer for their information services, they'd send a team of two or three people to work there. They would spend two or three months, sometimes longer, learning everything they could about the customer--how they ran their business, how their systems worked (and didn't work), and what they really cared about. Based on this genuine knowledge of the customer, Factset then developed customized information products and services tailored to the specific characteristics and economics of the account. Once they landed the account, they spent a ton of time integrating their product into the customer's systems. During this process, Factset's revenues were tiny and their costs were huge. If you looked at a monthly P&L for a particular account, you'd see they were losing a ton of money. Costs of $10,000 might be charged against revenues of $3,000."




▪ But then things would begin to change. After three or four months, Factset's products would be woven into the daily flow of the customer's operations. Their software would be debugged 
and working fine. Now Factset didn't need three people working fulltime on the account. One person could maintain the service, probably part-time. And as the word spread among the client's employees about how powerful Factset's data was and how effectively Factset's service had been customized to their specific needs, they began taking more and more advantage of it. Factset's monthly costs fell from $10K to $8K, while monthly revenues started to grow, from $3K to $5K to $12K.

▪ To succeed in business, you have to have a genuine, honest-to-goodness interest in profitability

▪ most of the executives were focused on things the division was already doing well, whose impact on profits seemed to be small--incremental quality improvements and modest production efficiencies--rather than the needs of their customers.

2. Pyramid Profit

▪ Here's how it works at Mattel. You sell a Barbie doll for $20 to $30. But imitators can come in below you. So you build a firewall. You develop a $10 Barbie to seal off that space. It's barely 
profitable, but it prevents other companies from establishing a connection with your customers. And even girls who start with the $10 Barbie usually move on to buy accessories and other dolls that make them profitable for Mattel. "But in order to achieve a real breakthrough, Mattel had to look in the other direction. Looking hard, they saw the opportunity for a $100 or $200 Barbie."

▪ Forget about the little girl. Instead, think about her mother. She played with Barbies twenty or thirty years ago. She remembers those dolls with incredible fondness. And now she has money to spend. Maybe Mom will buy a designer Barbie--finely crafted, exquisite. Not a toy but a collector's item, like the china teapots or African sculptures or rare postage stamps 
that enthusiasts will pay a great deal to own. Providing enormous satisfaction to the customer and enormous margins to Mattel."

▪ Barbie wasn't a product any longer, but a system, a carefully crafted, coordinated, and integrated system. A firewall of defensive product at the bottom of the pyramid and powerful profit-generators at the top.



▪ A true pyramid is a system in which the lower-priced products are manufactured and sold with so much efficiency that it's virtually impossible for a competitor to steal market share by underpricing you. That's why I call the lowest tier of the pyramid the firewall.

▪ The customers themselves form a hierarchy, with different expectations and different attitudes toward price. There are Mattel customers who absolutely won't spend more than $10 for a no-frills doll. There are others who'll pay top dollar for a unique product. The pyramid captures them both.

▪ General Motors, of course, invented the pyramid model back in the 1920s, under Alfred P. Sloan, with Chevrolet at the base and Cadillac at the apex

▪ Many businesses come in pieces. And all the pieces may not be equally profitable. In fact, in most cases, profitability is quite lumpy- sometimes high, sometimes low, sometimes non-existent.

▪ Think about Coca-Cola. One product, right? Yes--but several businesses. Coke has a grocery component, a restaurant component, a vending-machine component. Most of the profits flow from the restaurant and vending-machine sales

▪ Same product, several businesses. Whereas the Barbie pyramid is really based on several very different products targeted at basically distinct customer sets

3. Multi-Component Profit

▪ Now think about a hotel," Zhao pressed on. It has lots of components. One is called 'a single room for one night,' another is called 'a one-day meeting for twenty people,' and yet another is called 'a three-day convention for three thousand people.' Think about the relative dollars 
compared to the relative costs. Same rooms, lots of ways to sell them

▪ think about a bookstore. It has a foot-traffic-in-the-store component, a book-group-member component, an online-website component, and a corporate purchasing component. Same books, lots of ways to sell them--each with its own profit picture

▪ Burton recognized that the bookstore itself could be a base for building several new high-profit components: the corporate business, the book-group business, the personal-service business. After several months of working with the booksellers association, he developed a 
program to dramatically intensify the bookstores' outbound selling activities.

▪ He suggested having a couple of account managers call on corporate libraries and HR departments to promote the latest business books. Providing services to local book groups was next. And that was followed by promoting sales to high-purchase individuals. 
It was obvious, in a way. After all, the booksellers already knew that their best customers bought nearly $500 worth of books a year. But they'd never realized that these people represented a separate component of their business that they could consciously, deliberately 
target and grow. A simple but powerful insight.

▪ The large box on the left," he explained, "is your base business. The smaller boxes on the right are your component businesses

▪ "what's the idea behind this profit model?" Steve thought a moment. "Different parts of a business can have wildly different profitability."


▪ "The customer behaves very differently on different purchase occasions."

â–ª Different degrees of price sensitivity



4. Switchboard Profit

▪ So a switchboard is another word for packaging talent?" Steve asked. "No, no, no. The packaging concept was just the first step toward building a true switchboard. Packaging falls far short of creating the concentration of power that a switchboard requires."

▪ Step two," Zhao continued, "was to find a source of stories. In both TV and movies, good stories make the system go--they're the core around which everything is built. Realizing this, Ovitz knew he needed a great source of stories. So he befriended the leading literary agent in 
New York at the time, a fellow named Mort Janklow

▪ So now, with a good flow of stories, Ovitz had leverage with the talent. And by organizing the talent, he had leverage with the studios. Ovitz could bring a great story to a hot actor and a hot director and then bring all three to a studio hungry for movie ideas. It was a brilliant idea--and like many brilliant ideas, obvious in retrospect

▪ There's a step three?" - Even if you have a source of stories, along with the persuasiveness and skill needed to put together a package of talent, you're only controlling two of the variables. There's a third variable--number." "Meaning what?" "Well, you could work your tail off putting packages together and still represent only three percent of the market." Zhao smiled. "How interesting." "I don't know a lot about Hollywood," Steve went on, "but I'm guessing there were probably ten or twelve good-sized studios at the time." Zhao nodded. "Close enough." "And probably several hundred stars, directors, and screenwriters hat mattered." "Also close enough." "So if you're Michael Ovitz and you represent, say, a couple of dozen


▪ screen artists, the studios have lot of other options. They don't have to deal with you if they don't want to."

▪ But if you represent a couple of hundred artists, the studios' options start to narrow." 
"Does that apply only to the studios?" "No, that's the beauty of it. The more critical mass you build, the higher your probability of putting together a package that works. That, in turn, means that a star, a writer, or a director will be better off being represented by you rather than any other agent, because the odds of being part of a winning combination are so much higher."  "So now the studios have to deal with you, and the stars want to deal with you."

▪ "Let's say a star gets five million dollars for a picture," Steve began. "And let's say there are two big stars per picture--Meryl Streep and Robert Redford in the 1980s, or Tom Cruise and Nicole Kidman in the '90s. Figure the director gets a million and a half, and the writer gets half 
a million. On the original Hollywood model, the agent represents one star and gets a ten percent fee. That's $500 thousand. Here Ovitz represents a complete package and gets ten percent of $12 million, or $1.2 million. More than twice as much." "Is that it?" 
"Oh no, far from it." Zhao sat up straight, staring at Steve. He just might have a great 
student on his hands. "By representing a team rather than an individual, he has far greater 
bargaining power. He could raise that twelve million to fifteen million, or more. After all, the studio has nowhere else to go if it wants to get its hands on the biggest stars." "And therefore, the agent's fee would rise to one and a half million dollars, three times greater than in the traditional model." "And that's it?" "No, there's more. The biggest factor is that the probability of striking a deal goes way, way up. As the pool of talent you represent grows to two or three hundred, the chances of putting the 'right' talent together goes way up, and so does the probability that the studio has to deal with you. So your volume goes way up. The number of deals you can put together per unit of time will probably double or triple." "Net result?" 
"Profitability per unit of effort and unit of time is probably seven to ten times greater than in the traditional model."

5. Time Profit

▪ Why couldn't some company create a kind of telecom Switchboard by offering equipment, software, services--the whole nine yards--from every supplier, expertly mixed and matched for customized needs?"

▪ The profit would come from selling the equipment itself as well as from having inside knowledge of everybody's products, not just those of a single supplier. And the company that moved first could really make it work by signing deals to represent all the best manufacturers, 
consultants, and software makers. Of course, you'd need top-flight experts to work with the customers, to make sure that the systems you put together were absolutely the best. And you'd have to invest the time in studying each customer's business instead of trying to sell cookie-cutter solutions--a little like the Customer Solutions model. But the time invested up front could really pay off on the back end, with contracts to service and expand and upgrade the equipment continually.

▪ even weird numerical problems can usually be solved by using some information that's generally available and a little common sense."

▪ The key is to use the numbers to ask and answer critical questions.

▪ Intel invents a new chip and makes money by being the first to market?"

▪ "The main difference was that Intel usually had two to three years to profit from their innovations, while Waterstone's had only six to nine months. So Terry asserted that they needed instant diffusion--a faster way to squeeze out the juice before everybody else learned the secret. She helped design a neat system to accomplish this.


▪ Two weeks before announcing a new product, Waterstone's would send out a letter to two hundred clients letting them know it was on the way. A week in advance, they called them on the phone, saying, 'Our new product will be available next Monday.' "Thursday evening before the launch, they'd start a training session on the new product for everybody in the company--a crash course covering every detail. The class continued on Friday morning. Any unanswered 
questions raised by the participants had to be researched on Friday afternoon. Saturday morning they'd be at it again. They kept working through the weekend until the entire firm was ready to explain the new product in their sleep. "The client calls started coming in on Monday morning. By the end of the week, they'd have fifty or sixty inquiries. Within two weeks, the number would be up to a hundred.

6. Blockbuster Profit

▪ It's inevitable that not every R&D project will hit the target. R&D is anti-profit when it has no 
clear target, the wrong target--for example, a market where customers won't pay for what you've developed--or a trivial target, where the total profit return is a fraction of the total investment