Patterns: The Raw Material of Sustained Profitability
the new value chain which starts with the customer on the left and
ends with the organization on the right, knowledge is becoming the
primary raw material that fuels the system. Knowledge patterns and
their variants will proliferate in the next few years, as the focus
of the economy shifts from the manufacture of goods to the application
of useful ideas.
to Customer Knowledge
Operations to Knowledge
Knowledge to Product
to Customer Knowledge
the product to customer knowledge pattern, profit-oriented suppliers
convert a flow of product transactions into profound and systematized
knowledge of customers' preferences, price sensitivity, and buying
behavior. This knowledge can produce new profit streams in many
different ways: category management, precision merchandising, or
dramatic increases in the innovation success rate.
about customer behavior, not the product itself, is becoming the
true souce of profitability. Product expertise enables manufacturers
to create and capture that knowledge. The most profit-focused
manufacturers convert their product expertise to a new, knowledge-based
offering for retailers: category management. The manufacturer
offers to manage the entire category for the retailer. Superior
knowledge of customer behavior enables the manufacturer to generate
significantly higher gross margins fthrough skillful manipulation
of the combination of manufacturers' brands, house brands, generics,
and quantities of stock that will produce the greatest return.
The value is not in the products that the manufacturer makes;
it is in the unique customer knowledge that enables the manufacturer
to create the maximum returns for the retailer.
management addresses a chronic dysfunctionality that bedevils
all retailing activity the imbalance between demand and
availability at a given moment in time. Excessl inventory means
excess carrying cost. Insufficient inventory means stockouts and
lost gross margin. The product to customer knowledge pattern enables
companies to attack this dysfunctionality on several levels
not just store by store, but also region by region.
product to customer knowledge pattern also plays out in industrial
settings. There are two triggers: (1) the product has become a
commodity and (2) the supplier learns deeply about the customer's
usage system, creating an accurate model of the customer's true
economics. This information is used to define and drive those
product and service innovations that matter most to each customer.
do you do when you're in a Product to Customer Knowledge pattern?
to what your transactions are telling you about the customer.
Hear and capture the message.
Apply it to: (1) create new offerings, (2) develop new systems,
and (3) improve the customer's economics and your own.
profit begins to disappear from basic asset-intensive operations,
there are numerous opportunities to create profit in new ways: build
a unique knowledge position, fill a niche that has room for just
one player, or create services built on knowledge so scarce that
it makes these services valuable to buyers and sellers alike. A
minority of players have had the foresight to develop these new
profit-making activities, based on the knowledge and experience
they acquired in the course of running their operations. In other
cases, outsiders capitalized on the operations-to-knowledge pattern.
profitability often lies trapped inside the complex structure of
asset-intensive organizations. Profit-oriented suppliers create
new, knowledge based vehicles to unlock that potential profitability
and turn it into a major new source of profit growth for the company.
The biggest obstacle to exploiting the operations-to-knowledge pattern
is not financial or physical, but intellectual. Remove your mental
blocks about what business you are in to unlock its potential.
do you do when you're in an Operations to Knowledge pattern?
operations experience into unique knowledge.
Create a form, contract or database for selling it.
Shed the assets, sell the knowledge.
shift from value based on tangibles to value based on knowledge
is beginning to permeate the economy. But there is an important
movement in the other direction, as experience, expertise and knowledge
are transformed into products.
many business situations, knowledge is valuable but inaccessible:
hard to access and hard to apply. By turning knowledge into products,
the producer benefits through the far higher growth rate available
through product offerings than through contract services, and the
customer through an offering that leverages the experience obtained
from other customer contracts. If you depend on several individuals
within your firm to create value for your customers, look for a
way to systematize and leverage their knowledge into a broad based
do you do when you're in a Knowledge to Product pattern?
the most valuable knowledge your organization has created.
Crystallize your expertise into a highly replicable structure
that is easy to sell, easy to train, and easy to improve.
Advertise it. Sell it. Improve it.
is based upon Profit Patterns, written by Slywotzky, Morrison, Moser, Mundt
and Quella, published by Times Business, Random House, copyright © 1999 Mercer
Management Consulting, Inc.