Adopt an ecosystem mindset to find value in any market

How do you define a market? What’s your definition?

I’m sure you’ll realize immediately that ‘point of view’ impacts the definition quite a bit. The traditional definition states that market is “a place where two parties can gather to facilitate the exchange of goods and services”. I like to focus on the demand/consumer definition of a market.

For this write-up, I’ll stick with the definition of a market as a group of people interested in a product or service. I’ll also tack on the perspective of an “end market” and refine the definition to include the location of the end-user/where the final transaction takes place in a value chain.

Why am I so particular about defining “market” in this context?

I believe that our definition of market impacts the way we analyze it. By siding with the end-user definition, I’m adding more merit or paying attention to the concept of value chain and stakeholders.

Any market hides a multitude of interactions. There are multiple stakeholders in play. The end-user definition of market considers the fact that the product or service must start its journey somewhere before ending its destination to meet the demand/satisfy the final “job” it was hired for.

The concept of value chain in defining a market feeds into the theme of this write-up. Every market is an ecosystem of stakeholders. It is vital to understand your current place in this ecosystem and your interaction with other stakeholders.

What are the benefits of this “ecosystem mindset”?

Thoroughly map out the entire market

The biggest direct benefit of the ecosystem mindset is that it stops us from being “myopic” and helps us map out the entire market. It breaks away from one-dimensionally looking at a market in terms of current potential dollars and plays to the idea that any market is a sum of individual players or stakeholder groups.

Take any market (or market segment). There are multiple stakeholders from start to finish if you use the concept of an end market value chain as discussed earlier. One way to figure out the stakeholders in any market and your place in the market is to “follow the money” and think in terms of the “location of the end-user”. Ask yourself the following questions in any market — (1) Who is creating the demand? (2) Where is investment coming from? After you answer these two questions; you will be able to draw a line between investment and demand to figure out all the intermediaries capturing some value along the way.

To use a generic example of an oilfield service market — stakeholders in this context would include private and public investors, service companies, equipment manufacturers, majors, E&Ps, NOCs, commodity suppliers to name a few. I’m sure it’s possible to identify additional stakeholders, intermediaries in this market too!

Tell the complete story of the market

As shown in the previous section, identifying intermediaries and every stakeholder in the market helps you figure out where your company fits in best. Companies like to increasingly focus on their immediate customer and that’s not a bad thing. On the flip side, it also leaves your business very vulnerable to market changes and demands of your immediate customer. To serve your immediate customer better, it is vital on your part to understand the customer’s business and the market at large.

Let’s expand this concept further. By mapping out the entire market, you can closely study the interdependencies of the various stakeholders and the roles they play — for ex: end user, buyer, decision maker, influencer, among others. It might also identify your over reliance on specific stakeholders.

Now let’s look at how these interdependencies feed into the story of the market. Identifying each stakeholder helps you to further scrutinize their individual business choices. Why does that matter? What happens in a market is essentially an accumulation of individual business choices made by multiple individual stakeholders.

Taking this ‘ground up’ view of the market not only helps you build this colorful, rich story of the market, but it also helps you to home in on the “true” key market drivers.

Speculate with more confidence on how the market will evolve

Every stakeholder (business entity) in any market must make the same individual business choices. These choices cover decisions relating to offering a product or service, selling, and support at a primary level. You can break these choices further down into specifics like operations, distribution, profitability, and much more.

These individual business choices accumulated over multiple stakeholders in any market tells the broader story of the market as insinuated earlier. When researching any market, it might help to isolate each stakeholder and look at the different companies that fall into each bucket for starters. As a follow-up, you can study the business choices made by each company on different time horizons. It’s easy to see the choices a company will make in the short run — say 6–12 months. But, knowing their pattern of choices and their place in a market; one can speculate with some level of confidence what they might do over a longer period (say 2–3 years or even longer).

Finally, we can also take this one step further by superimposing the impact of broad external trends to see how each stakeholder might modify their business choices to respond. Think about business choices of each stakeholder in response to an influx of certain technologies, options for new substitutes, breakdown of certain cost structures, etc. The ecosystem mindset in extension also helps with scenario planning!

Create a path to capture more value

‘Profit Pools’ is a strategy concept popularized by two Bain consultants in the late 90s. A profit pool is “defined as the total profits earned in an industry at all points along the industry’s value chain”. The classic example from the HBR article uses the US auto industry from the 90s to show how the most profitable areas in that industry’s value chain weren’t the ones generating the biggest revenues.

Adopting the ecosystem mindset brings the applicability of the profit pool concept to some extent down to a market or market segment level. Think about it for a second. Mapping out every stakeholder that captures value along the line connecting investment to demand works as an audit of the “true profiteers” and their modus operandi.

Ask yourself — how powerful can this information be? I’d say as powerful as you want it to be.

Let’s do a quick thought exercise. Imagine you’ve mapped out every stakeholder in a specific market. You understand their individual business choices as it stands right now. And have a sense of the interdependencies, profitability, among others. What can do you do now? There are a couple of things I can think of right away. For example,

• You can start by studying each stakeholder — say in terms of revenue and profitability — and see how you can reposition yourself to capture more value in that specific market.
• Challenge yourself to reimagine your business to capture more value in specific areas where they “pool up” in that market.
• There might be new partnerships, alliances, joint ventures worth exploring with certain stakeholders.
• More than anything, you can speculate which stakeholders are slowly being squeezed out and understand who is accumulating substantial power in that market.

The ecosystem mindset stops you from being passive or reactive in a market. This mindset forces you to take an active role in generating value while uncovering new ways to capture more value. Analyzing any market with the ecosystem mindset stops you from being completely surprised by market developments.