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).