The Profitability Test: Does Your Strategy Make Sense?

by Harborne W. Stuart Jr.

Overview

A new way to determine whether a business strategy will lead to profitability.

This book teaches readers to understand profitability in a systematic way, equipping them to provide logically coherent answers to questions about whether a new venture will be profitable, if changes in business strategy will generate an increase in profits, or if “staying the course” will result in continued profitability. Unlike books by business gurus that offer one-size-fits-all advice, this book starts from the premise that you, the reader, are in the best position to make difficult judgments about your business. It shows how to turn these judgments into coherent analysis, presenting state-of-the art theory for understanding business strategy from an economic perspective. The basic building block is the value that is created when the buyer and seller make a deal. In simple terms, if a company is to be profitable, it must make a favorable deal with each and every customer.

After setting out key principles and applying them to market situations, the book teaches readers to apply the analysis to their own businesses—in other words, to create their own business game, the main ingredients of which are people and the value that they can create. It addresses how to integrate strategic moves into the book's theory of value creation and competition in order to address the sustainability of a company's profits, the effectiveness of the “invisible hand,” and restrictions to competition. Optional appendixes explain the relevant mathematics.

Product Details

ISBN-13:	9780262337571
Publisher:	MIT Press
Publication date:	08/16/2016
Series:	The MIT Press
Sold by:	Penguin Random House Publisher Services
Format:	eBook
Pages:	224
Sales rank:	627,821
File size:	3 MB
Age Range:	18 Years

About the Author

Harborne W. Stuart Jr., currently Adjunct Professor at Columbia Business School and School of Engineering and Applied Sciences, has held positions at New York University Stern School of Business, MIT Sloan School of Management, and Harvard Business School.

Table of Contents

Acknowledgments ix

Introduction xi

I Value Creation and Competition 1

1 Value Creation: The Foundation of Profitability 3

2 Contributed Value and Unrestricted Competition 7

Appendix: The Mathematics of Unrestricted Competition 20

3 Willingness to Pay and Economic Cost 25

Appendix: Using Decision Trees in WTP and Economic-Cost Calculations 39

II Being Better-Winning the Customer 43

4 Competing for the Customer: The Value-Cap Advantage 45

5 Customer Tastes and Profitability 53

Appendix: Contributed Value and Value-Cap Advantages 58

III Being in Demand 61

6 Guaranteed Profitability: The Power of Exclusion 63

Appendix: Monopoly Power and Supply-Demand Reasoning 69

7 Envy Is a Form of Exclusion 79

8 Nonconstant Marginal Costs 85

9 Market-Price Effects 95

10 Being in Demand: Guaranteed and Potential Profitability 103

Appendix: Supply and Demand Revisited 109

11 Profitability under Unrestricted Competition 113

IV Your Firm's Game 115

12 Buyers and Competitors 117

13 Suppliers 127

14 Larger Games 139

15 Economic Value: Relative and Subjective 147

V Changes in the Game 155

16 Sustaining Profitability 157

17 Strategic Moves: Changing the Game 169

Appendix: Game Matrices for Game Trees 188

18 Strategic Moves: Restrictions 191

Conclusion: A Coherent Story 195

Notes 199

Index 203

What People are Saying About This

Giovanni Gavetti

The Profitability Test is a significant contribution for scholars, instructors, and especially students. But it is a significant contribution also for the expert strategist seeking intellectual challenges. Top strategists have two virtues: great instincts and excellent discipline. After reading this book, I can't think of a better manual for sharpening these skills, especially discipline. In fact this is probably the most analytically rigorous strategy manual out there.

John Kay

A fine survey of the real economics of business strategy. It explains what others have failed to explain—why different firms facing the same five forces perform differently.

Endorsement

The Profitability Test is a significant contribution for scholars, instructors, and especially students. But it is a significant contribution also for the expert strategist seeking intellectual challenges. Top strategists have two virtues: great instincts and excellent discipline. After reading this book, I can't think of a better manual for sharpening these skills, especially discipline. In fact this is probably the most analytically rigorous strategy manual out there.—Giovanni Gavetti, Associate Professor of Strategy, Tuck School of Business, Dartmouth University

Ramon Casadesus-Masanell

The most comprehensive, clear, and well-organized exposition of value-based business strategy to date, a rich approach that builds a logically consistent framework from first principles to understanding organizational value creation and value capture. The Profitability Test synthesizes the contributions to this body of knowledge of the past two decades and offers a number of new results and ideas. An indispensable reference for readers seeking to develop a coherent 'story' of their firm's value and profitability.