Ideas: Management Notes: The Design Beneath The Disorder

IDEAS: MANAGEMENT NOTES
The Design Beneath The Disorder

The changes assailing your industry and your company are chaotic and unpredictable only on the surface. Lurking within are patterns that you can recognise--and profit from.

By R. Sukumar

Spare a thought for those who have forgotten the lessons of history and are, therefore, condemned to repeat it, first as tragedy, and then as farce. Learning from the patterns of the past to make profits in future is no simple task. In fact, according to the third work in Adrian Slywotzky's trilogy on strategy, Profit Patterns, it's as difficult as seeing through the cubism of Picasso to spot the Velasquez masterpiece that lies beneath it. Once you've managed to identify the pattern that underlies your industry, though, you will have unlocked the key to the secret of making profits in it.

The origins of the theory can be traced to the mathematical concept of pattern-recognition. The magnitude of the changes assailing business today, originating as they do from competitors, customers, other industries, new technologies, and a hundred other sources, often leaves companies bewildered. Unable to discern patterns in these changes, they just classify the whole situation as chaotic--which makes it difficult, if not downright impossible, to formulate pre-emptive strategies. Look at the changes as part of a pattern, however, and even a fragmentary glimpse can reveal the entire design--telling you just where you're headed.

So, Slywotzky argues that it is essential to extrapolate from the trends that an analytical study of your industry will reveal--the tools for which are presented in his first work, Value Migration--where the profits are headed in future. And once this destination--the subject of work No. 2, The Profit Zone--has been identified, the flow must be slotted into one of the 7 broad classifications, further sub-divided into 30, of the patterns that he reveals: Mega, Value Chain, Customer, Channel, Product, Knowledge, and Organisational. Mega patterns like Convergence--where companies from previously seemingly-distinct industries become competitors--span several elements of the value chain; others operate in more restricted confines.

What does this mean for companies? Naturally, those able to understand the patterns and leverage them to their advantage will fare better than the rest. And end up adding more shareholder value. However, to succeed, companies need to leverage several profit patterns, and not just one, to their advantage. Take the case of Cisco Systems. The network major recognised the product-to-solutions pattern in 1994, when sales of its network routers slowed down, and moved to a new profits zone by acquiring 18 companies offering network products and solutions, over 5 years. The cost of these acquisitions: $7 billion. The shareholder value Cisco added in the same time-period? More than $90 billion.

At the same time, the company has also leveraged the de facto standard profit-pattern to its benefit. The pace at which it moved from a product-seller to a solutions-provider increased the company's marketshare and allowed it to develop equipment standards. Today, Cisco even licenses the software running its switches to its competitors. And to retain its market dominance, it has exploited another profit-pattern: the move from conventional to digital business design. Apart from using the very technology it vends to link its employees, suppliers, and contract-manufacturers, the company generates more than 50 per cent of its revenues through on-line sales. Cisco's success, says Slywotzky, flows from its ability to see a pattern where others saw disorder. So will yours, so long as the pattern is palpable.