The Profitability Test
Does Your Strategy Make Sense?
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.
Downloadable instructor resources available for this title: case studies
Paperback$35.00 X ISBN: 9780262529402 224 pp. | 7 in x 9 in 99 figures, 2 tables
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.
Professor, Oxford University; author of Other People's Money and Foundations of Corporate Success
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.
Herman C. Krannert Professor of Business Administration, Harvard Business School; editor of the Journal of Economics & Management Strategy
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.
Associate Professor of Strategy, Tuck School of Business, Dartmouth University