Profit Patterns

February 21, 2012

8098

Profit Patterns: 30 Ways to Anticipate and Profit from Strategic Forces Reshaping Your Business by Adrian Slywotzky

Adrian Slywotzky applies pattern thinking to business models and markets in Profit Patterns, a book which lists 30 strategies that can be applied to business designs, products, and services. Slywotzky’s patterns identify changes to an industry’s landscape as it transforms to a future state and describe economic models for profitability and sustainability. The book provides readers with patterns to predict, or at least understand, the dynamic of the market in which they compete.

Slywotzky’s book is a great way to examine your current market situation, think about where your industry is heading, and identify options for next steps. Although not all patterns will be applicable to all situations, examining the patterns provides a set of questions to ask for guiding strategy. The book includes a “Strategic Landscape” model that is an early version of several business model frameworks which are currently in use.

He ends the book by integrating the patterns into an overall decision making process that tries to be one step ahead by asking forward-looking questions and mapping future outcomes. Based on his process, Slywotzky uses the patterns to identify current business models and project forward new opportunities. Each pattern has a set of questions and triggers that indicate the conditions which favor its usage. He also lists “signals and clues pointing to the emergence of a new pattern” to help predict possible market evolution.

There are thirty patterns in the book grouped into seven categories: Mega, Value Chain, Customer, Channel, Product, Knowledge, and Organizational.

The Mega Patterns operate at the industry level and include convergence of separate industries into a single industry, collapse of average offerings in favor of extreme offers, and creating of a market leading de facto standard.

The dynamics of profit and value are examined in Value Chain patterns such as deintegration, reintegration, and strengthening the weakest link.

Customer patterns are important because, Slywotzky says, “ignorance of the complexities of customer behavior is the single greatest risk facing businesses today.” Changes in profitability, microsegmentation, and shifts in power from supplier to consumer are important customer profit patterns to understand. Slywotzky notes that “as power and influence shifted downstream, closer to customers, distribution channel players became more important.”

Channel patterns outlined in the book include multiplication (from few to many), concentration (from many to few), and compression (in which redundant steps are removed from the process).

Knowledge patterns acknowledge that information and understanding power core business processes along the entire value chain. Patterns emerge as knowledge moves from product orientation to customer focus, as companies identify intellectual property they can sell based on unique operational expertise, and as knowledge becomes “productized” when companies move from selling tangibles to intangibles.

Slywotzky writes: “The dominant paradigm in business used to be asset efficiency in the value chain. Today, it is targeted value creation for the customer. Tomorrow, it will be a simultaneous focus on the customer and the supplier’s organizational system.” He identifies several Organizational shifts: changes in the relative power and resource level of functional areas within the organization, moving from a hierarchical organizational to a network-based structure, and building organizational structures around new capabilities.

Slywotzky describes five Product patterns in the group which epitomize the trend of value migration away from products to adjacent economic assets such as brands and solutions.

Product to Brand

The biggest barrier to exploiting the shift from product to brand lies in not really understanding the customer, and therefore not being able to create a brand that has high meaning and motivational power for the buyer.

As products proliferate and differentiation decreases, customers need a way to make purchasing decisions. Brands are one way to signal differentiation in the form of customer satisfaction. Strong brands can establish strong relationship and elevate commodities to high priced status symbols. Here, Slywotzky suggests looking beyond the product and to the benefits a strong brand can provide.

Product to Blockbuster

This pattern has consequences for portfolio management and is strongly present in pharmaceuticals, films, music, sports talent, and network TV. Blockbusters in each of these industries frequently provide profits that fund the remainder of a company’s offerings. As the value shifts toward crown jewels, these can be used to create a halo effect for other products and services. Network TV schedules use blockbuster programs to anchor adjacent shows and increase audiences across several time slots. Of course, creating systematic blockbusters is everybody’s dream, but Slywotzsky does suggest some leading questions to ask about this pattern: what market scenario would create a blockbuster pattern in your industry?, does your industry’s profitability come from brands, portfolios, or blockbusters?, what would it take for your company to create a blockbuster system?

Product to Profit Multiplier

Are your assets ‘sweating”…or are they resting comfortably while a competitor works more creatively to capture your industry’s value?

Disney, the Bloomberg, and celebrity brands like Michael Jordan and Martha Stewart exemplify the profit multiplier pattern. Here, a single asset or asset class is used across a wide range of media or markets. Disney famously takes movie characters and extends them to toys, books, television, and wide variety of branded products. Bloomberg takes their content and repurposes it across several channels and audiences. Slywotzky asks: “are your assets being leveraged to the maximum extent possible?; what organizational systems or methods are in place for doing so?” This pattern manifests in technology industries as product platforms which are designed for multiple uses and markets.

Product to Pyramid

This pattern is similar to the product multiplier, but creates a multiple product layers with the top of the pyramid providing the highest profit. Slywotzky gives Barbie dolls and American Express as examples–each pyramid has multiple price and feature levels. In these two cases, there is both product line extension and different branding. Pyramids can be built to support profitability at higher levels. Swatch is an example of a “firewall brand” at the bottom of the pyramid whose goal it is to prevent competitors from moving to the top of the brand hierarchy. Each layer of the pyramid may be aimed at a specific market segment. Evidence of customers forming new preference groups can be a signal to investigate this pattern. Slywotzky also suggests evaluating your own and your competitors’ vulnerabilities at the low end of your product line.

Product to Solution

This pattern is triggered as customers begin to understand their systems economics, and as suppliers struggle to differentiate themselves. Great product functionality is no longer enough to solve customers’ problems.

Slywotzky notes that value in the solution space is measured primarily in economic terms, not only by product functionality. A keen understanding of the customer’s financial success metrics, their operational processes, marketing, and sales is a requirement for a winning solution. Frequently, a solution operates against and provides benefit for a customer business process rather than specific “job to be done” as a product might. GE’s expansion into maintenance programs, customer service offerings, and financing is an example of building value beyond a product. Signals that a solution offering is a good strategy include commoditization of existing product offerings and inefficiencies in customer systems and processes. Slywotzky suggests determining how much a customer spends to deploy and maintain your product as a clue to potential solution benefits.

In addition to an inventory of patterns, the book contains a strategic planning framework that is intended to help anticipate industry changes. Slywotzky focuses on examining the rate of change in your industry and comparing that to the rate of change within your company. He says that moving faster isn’t always the right answer; often, moving in synch with customer needs or leap-frogging in anticipation of changes or moving in the right sequence are better choices.