Strategic Realism

 

There are many small non-profits which have no staff, or only part-time office support. These associations, clubs, and charities are almost entirely dependent on their volunteer workforce, both for governance, and for program and service delivery. Often, the same people who already give hours each week to their involvement with the organisation, not only approve the strategy, but are expected to achieve the targeted outcomes.

In working with some of these smaller organisations, I have sometimes found that while board members recognise their strategy is something important to have, it is not something they pay much attention to outside of an annual or triennial planning exercise. Once that exercise was completed, the strategy stayed ‘on the shelf‘, and was rarely (if ever) addressed at board meetings or in committees and working groups.

Not surprisingly, boards which did not ‘operationalise’ their strategy, usually found that goals set in the previous plan had not been progressed or achieved.

Reviewing the factors underlying such strategy ‘failure‘ or ‘slippage‘, certain common elements can be identified (amongst others). Before adopting your strategy, considering these suggestions (the 5A’s of strategy execution) may help you to avoid these pitfalls:

Avoid

• too many goals
• overly ambitious goals

Assess

• your organisation’s capacity to achieve the goal
  – How many hours of work might be involved in achieving each goal in the strategy, and does the organisation have sufficient volunteers willing to contribute this time? (See chart below)
  – Are the volunteers equipped to do the work required to achieve the goal, or might they need training, guidance, or other resources?
  – What funding and technological support might be required to facilitate goal achievement?
  – Is external support required (e.g. advocacy, legal, technical), and is this available within your network or will it require third party engagements?
• the likelihood and severity of risks associated with the activities required to achieve the goal, then develop and apply risk controls (e.g. policies, procedures, authority limits, supervision, guidelines, etc.)
• progress towards goal achievement at intervals throughout the year (or plan period)
• the need for goal or execution plan adjustments in the light of further insights or changed circumstances

Assign

• responsibility for execution of the action (steps) required to achieve the goal
• a director with responsibility for acting as goal sponsor (mentor), liaising between the board and those executing action on behalf of the board
• milestones (progress goals) and timelines for the action plan

Allocate

• priority ranking to goals, so that where a new or emerging priority requires escalation, or resource scarcity becomes a problem, the strategy can be adjusted accordingly
• sufficient resources to support the volunteer/s expected to achieve the goal
• time on your board meeting agenda for goal progress reports from the responsible person or group (say once or twice during the year)

Advise

• escalation triggers requiring that a matter be brought back for Board advice or decision
• what outcomes and impact the achievement of the goal will provide, and who the intended beneficiaries are (consider a Theory of Change or logic model for major projects).

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The Profit Zone

 

The Profit Zone: How Strategic Business Design Will Lead You to Tomorrow's Profits by Adrian J. Slywotzky and David J. Morrison

This is a quick read and according to me a rather good book in the quick-read-business-genre. It is divided into three parts where the first part discusses business models and how profit happens. The second part is about successful business design reinventors such as Jack Welch (GE), Nicolas G Hayek (SMH) and Roberto Goizueta (Coca-Cola). In the third part the authors summarize its customer-centric and profit-centric thinking in what they call The Profit Zone Handbook. I will only present some of the ideas from the first part which I find most useful.

The Customer and Profitability in focus
The customer-centric view is dominant in the book and the main recommendation is to truly understand the customer behavior, decision-making process, price sensitivities and preferences, and design the business model accordingly. Businesses must be designed for profitability and as the arena in which high profit is possible keeps changing, so must the business model. The main questions repeated several times are:

• Where will I be allowed to make a profit in this industry?
• How should I design my business model so that it will be profitable?

The authors define the concept of business design (but also use the term business model) as composed of four elements or dimensions that are all linked to the others:

Customer selection

• Which customers do I want to serve?
• To which customers can I add real value?
• Which customers will allow me to profit?
• Which customers do I not want to serve?

Value Capture

• How do I make a profit?
• How do I capture, as profit, a portion of the value I created for customers?
• What is my profit model?

Strategic Control

• How do I protect my profit stream?
• Why do my chosen customers buy from me?
• What makes my value proposition unique/differentiated vs. Other competitors?
• What strategic control points can counterbalance customer or competitor power?

Scope

• What activities do I perform?
• What products, services, and solutions do I want to sell?
• Which activities or functions do I want to perform in-house?
• Which ones do I want to subcontract, out-source, or work with a business partner to provide?

This is somewhat similar to my approach to business models; starting at who the value is created for, how the value is created and captured, and how the value creation and capture is controlled. The traditional way, presented in most literature about business models and in Exhibit 2.2 in the book, is to start from assets/core competencies and go through inputs/raw material, product/service offering, channels and finally the customer. The authors define their customer-centric model by starting on the customers' needs and priorities and then move in the other direction of the chain ultimately to the assets/core competencies needed to satisfy the customers' needs.

Strategic Control Point Index
As I find very little literature about business models looking at control mechanisms, I am happy to see what the authors call Strategic Control Point that is similar to my reasoning about Control Mechanisms. "Every good business design has at least one strategic control point. The best business designs have two or more."

In Exhibit 3.4 the authors present 10 different Strategic Control Points:
Own the standard, (High profit-protecting power)
Examples: Microsoft, Oracle
Manage the value chain, (High)
Examples: Intel, Coke
String of superdominant positions, (High)
Example: Coke internationally
Own the customer relationship, (High)
Examples: GE, EDS
Brand, copyright, (Medium)
Examples: countless
Two-year product development lead, (Medium)
Example: Intel
One-year product development lead, (Low)
Examples: few
Commodity with 10 to 20 percent cost advantage, (Low)
Examples: Nucor, SW air
Commodity with cost parity, (None)
Examples: countless
Commodity with cost disadvantage, (None)
Examples: countless

Identified profit models
How and why profitability occurs varies significantly from one industry or company to another. Slywotzky and Morrison have identified 22 profit models and shortly explain how profit is made in each of the models. These are:

1. Customer Solutions Profit
2. Product Pyramid Profit
3. Multicomponent Profit
4. Switchboard Profit
5. Time Profit
6. Block Buster profits
7. Multiplier Profit
8. Entrepreneur Profit
9. Specialization Profit
10. Install Base Profit
11. De Facto Standard Profit
12. Brand Profit
13. Specialty Product Profit
14. Local Leadership Profit
15. Transaction Scale Profit
16. Value Chain Position Profit
17. Cycle Profit
18. After-Sale Profit
19. New Product Profit
20. Relative Market Share Profit
21. Experience Curve Profit
22. Low Cost Business Design Profit

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Economic objectives of firms

 The main objectives of firms are:

1. Profit maximisation
2. Sales maximisation
3. Increased market share/market dominance
4. Social/environmental concerns
5. Profit satisficing
6. Co-operatives

Sometimes there is an overlap of objectives. For example, seeking to increase market share, may lead to lower profits in the short-term, but enable profit maximisation in the long run.

Profit maximisation

Usually, in economics, we assume firms are concerned with maximising profit. Higher profit means:

• Higher dividends for shareholders.
• More profit can be used to finance research and development.
• Higher profit makes the firm less vulnerable to takeover.
• Higher profit enables higher salaries for workers

Alternative aims of firms

However, in the real world, firms may pursue other objectives apart from profit maximisation.

1. Profit Satisficing

• In many firms, there is a separation of ownership and control. Those who own the company (shareholders) often do not get involved in the day to day running of the company.
• This is a problem because although the owners may want to maximise profits, the managers have much less incentive to maximise profits because they do not get the same rewards, (share dividends)
• Therefore managers may create a minimum level of profit to keep the shareholders happy, but then maximise other objectives, such as enjoying work, getting on with other workers. (e.g. not sacking them) This is the problem of separation between owners and managers.
• This ‘principal-agent‘ problem can be overcome, to some extent, by giving managers share options and performance related pay although in some industries it is difficult to measure performance.
• More on profit-satisficing.

2. Sales maximisation

Firms often seek to increase their market share – even if it means less profit. This could occur for various reasons:

• Increased market share increases monopoly power and may enable the firm to put up prices and make more profit in the long run.
• Managers prefer to work for bigger companies as it leads to greater prestige and higher salaries.
• Increasing market share may force rivals out of business. E.g. the growth of supermarkets have lead to the demise of many local shops. Some firms may actually engage in predatory pricing which involves making a loss to force a rival out of business.

3. Growth maximisation

This is similar to sales maximisation and may involve mergers and takeovers. With this objective, the firm may be willing to make lower levels of profit in order to increase in size and gain more market share. More market share increases its monopoly power and ability to be a price setter.

4. Long run profit maximisation

In some cases, firms may sacrifice profits in the short term to increase profits in the long run. For example, by investing heavily in new capacity, firms may make a loss in the short run but enable higher profits in the future.

5. Social/environmental concerns

A firm may incur extra expense to choose products which don’t harm the environment or products not tested on animals. Alternatively, firms may be concerned about local community / charitable concerns.

• Some firms may adopt social/environmental concerns as part of their branding. This can ultimately help profitability as the brand becomes more attractive to consumers.
• Some firms may adopt social/environmental concerns on principal alone – even if it does little to improve sales/brand image.

6. Co-operatives

Co-operatives may have completely different objectives to a typical PLC. A co-operative is run to maximise the welfare of all stakeholders – especially workers. Any profit the co-operative makes will be shared amongst all members.

Diagram showing different objectives of firms

• Q1 = Profit maximisation (MR=MC)
• Q2 = Revenue Maximisation (MR=0)
• Q3 = Marginal cost pricing (P=MC) – allocative efficiency
• Q4 = Sales maximisation – maximum sales while still making normal profit (AR=ATC)

https://cutt.ly/N2dfO0C

How to Sell More Profitably

 There are only three ways to increase profitability – sell more products, increase prices, reduce costs. Almost every company has in its DNA the desire to sell more products. Almost every company is diligent in keeping a control of its costs.

The big weakness for most companies is understanding how the manipulation of its prices can be used to improve profitability. This is a very powerful weapon in selling more profitably. A 1% increase in price for most companies goes straight on the bottom line and adds around 8% to operating profits. Find out more in the handy infographic below.

https://bit.ly/3NhCJa9

KPI Dashboards (Part 1)

 

https://bit.ly/3rO5kK8

15 Most Profitable Industries in the World in 2021

 In this article we will take a look at the 15 most profitable industries in the world in 2021. You can skip our detailed analysis of these beneficial industries, and go directly to the 5 Most Profitable Industries in the World in 2021.

With the pandemic raging on, pushing the world into economic distress, some industries are keeping the world’s economy going. In this article, we highlight the 15 most profitable industries in the world in 2021. Covid-19 has had some adverse effects on the global economy. With countries going into lockdowns and shutting down businesses, it is inevitable to anticipate that a period of economic depression is before us. Nevertheless, some industries have managed to keep their heads up high and stay optimistic even in these trying times.

Sometimes when things are falling apart, they may actually be falling into place. As countries begin to lift their lockdowns and businesses resume their standard operational procedures, we see that although the costs of providing countermeasures to coronavirus may be bothersome for many companies, only the strongest will survive. Yes, we will show you how surprising the fact is that in these times of economic recession, some of the most powerful industries managed to make profits and kept the world’s economy rolling. The tech industry reflected positivity the most.

The 37-year-old CEO of Facebook (NASDAQ: FB), Mark Zuckerberg, became a centa-billionaire with a net worth of $119.3 billion. Jeff Bezos, the CEO of Amazon (NASDAQ: AMZN), became the richest man globally with a net worth of $186.8 billion. Apart from tech giants, companies in the food and beverages industry such as PepsiCo (NASDAQ: PEP) have also shone brightly in this period of darkness. Our list only covers the most robust industries that have had the strength to bounce back after the blow that came with COVID-19. We should realize that some sectors, once mighty, could not become a part of this list, such as the tourism, airline, and hotel industries. International and even regional travel bans in some regions caused these industries to collapse, having several companies that belong to these industries declare bankruptcy. These very industries and many others like them will not be rising to their true potential any time soon until this pandemic is over or until there is a substantial decrease in the casualties.

Our Methodology

To compile this list, we looked at statistics presented in datasets by Aswath Damodaran, a professor of corporate finance and valuation at the Stern School of Business at New York University. This website contains credible information about industries in the form of datasets compiled, bifurcating industries according to niches, based on corporate finance and valuation metrics. We looked at three measures, gross profits, net income, and return on invested capital, to determine which industries would make it to our list of the 15 most profitable industries in the world in 2021. The gross profit is simply the difference between the revenue generated by the industry and the cost of goods that it sold. The net income is the revenue left after taking away all the expenses, taxes, and costs. The return on invested capital (ROIC) is the ratio of net income and capital invested. It helps determine how much an investor is benefitting from investing in an industry.

Photo by Campaign Creators on Unsplash

So without further ado, let’s take a look at the 15 most profitable industries in the world in 2021.

Most Profitable Industries in the World in 2021

15. Online Retail Industry

In our list of the 15 most profitable industries globally in 2021, the online retail industry ranks at number 15. With the ongoing pandemic, online sales have skyrocketed, contributing to a $288.8 billion gross profit of the online retail industry. The industry has capital returns at 11.19% and a net income of $45.7 billion. Companies such as Amazon.com Inc. (NASDAQ: AMZN) alone generated an online net revenue of $52.9 billion from online stores in the first quarter of 2021.

14. Food Processing Industry

Developing countries such as Pakistan and India have taken a toll since 2019 and have been in economic distress. Nevertheless, the food processing industries are what keep these countries going. Nestlé S.A. (OTC: NSRGY) showed a growth rate of 2.4% since 2019. The food processing industry made it to our list of the 15 most profitable industries in the world in 2021, with gross profits maxing at $390 billion, a 14.35% return on invested capital, and a net income of $81.2 billion. PepsiCo (NASDAQ: PEP) is another famous company that contributes to the gains made by the food processing industry in 2021.

Like TAKE-TWO INTERACTIVE SOFTWARE, INC Common Stock (NASDAQ: TTWO), Intel Corporation (NASDAQ: INTC), NVIDIA Corporation(NASDAQ: NVDA), Advanced Micro Devices, Inc. (NASDAQ: AMD), PayPal Holdings Inc. (NASDAQ: PYPL) and MasterCard Inc. (NYSE: MA), Pepsi’s business also thrived in the midst of the pandemic.

13. Soft Beverages Industry

We have been consumers of non-alcoholic beverages for a long time. The soft beverages industry boasts a return on invested capital of 20.19% and a gross profit of $115 billion. PepsiCo (NASDAQ: PEP) has reported an increase in net income from $1.77 billion to $1.85 billion, along with an 8.8% increase in revenue. The industry boasts a net income of $22.7 billion.

12. Real Estate Development 

Being one of the most tangible assets one can own, property keeps the real estate development industries in business. This industry has generated a net income of $85.3 billion and a gross profit of $264.4 billion. The capital returns, however, are one of the lowest in our list at a mere 8.29%

11. Information Services 

The world depends on data more than one may think, especially now in the digital era where data is perpetually collected, logged, and analyzed. The information services industry is one of the 15 most profitable industries in the world in 2020, encompassing a diverse range of companies. PayPal Holdings Inc. (NASDAQ: PYPL) and MasterCard Inc. (NYSE: MA) are two of the most renowned companies in this sector. The information services industry generated gross profits up to $108 billion, a net income of $29.5 billion, and a 23.40% return on invested capital.

Like TAKE-TWO INTERACTIVE SOFTWARE, INC Common Stock (NASDAQ: TTWO), Intel Corporation (NASDAQ: INTC), NVIDIA Corporation(NASDAQ: NVDA), Advanced Micro Devices, Inc. (NASDAQ: AMD), PepsiCo (NASDAQ: PEP) and Amazon.com Inc. (NASDAQ: AMZN), PayPal Holdings Inc. (NASDAQ: PYPL)’s business also thrived in the midst of the pandemic.

10. Semiconductor Industry 

Semiconductors are small but essential components of electronic devices. The computer you are using contains semiconductors, so does your smartphone, and if you own an electric car, then yes, your vehicle contains them too. The semiconductor industry has always been popular, giving us more reason to include it in our list of the 15 most profitable industries in the world in 2021. Intel Corporation (NASDAQ: INTC), NVIDIA Corporation(NASDAQ: NVDA), and Advanced Micro Devices, Inc. (NASDAQ: AMD) are some of the big players in this sector. The semiconductor industry boasts its net income of $81.5 billion and a 19.36% return on capital investment. The gross profit generated values at $219.9 billion.

9. Life insurance 

The insurance industry has been popular over the years, life insurance being the most popular of the vast array of insurance industries. This industry has made net income up to $86 billion and a gross profit of $452.6 billion. The return on capital, however, is relatively low, at 10.70%.  Prudential Financial Inc. (NYSE: PRU) is a Fortune 500 company contributing to the life insurance industry.

8. Healthcare Support and Services 

The waves are coming in and not in a good way. With the third wave of Covid-19 taking over the world, the need for healthcare support rises. Healthcare is a “need,” not a “want.” Medical treatment is expensive and extensively required by the entire population in these tragic times. As essential and fundamental as it is, the healthcare support and services industry has a net income of $53.8 billion and a 26.98% return on investment. It does not come as a surprise to see this industry make it to our list of the 15 most profitable industries in the world in 2021—the gross profit for healthcare services values at $320.5 billion.

7. Computer Services 

Computer services have been, and always will be in demand. The computer service industry is growing at exponential rates. With the increase in demand for computer services, tech companies are bound to generate large profits, contributing to a net income of $41.5 billion and a return of 21.92% on capital. The gross profit for this industry is a whopping $209.7 billion. Amazon.com Inc. (NASDAQ: AMZN) provides cloud computing, and Apple Inc. (NASDAQ: AAPL) offers online services. We anticipate this industry to move up on our list in the future because the demand for computer services is growing each day.

Like TAKE-TWO INTERACTIVE SOFTWARE, INC Common Stock (NASDAQ: TTWO), Intel Corporation (NASDAQ: INTC), NVIDIA Corporation(NASDAQ: NVDA), Advanced Micro Devices, Inc. (NASDAQ: AMD), PayPal Holdings Inc. (NASDAQ: PYPL) and MasterCard Inc. (NYSE: MA), Apple’s business also thrived in the midst of the pandemic.

6. Software (Entertainment) 

You will see another software industry in this list, indicating that the software industry is so huge that we had to classify it into two categories. The entertainment software industry primarily encompasses video-game companies, which we all know to be profitable. We have heard of the name Rockstar Games Inc, owned by TAKE-TWO INTERACTIVE SOFTWARE, INC Common Stock (NASDAQ: TTWO), and their rather popular grand theft auto franchise, which has sold over 145 million copies of GTA 5 just in 2021. The entertainment software industry has a net income of $83.5 billion and an 18.32% return on capital investment, making it to our list of the 15 most profitable industries in the world in 2021.

5. Household Products 

Yes, household products may come cheap, but they come from an industry that belongs to one of the 15 most profitable industries in the world in 2021. Colgate-Palmolive Company (NYSE: CL), The Procter & Gamble Company (NYSE: PG), and L’Oréal S.A. (EPA: OR) are just a few of the many companies that contribute to the net profits and investment returns of the household products industry. For the year 2021, the household products industry has a net income of $40.6 billion and a capital return rate of 24.60%, which is quite decent. The gross profit stands strong at $239.6 billion.

volodymyr-hryshchenko-WU9dA3C4R28-unsplash

4. Oil and Gas Industry 

Though this is not an eco-friendly industry, it still earns more profits than many industries that care relatively more about the environment. Chevron Corporation (NYSE: CVX), Exxon Mobil Corporation (NYSE: XOM), and Shell (AMS: RDSA) are the names known to many, and these companies contribute to the oil and gas (integrated) industry’s net income of $31.3 billion and the highest gross profit seen in this list that values at $833 billion. Conversely, the return on capital investment is the lowest seen in the list, at 4.64%.

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3. Drugs and Pharmaceuticals 

The drug industry is notorious for high-priced products. If you look at some of your prescriptions (if you have any), you will realize how much money you are handing to this industry, which is making billions in profits, $95.8 billion to be exact. It is not surprising to see this industry in the top three of our list of the 15 most profitable industries in the world in 2021. The drugs and pharmaceuticals industry has attained a gross profit of $643.2 billion and a 17.06% return on capital.

adriaticfoto/Shutterstock.com

2. Computer Peripherals 

Now that working from home has become common practice for everyone, computers and their accessories have become more of a necessity than a luxury. This will go on until coronavirus does not leave us all alone. The computer peripherals industry is a growing industry, accumulating more and more profits as time passes. The net income for this industry currently rests at $96.4 billion with a 19.92% return on capital. The gross profit for the peripherals industry stands at $345.8 billion.  Some of the renowned companies in this industry are Apple Inc. (NASDAQ: AAPL), Microsoft Corporation (NASDAQ: MSFT), Hewlett Packard Enterprise Company (NYSE: HPQ), and Acer Inc. (TPE: 2353).

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1. Software (System and Application) 

As promised, here comes the other software industry at the top of our list of the 15 most profitable industries in the world in 2021. The industry gave us Microsoft’s Windows and Apple’s Macintosh operating systems. The industry made our lives easier by giving us applications for writing documents, surfing the internet, and attending meetings virtually. Microsoft is possibly the most famous company associated with the software systems and applications industry. This industry will continue to dominate with a net income of $81.3 billion and capital returns of 32.07%. The gross profit for the application software industry stands strong at $339.9 billion. The need for new software applications is ever-growing, as we humans want easier lives. Without these software applications, all electronic devices would be as good as rocks or overpriced paperweights.

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