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Business Value and Revenue Management

企業價值及營收管理

Jason C. H. Chen (陳周宏 ), Ph.D.

Professor and Coordinator of MIS

Graduate School of Business, Gonzaga University

Spokane, WA 99258 USA

Editor-in-chief, International Journal of Revenue Management

chen@jepson.gonzaga.edu

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Outline of the Topic

• Business Models and Why?• Evolutions of Economy• Value Creation/Innovation

– Information Systems Strategy Model– Michael Porter’s Five-Competitive Forces Model– Red vs. Blue Ocean Strategy

• Revenue Management– Models and Applications

• Conclusion

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Source: Compustat. Grant explored ROEs for these industries for the years 1985-1997: R. M. Grant, Contemporary Strategy Analysis: Concepts, Techniques, Applications (Oxford, U. K.: Blackwell, 2002) p. 68.

Industry Profitability, 1981-2001

Industry ROE ROA1. Pharmaceuticals 25.87% 10.27%2. Chemicals and allied products 21.70 7.883. Food and kindred products 24.78 7.254. Printing and publishing 16.30 6.685. Rubber and miscellaneous plastic 15.07 6.256. Fabricated metal products 19.00 5.587. Paper and allied products 13.77 4.708. Electronics and electrical equipment (no computers) 9.63 4.679. Nonferrous metals 10.39 4.23

10. Machinery, except electrical 15.69 3.8011. Petroleum and coal products 13.25 3.7612. Textile mill products 5.11 3.7113. Aircraft, guided missiles, and parts 14.02 3.5714. Stone, clay, and glass products 9.16 3.4415. Motor vehicles and equipment 11.91 3.1616. Iron and steel 6.40 3.1417. Airlines (transportation by air) 2.68 2.05

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Firm Profitability, 1981-2001

Source: Compustat

Firm ROA Firm ROA

Pharmaceuticals Airlines

Bristol Myers Squibb 13.71% Southwest Airlines 4.85%

Merck 13.37 AMR 1.51

Schering Plough 12.89 Delta Airlines 1.50

WYETH American Home Products 12.52 UAL 0.96

Eli Lilly 10.23 US Air 0.31

Pfizer 9.66 America West Holdings -3.27

Pharmacia & Upjohn 7.98 Continental Airlines -4.97

American Cyanamid 3.57 TWA -5.37

Northwest Airlines -3.40

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Determinants of Profitability

WHY?

Business Models

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The Evolutions of Economy

OLD Economy

Post Economy(2001-and Beyond)

NEW Economy

(1994-2000)

Product/Service Information/Internet

Knowledge

Market share Time to market/Site visitation

Wallet share/Profit

Economies of Scale/Efficiency

TechnologyImprovement/Effectiveness

Retaining customers/Win service/ Innovation

Based on

Measurementof success

Focus

N

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Essential Value Propositions for a Successful Company

• Business Model

• Core Competency

• Execution– Set corporate goals and get executive

sponsorship for the initiative

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Cooperating to Create Value

Revenue

Customer Value Relative Positioning

Competitive forces (coopetitors)

-Suppliers-Customers-Rivalry-Threat of Entry-Substitutes-Complementors

Firm’s Decisions1. Differentiation2. Low-cost3. ???

(influence)

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Business Models and Revenue Management

• The framework for making money.

• It is the set of activities which a firm performs, how it performs them, and when it performs them so as to offer its customers benefits they want and to earn a profit.

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Case Example: Wal-Mart• Analysis: Which, How, and When in Wal-

Mart’s Success– Which:

• moved into small towns that its competitors shunned

– How:• Wal-Mart saturated contiguous towns and built

distribution centers and logistics systems

– When:• First mover advantage by capturing scarce

resources, locations, and loyal employees and customers

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Business Models and Revenue Management

Industry Factors-Competitive forces

-Cooperative forces

-Industry value drivers

ProfitabilityProfitability

ACTIVITIESPositions•Customer value•Market segments•Revenue sources•Relative positioning

Resources

Costs

create andappropriate

value

Firm

(Business Model)

Form

ulat

es

Executes

Which,

How,

When

Value Chain(Business

Systems)

Value

Systems

FIRM-SPECIFIC FACTORS

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When to Perform Activities

• Two firms can perform similar activities in similar ways but still end up with business models whose profitabilities are different if the timing of when they perform the activities is different.– First-mover advantage– Windows of opportunities

• periods within which some activities are best performed

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-10 -5 0 5 100

50

100

150

200

250

300

Time of market introduction relative to competition (months)Is timing for market entry really important?

Pro

fits

rel

ativ

e to

co

mp

etit

ion

s (%

)

Relationship between profits and time of market introduction

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Revenue Management

(a.k.a. yield management)

開源或節流 ?

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Revenue Management (RM)

• RM focuses companies on revenue growth, not cost-cutting and downsizing.

• RM drives bottom-line increases through top-line improvements.

• Growth comes from the marketplace, not the workforce.

• The key to real growth is learning how to deal effectively and proactively with a constantly changing markets.

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Revenue Management (RM) vs. MIS

• MIS is to deliver – the right information, to the right people– at the right time, with the right form

• RM is to sell– the right product, to the right customer– at the right time, for the right price– Thereby maximizing revenue from a

company’s products

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Examples on Revenue Management

• A No-Tech approach to RM– Barbershop

• A Low-Tech approach to RM– Opera House

• A High-Tech approach to RM– Airlines

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Other Examples

• Hotel

• Car rental

• Golf

• Broadcasting

• Shipping

• Restaurant

• Etc.

因應競爭台鐵擬採彈性票價

How about in Taiwan?

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Some U.S. airline industry observations

• Since deregulation (1978) 137 carriers have filed for bankruptcy.

• From 95-99 (the industry’s best 5 years ever) airlines earned 3.5 cents on each dollar of sales:– The US average for all industries is around 6 cents.– From 90-99 the industry earned 1 cent per $ of sales.

• Carriers typically fill 72.4% of seats and have a break-even load of 70.4%.

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Matching supply to demand when supply is fixed

• Examples of fixed supply:– Travel industries (fixed number of seats, rooms, cars,

etc).– Advertising time (limited number of time slots).– Telecommunications bandwidth.– Size of the MBA program.– Doctor’s availability for appointments.

• Revenue management is a solution:– If adjusting supply is impossible – adjust the demand!– Segment customers into high willingness to pay and

low willingness to pay.– Limit the number of tickets sold at a low price, i.e.,

control the average price by changing the mix of customers.

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Revenue management and margin arithmetic

• Small changes in revenue can have a big impact on profit, especially for high gross margin and low net profit % industries:Percentage change in profit for different gross margins, revenue increases and net profits as a

percentage of revenue.

Gross margin 1% 2% 5% 8%

Gross margin 1% 2% 5% 8%

100% 50% 100% 250% 400% 100% 17% 33% 83% 133%90% 45% 90% 225% 360% 90% 15% 30% 75% 120%75% 38% 75% 188% 300% 75% 13% 25% 63% 100%50% 25% 50% 125% 200% 50% 8% 17% 42% 67%25% 13% 25% 63% 100% 25% 4% 8% 21% 33%15% 8% 15% 38% 60% 15% 3% 5% 13% 20%

Revenue increase

Net profit % = 2% Net profit % = 6%

Revenue increase

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Ugly reality: cancellations and no-shows• Approximately 50% of reservations get cancelled at some

point in time.

• In many cases (car rentals, hotels, full fare airline passengers) there is no penalty for cancellations.

• Problem: – the company may fail to fill the seat (room, car) if the passenger

cancels at the very last minute or does not show up.

• Solution:

– sell more seats (rooms, cars) than capacity.

• Danger:

– some customers may have to be denied a seat even though they have a confirmed reservation.

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39%

62%

86%

61%

38%

14%Business launch

Revenue Impact

Profit Impact

Launches within red oceans Launches for creating blue oceans

The Profit and Growth Consequences of Creating Blue Oceans

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Winners vs. Losers• What separates winners from losers in creating

(ultimate) strategic competitive advantage is neither bleeding-edge technology nor “timing for market entry.”

• It is from “value innovation”

FirmFirmprice

utility

cost

Innovation ValueInnovation

ValueInnovation

align

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Value Innovation

Customer Value

Costs

Value Innovation

The Simultaneous Pursuit of and Differentiation Low Cost.

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The Twenty-first Century will ...

• The twenty-first century will witness only two kinds of companies:– those that exploit Information Technology (IT)– those that are out of business

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Conclusion

• Value innovation and business models• Revenue management and overbooking give

demand flexibility where supply flexibility is not possible.

• Concept and powerful tools to improve revenue:– American Airlines estimated a benefit of $1.5B over 3

years.– National Car Rental faced liquidation in 1993 but

improved via yield management techniques.– Delta Airlines credits yield management with $300M in

additional revenue annually (about 2% of year 2000 revenue.)

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Revenue Management

• If you are interested in the issues of RM

• International Journal of Revenue Management

• http://www.inderscience.com/ijrm

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International Journal of Business and Systems Researchwww.inderscience.com/ijbsr

International Journal of Mobile Learning and Organisationwww.inderscience.com/ijmlo

http://barney.gonzaga.edu/~chen/journals.html

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The Seven Core Concepts ofRevenue Management

1. Focus on price rather than costs when balancing supply and demand.

2. Replace cost-based pricing with market-based pricing.3. Sell to segmented micro markets, not to mass market.4. Save your products for your most valuable customers.5. Make decisions based on knowledge, not supposition.6. Exploit each product’s value circle.7. Continually reevaluate your revenue opportunities.