Knowledge Patterns: The Raw Material of Sustained Profitability

In 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.

Product to Customer Knowledge • Operations to Knowledge • Knowledge to Product

Product to Customer Knowledge

In 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.

Category Management

Knowledge 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.

Precision Merchandising

Category 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.

Innovation Success Rate

The 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.

What do you do when you're in a Product to Customer Knowledge pattern? Listen 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.

Operations to Knowledge

When 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.

Potential 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.

What do you do when you're in an Operations to Knowledge pattern? Translate operations experience into unique knowledge. Create a form, contract or database for selling it. Shed the assets, sell the knowledge.

Knowledge to Product

The 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.

In 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 product offering.

What do you do when you're in a Knowledge to Product pattern? Identify 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.

Page content 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.