Mapping Your Market Pool and Potential Profits

Knowing in which market a business should compete and the tasks needed to earn profit are necessary for sustainable growth. A paper by Gadiesh and Gilbert (1998) helps strategic decision makers think about their profit pools and how to earn sustainable profits.  Some companies have declined because they were trapped in drying pools and didn’t consider other possibilities in creating new revenue streams.

Mapping a profit pool affords the opportunity to see which activities are earning them revenue and which should be adjusted. Furthermore, it also provides an opportunity to open the underlining industry structure and determine which economic forces and pressures are impacting their opportunities. To understand the environment creates greater opportunity for strategic thinking. 

Mapping the value pool is a process of outline the value chain activities and then the potential profits of each. It is a process of defining boundaries, estimating the pool’s size, value-chain profits, and reconciling the calculations. Together these components should provide some discussion on the possibilities available in the market for new businesses opportunities. 

Defining the Pool: Defining a pool is helpful in determining what segment of market a business should be working within. The first step is to define this market for analysis. Understanding the boundaries of that market will help in narrowing down which information will be relevant for analysis. Are you in the banking business, fishing business, or telecommunications business?

Size of Pool: The size of the pool is the total profits that can be earned within a particular market. Analysts often look at industry reports to determine the overall value of a market. At times it may be necessary to add a number of industry statistics together if they fit within a firm’s market pool. For example, a fish farm may find that there is a billion dollars (pool size) total worth of fish activity within the area.

Value-Chain Profits: Breaking the pool down into the profits made through each value-chain activity can be difficult because financial information may not be readily available. Using pure players to create benchmarks and then estimating mixed players activity is beneficial.  The goal is to break the profits of the industry into varying activities such as fish farms, fishing vessels, distribution, farmer markets, etc…

Reconciling the Differences: Once you add up the distribution of value-chain profits and know the total value of the industry they should roughly equally the same size.  If they do not come out similar then the information used or the estimates may be wrong. It is necessary to explore the differences to seek better information. 

The benefit of outlining where profits can be earned and made is to determine where new businesses can find their profits as well as determining areas that have the potential to grow. Generally, the use of a pool analysis will help companies determine new opportunities and change their business strategies when their pool is declining. The overall process of understanding the market and scanning the environment brings more knowledge and information for decision-makers. 

Gadiesh, O. & Gilbert, J. (1998). How to map your industry’s profit pool. Harvard Business Review, 76 (3).

Developing Strategy through the Creative Process

Creativity is an important component of strategic thinking. Those who are able to imagine and think through varying scenarios are capable of predicting the end game.  Research by Larson and Angus helps shed light on the process of creative learning and its association with developing critical strategies (2011). This learning can start in high school and move into the early college years. Creative learning may continue through one’s lifetime.

The development of agency is an important tool for achieving goals and ensuring the ability to move through a changing environment.  Projects in young adulthood and early college can help to develop the mental faculty of seeing projects to their completion as well as thinking creatively about solving problems. Education should have a level of creative faculty to develop these skills to match concrete content learning.

Agency skills also develop the ability to have executive control over one’s own thoughts, learn new cognitive tools, develop creative problem solving, learn the action skills to achieve goals and move into higher order thinking. These skills and abilities further create a platform for strategic thinking.  Without the ability to think creatively, it is doubtful that new methods and paths will be found.

Programs often use the “arc of work” approach which includes the concepts of planning, monitoring, adjusting existing plans and receiving feedback. When projects span of a period of weeks and months it requires students to be reflective of their creative process. When the situation changes the students can find ways of adapting to those changes. It is this thinking about and reflection on methods that helps students find new ways to complete their projects in meaningful ways.

When people are engaged in projects and own the results they invest themselves into the process more deeply. It is an investment that helps create higher order thinking and strategic planning. The creation of a long-term project helps to connect the many different work methods and strategies students use to navigate their environment. It helps solidify successful methods from unsuccessful ones.  They are likely to use these later in their working life.

The researchers used 11 different programs to assess the results of subject creative process. They worked back into the creative process and conducted in-depth research to assess how such projects foster creative strategic thinking.  A few years later, they interviewed the participants again to create a longitudinal approach. They looked at artistic programs, social activism, media arts, political action, and leadership programs. An in-depth review of plans, thought processes, and perceptions were particularly important.

The participants reported that they learned how to mobilize their efforts and regulate their time. They gained the long-term perspective that allowed them to create strategies to complete their projects. Their plans were broken down into action steps. Steps are seen as sequential actions that lead to project completion. 

Most remarkably, participants learned that strategic thinking requires the ability to adjust with changing circumstances, understand how others respond, and think through the alternatives, and have backup plans. They were able to think through how human systems operate and what cognitive models others use to respond to their various actions. Most importantly, they were able to transfer the skills learned to other areas in life including prediction of events and determining alternative actions.

The report connects the concepts of creative thinking and analytic analysis to determine the potential scenarios.  The authors come to a definition of strategic thinking as ‘Use of advanced executive skills to anticipate possible scenarios in the steps to achieving goals and to formulate flexible courses of action that take these possibilities into account.’’ Strategy is a process of first envisioning the possibilities and then systematically thinking through the likely outcomes of results. It is both a freethinking and analytical process where possibilities are explored and the most likely ones chosen. When the environment changes, so does the strategies.

Larson, R. & Angus, R. (2011). Adolescents’ development of skills for agency in youth programs: learning to think strategically. Child Development, 82 (1). 

The Development of Strategy in Small and Medium Organizations

Strategy formation may be one of the most important aspects of managing a company. Without a proper strategy the ship bounces around the sea in hopes of finding fruitful land. How that strategy is formed is often a difficult question to answer. Research by Pop and Borza, (2013) helps to determine how strategy works within small and medium organizations (SME). This helps further solidify the concept that strategy is based   upon the environment and resources available that help to make companies more competitive.

In developing strategic decisions it is important for managers to interpret the signals coming from the internal and external environment appropriately. Doing so creates an opportunity to formulate strategies not only for their daily operations but also for long term corporate interests. It is this strategy that will act as a guide to regeneration and renewal that leads to corporate achievement. 

Successful strategies are developed, implemented and then re-evaluated. Companies that are static and unable to change are the ones that will eventually suffer economic decline.  Renewing products, procedures, marketing campaigns, distribution methods, financial resources, and human capital components are just some of the overall process that should be revisited and improved on a continual basis. 

To help determine how strategy is evaluated, formulated and implemented at Romanian SMEs the researchers conducted a number of case studies. They utilized five companies and formulated their approaches into concepts such as the definition of strategy, implementation, development, references, evaluation, and information in the strategic process.  The study helps highlight the process of strategic development as well as the thought processes that are applied. 

Understanding the environment and moving through a systematic evaluation of strengths and weaknesses was beneficial. The process of environmental and competitive understanding was seen as “keeping an eye on the market”. The decision makers used exact data to make their strategies but maintained a level of flexibility to mitigate risk. They adjusted their strategy when the market called for it. 

When companies were developing the mission and the management team’s personal values were extremely important in developing appropriate statements and policies. Missions and processes have changed overtime making strategy a fluid endeavor. There wasn’t a specific point at which the companies made changes but they did so based upon their understanding of their environment. 

When change was needed it was typically the manager or the executive that made the decision. They focused on changing processes in order to adjust the internal workings of the organization to the newly adopted strategies. At times these changes created a positive or negative chain reaction throughout an organization. When these changes were dysfunctional they changed the strategy or processes again. 

Since many new companies within their market went bankrupt the managers tried to maintain an entrepreneurial stance and use strategy to ensure they are meeting their longer term objectives. This included trying new products and services when they create an opportunity. Yet despite their interest, the new opportunities needed to fit within their strategic needs to be considered relevant. 

Each company used their own specific approaches to formulating a strategy. The report doesn’t go into these concepts in depth but it is possible to see some trends that include 1.) understanding environmental needs, 2.) understanding internal resources, 3.) developing the strategy, 4.) changing processes to match the strategy, 5.) being open to new opportunities within the strategy and, 6.) changing the strategy when the market changes.  As such, strategy is a constant fluid evaluation of one’s internal and environmental factors. It is a process of seeing the trends and meeting those trends in ways that maximize financial growth and organizational sustainability. 

Pop, Z. & Borza, A. (2013). Summarizing the crucial steps of the strategic management process through the eyes of Romanian managers of SMES. Review of Economic Studies & Research Virgil Madgearu, 6 (1).

Developing Corporate Strategies

As the market becomes chaotic the need to change the strategic formation models becomes apparent to match this need. Strategic behavior is associated with capital resources and the competencies of the corporation. A paper by EL Namiki in the Ivey Business Journal (2013) helps in furthering the Systemic Strategy Analysis Model (SSAM) of strategic thinking which understands the flows of thought formation within companies in order to analyze a company’s competitive position.

Strategic behavior is seen as a process of developing and enacting choices. Systematic strategic behavior focuses more on the developing and enacting of choices that are in alignment with the structural and environmental constraints of an organization. Strategic business choices, by their nature, are more confined than those enacted by individuals. Proper analysis is needed to define corporate strategy.

Where resources and company attributes meet each other there is a strategy that could be developed to full bloom.  When the attributes and resources change there would be a shift in the overall strategic trajectory. The path would adjust based upon the most advantageous route to achieving objectives. It is possible to map these concepts and draw out possible strategies. Consider the following four concepts when developing a strategy: 

Seeking Concentration: 

Concentration relates to the overall concept of market saturation. When a small amount of firms dominate an industry, it is said to have high concentration. If a large amount of entrepreneurial or boutique firms exist within an industry, there is a low level of concentration. The success of achieving a level of market presence will depend on the ability to meet the challenges of the environment based upon competing companies. 

Seeking Competencies:

Competency is a level of strong and competitive performance in a particular domain. It could be anything that furthers a strategy such as distribution, product design, technology, etc… Organizations seeking to enhance a competency either hire the right people or train them with competitive skills. Successful firms like Google have attracted the right talent to further their strategic competencies.

Seeking Focus:

At times it is necessary for companies to narrow down their efforts and focus on core offerings in order to enhance those things they excel in and remove activities they do not excel in. This may mean selling off brands that do not enhance core competencies or outsourcing internal functions that distract from the core strategy. Improving upon core competencies creates higher levels of competitive advantage. 

End Game:

When a company has maximized profits and a period of low profits sets into product lines or services they should consider an end game. This end game occurs when competitive offerings decline and there is little hope of recovery or the products have lost their market luster. Generally, this is a result of root misalignment between the offerings and current market needs. A strategy should include when to get out of the market and move onto new products and services. 

El Namaki, S. (2013). Strategic thinking for turbulent times. Ivey Business Journal, 77 (4).