Pattern Thinking

Mercer Management Journal
Number 11
1999
The Strategic Shortcut:

Harnessing Pattern Thinking
To Seize the Value Growth Advantage
Finding the meaning beneath the surface chaos of
today’s dynamic business landscape is not easy. Even
more difficult is achieving that insight quickly. Yet with
business design lifecycles now commonly measured in
years rather than decades, speed is essential. For
executives to deliver sustained shareholder value
growth, they must anticipate and quickly respond to
the opportunities and perils this dynamism creates—
before the landscape shifts again. Clearly, executives
need a strategic shortcut . . .
Management Consulting
Number 11 The Strategic Shortcut:
1999 Harnessing Pattern Thinking
7 Letter to readers
by James W. Down and James A. Quella
Overview 11 Countering strategic risk with pattern thinking

How to identify tomorrow’s profit zones before the competition
by Adrian J. Slywotzky, James A. Quella, and David J. Morrison
How can executives ensure that their shareholder value will continue to
grow rather than stagnate or even collapse? Pattern thinking, which
assists in endeavors from medicine to chess, can be harnessed to offset
this major business risk.
Traditional Pattern 27 A classic pattern transformed

Capturing value as a new “middle” collapses
by Ted Moser
One venerable pattern, where customers move toward opposite
extremes of the product value creation spectrum, still catches firms
unprepared. Now, an information-based Collapse of the Middle poses a
new threat. There are two routes away from this unprofitable middle.
Emerging Pattern 37 The real point of going digital

It’s not about your website—it’s about rethinking
the business basics
by John F. Marshall, Richard S. Christner, and Erich Almasy
Many firms embrace the Internet without understanding why. The
technology can be worthless if simply tacked onto existing operations.
But a truly digital business design—which doesn’t change how
companies do business so much as it changes what they do—can open
new avenues to capture profits and lock in customer loyalty.
Patterns in Action 49 Shifting value in the new euro zone
How the single market will accelerate business design
innovation
by Kevin Mellyn, William Stevenson, and César Paiva
The vast capital market created by the euro offers exciting opportunities
for upstart firms—and unprecedented threats to the survival of
incumbents. Financial services will feel the impact first, but eventually
every industry will experience a wave of new business designs that focus
on the interests of the newly powerful consumer.
Using Pattern 65 Bring on the recession!

Thinking Preparing now can improve a firm’s competitive position
by Robert G. Atkins, Laurence H. Alberts, and August Joas
Good times carry with them the danger of complacency. Managers who
wait until the recession is upon them will have little flexibility to turn it
to their advantage. Six smart moves can create opportunities before it’s
too late.
Using Pattern 75 Chance favors the prepared mind

Thinking Spotting the leading indicators of change through
Strategic Anticipation®
by Charles P. Hoban and Eric Almquist
Patterns don’t strike without warning. But anticipating them requires a
disciplined search for leading indicators. Here is a blueprint for building
an early warning system.
89 Executive summaries
Abstracts of the main articles of this issue in English, French, German,
Spanish, Portuguese, and Chinese.
For the latest thinking

on patterns, visit
102 The Periodic Table of Strategy
www.profitpatterns.com. This pullout poster depicts the 30 currently identified strategic patterns.
5
As one of the world’s premier corporate strategy firms, Mercer
Management Consulting helps leading enterprises achieve sustained
shareholder value growth through the development and implementa-
tion of innovative business designs. Mercer’s proprietary business
design techniques, combined with its specialized industry knowledge
and global reach, enable companies to anticipate changes in customer
priorities and the competitive environment, and then design their busi-
nesses to seize opportunities created by those changes.

Editorial Board Editor
Matthew A. Clark, chairman Paul Hemp
João P. A. Baptista
James W. Down Associate Editor
Philip M. Giudice John Campbell
August Joas
David J. Morrison Designer
Constance M. O’Hare Trina Teele
Patrick A. Pollino
James A. Quella
Adrian J. Slywotzky
Mercer Management Journal is published twice yearly by Mercer

Management Consulting, Inc., for its clients and friends. The contents
are copyright © 1999 by Mercer Management Consulting.
Strategic Anticipation®, Strategic Choice Analysis®, and

Value Migration® are proprietary trademarks of Mercer Management
Consulting that have been registered with the U.S. Patent and
Trademark Office.
All rights reserved. Excerpts can be reprinted with attribution

to Mercer Management Consulting. Articles can be found on our
website: www.mercermc.com. More information on profit patterns can
be found on the patterns website: www.mercermc.com/profitpatterns
or www.profitpatterns.com.
For information on reprinting articles and all other correspondence,

please contact the editor at:

33 Hayden Avenue
Lexington, Massachusetts 02421
781-674-3276
paul.hemp@mercermc.com
To our readers,
A recent study by Mercer Management Consulting found that
10 percent of Fortune 1000 companies lost more than one-quar-
ter of their shareholder value in a one-month period at least once
between June 1993 and May 1998—a period generally unmarked
by significant market volatility. Moreover, nearly 60 of these
100 stock price collapses resulted not from financial or opera-
tional missteps, but from poor strategic decisions. The companies
misjudged such things as customer demand and competitive
pressure, destroying billions of dollars in value. Needlessly.
More and more in our work with clients, we see business leaders
facing seemingly chaotic and increasingly dynamic markets, nim-
ble and well-funded upstarts, and shorter windows of
opportunity. These executives have come to realize that they rely
on the traditional rules of strategy at their peril, that a new
approach to strategy development is required. We suggest that
“pattern thinking” is a key element of this new approach.
Pattern recognition is a fundamental human skill. From the

infant learning language to the chess grandmaster in a champi-
onship match, facility in recognizing recurring patterns is
essential to success.
Patterns exist in business, too. Mercer Management Consulting’s

newest book, Profit Patterns: 30 Ways to Anticipate and Profit from
Strategic Forces Reshaping Your Business (Times Business/Random
House), describes 30 profit patterns that have repeated them-
selves across industries and can help managers find the profit
zone before competitors do—hence the phrase “strategic short-
cut.” Written and researched by a team of Mercer consultants,
the book represents the distillation of decades of strategy experi-
ence in virtually every industry. It continues the trajectory of
Mercer’s leading-edge thinking over the past four years on the
topics of profitable growth and shareholder value growth:
• Grow to Be Great, which in 1995 made the case for profitable

growth, established the importance of customer relationship
7
management and demonstrated the danger of focusing solely
on cost-cutting.
• Value Migration, the 1996 business bestseller, described a

new strategic landscape in which shareholder value flows not
to the scale player, but to the competitor with the business
design best matched to evolving customer priorities.
• The Profit Zone, one of Business Week’s top ten business books
of 1998, showed how twelve companies delivered sustained
shareholder value growth through continual reinvention and
profit-centric thinking.
All these books have espoused an “outside-in” approach to strate-

gy, in which changing customer priorities, rather than static core
competencies, are key.
This issue of the Mercer Management Journal elaborates on and

extends the thinking in Profit Patterns. From the first article,
which provides an overview of and rationale for pattern thinking,
to the last, which shows how patterns can be applied, we try to
offer a detailed perspective on how pattern thinking can help you
to seize the value growth advantage. In addition, we include a
pullout poster of the 30 patterns, which serves as a ready
reminder of the current family of patterns. We also invite you
to visit our patterns website, www.profitpatterns.com.
We believe learning to recognize and apply profit patterns is a

wise investment. Some have likened pattern thinking to putting
on a pair of infrared goggles on a cloudy, moonless night.
Although we all would like to operate in a bright and clearly
delineated business environment, we suspect that yours, if not
completely obscured, has its share of shadows. Seeing the
meaning in those shadows before competitors do could be the
difference between value growth and value stagnation—or
collapse.
Sincerely yours,
James W. Down James A. Quella

Vice Chairman Vice Chairman
8
Overview
Countering strategic risk with pattern thinking

How to identify tomorrow’s profit zones before the competition
By Adrian J. Slywotzky,
James A. Quella,
and David J. Morrison
T he primary task of senior executives seeking sustained value

growth can be succinctly described as the management of
risk for the benefit of shareholders. Risk is an essential element
of any strategy; take on too little or too much and the returns are
not there. The business lexicon is filled with terms that reinforce
How can executives ensure this connection, such as “bet the company,” “risk/reward trade-
off,” and “calculated risk.”
that their shareholder
Entire industries, representing much of what we know as the
value will continue to grow insurance, financial services, and operations consulting sectors,
have evolved to help companies manage three types of risk:
rather than stagnate or
• Hazard Risk. Insurers created property and casualty, health,
even collapse? Pattern and liability insurance to enable companies to pool this type
of risk with other firms, dramatically decreasing the financial
thinking, which assists in impact of such risk on the individual enterprise.
endeavors from medicine • Financial Risk. Financial services firms have developed tech-
niques and financial instruments to help companies dampen
to chess, can be harnessed or hedge against the impact of financial risk—for example,
fluctuations in exchange rates or input costs.
to offset this major busi-
• Operational Risk. Consulting firms have devised ways for
ness risk. businesses to minimize information, systems, and business
process risks—for example, systems failures that interrupt
the flow of information within a company.
Each of these risks, however, pales in comparison to strategic

risk, which can bring a corporation to its knees—and which
must be borne directly by management and shareholders. The
risk is particularly grave because the typical strategic planning
process is completely unsuited to uncovering and overcoming
strategic risk. Pattern thinking represents a new sense-and-
respond approach that is more effective in both characterizing
Mercer Management Journal 11

strategic risk and identifying and exploiting new profit
opportunities.
Overview
Strategic Risk
Strategic risk is concerned with one overriding question: Can
the firm’s business design deliver sustained, above-average
growth in shareholder value? This question is equally relevant to
established companies, with historically successful business mod-
els, and to start-ups that are making bets on new ones. In a
world where business designs lose their customer relevance and
profit power more quickly than before, strategic risk is manifest-
ing itself abruptly and dramatically.
When investors spot strategic risks that threaten a company’s

health, they react swiftly and decisively—at times with devastat-
ing results. Over the five-year period that ended last May,
10 percent of Fortune 1000 companies lost, at least once, one-
quarter of their shareholder value within a one-month period. A
study by Mercer Management Consulting found that the stock
drops were almost all triggered by reduced quarterly earnings or
reduced expected future earnings. And the majority—58 per-
cent—of these earnings shortfalls were caused by strategic risk
factors, such as a drop in customer demand, channels misaligned
with customer priorities, or increased competitive pressure.
Thirty-one percent were the result of operational risk, and six
percent were the result of financial risk. Interestingly, traditional
hazard risk triggered none of the stock price drops.
The elements of a business design

A company’s business design—the entire system by which it delivers utility to its customers and
thereby generates sustained value growth for shareholders—comprises five elements:
• Customer Selection and Value Proposition. Which customer segments are most attractive and
what product/service offerings will enable me to capture their business?
• Value Capture/Profit Model. How will I maximize my profit from serving my chosen customers?
• Strategic Control. How will I protect my profit stream to prevent it from being captured by
competitors or customers, or from being diverted out of my industry altogether?
• Scope of Operations. What are the most critical activities I need to control to create value for the
customer and capture value for myself?
• Organizational Systems. What organizational capabilities are critical to my translating the other
elements into marketplace success?
(For a more detailed discussion of business design, see Mercer Management Journal 10.)
12
In the future, sophisticated companies will understand the
impact and interrelationship of these four types of risk and man-
age them as a whole, a process known as enterprise risk manage-
Overview
ment. At the heart of this discipline, however, is a keen and
detailed understanding of strategic risk, which, while posing the
most serious threat to a company, can, like the others, be avoid-
ed or managed if it is anticipated.
A mismatch between an enterprise’s current business design and

the current strategic landscape of changing customer priorities
and competitive business designs is at the core of strategic risk.
Depending on both the degree of that mismatch and the power
of competitive business designs, strategic risk can manifest itself
in three ways:
Value Collapse. Weighed down by low customer relevance and

besieged by more nimble competitors with better business
designs, the firm’s shareholder value simply evaporates. Our
research shows an increasing number of companies that lose over
half of their value in five years or less (Exhibit 1). Marvel
Entertainment hoped to emulate Disney by turning its trove of
popular comic book characters into blockbuster businesses
through movies, products, and licensing. It proved unable to fol-
low up on the success of its relaunch of Spiderman, and value
collapsed as the company was no longer able to meet its debt
service obligations. Service Merchandise lost 80 percent of its
value by seeing the world too narrowly. As the most successful
player in the declining segment of catalog showrooms, it focused
on optimizing its current position instead of moving its brand
decisively into new and growing areas. CML Group lost
$1.5 billion by ignoring customers’ desires for smaller and
cheaper alternatives to its NordicTrak.
Value Stagnation. More subtle than value collapse, value stagna-

tion is the absence of any sustained growth in shareholder value.
The company, in effect, economically treads water. This phe-
nomenon is particularly striking when compared to the extraor-
dinary performance of the stock market as a whole over the past
decade where “holding your own” means losing ground
(Exhibit 2). Whirlpool missed the shift in major appliance value
from products to downstream activities (e.g., financing and ser-
vice), ceding a great value creation opportunity to retailers such
as Sears, Circuit City, and Best Buy. Rubbermaid, failing to
anticipate increasing customer consolidation, found itself unable
to pass on cost increases to powerful channel players such as
Wal-Mart. U.S. Steel, despite a wrenching overhaul in the 1980s

2.5
Exhibit 1 Value collapse Marvel Entertainment
Shareholder Value
Overview
(in $billions)
1.5
0.5
0
1995 1996 1997 1998
1.2
Service Merchandise
1.0
Shareholder Value
0.8
(in $billions)
0.6
0.4
0.2
0.0
1993 1994 1995 1996 1997 1998
1.6
CML Group
1.4
1.2
Shareholder Value
(in $billions)
0.8
0.6
0.4
0.2
0
1992 1993 1994 1995 1996 1997 1998
Source: Mercer Management Consulting Value Growth Database.
that left it a leaner business with improved products, failed to

craft a business design that would overcome the problems of
industry volatility and cheap foreign competition.
Silver Medalist in a Polarization Game. It used to be the case that

the largest player in an industry was the most valuable. That
firm moved down the experience curve fastest, leading to the
lowest-cost position, the highest profitability, and the deepest
pockets for ongoing investment. Value proportionality was the
rule: A company’s share of total industry value was in direct pro-
portion to its size.
But over the past couple of decades, the rules have changed;
biggest is not necessarily best. Now the highest valuations go to
those companies with the most powerful business designs, solid-
ly positioned to mine the potential of their industries’ “profit
14
12
Exhibit 2 Value Whirlpool
stagnation S&P 500
10
Shareholder Value
8
Overview
(in $billions)
6
0
1993 1994 1995 1996 1997
Rubbermaid
14
12
S&P 500
Shareholder Value
10
(in $billions)
0
1993 1994 1995 1996 1997 1998
8 US Steel
7
6 S&P 500
Shareholder Value
(in $billions)
0
1993 1994 1995 1996 1997 1998
zones,” the places where customers allow enterprises to earn

returns above the cost of capital. But that isn’t the only change:
Not only are big companies no longer the preordained winners,
but the winning business designs win big. In fact, investors
reward them with a disproportionate share of industry value.
We refer to this new disproportionality as polarization. With

polarization, the gold medalist captures the greatest share of
industry value, while the silver medalist—often a strong value
growth performer itself—is worth only one-third to one-twenti-
eth of the value of the winner. While the silver medal still has
value, it represents a disappointing consolation prize (Exhibit 3).
Pepsi’s strong value growth was dwarfed by that of Coca-Cola.
Why? Because Coke understood that restaurants, vending
machines, and international expansion were the profit zones in
the beverage industry and moved aggressively to capture them.

Exhibit 3 Silver medalist 200 Coke
in a polarization game
160
Shareholder Value
Overview
(in $billions)
120
80 Pepsi
40
0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
100
90
Home Depot
Shareholder Value 80
70
(in $billions)
60
50
40
30
20 Lowe’s
10
0
1992 1993 1994 1995 1996 1997 1998
40
35 Oracle
30
Shareholder Value
(in $billions)
25
20
15
10
5
Sybase
0
1991 1992 1993 1994 1995 1996 1997 1998
Lowe’s got a late start in consolidating the home improvement

products channel and was less effective in communicating its
strategy to the Street. Although the company eventually
regrouped and created almost $20 billion in value, it remains in
a distant second place. Sybase, considered to have the best rela-
tional database product in the early 1990s, was the darling of the
IT department. It failed, however, to adapt its strategy as the
battle shifted from technology to applications and the decision-
making shifted from IT to functional heads and top
management.
The process of polarization typically unfolds in two phases.

First, multiple competitors make investments and business
design moves that they hope will match customers’ priorities
most effectively. Competitors appear at parity as legitimate con-
16
tenders for leadership. Beneath the surface lies a different reality.
One competitor “gets it” and, armed with this superior under-
standing, makes the crucial moves and countermoves to win. In
Overview
the second phase, these moves are rewarded as value polarizes
and the gold medalist reaps the benefits. By the time that the
success of the moves becomes widely known, it is generally very
difficult for rivals to catch up—until the landscape shifts again
and even the winning player must rethink its business design.
As these three manifestations of strategic risk illustrate, the

impact of such risk can be more catastrophic than most of the
traditional perils against which we insure and hedge. Yet in our
experience, few executives and board members have adequately
Pattern thinking isn’t about evaluated and prepared for this risk.
predicting the future with Strategic Planning is Not Strategic

But surely, isn’t this the job of a company’s strategic planning
certainty, but about quickly group? The answer is a resounding “Yes, but. . . .” Yes, if they
have the right tools and mindset, but it is important to keep two
identifying a smart port- facts in mind:
folio of options. • Status Quo Mindset. Many strategic planning groups tend to
think incrementally and in parts rather than expansively and
holistically. Enmeshed in the comforting linearity of spread-
sheets, focusing on the company and its products rather than
the customer, they too frequently settle for continuous
improvement—focusing on percentage-point gains in rev-
enue or margin growth or manufacturing efficiency—when
the customers outside the walls are calling for revolution.
• It’s Everyone’s Job. Assessing and responding to strategic risk

is the responsibility of every manager. Thinking about dis-
continuous change is hard and data-intensive. No single
department may have access to all the data necessary to
identify evolving strategic risk.
What is required is no less than a completely different approach

to risk and opportunity identification and to strategy setting.
Today, the crucial task for executives is managing strategic risk:
identifying the potential for value collapse while there is still
time to avert it; recognizing that value stagnation is a given in
the absence of a different approach to the market; evaluating the
likelihood that even a fast-growth business might forgo the
polarization premium (Exhibit 4).

Exhibit 4 Managing Value Collapse Value Stagnation Silver Medalist
strategic risk 80 100 $35
$30
Overview
$25
$20
40 0
50
$15
$10
$5
0 0 $0
Pattern Thinking as a Strategic Shortcut

Pattern recognition is a fundamental cognitive skill. Languages
are patterns of sounds and characters, and so communication
and comprehension involve developing a skill for pattern
recognition.
Pattern recognition is also crucial to many sciences. Genetics,

seismology, medicine, and meteorology all harness pattern
thinking to understand and predict complex phenomena.
Harnessing patterns is even central to the games we play: The
blackjack player uses them in deciding whether to take a card or
to hold, the American football quarterback to interpret the
opponent’s defense and evaluate potential plays, the chess grand-
master to envision possible endgames.
Our research suggests that the same is true of business. Great

managers are skilled at pattern recognition. Every industry is
reshaped by patterns of strategic change that can drastically shift
profit and power across the landscape. Sometimes the patterns
build slowly and sometimes they move rapidly—but change is
always occurring. The ability to anticipate how and why a com-
pany’s strategic landscape is changing, to connect symptoms to
causes, and then to create strategies that lead to significant, sus-
tained value growth is an art and a skill that everyone in the
world of business and investment can profitably cultivate.
It is also a skill that is crucial in a world where the half-lives of

business designs are growing ever shorter. In this environment,
executives don’t have time to exhaustively evaluate the likelihood
of each potential option for industry evolution. This would take
time that markets no longer allow. Managers need a shortcut
that allows them to speed up the process and identify their port-
folio of options on the fly. Otherwise, they’re like novices at
speed chess, still evaluating moves when their time is up.
The good news is that all business people are already engaged in
pattern thinking. From CEOs to middle managers to securities
18
analysts, we already traffic in patterns as basic tools of our work
and our strategic thinking. Many managers can describe and
apply the “consolidation and shakeout” pattern. Many can
Overview
articulate the characteristics and consequences of the “commodi-
tization” pattern, the “disintermediation” pattern, or the “deregu-
lation” pattern.
Even if patterns are not new, they are growing in importance.

Compared with the late 1980s, the number and complexity of
the patterns required to excel in business have grown. Back then,
managers operated, either explicitly or implicitly, with a dozen
or so strategic patterns at their fingertips. Today, business people
must know several times as many, and the list is growing.
Pattern recognition is part of a process that we call Strategic

Anticipation®. It is not about predicting the future with certainty.
Instead, it is about being prepared to exploit change, and making
informed decisions as to the best moves and countermoves for
the business. It is about moving the management team up the
Strategic Anticipation spectrum from “I’m totally oblivious to
the potential changes that might transform my industry” to “I
see it coming” (Exhibit 5).
Exhibit 5 Strategic
“I KNOW FOR SURE”
Anticipation® spectrum
“I SEE IT COMING” Strategic Anticipation is about
understanding enough to make
the correct moves to reduce your
“I THINK IT MIGHT HAPPEN” strategic risk and capitalize on
tomorrow’s opportunities
“I HAVE A SNEAKING SUSPICION”
“I’M TOTALLY OBLIVIOUS”
In the late 1980s, IBM found itself in the unfortunate position

of being the first major victim of a relatively new pattern, the
Deintegration of the Value Chain. Others had profited before
through deintegration. For example, in the 1960s Toyota dis-
pensed with the integrated automotive model of the “Big Three”
and focused the company on only those aspects of the value
chain critical to satisfying the most important priorities of
customers, while outsourcing the rest. Yet this pattern swept
through the computer industry far more quickly and with
greater value-destruction power than it had elsewhere.
In the glory days of the mainframe, an integrated model drove

IBM’s success. IBM created the hardware, wrote the software,

and its legendary sales force was the channel. With the advent
of the personal computer, IBM executives recognized that a fully
Overview integrated approach would not work in the higher-volume,
lower-margin PC business. They did not, however, recognize
that they would need to harness a different profit model in a
world in which the microprocessor and the operating system
became the proprietary value added and were out of IBM’s con-
trol (Exhibit 6).
Mainframe World PC World

Exhibit 6 From
integration to Chips Intel Architecture Motorola RISCs
deintegration
Compaq Dell Packard Hewlett
Computer IBM Etc.
Bell Packard
Operating
System DOS and Windows OS/2 Mac UNIX
Application
Software Word WordPerfect Etc.
Sales and
Distribution Retail Stores Superstores Dealers Mail Order
IBM DEC
Vertical Horizontal
IBM understood the priorities of personal computer customers,

who wanted inexpensive computer power and compatibility. By
endorsing Intel’s microprocessor and Microsoft’s operating sys-
tem, IBM sought to drive unit volume by establishing an open
standard for personal computing. In allowing other firms to own
those steps of the value chain most relevant to customers, how-
ever, it shut itself out of the industry’s largest profit zone. Its
business design choices set in motion a dramatic flow of share-
holder value—something we call Value Migration®—across a
no-longer-integrated computing value chain. Value flowed to the
businesses that owned the standards (Intel and Microsoft) and
away from just about everybody else, with IBM alone ceding
$100 billion in market value from 1985 to 1992. In 1986, IBM
owned 55 percent of the shareholder value in computing. By the
end of 1997, IBM retained less than 13 percent, while Microsoft
had captured nearly 20 percent, and Intel over 14 percent of the
sector’s value (Exhibit 7).
The point here is not that pattern thinking alone would have
enabled IBM to avoid its vertiginous value collapse. The deinte-
gration pattern was too new and the discipline of pattern think-
ing only nascent. Deintegration will, however, happen again.
There are early signs of it in telecommunications, chemicals, and
utilities. Are executives in these and other industries that will
20
Total Shareholder Value
Exhibit 7 Deintegration (in $billions)
of the value chain in $136
$169
$172
$159
$193
$202
$232
$296
$370
$588
$782
$1005
$1550
100
computing Service
Net- Overview
Cisco working
Percent of Total Shareholder Value

80
Software
60 Microsoft
40 Semicon-
Intel ductors
20
IBM Hardware
0
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Source: Mercer Value Growth Database.
experience this pattern better prepared than IBM to benefit

from it?
Profit Patterns
Our research to date has described thirty patterns, a number
that we expect will increase as new patterns are discerned and
variants of existing patterns catalogued. (Additional pattern-
related information and new patterns and variants as they are
identified can be found at www.profitpatterns.com.) Patterns can
characterize both the ways industries evolve as well as winning
business design moves that have been proved time and again in
different industries. These patterns are organized along two
dimensions: incidence and type (Exhibit 8; see also the enclosed
pullout poster, “The Periodic Table of Strategy”). Incidence cap-
tures the fact that, while some patterns have been seen over and
over again, others are just emerging. Type expresses the primary
areas of the pattern’s impact. These patterns are the distillation
of several decades of observing and crafting winning business
strategies.
There are presently seven discrete pattern types:
• Mega Patterns. These patterns play out across many areas of

business over long periods of time, often decades. Examples
include Convergence—when multiple industries merge into
one—and Collapse of the Middle, which is the subject of
another article in this issue of the Journal (see page 27).
• Value Chain Patterns. Industry value chains used to be

incredibly stable. Today, they are compressed, broken, and

Emerging
Back to
Profit
Overview
Product to Conventional
De Facto Re- Profit to Digital
Standard intermediation Multiplier Business
Design
Technology Product to Knowledge

Shifts the Reintegration Redefinition Compression
Blockbuster to Product
Incidence
Board
Product to
Convergence Squeeze Micro- Product to Customer Cornerstoning
segmentation Solution Knowledge
Strength-
Collapse of Power Shift Multiplication Product to Operations to Pyramid to
ening the
the Middle Pyramid Knowledge Network
Weak Link
Product to
No Profit Deintegration Profit Shift Concentration Brand Skill Shift
Traditional
Mega Value Chain Customer Channel Product Knowledge Organizational
Type
Exhibit 8 Profit Patterns: put together again. Examples include Deintegration,

The Periodic Table of described above, and Strengthening the Weak Link, in which a
Strategy stronger value chain participant removes impediments to
satisfying customers by buying or helping weaker value
chain participants.
• Customer Patterns. Customers are the ultimate arbiters of

value. The results of their constantly shifting priorities are
value creation and value destruction. One example is the
Profit Shift pattern in which increasingly divergent customer
segments yield extraordinary variation in customer
profitability.
• Channel Patterns. As power and influence have shifted

downstream, closer to customers, the distribution channel
has become more important because of its proximity to criti-
cal information on customer preferences and behavior.
Examples are Compression, in which upstream players go
direct to the customer by assuming some or all of the func-
tions previously controlled by the channel, and
Multiplication, in which entirely new players such as
Amazon.com use new channels to capture extraordinary
value through innovation and customer knowledge.
• Product Patterns. In recent times, profit and value have begun

to migrate away from “products” in several directions. The
common denominator across these patterns is that the value
that had existed in the product itself has moved next door,
22
economically speaking, to new scarce assets such as brands,
blockbusters, and solutions.
Overview
• Knowledge Patterns. Knowledge can be disorganized, dissi-
pated, and squandered. Or it can be organized and focused,
to the profit of both supplier and customer. As the economy
continues to shift from the manufacture of goods to the
application of useful ideas, this category of patterns will
increase in importance. One important example is the
Knowledge to Product pattern in which scarce, labor-intensive
expertise is crystallized into a product form.
• Organizational Patterns. There has been much innovation

in organizational systems in response to the increasing
dynamism and complexity of our economy. Firms increas-
ingly will need to be more observant of and responsive to
the needs of customers and top employees, both current and
prospective. For example, the promise of digital technology
to revolutionize the relationship with both of these stake-
holders has triggered an emerging pattern, Conventional to
Digital Business Design, which is the subject of another arti-
cle in this issue of the Journal (see page 37).
Strategic Pattern Recognition

Pattern recognition is still more of an art than a science.
Nonetheless, there are specific steps that managers can take
Pattern thinking, rigorously to improve their chances. The first is to increase their working
repertoire of identified patterns, not only the thirty described in
applied, empowers the dili- the book Profit Patterns, but also others that management teams
themselves have discerned. As exercises, managers should evalu-
gent manager to challenge ate their weekly business reading through the lens of patterns;
read about developments in other industries, which might find
the great visionaries so application in theirs; or try recasting their company’s history in
pattern terms.
often glorified in strategy
With a foundation of pattern knowledge, managers can employ
literature. the three-stage process of Strategic Pattern Recognition:
• Scan the strategic landscape, collecting and analyzing data

on the three categories of leading indicators: dysfunctionality
(for example, mismatches between the priorities of future-
defining customers and the offerings of current suppliers),
variability (for example, important differences among cus-
tomer segments in priorities and profitability), and shifts in
continued on page 26

Executive Perspective
Overview
“Going beyond the product”

Daniel P. Burnham is president and chief executive officer of
Raytheon Company, a leading defense electronics contractor,
business aircraft manufacturer, and engineering and construction
firm. The company, based in Lexington, Massachusetts, has more
than 100,000 employees worldwide and had revenue of $19.5 bil-
lion in 1998. He spoke recently with Mercer Management Journal
about some strategic patterns affecting Raytheon.
Many companies have tried in recent years to Can you give an example?
improve profitability through consolidation Let me give you two of them, one in a traditional
and cost-cutting. Is that enough? and conservative—some would say mature—mar-
Let's go back to the fundamentals. A business ket called "missile systems," the second in a new
can create prosperity for its various constituencies market called "fractional ownership.” When
only through a combination of growth and pro- Raytheon and Hughes Electronics’ defense opera-
ductivity. One cannot simply use conventional tions merged in 1997, we ended up with a large
productivity to drive long-term prosperity: The share of the missile business in the United States.
lowest cost buggy-whip manufacturer comes to We made commitments to our customers that we
mind. And growth without productivity will suck would take out costs aggressively as a result of
value out of a system. So these are flip sides of this. We did, and with impressive speed—for
the same coin. They are both vital and, indeed, example, cutting the cost of producing the
interactive. The best way to generate growth is AMRAAM [Advanced Medium Range Air-to-Air
having the right perception and knowledge of Missile] by over 20 percent from buy to buy. Our
customer priorities—understanding them better customers were delighted with these reductions
than even the customers themselves do—and and, in the conventional view, this would be a
then addressing those priorities at the lowest sufficient model. The problem was that this cus-
cost. Productivity addresses the lowest cost, the tomer satisfaction could lead to the shrinking of
least hassle. It does not address business acumen our business because of the “cost-plus” nature of
and innovation. But achieving greater productivity the defense industry. And while we're interested
generates the funds needed to invest in growth. in satisfying our customers, it's in order to grow,
And the more you grow, the easier it is to contin- because without growth, you lose the whole
ue to be productive. You see growth and produc- spark that keeps an organization striving, push-
tivity creating a virtuous circle. But either one ing, excelling. So the AMRAAM team under
without the other becomes a value destroyer. Chuck Anderson said, “Hey, wait, how do we
create growth out of this thing?” They sat down
As you survey today’s business landscape, with the customer—in this case, the Air Force—
do you see patterns that suggest effective and said, not exactly in these terms, "How do we
methods for achieving growth—particularly, create value for you across the entire chain of
sustained value growth? activities that relates to this missile system?” They
One is the “product to solution” pattern, getting came to understand the customer’s needs and
to understand customer needs so well that you problems and hassles across the full chain. And
are going beyond the product to offer services or they came in with a solution to the problems that
systems—“solutions”—that enhance the cus- put Raytheon into a side of this segment of the
tomer’s use of the product. business it had never been in before—logistics
Overview
and services and training. This gave us not only mately intertwined with the customer, would be
growth but also an increasingly positive reputa- at a disadvantage in trying to do.
tion with the individual customers and their boss-
es, and their bosses. When you start moving up One of the patterns described in Profit
that ladder, you've got some real leverage. Patterns is “skill shift,” in which companies
find themselves with a workforce whose
You mentioned another application of this expertise matches yesterday’s customer
pattern. needs. How do you get Raytheon’s
We traditionally saw ourselves [in the commercial traditional engineering culture to respond to
aircraft market] as an airplane producer and sell- the priorities of today’s customers?
er. But there is a completely different model that First, the closer you are to the customer, the more
says: "People don't always want to own air- intuitive and sensitive you get about that cus-
planes; they want to have access to hassle-free tomer's needs. So we encourage our organization
travel wherever and whenever they want it. But to get as close to the customer as is possible—
they can’t always afford to own a business air- not simply the traditional CEO or program officer
craft. So, how do we create more consumers of or procurement officer, but the ultimate users of
airplane hours?” The answer is shared, or frac- the product or service. Second, we are building
tional, ownership [in which customers purchase on the inherent strengths of an engineering-
the right to use an executive jet for a certain intensive organization—not trying to change it.
number of hours a year]. We’re no longer just the We have about 40,000 engineers. And what do
producer of the airplane; through our Raytheon we know about engineers? They are “smarter
Travel Air business, we’re also the provider of the than the average bear” and they love to solve
hours and the pilots. The traditional view at problems. So the challenge is simply this: Give
Raytheon was, "We're not in that business. them the right problem to solve. We have seen
We're going to make planes and let other peo- their receptivity to radically different ideas. Rather
ple—GE Capital or someone like that—handle than hearing, “That doesn't work here,” we’ve
these other services.” But now, guess what? At heard, "That's a powerful intellectual concept.
the same time that we’ve created a whole new Let's get our minds around it so we can use it to
business, we’ve also helped to create a whole solve our issues.” Engineers don’t look at differ-
new demand for airplanes. We certainly can't ential equations and say, "Oh, forget it! I can't
take credit for the creation of this market—that figure that out.” That's what the liberal arts
goes to Executive Jet—but we can for rapidly fol- degree guys do. The engineers say, "Let me mas-
lowing the lead. You don't have to invent every ter this so I can use it.” And that's how we're
idea in order to be prosperous. approaching this thing, providing them with more
exposure to customers and to external thinking.
What do these examples tell us about the
customer? What are some other organizational
Customers want someone to help them define challenges to becoming more customer-
their problem and help them solve it. Now you focused?
can't do that by being an interloper. You've got There’s the challenge of institutionalizing these
to be intimately and inextricably intertwined with things and changing all of your support sys-
that customer, to create cross-dependencies. For tems—for example, training, hiring, your internal
example, in our engineering and construction information flow—so that they revolve around
business, we have a large and growing mainte- these strategies and become self-reinforcing. This
nance services business. That allows us to under- allows you to develop a real competency around
stand our customers—not just to perform tradi- the execution of these strategies. This makes it
tional maintenance services but, most importantly very hard for competitors to emulate—because
for us and for them, to get to know their facilities while anybody can read the strategy, it's how you
as well as they do. Maybe better. We get to do it that counts. It's the interaction of all your
know what's important to them, what their bud- support systems in a way that's almost impossible
get situation is. Then we can come in and fashion to unwind.
solutions that competitors, who are not so inti-
continued from page 23
the rate or direction of change (for example, rapidly changing

Overview customer priorities).
• Compare the leading indicators you have identified with

your library of patterns, looking for those patterns most
likely to unfold.
• Assess the likelihood and impact of these patterns’ occur-

rence and then consider an array of strategic responses,
based upon the type of pattern and how early in the lifecycle
it has been spotted.
This process, which must be carried out on an ongoing basis, is

described in greater detail in another article in this issue of the
Journal (see page 75).
Ensuring that your planning process includes this kind of think-

ing represents a significant competitive advantage. So much of
the strategy literature glorifies the great visionaries, and as such
is interesting but not actionable. Pattern thinking, rigorously
applied, allows every manager to think like a grandmaster and
thus empowers the hard-working to challenge the best.
As in chess, one does not become a grandmaster overnight. But

movement along the early learning curve is quick, and mastery
of the basic patterns can lead to dramatic performance improve-
ments in a short period of time. And because the game of busi-
ness is becoming more like speed chess, “getting it” early is
essential. Managers who learn this discipline and act before the
ground shifts beneath them can stake out the next profit oppor-
tunity again and again, thereby beating competitors who don’t
see the patterns.
Adrian J. Slywotzky is a vice president of Mercer Management

Consulting based in Boston. He is a co-author of Profit Patterns:
30 Ways to Anticipate and Profit from Strategic Forces
Reshaping Your Business; and The Profit Zone: How Strategic
Business Design Will Lead You to Tomorrow’s Profits; and the
author of Value Migration: How to Think Several Moves Ahead
of the Competition. James A. Quella is a vice chairman of the firm
based in New York and a co-author of Profit Patterns. David J.
Morrison is a vice president of the firm based in Boston and a co-
author of The Profit Zone and Profit Patterns.
26
A classic pattern transformed
Capturing value as a new “middle” collapses
By Ted Moser Classic

Pattern
T he going-out-of-business sale at the local department store

has been one of the most vivid commercial images in the
United States over the past few decades. The stores, whether
locally owned or part of a regional or national chain, were often
cultural as well as business institutions in towns and cities across
One venerable pattern, the country. In some cases, the store closings signaled population
shifts from Main Street to the suburbs. But the demise of the
where customers move department store is primarily the reflection of a powerful strate-
gic pattern: the Collapse of the Middle.
toward opposite extremes
Shareholder value shifts in the retail industry confirm the pat-
of the product value tern lying behind those darkened department store windows.
From 1985 to 1994, discount stores (such as Wal-Mart) and
creation spectrum, still “category killer” superstores (Home Depot) at one end of the
spectrum and up-market specialty retailers (the Gap) at the
catches firms unprepared. other created more than $160 billion in shareholder value—
mostly at the expense of the all-things-to-all-people department
Now, an information-based store (Exhibit 1).
Collapse of the Middle Retailing isn’t alone in being reshaped in recent years by the
Collapse of the Middle pattern. In numerous industries, from
poses a new threat. There automobiles to restaurants to beer, value has flowed to one of
two extremes: low-cost product offerings, often focused on a
are two routes away particular category of product, and premium-priced offerings,
distinguished by superior product benefits, design, service, or
from this unprofitable brand image. The losers have been the moderate-cost, moderate-
benefit—“average”—offerings (Exhibit 2).
middle.
Many business managers have played by the “don’t get caught in
the middle” rules for years. They have defined their product
strategies around the twin poles of low-cost and high-perform-

Exhibit 1 The Collapse Total Shareholder Value
(in $billions)
of the Middle in U.S.
retailing $80 $71 $87 $105 $102 $176
100
Wal-Mart
80 Discount stores,
Percent of Total Shareholder Value

led by
Wal-Mart, gain
Other share of value
Discount
(current dollars)
60
Department
Classic stores lose share
Pattern Department of value
40
Specialty stores
hold their own
20 Specialty
Superstores, led
by Home Depot,
Other Superstores gain share of
Home Depot value
0
1986 1987 1988 1989 1990 1991
Source: Mercer Value Growth Database.
ance products, plus a third option—superior customer segment

focus. Thus, the product-based Collapse of the Middle is not a
new phenomenon; its impact has just intensified as cutthroat
global competition has increased.
Information-based Collapse of the Middle

What is genuinely new—and what is upsetting the carefully laid
plans of many product-based companies—is a new Collapse of
the Middle, one defined by information-based, rather than
product-based, benefits to the customer.
20 Years Ago
Exhibit 2 Product-based
Collapse of the Middle
Value
Low-Cost Product Moderate-Benefit, High-Benefit Product

Moderate-Cost
Product
10 Years Ago
Value
Low-Cost Product Moderate-Benefit, High-Benefit Product

Moderate-Cost
Product
28
The relentless development of the microprocessor has allowed
companies to track and manage enormous amounts of customer
information, resulting in the emergence of new kinds of compet-
itive advantage. Furthermore, greater information access has
pulled away the veil from many products, enabling customers to
see that in some cases there is little difference among them.
Information-based benefits to the customer can be created

through two different extremes (Exhibit 3): Classic
Pattern
• Superior information about customer-level priorities, com-
bined with an innovative business design, leading to superior
product and service customization at low cost
• Superior information about customer-level processes, com-

bined with an innovative business design, leading to superior
solutions to customers’ problems
Exhibit 3 Information- Past

based Collapse of the
Middle
Value
Low-Cost/ Superior Product Solutions

Customized (most benefits or
lowest cost)
Present/Future
Value

Customized (most benefits or
lowest cost)
Because of the growing power of information-based perform-

ance, managers can no longer afford to think of value proposi-
tions only in product-based, price/performance terms. If they
do, they are in danger of being blindsided by competitors that
exploit new value propositions made possible by the manage-
ment of information.
The companies most vulnerable to this threat are those that

have historically taken a middle-of-the-road approach to infor-

mation transfers between their companies and their customers,
an approach characterized by the product sales force.
Regardless of whether a company’s sales force comprises sales

representatives on payroll, commissioned brokers, distributors,
or sales agents, the underlying economics and activities of a sales
force as an information transfer vehicle is the same: Relatively
well paid individuals play a relatively low value-added informa-
Classic tion transfer role. They explain new product features. They com-
Pattern pare their products’ performance to that of the competition
(usually in a biased fashion). They give advice on when their
products are appropriate to use (again in a biased fashion). They
take orders.
The sales force is to information transfer what department stores

are to retailing: all things to all customers, operating in the
moderate-to-high-cost, moderate-benefit middle.
An Integrated Product and Information Perspective

Many companies now compete in markets where product bene-
fits and information benefits compete for customer attention.
To the extent that product differentiation is strong, the product
drives customer decisionmaking. To the extent that product
differentiation is weak, information-based performance domi-
nates customer decisions.
The unmistakable trend, however, is a decrease in product dif-

ferentiation and a rise in the role that information plays. Many
The new Collapse of the product-centric business designs, no matter how soundly posi-
tioned in terms of product price and performance, are soundly
Middle is upsetting the beaten by both “low-cost/customized” business designs and by
“solutions” business designs.
carefully laid plans of many
For example, the value in computing has shifted away from tra-
product-based companies. ditional original equipment manufacturers to companies such as
Dell Computer (whose low-cost machines are customized
overnight to individual customer specifications); IBM and
Hewlett-Packard (manufacturers that have become solutions
providers); and EDS and Andersen Consulting (which provide
solutions on an outsourced basis). Even Compaq, the clear win-
ner in low-cost product manufacturing, has just joined the ranks
of the solutions providers through its acquisition of Digital
Equipment; it is also mimicking Dell through its new decentral-
ized, last-minute assembly system.
30
Business Design Challenges
Few patterns create greater management challenges than
responding to the information-based Collapse of the Middle.
That’s because such a response requires a company to organize a
new business design around a new value proposition. This often
requires new product design, a new product line, new profit
models, new information systems, new incentive systems, and,
perhaps most important, new corporate cultures.
Classic
Pattern
Exhibit 4 Business design
Product Out-
options along two Advisor sourcing
dimensions of the
Product Tailor Automated
information value Process
creation spectrum Modular Designer/
Manufacturer Integrated
Value
Product Line
Middleman Eliminator
One-Stop Shop
Product Pyramid Builder
Service
Platform Recycler
Category Killer Consumables

Customized (most benefits
or lowest cost)
These new business designs range along the spectrum that

extends in both directions from the collapsing, product-centric
middle (Exhibit 4). Some of these business design responses to
the Collapse of the Middle exploit other known patterns—the
Platform Recycler, for example, is a reflection of Product to Profit
Multiplier—described in other articles in this issue of the Journal.
The question for companies to resolve is, “How far should I go

in either direction?” Getting it right can separate market winners
from losers: A low-cost/customized or solutions approach that is
too “weak” or too “strong”—that either doesn’t go far enough
along the spectrum, away from the product-centric middle, or
goes too far—can equally miss the customer target.
The answer depends on the location of future value spaces,

which are created by a combination of untapped opportunities,
competitor initiatives, and emerging customer priorities. The
business designs on the following pages give a sense of the
breadth of choices available.
***

Hitting the solutions sweet spot
What kind of solution or solu-
tions should your company
Product Out-
Advisor sourcing offer to customers? The right
Product Tailor Automated choice depends on the emerg-
Process
Modular Designer/ ing customer priorities in your
Manufacturer Integrated
industry. All choices along the
Value
Product Line
Middleman Eliminator
Classic One-Stop Shop
spectrum, however, have a
Pattern Product Pyramid Builder
common aim: to enhance
Service
Platform Recycler “beyond the product” activities
Category Killer Consumables
that allow customers to get
maximum value from the
Low-Cost/ Superior Product Solutions product.
or lowest cost)
Consumables Solution: The manufacturer offers both a product

and the consumable accessories or services that are needed to use it.
This “razor and razor blades” business model has provider’s profits. Customers value the
proliferated in the past decade. In consumer mar- Consumables Solution when it ensures product
kets, one finds single companies selling printers compatibility and quality at a reasonable price.
and ink jets, pens and refills, cellular phones and They resent it and look for generic alternatives
service contracts. In industrial markets, it is med- when the pricing of consumables appears to be
ical monitors and electrodes, air compressors and price gouging. To succeed, therefore, a company
air filters, and so on. One reason for the populari- must continually innovate to keep its consum-
ty of this solution is the power of the “razor ables proprietary to the base product, not
blade” to generate profits. The consumables may generic; superior in performance to generic com-
account for 80 to 120 percent of a solutions petitors; and reasonable in price.
Service Solution: The manufacturer or retailer offers after-sales service

that protects customers from economic loss due to product failure.
This solution matters whenever the customer develop their product line scope around a strate-
depends heavily on product “up-time.” Its gy of superior service, enabling them to afford-
impact is most dramatic in industrial markets, ably offer full-time, on-site service staff when the
especially when manufacturing equipment keeps competition cannot. This “no lost productivity”
a factory assembly line running. For example, solution, a far cry from the old “send it back if it
leading equipment suppliers offer services such doesn’t work” guarantee, is now creeping into
as global telephone diagnosis and remote service the consumer market. Some makers of cellular
of their products within minutes of failure, fol- phones and personal organizers now boast
lowed by worldwide, on-site service several hours worldwide service hotlines and 24-hour replace-
later. Some industrial suppliers go so far as to ment shipments.
One-Stop Shop Solution: The manufacturer offers a product line whose

breadth and depth perfectly mirror the customer’s purchasing needs.
This solution is particularly effective for cus- sell as broad a range of goods. Hospital goods
tomers who want purchasing-related simplicity suppliers have successfully used this approach.
and cost savings. These customers are looking The emerging global airline alliances exploit the
both to reduce the number of suppliers they One-Stop Shop Solution via linked frequent flyer
must deal with and to benefit from price dis- points and corporate travel discounts. The
counts based on combined purchases across the approach will soon come to the home as cable
provider’s broad and deep product line. companies begin offering telephony, Internet
Competitors with narrower product lines can’t access, and video entertainment—all at a signifi-
match the volume discount because they don’t cant discount if the entire bundle is chosen.
Integrated Product Line Solution: The manufacturer designs in
superior performance, in the form of higher output or lower operating
cost, for the customer who buys the whole product line.
Applied Materials makes equipment for more meet their productivity improvement targets.
than twenty distinct manufacturing steps in the Boeing offers its customers, the airline operators,
semiconductor fabrication process. Its customers, a similar type of solution, but with the promise of
the major chipmakers, don’t really care how fast lower operating costs rather than higher output. Classic
any of these twenty or so machines works in iso- The Boeing family of airplanes has been devel- Pattern
lation. They do care how fast the machines, oped to maximize commonality—common parts,
working in optimized harmony, can produce a common maintenance procedures, common con-
chip. Because it takes an Integrated Product Line trol panels and design—to minimize an airline’s
perspective, Applied Materials can assure cus- costs of training, servicing, and spare parts. The
tomers that it is always working on the next bot- more loyal a customer is to the Boeing product
tleneck improvement that will help customers line, the lower its operating costs.
Automated Process Solution: The manufacturer automates

processes and activities previously carried out by the customer.
For the individual consumer, these solutions can acteristics of the gift recipient and then suggests
range from the simple ones of today (the coffee gifts that may be appropriate. The financial value
pot that starts brewing at 6:00 a.m. while the of an Automated Process Solution is even greater
coffee drinker sleeps) to the complex ones of for industrial customers because the labor savings
tomorrow (self-navigating automobiles that never can be multiplied. Equipment that needs no
crash and never get lost once the driver has com- operators and factories that need fewer workers
municated the destination). This strategy is not are a compelling benefit. By eliminating labor or
limited to hardware. When a mutual fund com- thought that a customer would otherwise have
pany offers customers investment portfolio opti- to apply in order to use and enjoy a product, the
mization software, it is adding an Automated value of the Automated Process Solution can
Process Solution to a service. So does dwarf the value of the original product or service
Amazon.com when, as part of its online gift pro- that it accompanies.
gram, it asks users to type in three personal char-
Outsourcing Solution: The supplier offers to do everything for the

customer, eliminating nearly all customer effort and financial risk.
This is the ultimate solution. Provided that the product design teams, human resources pro-
supplier performs up to expectations, there is lit- grams, manufacturing divisions, and back offices.
tle for the customer to do or worry about. That What started as a business solution is growing in
allows the customer to effortlessly enjoy the pur- consumer markets as well, with time-pressed con-
chased product or get on with other, higher-prior- sumers paying others to perform activities associ-
ity work. Outsourcing Solutions started in the ated with owning a car or weekly shopping. In all
computer services market when EDS offered to cases, the greatest challenge facing outsourcing
relieve CEOs of their information technology companies is generating primary demand—con-
departments, providing guaranteed on-time per- vincing the customer that the outsourcer can do
formance at a declining cost. Today, one can find equal or better work at a lower cost than the
outsourced sales and marketing departments, customer.

Blending low cost with customization
Management teams looking to
Product Out- create a “low-cost/customized”
Advisor sourcing
business design face the same
Product Tailor Automated
Process question that confronts those
Modular Designer/
Manufacturer Integrated contemplating a “solutions”
Value
Product Line
Classic Middleman Eliminator design: Where do I invest along
Pattern Product Pyramid Builder
One-Stop Shop
a spectrum of possibilities?
Service
Again, the answer depends on
Platform Recycler
the untapped opportunities
Category Killer Consumables created by emerging customer
priorities in your industry.
or lowest cost)
Category Killer: A supplier is able to offer low prices and broad

selection by focusing on and then dominating a product category.
The first strategic choice on this dimension of the Category Killers. In financial services,
spectrum produces a powerful offer that gives Countrywide has staked out a leading position in
customers both the best selection and the lowest U.S. consumer mortgage initiation; MBNA has
prices within a particular category of products. become the dominant affinity credit card issuer
The retail industry offers the most visible exam- for corporations. Category Killers achieve the
ples of Category Killers: Toys ‘R’ Us, Home low-cost position through scale economies that
Depot, and Circuit City, to name just a few in the arise from dominating a category. Other business
United States. Other markets have also seen the design choices, however, can improve low-cost
rise of both consumer and non-consumer positions even further.
Platform Recycler: Manufacturers lower the cost of heavy R&D

investment by reusing key assets.
Platform strategies can be applied to technolo- models as well. Disney utilizes its familiar animat-
gies, hardware, software, images, and brands— ed characters as platforms. After developing the
anything that requires a major, up-front invest- characters, Disney multiplies the profit it gener-
ment. Auto manufacturers are increasingly using ates from them by reusing them in different set-
existing automobile platforms, which cost tings: movies, videos, TV shows, theater produc-
between $2 billion and $4 billion each to devel- tions, merchandising, retail stores, theme parks,
op, as the bases for multiple different brand and hotels, restaurants, and cruise lines. The higher
model combinations. For example, the same plat- the level of asset reuse, the higher the profit
form used on multiple Volkswagen models will margins.
be found underneath Audi, Seat, and Skoda
Product Pyramid Builder: A company exploits cost synergies

between low-end and high-end products.
In the 1980s, the Japanese auto producers market businesses. The first company to achieve
began making luxury cars that were 25 to an effective pyramid in any industry can reap
35 percent cheaper than those of luxury special- above-average profit margins in its high-end
ists such as BMW, Mercedes-Benz, and Jaguar products while enjoying market share gains by
without sacrificing quality or performance. Their undercutting competitors’ prices. Today, all the
secret? Creating low-cost, high-end products by major auto manufacturers are scrambling to
exploiting platform, scale, and production ensure that their portfolios are structured as
process advantages that accrue from their mass- pyramids.
Middleman Eliminator: A manufacturer goes direct to the end
customer to lower costs and address individual customer priorities.
Low-cost business design choices are not limited dence of the benefits of this business design.
to manufacturing economics. They can also be With the cost savings realized from going direct
achieved through a radical reduction in go-to- to the customer, Dell is able to offer rock-bottom
market costs. Technology is enabling companies prices. Furthermore, Dell customers are able to Classic
to sell directly to the ultimate consumer, avoiding configure their own computer when ordering a Pattern
sales force and distributor costs in the process. new one, and then find it on their doorstep
This “channel compression” also allows compa- 48 hours later. Investors have rewarded Dell for
nies with excellent logistics systems to offer cus- its sales-to-asset ratio, which is 30 times higher
tomers made-to-order products. The well-known than those at IBM.
story of Dell Computer provides powerful evi-
Modular Designer/Manufacturer: A product and its design are

broken down into modular components that allow for rapid and
low-cost customization.
Allowing customers to customize the products behind. Direct catalog clothing retailers such as
they order is not a trivial achievement. One Lands’ End are increasingly modularizing their
means to accomplish this is to develop a modular product offer and manufacturing processes—
product line that offers a menu of performance dying colors as late as possible, for example. It
levels, visual designs, price ranges, and options will not be long before clothing consumers can
from which customers can choose. Dell has mas- ‘‘design” what they want to buy from mix-and-
tered the concept but other companies aren’t far match styles, fabrics, and dyes.
Product Tailor: A company’s individualized ordering system allows

customers to create their own version of a product.
In order to truly customize their own orders, cus- customer involvement of the kind that has never
tomers need to be able to tell the supplier the been achieved by traditional means of doing
exact specifications of the product they plan to business. Levi Strauss now offers custom-fit blue
purchase. This requires interactivity between the jeans over the Internet, with consumers sending
customer and the supplier via telephone or the company their exact measurements and
Internet ordering systems. These systems com- receiving blue jeans made just for them. Levi’s
plete the shift from manufacturer “push” sys- saves the consumer’s measurements in a file that
tems to customer “pull” systems. They create enables rapid re-ordering.
Product Advisor: A company provides individualized advice to

help consumers sort through the countless options that low-cost
customization makes available.
The only downside to individualized, order- computerized advice based on an individual’s
exactly-what-you-want systems is that they can purchase history, on individual interest profiles,
require customers to invest time in deciding what and on correlated purchases by other customers
they want from a dizzying set of choices. Levi (‘‘people who bought this book also
Strauss doesn’t force this challenge on customers bought. . .”). Charles Schwab gives advice
because it sells a relatively narrow product line. through mutual fund ratings and a portfolio
Amazon.com does, because it offers millions of manager tool.
books from which to select. Amazon provides

***
Implementation Choices
The spectrum of choices for implementing low-cost/customized
and solutions business designs ends on the previous page, but
only momentarily; new ones will soon emerge.
Classic For most companies, though, the challenge is not to leapfrog

Pattern these cutting-edge business design choices; rather, it is to catch
up on the fundamental dynamics of the Collapse of the Middle.
They must shift from product-centric business designs that are
in danger of value collapse to either low-cost/customized or solu-
tions business designs that can generate a new era of value cre-
ation for customers, employees, and shareholders alike.
One final issue for managers to consider is whether their com-

pany is equipped to venture outward toward both ends of the
spectrum at the same time, and possibly even retain a position in
the middle by continuing to try to offer a differentiated product.
The company that tries to capture value along each of the two
Collapse of the Middle dimensions will have to create and man-
age two cultures within the same business. If it chooses to play in
one value space alone, it will need to achieve a much more domi-
nant market share there in order to generate the same profit that
it previously did in a broader market.
The cultural challenges of pursuing value through multiple busi-

ness designs are significant because of institutional memory and
the necessity of recruiting the right new talent. Cultures that for
decades took pride in their product-driven performance are often
populated with product engineers who find it hard to respect
information-based success as a worthy replacement.
Whichever choices make most sense for a given company, the

value shifts that are driving the Collapse of the Middle—the
commoditization of product positions and the rising importance
of information-based differentiation—are here to stay.
Ted Moser is a vice president of Mercer Management Consulting

based in Paris and a co-author of Profit Patterns: 30 Ways to
Anticipate and Profit from Strategic Forces Reshaping Your
Business.
36
The real point of going digital
It’s not about your website—it’s about rethinking the business basics
By John F. Marshall,
Richard S. Christner,
and Erich Almasy
I t is the rare company that does not claim to be developing an

“Internet strategy.” Few companies would admit that they are
not preparing for this extraordinary change in the way people
work, shop, entertain themselves, and generally manage their Emerging
lives. Even for technological skeptics, the past year has proven Pattern
Many firms embrace the the importance of this new medium, and the number of Internet
initiatives is exploding.
Internet without under-
Most of these initiatives, however, risk failing or falling well
standing why. The technol- below their potential. Companies are frequently disappointed in
two ways: First, no one visits or purchases from the corporate
ogy can be worthless if website. And second, attempts to automate people and paper
processes often yield few if any efficiency gains.
simply tacked onto existing
The heart of the issue lies in understanding why your firm is
operations. But a truly digi- using technology. Taking full advantage of the “digital revolu-
tion” is not about launching a website or wiring the entire enter-
tal business design—which prise. It’s not about moving more product or tweaking the effi-
ciency of current processes. It’s about using technology to enable
doesn’t change how com- changes—often fundamental ones—in your business design, the
system by which the firm delivers utility to its customers and
panies do business so thus generates sustained shareholder value growth.
much as it changes what A small but growing number of companies have recognized how
to leverage technology in order to reinvent their business designs
they do—can open new and dramatically increase shareholder value. Many of the pio-
neers, moreover, are not Internet start-ups but rather forward-
avenues to capture profits looking incumbents such as Charles Schwab, Dell Computer,
and General Electric. Moving from Conventional to Digital
and lock in customer Business Design—one of the newest strategic patterns reshaping
the business landscape—opens new avenues to capture profits,
loyalty. secures strategic control of the profit stream, and locks in cus-
tomer loyalty, creating entirely different economics for the firm.

The digital revolution implies changing not just how a firm per-
forms activities, but also what activities it performs, whom it
performs them for, and how it makes a profit from them.
Order-of-Magnitude Improvements
The concept of digital business design draws on the observation
by Nicholas Negroponte of MIT’s Media Lab that the econom-
ics of moving “bits” (information) is different from that of mov-
ing “atoms” (physical assets); different not by mere percentages
but by orders of magnitude. Consider the following examples:
• Cost. An online bank transaction costs $.04 versus more than

$1 for a transaction at a branch, a greater than 25x factor of
improvement.
Emerging • Quality. The design process for the Boeing 777, being
Pattern entirely electronic, generated one-tenth the number of errors
generated by the prior physical design process.
• Customer Access. While a large retail store might be lucky to

get 50,000 visitors a month, a leading electronic retailer will
get over 5 million visitors—a 100-fold improvement, and
one that is still growing sharply.
• Choice. Amazon.com, the Internet’s leading retailer, “stocks”

over 4 million books, roughly 25 times the assortment of a
Borders superstore.
Some of the most sophisticated users of digital capabilities are

forward-looking incumbent firms. Dell’s direct-to-consumer PC
model revolves around a highly digital order processing, invento-
ry management, and production system, which removes the
assets from an asset-intensive process. GE transformed its pur-
chasing process to a state-of-the-art online bidding system,
which enables rapid (and lowest-cost) fulfillment of even arcane
product input needs.
Charles Schwab is among the most successful digital reinventors

to date. Two years ago, Schwab launched an aggressive Internet
initiative; today it generates more than half of its trades electron-
ically. The firm has carved out a 30 percent share of the online
securities market, more than the next three competitors com-
bined, despite having commissions twice that of low-cost
Internet rivals. Schwab designed a high-service model by digitiz-
ing many of the traditional broker’s value-added services, such as
38
selecting mutual funds and defining portfolio asset allocations.
In addition, the electronic model has helped change the way
Schwab makes money. Schwab serves customer needs by giving
customers unparalleled access to and comparison of multiple
investment options, rather than trying, like the traditional bro-
ker, to sell a limited set of proprietary products. The company
earns profit from both customers and investment managers, and
is growing its customer base dramatically faster than the tradi-
tional model. And Schwab is extending the model abroad. In
Hong Kong, three-quarters of Schwab’s trades are made over the
Internet. Schwab’s market value has increased 23 times over the
past seven years, and we attribute roughly half of the current
value to its electronic offering.
The benefits of a digital business design also can be realized in

smokestack industries such as basic manufacturing, transporta- Emerging
tion, and utilities. Cemex, a Mexican cement producer, has rein- Pattern
vented its business through intelligent investments in digital
technology. Cemex uses a global satellite system and computers
in every truck in its fleet to respond flexibly to changing cus-
tomer conditions. This digital network allows Cemex to deliver
cement within 20 minutes of the agreed-upon time, down from a
three-hour margin three years ago—a degree of reliability for
which many customers gladly pay a premium. Going digital has
made Cemex more profitable than its major competitors.
Digital momentum
For the first time in many years, business analysts are dramatically raising, not lowering, their
Internet expectations. Here’s why:
• 100 million people accessed the Internet in the fourth quarter of last year. U.S. access should
reach 50 million households within its first seven years versus the 38 years it took for radio.
• Roughly 9 billion e-mail messages are now transmitted daily as compared to 300 million pieces
of first-class mail, according to research firm eMarketer.
• Internet commerce is accelerating sharply; annual U.S. business-to-business e-commerce

reached $20 billion in 1998, and it is expected to more than double every year for the foresee-
able future. Analysts expect consumer Internet commerce to eclipse catalog sales within the
next four years—a forecast more than triple that made just six months ago.
• The stock market has validated—perhaps overvalidated—this opportunity with its recent
exuberance over Internet companies. Amazon.com stock recently has been valued at about
$24 billion compared to Sears’ $18 billion, even though Amazon has less than 2 percent
of Sears’ sales.

Perhaps the most powerful manifestation of the changes enabled
by doing business digitally is in the way companies can finance
themselves. For example, Dell’s digital system allows it to receive
payment from customers immediately, yet the firm has a week
before it has to pay suppliers. Thus, Dell can operate with nega-
tive working capital (its current liabilities are greater than its cur-
rent assets), unheard of for a manufacturer. Similarly, every dollar
of sales at Amazon.com generates $.02 in capital versus the $1 of
capital consumed for $1 of store sales at Barnes and Noble. These
companies have flipped the traditional financing model so that
customers actually finance the business as it grows.
New Avenues to Capture Value

As the above examples illustrate, digital economics fundamental-
ly reshape the relationship between customer and supplier. As a
Emerging consequence, going digital involves more than merely selling
Pattern Digital capabilities allow online or automating processes. It also requires that companies
consider a broad set of strategic options, often challenging the
some firms to be financed assumptions of their existing business designs.
by their customers. Dell Consider the market for classified advertising. Major newspaper
companies recognized the threat posed to their classified busi-
Computer actually operates ness by the Internet and have responded with electronic local
classifieds. But a fundamentally different business design—the
with negative working online auction market—is proving superior in at least one area of
the traditional classified field. The current online leader, eBay,
capital. holds 800,000 auctions a day in more than 1,000 categories,
including collectibles, computers, and photography, a breadth
that dwarfs the conventional model. Furthermore, its digital fea-
tures offer in-depth product information and buying advice,
product pictures, and buyer and seller ratings. For eBay, the result
has been the creation of a unique community of eBay enthusiasts
and a market capitalization of over $10 billion—much greater
than that of the New York Times, Chicago Tribune, and Los Angeles
Times combined, by our estimates. Although Wall Street’s valua-
tion of eBay may prove fickle, the economic differences between
the models are real. Alternative online competitors are also
attacking other portions of the classified market, including auto-
motive (Auto-by-Tel), real estate (Realtor.com), and employment
(Monster Board). In this case, then, newspaper publishers may
have made what appeared to be the right process move, but
potentially missed the most value-creating business design
moves.
40
Not all situations are as pronounced as the online classified auc-
tion market, and moving from a conventional to a digital busi-
ness design can involve varying degrees of change. Some of the
new avenues of value creation will be close to their physical
counterparts. At the other extreme, significant long-term value
may often reside in entirely new business models such as “digital
intermediaries,” whose scope of activities may be limited to con-
trolling customer interactions and information flows. The hierar-
chy of value creation options has three levels, each moving fur-
ther from the existing business design (Exhibit 1):
Value Creation Avenues

Exhibit 1 Value creation
through digital business
design • Transaction, commission referral fees
• Advertising
Digital • Information brokering
Intermediaries Emerging
Pattern
Atoms to bits
• Customer needs anticipation

• Customer retention
•Up-selling, cross-selling, solutions
Digital Customer Linkages selling
• Speed
• Cost reduction
• Asset reduction
Digital Process Improvement
1. Digital Processes—to increase speed and lower costs. New digital

processes can lead to significant value capture, but they must be
structured around delivering a unique offering that’s highly val-
ued by customers. Federal Express, for instance, dramatically
increased service levels and saved $100 million by establishing
electronic customer service and order tracking. Few other con-
ventional processes are immune from “digitization”; thus, a
company can pursue e-purchasing, e-manufacturing, e-recruiting,
e-training, e-marketing, and e-selling (Exhibit 2).
Digitizing those processes may be the extent of the necessary

change to the existing business design—at least for a while.
Cemex has neither expanded its scope of activities nor changed
its product or customers, yet it has benefited tremendously by
digitizing its truck dispatch and delivery system. But since digital
processes can quickly be copied by competitors, this position will
likely become merely an entry ticket to play in tomorrow’s battles

Marketing/ Customer
Product Warehousing/ Sales Service/Product Human
Design/R&D Procurement Manufacturing Forecasting
Distribution Support Resources
• R&D • Central • Open Book • Tracking • Product Roll-outs • Sales Force • Infrastructure • Online Training
Collaboration Procurement Management UPS National Automation Maintenance Microsoft
Unilever Unisys Sony Semiconductor Cisco MCI
• Cross-Docking • Recruitment
• Modular Design • Just-in-Time • Build-to-Order Wal-Mart • Web Marketing • Customer Buying • Customer Service Cisco
Boeing National Dell Oldsmobile Assistance Automation
Semiconductor • Digital Delivery Auto-by-Tel Chubb
• Beta Testing • Engineering Egghead.com
Yahoo! • Online Bidding Design
General Electric Management
Ford
Source: TechWeb, CIO magazine, Internet Week, AutoWeb, Mercer analysis.
Exhibit 2 Digital in the digital marketplace. The greater opportunity lies in the
infrastructure enables
processes to be reinvented
next levels, which affect the interaction with customers.
across the value chain
2. Digital Customer Information—to tightly link the customer to the
business, creating unparalleled opportunities for dynamic feedback.
The Internet has unleashed a world of hyper-connectivity, mak-
Emerging ing it easier to retain customers, increase customer value, and
Pattern anticipate shifting customer priorities—benefits that are much
broader than digitizing processes and much harder to replicate.
Amazon.com’s online bookselling model enables it to capture in-

depth preferences and finely target its offering based on buying
propensity. Amazon’s moves have already yielded 60 percent of
sales from repeat customers and an average sale per customer
that is significantly higher than a conventional bookstore.
3. Digital Intermediaries—to act solely as the gatekeepers of informa-

tion flows. In many industries, the customer information manage-
ment role may move to entirely new and powerful intermedi-
aries. As information inundates customers, these businesses
become “must visit” clearinghouses, capturing value by selling
access to and sorting information. They act as much as agents for
the buyer as representatives of the vendor. Scale economies allow
them to stake out differentiated, high-value positions. Our
research finds that two kinds of digital intermediaries are
emerging:
• Vertical hubs form around distinct vertical markets, creating

specialized, information-based solutions to help customers
manage a complex purchase occasion. Auto-by-Tel assembles
information, financing, pricing, and insurance into one place
online to make the vehicle transaction more convenient.
Such businesses don’t generate revenue merely by selling
their own products and services, but instead by becoming the
definitive, information-based destination for both customers
42
and suppliers. This unique role opens up new potential
avenues of value capture—allowing new revenue streams to
come from customers, suppliers, or both—in forms such as
referral fees, subscriptions, and advertising revenues,
among others.
Digital intermediaries are • Online markets create a meeting place for buyer and seller.
Like eBay, online markets in a number of industries—
as much agents of the including metals, utilities, and chemicals—have increased
purchasing efficiency for both buyer and seller.
buyer as representatives
Lessons from Early Adopters
of the vendor. Conventional business designs reflect the characteristics of the
physical world. Firms define their scope based on physical
processes: manufacturing products, managing retail locations,
operating warehouses or transportation networks. They build Emerging
competitive advantage around physical bottlenecks, such as limi- Pattern
tations in prime real estate or monopolies over transportation
links. Significant portions of value capture in traditional business
designs are derived from the lack of information and choice on
the part of customers—essentially “value ignorance.”
Going digital requires that firms rethink their basic assumptions

about customer relationships, scope, and how value is captured.
The shift also implies changes in the sources of strategic con-
trol—how profit streams are protected from competitors and
powerful customers. Strategic control inevitably shifts from own-
ership of hard-to-replicate physical assets such as production
facilities and premium real estate to virtual assets such as cus-
tomer relationships. (Exhibit 3 summarizes some of the major
business design transitions.)
The leaders in digital business design to date have learned to

apply the following new principles:
Let the customer run the business. Traditional boundaries between

firms and their customers break down in the digital world.
Customer segmentation, once a crude, company-imposed exer-
cise, becomes a process wholly driven by the customer.
Customers now run the factory at Mattel: The company’s Barbie
website enables children to design the product to their own taste
from more than 6,000 options. Weyerhauser allows its large
customers to directly place custom orders for doors and door-
frames, eliminating the middleman and improving profitability

Conventional Digital
Exhibit 3 The shift is
Customer Selection
fundamental, not • Supplier-imposed • Customer-driven
and Value
segmentation segmentation
incremental Proposition
• Defined around products • Defined around customer

Scope of problems
• Integrated value chain
Operations • Virtual offerings/alliances;
disaggregated value chain
Value Capture/ • Product and price • Numerous new avenues of

Profit Model customer relationship-driven
value capture
• Economies of scale • Informational economies

Strategic Control of scale
• 2-year lead
• 2-month lead
Organizational
Systems • Plan and execute • Iterate and adapt
Emerging and customer satisfaction. The more sophisticated websites such

Pattern as Amazon.com’s are moving toward segmentation at an individ-
ual level, offering a glimpse of the online execution of another
pattern, Microsegmentation.
Define new ways to create customer value. As digital services and

shopping “bots” make prices and product features more transpar-
ent, they dissolve customers’ value ignorance. And as digital
infrastructure automates human processes and breaks down geo-
graphic barriers, businesses based on personal service or physical
proximity may see their customer segments shrink or change.
The conventional wisdom that the digital world offers higher

convenience and lower cost misses this larger point: Digitizing
processes creates opportunities to add value to a conventional
product or service. Charles Schwab has gone well beyond its his-
torical low-cost and convenience model by digitizing many of
the traditional broker’s value-added functions. Schwab’s online
asset evaluator helps customers choose an investment strategy,
select asset classes to invest in, choose the best performing
mutual funds in each category, and rebalance their portfolio
when required.
Redefine the scope of the business—around the customer’s problem.

A firm’s product typically represents only a small fraction of the
total value available through digital thinking. Freed from the
scope constraints of physical processes, digital businesses can be
re-conceptualized as “problem solvers” rather than “product
providers.” For example, Garden.com—the emerging e-destina-
44
tion for gardening—uses its Internet-based business to address
the entire set of needs around a complex project rather than sim-
ply presenting a catalog of gardening products. Value has moved
to the information, to the ability to put products in context,
and to the solution provided. The offering can now include per-
sonalized advice, project planning help, and additional products
and services from multiple suppliers, which should improve
customer satisfaction, lock in loyalty, and create new avenues
to capture value.
In the business-to-business market, W.W. Grainger is attempt-

ing to broaden its traditional role as distributor of maintenance
and repair products to become the digital purchasing intermedi-
ary for multiple products. Grainger’s OrderZone is signing up
distributors of other business supplies to create a one-stop supply
source and significantly streamline paperwork for buyers. Emerging
Pattern
The incumbent advantage

Hot Startups.com may dominate the news about the digital world. But incumbents have
significant advantages to exploit when they decide to go digital:
Brand and customer access. Digital buying, par- Physical assets and activities. Physical assets
ticularly for consumers, is a highly uncertain and activities don’t disappear in a digitally man-
process. Mercer’s research shows that brand aged world, but their roles change. For exam-
familiarity and trust remain the top purchase ple, effective digital retailers will transform their
criteria for online consumer sales, and that stores from local stocking points to local display
established physical brands have a significant and idea centers. Commodity goods that cur-
potential advantage over newer brands. Publicly rently tie up expensive inventory and real estate
traded Internet start-ups currently have average assets will be offered electronically through in-
marketing expenditures of more than 75 per- store kiosks. Store assets over time will be put
cent of sales, as they attempt to build brand to new purposes such as display, idea genera-
and supplant long-standing customer relation- tion, and entertainment.
ships. Well-known “bricks and mortar” incum-
bents typically need much smaller marketing The challenge for incumbents is to transform
expenditures to make the transition from con- assets to achieve maximum value. They need to
ventional to digital customer relationships. reposition brands for greater digital relevance,
revisit customer information and enhance digi-
Customer knowledge. Unlocking value in a digital relationships, and retrain employees for
tal business design requires mining the rich new, digitally assisted functions. But the funda-
flow of information between supplier and cus- mentals are strongly in the incumbents’ favor,
tomer. Mercer’s client work indicates that the and those with the foresight to make these
rich wells of customer information represent transitions early have reaped significant rewards
one of the most undercapitalized assets in cor- and retained market leadership positions
porate America today, and that the further digi- against new entrants.
tization of the supplier-customer interaction has
only started to unlock its potential.

Grainger’s scope is moving from “product distributor” to “pur-
chasing agent assistant,” creating the opportunity to earn fees
from its service to customers and partners rather than from just
stocking physical product.
These examples suggest that traditional notions of scope must be

reexamined in light of the brutal efficiency of information
exchange. Going digital uncouples value chains and puts a higher
premium on alliances, both in the short and the long term.
Broaden the profit model. As digital customers become more fully

informed about choice, price, and value, they exercise greater
pressure on prices and suppliers’ profit margins fall. To restore
profitability, digital businesses must deploy a broader set of value
capture mechanisms, including after-sale activities, cross-selling,
Emerging and up-selling. Furthermore, the opportunities for value capture
Pattern can extend well beyond traditional mechanisms to encompass
referral fees, transaction commissions, or advertising.
Wal-Mart’s online experience demonstrates the potential danger

of moving old profit models into the digital marketplace. Wal-
Mart had only limited early success with its online offering,
which shares the same profit model as the store-based business—
earn margin on low-priced merchandise. Many other such online
catalogs have also failed to generate a return. At the core of
Amazon’s profit model, by contrast, is not the merchandise itself
but rather the rich flow of information between firm and cus-
tomer, which dramatically increases selling effectiveness.
Exploit conventional assets for digital advantage. Existing channels,

Beyond higher convenience customer relationships, supply chain capabilities, sourcing rela-
tionships, and even brands can be leveraged to gain advantage in
and lower cost lies a more digital markets. A major retailer has learned that an online
relationship actually increases its sales per customer within its
powerful benefit: adding physical stores, and that the stores enhance its online offer by
providing convenient locations to showcase and fulfill online
value to customers. merchandise. In another case, Realtor.com has capitalized on its
control of the Multiple Listing Service in its bid to dominate the
Internet real estate market.
Seize early-winner advantage. In the digital world of network

effects and increasing returns, early wins create self-reinforcing
cycles. The flow of information between the firm and its cus-
tomers can drive down the customer relationship learning curve.
46
Digital land-grab strategies allow companies to quickly gain
ownership of scarce brand recognition and online relationships.
Early winners attract a disproportionate share of capital, talent,
and customer and partner attention. Winning the mindshare of
these key players early generates further momentum, which can
cause the company’s market value to soar (Exhibit 4).
Exhibit 4 Early winners Online Service Providers Online Book Sellers Major Portals
Subscribers (1998YE) Sales (1998 4Q) Market capitalization/
move fast and iterate, monthly visitors (April 1999)
achieving dominant
positions America Online Amazon.com Yahoo!
14.5 million $154 million $895
Microsoft Network BarnesandNoble.com Excite

2 million $17 million $444
AT&T WorldNet
1 million
Emerging
Pattern
The confluence of a dominant digital brand and superior cus-

tomer relationships can lead to a de facto standard position for
early movers. Early de facto standards in e-business include
Microsoft in PC software, Cisco in Internet networking equip-
ment, America Online in consumer online services, and
Amazon.com in book selling. Battles are currently being fought
in the digital travel, auto retailing, bill payment, and investment
markets; ultimately, each sector of the economy presents similar
opportunities.
Iterate and Adapt

Incumbent companies, to be sure, may find it difficult to jettison
some or all of the existing assets and practices and replace them
with a digital model. The cultural change required is often much
more daunting than the technological change. In fact, selling to
the employee is as important as selling to the customer. But
ignoring the spread of digital capabilities is not a viable option.
There is no single best strategy answer in the digital world.

Here, the cost of imitation is low and timing is compressed, so
speed and relentless iteration and adaptation are critical.
Winners take advantage of the low cost of experimentation,
building on early leadership positions to beat the competition to
the next profit zone. Amazon.com, Cisco, and AOL sustained
their early wins by continually adapting, improving, and expand-
ing. They all began with a thorough assessment of how digital

capabilities can fundamentally change the ability to identify and
address shifting customer priorities. Thus, the best digital think-
ing can unlock new value and yield innovative business designs
that can own the hearts and minds of the most valuable
customers over the next decade.
John F. Marshall is a principal of Mercer Management Consulting

based in Boston. Richard S. Christner and Erich Almasy are Mercer
vice presidents, based in Washington, D.C., and Toronto, respectively.
Emerging
Pattern
48
Shifting value in the new euro zone
How the single market will accelerate business design innovation
By Kevin Mellyn,
William Stevenson,
and César Paiva
O f the total stock market value created by companies during

the past three decades, a disproportionately large amount
has been captured by shareholders in the United States. There,
customers reign and producer groups, both management and
labor, are correspondingly weak. Value is constantly flowing away
The vast capital market from established businesses with outmoded business designs and
toward innovative competitors, often start-up companies, with
created by the euro offers business designs better configured to identify and address evolv-
ing customer priorities. Behind this dynamic competition is a
exciting opportunities for vast, highly liquid capital market, which funds promising new
business designs and punishes those firms that fail to adapt. Patterns
upstart firms—and
in Action
Europe, especially continental Europe, has had a different expe-
unprecedented threats to rience both in economic performance and in the political con-
sensus that underpins economic arrangements. While each
the survival of incumbents. European country has its own distinctive characteristics, the
“average” citizen in Europe has fewer choices as a consumer, but
Financial services will feel stronger social protections. Shareholders’ interests do not rank
above those of workers, communities, and management. The
the impact first but, even- economy is viewed as having an important social dimension.
tually, every industry will While we cannot expect this long tradition to change quickly or
completely in the direction of “Anglo-Saxon” capitalism, the
experience a wave of new arrival of a single European currency in January 1999 represents
a powerful catalyst for change in the strategic landscape. The
business designs that focus new balance of power creates exciting opportunities for upstarts
and unprecedented threats to the survival of incumbents:
on the interests of the
• Removal of many market distortions that hinder trade and
newly powerful consumer. investment among European Union nations
• Accelerated business design innovation in all EU industries

• Heightened strategic risk to those who insist on playing by
the old rules
• Dramatic reshaping of the bank-centered financial services

model to the detriment of incumbent banks
• Assault by U.S. and other “outsider” financial services firms

that don’t have to worry about defending the status quo
Many of the forces that will be shaping the European economy

have already altered other markets, particularly in the United
States. What took a generation to unfold in America will tele-
scope into a few years in Europe, so recognizing these patterns of
change early and ahead of the competition is the only way for
companies playing in the new euro zone to succeed.
The complexity of this change makes it difficult to identify pre-

cisely where the future opportunity spaces will emerge. But we
can suggest two major patterns, detailed below, that likely will
drive the flow of value in the European market.
Companies that anticipate these and other relevant patterns, and

Patterns then reinvent themselves around customer-centered business
in Action designs, will be well positioned to create sustained value for their
shareholders and enhanced opportunities for other stakeholders.
By drawing on a repertoire of patterns, companies can move
quickly to seize opportunities for profit growth. By contrast,
companies that assume the euro will bring merely a larger
“domestic” market (where competitive success is determined
along the traditional dimensions of scale and scope based on
market share) or that count on traditional regulatory or cultural
barriers to protect them from pan-European competition face
the potential collapse of their profits and shareholder value. And
if innovative European firms do not beat them to the new profit
zones being created by the euro, American competitors already
present across Europe surely will.
Pattern I:
Bank-Centered to Market-Centered Financial System
Over the past thirty years, the U.S. economy has steadily pro-
gressed from a bank-centered model towards a more dynamic,
market-centered one. The development of the euro-dollar mar-
ket in London, the revival of the commercial paper market, and
the deregulation of securities trading commissions, money mar-
ket mutual funds, and interest rates were all milestones in this
50
process. Shareholder activism spurred the rise of high-yield debt
to finance takeovers and leveraged buyouts, while demand for
seed financing by small innovative firms expanded the pool of
venture capital. And advances in information technology enabled
new financial products to spread more efficiently. These develop-
ments have spawned a financial system in which equity and debt
raised in the markets vastly outweigh bank borrowing, and bank
deposits represent a small fraction of household wealth.
The United Kingdom has developed some of these same market-

centered characteristics, but continental Europe is still highly
bank-centered, both from a financing and a household balance
sheet point of view. Consider, for example, Germany (Exhibits 1
and 2), where the universal banks, with their corporate cross-
shareholdings, not only hold the bulk of individuals’ personal
savings, but also dominate the corporate debt and equity mar-
kets. Similarly, a huge gap exists in the size of venture capital
pools in the United States and the United Kingdom compared to
Exhibit 1 Funds placed 40

41%
with banks
Percent of Total Financial Assets
Patterns
in Action
20
20%
14%
0
U.S. U.K. Germany
End of 1997
Source: Federal Reserve, Bank of England, Deutsche Bundesbank.
Exhibit 2 Corporate 100 Securities,

Commercial
financial liabilities
Percent of Total Financial Liabilities
29% Paper, Trade

80 Credit,
Other
Bank Loans
60 82%
90%
40
71%
20
18%
10%
0
U.S. U.K. Germany
End of 1997
Source: Federal Reserve, Bank of England, Deutsche Bundesbank.

Financial services in Germany
An early testing ground for competition
By Dr. Rolf Seebauer
Germany’s financial services firms will be among the recently merged financial institutions serve as
the first in Europe to feel the euro’s impact. Are little more than warehouses of outdated business
they adequately prepared? designs. As a result, U.S. banks have lost share of
assets to other types of financial firms. Even the
An early reading suggests that they are not. “one-stop shop” conglomerate business model is
Germany’s financial services industry is particular- not a proven success.
ly vulnerable, being so dominated by large, uni-
versal banks. The single currency market will Consumers in Europe will have an expanding
attract new competitors from abroad as well as array of financial products and services to choose
new home-grown entrepreneurs. And judging from, and many will be looking for tailored solu-
from the U.S. experience of the past thirty years, tions that tend to be best provided by specialists.
the universal banks will soon be under assault by Winning strategies will involve differentiated
specialist institutions, which are focused on a value propositions built around a superior under-
narrow set of customers and product offerings. standing of individual customer segments. This
In fact, many of the specialists are already look- might entail working with specialist partners, and
ing for opportunities throughout “euroland.” a few German banks have taken small steps in
this direction. Deutsche Bank will merge its retail
German bank executives recognize that competi- banking business with Bank 24, which handles
tion will intensify. In response, most of the banks accounts strictly by telephone and online.
Patterns are now going through a round of consolidation.
in Action In some cases, they are also expanding their A final challenge to the German banks involves
scope. Deutsche Bank, for example, is acquiring their long tradition of close ties, including equity
Bankers Trust to gain size, a major U.S. presence, stakes, with the large industrial and commercial
and a deeper expertise in investment banking. firms to which they extend credit. Those client
companies will themselves come under increas-
German insurance firms also have been pursuing ing competitive pressure from foreign firms and
consolidation, in this case with an emphasis on domestic entrepreneurs. If the client companies
cost-cutting. Their costs have grown so high that don’t adapt and respond quickly to the upstarts,
industrial and commercial customers increasingly their value will decline. That could depress the
are switching to self-insurance, preferring to take shareholdings of the banks as well as the value
on their own fire or product liability rather than and quality of the credit portfolio.
pay high prices to the insurers.
In some cases, banks, insurance firms, and other

players are combining to form conglomerates
that aim to cross-sell a broader array of products
and services. Thus, the French bank Société
Générale recently merged with the investment
bank Paribas to form SG Paribas. The French
insurer AGF—a subsidiary of the German Allianz
Holding AG—is the biggest stockholder.
Dr. Rolf Seebauer is a vice president of Mercer
But market share and cost-cutting strategies are Management Consulting based in Munich. The
not sufficient to succeed in the new environ-
ment. Those approaches have not created share- firm that he heads, Dr. Seebauer & Partner,
holder value in the United States, where some of recently merged with Mercer.
Exhibit 3 Venture 60
capital investments U.S.

50
40
$ Billions
30
20
U.K.
10
Germany
0 France
1994 1995 1996 1997
Source: www.securities.com/vexpressrlse.
the continent (Exhibit 3); while those in Germany are growing

at a high rate, the base is small. And finally, the market capital-
ization of the U.S. and U.K. stock exchanges dwarfs those of the
major European economies (Exhibit 4).
European firms today compete in home markets that in some

ways resemble the United States of thirty years ago. Large
incumbents financed by large financial institutions dominate
most traditional sectors; managers rather than shareholders hold
corporate control; and most innovation arises either from
government-funded research and development or from the labo- Patterns
ratories of the largest companies. in Action
The arrival of the euro changes all this. In the United States and
United Kingdom, deregulation helped trigger a pattern of change
to more efficient financial markets. In Europe, the political ini-
tiative of sweeping away currency borders will trigger a similar
pattern of change. The strategic significance of a single currency
lies in the consolidation of eleven sub-scale capital markets into a
single market of enormous depth and liquidity—one as large as
Exhibit 4 Market
capitalization
10
6
$ Trillions
0
U.K. Germany France Italy Netherlands Spain U.S.
End of 1997
Source: Meridian Securities.

that for the dollar. This leap in scale alone will accelerate the
movement of European finance from a bank-centered model to a
market-centered model where publicly traded equity and debt
dominate financial intermediation, the process of bringing
The universal banks will be together savers and borrowers by matching their maturity and
risk preferences.
threatened by specialist
The change will be rapid because the technology to enable mar-
firms focused on narrow ket-to-market financial contracting (asset securitization, deriva-
tives, quantified risk management) has already been developed by
customer segments. global investment banks in the U.S. dollar markets and is ready
to be leveraged by the same firms in the new euro market. Most
European national markets have lacked sufficient scale of oppor-
tunity to outweigh the local barriers to entry; now, the single
market presents global firms with an irresistible target. Moreover,
the American firms, which dominate the investment banking
elite, will be able to realize the potential of a truly pan-European
capital market without the distraction of defending material self-
interest in the current system.
Pattern II:
Financial Value Chain Deintegration and Segmentation
Patterns No European business sector will be impacted by the euro
in Action sooner or with greater force than banking and finance.
To start, firms and individuals no longer have to pay the high

transaction costs of converting one national currency to another.
The risks and hedging costs of protecting the value of invest-
ments or receivables in other European countries also has been
eliminated, making it easier to sell goods and services, to invest,
and to buy inputs to production on a continental basis. As these
costs melt away, we expect to see a contraction in the income
that European banks have earned by trading currencies, making
cross-border payments, and otherwise facilitating cross-border,
cross-currency activity. Foreign exchange revenue, a key compo-
nent of bank earnings in Europe, is expected to collapse by as
much as 70 percent.
More long-lasting changes will follow, particularly in the realm

of financial intermediation. Bank-centered systems channel indi-
vidual and corporate savings to established and “safe” borrow-
ers—normally the industry incumbents or public or quasi-public
enterprises. Market-centered systems, by contrast, are constantly
looking for superior returns for investors and lower costs of capi-
tal for borrowers. Innovative business designs that attack incum-
54
bent offerings have relatively open access to venture capital,
development capital, initial public offerings, commercial paper
markets and securitization of assets for working capital, and
derivative transactions for risk management. That structure of
financial contracting is almost totally dominated by U.S. securi-
ties firms and global banks.
Nothing of similar scale and sophistication has yet developed

within the euro zone. As the scale of a single European capital
market accelerates the shift to a market-centered financial mar-
ket, the large continental institutions will face more urgently the
need to realign their business models. The underlying flow of
shareholder value will move away from traditional business
designs, such as the universal banks, to institutions that have
adopted an effective specialist role, typically structured around a
well-defined customer and set of customer needs. These business
models typically cherry-pick the best customers of the traditional
players by offering select customers a better-defined value
proposition.
The best examples in the U.S. banking industry are the “category
killers” that do one thing superbly well—mono-line credit card
issuers (Capital One), mortgage originators (Countrywide), Patterns
mutual fund providers (Fidelity), and so on. The major category in Action
killers are actively scouting opportunities in Europe. American
firms such as Capital One have already arrived in the United
Kingdom with ambitious plans to expand into Europe. The
increasing globalization in consumer credit means that customer
relationship management is now a strategic imperative of the
first order for European financial institutions.
Within Europe, U.K. banks have led the pace of innovation in

direct banking, using telephone call centers (First Direct) and
supermarket banking (Royal Bank of Scotland and Bank of
Scotland), and they have an edge in mortgage financing and
securitization. Barclays has launched B2, a product that offers
the safety of a bank deposit with equity-type returns. Given new
electronic delivery channels and the harmonization of European
regulation, there is no reason why U.K. banks cannot attack gaps
in the European consumer financial services market as effectively
as the Americans.
Many European bank executives recognize that this assault will

come, and they are consolidating to gain greater market share

Anticipating the next wave
Using patterns to identify winning business designs in U.S. financial services
By Corey Yulinsky
The advent of the euro portends sweeping Now, these and other patterns—both existing
changes in the European financial services indus- and emerging—are catalyzing another cycle of
try. For a taste of things to come, look to the tur- “creative destruction.” As the easy money era of
moil that has already shaken the industry in the a nearly ideal interest rate environment and
United States. In the past decade, evolving busi- merger-driven value growth ends, innovative new
ness designs have changed the face of financial business designs, which will poach the high-value
services. Then, just when these new designs have customers, should generate the greatest share of
become well-defined, the landscape shifts again. shareholder value. This transition will happen
Understanding how patterns play out can help both more quickly and more stealthily than did
financial services executives anticipate where the flow of value from incumbents to category
value will shift next and what moves to make in killers in the late 1980s and early 1990s.
response.
The new business designs with the greatest
The fundamental economics of the business have potential for growth are not likely to resemble
been transformed by the confluence of four core the giants created by the megamergers of the
patterns over the past decade: past year. Research by Mercer Management
Consulting shows that the stock market has not
• Disintermediation. The tidal wave of informa- changed the underlying valuation of the industry
tion about customers, unleashed by continual- consolidators, which trade at roughly the same
ly cheaper and more powerful information market/book multiples as smaller traditional play-
Patterns technology, undercut the economic value of ers. The consolidators may have grown bigger,
in Action being an intermediary. That business model but they have not created business designs that
had been based on proprietary information generate more value for customers or sharehold-
about customer creditworthiness, for example, ers. These firms, while recognizing the benefits of
that allowed the institution to effectively large customer bases and the associated informa-
match borrowers with lenders. tion flow, aim primarily to drive down the cost
curve. They segment their value propositions at
• Industry convergence. The information deluge, the broadest level and view competition through
along with deregulation, also enabled firms to a product lens. (For a more detailed discussion,
cross traditional industry boundaries, with core see Mercer Management Journal 10.)
abilities to manage customers, price and pack-
age risks, and place risk with investors becom- Two new business designs, by contrast, provide
ing increasingly common to banking, securi- the greatest threat to this traditional consolida-
ties, and insurance. tors model. These business models exploit the
four core patterns described above, as well as a
• Customer power shift. Simultaneously, infor- number of others, including:
mation technology provided greater economic
transparency of financial products and servic- • Reintermediation, in which Web-based firms
es, which expanded customer choice and add value by bringing together online buyers
power. and sellers—a partial reversal of the general
trend of disintermediation.
• Deintegration of the value chain. Transparency
also encouraged the funding and profitable • Profit Shift, in which profitability becomes con-
growth of category killers, which specialize in centrated in a small group of customers.
one part of the value chain at the expense of
the vertically integrated players.
• Microsegmentation, which allows companies the new companies incorporate “experience
to target and serve those highly profitable management” (enhancing the customer’s total
customers. experience with the company, including but not
limited to the use of the product) and interactivity
• Product to Customer Knowledge, which is the (constant feedback about the customer’s needs
conversion of knowledge about the customer and preferences). The goal is to increase both the
into profitable action. economic value offered to customers and the
value that can be extracted from the most prof-
One of the two new business designs, which we itable customers.
call the Next Wave Category Killer, starts with the
customer-value and information-based strategies For example, NextCard, which bills itself as the
exploited by first-generation category killers. But “First Internet Everything Card,” provides almost
Battling Business Designs
Traditional/ Next Wave Online

Consolidators Category Killers Aggregators
Credit Card
Mortgage
Patterns
in Action
Investments
Insurance
Scale of operations Creation of customer solutions, Maximized choices, minimized

Source of based on customer information shopping costs
Advantage and analytic insight
• Mass market • Segmented by customer’s needs • Micro-segmented

Market • Macro-segmented value • Customer-centered value • User-driven customization
Orientation proposition proposition, linked to customer
experience
Vertically integrated • Select elements of infrastructure • Virtual, networked infrastructure

Degree of
Integration • Customer-facing activities • Customer information and brand
are key assets
Silos Horizontal, process-driven Entrepreneurial

Organizational
Structure
Command and control Flat, decentralized Real-time response

Decision-
making Process
Planning cycle Test and learn Internet time

Time Horizon

instant credit approval through online links to • Reconfigure multi-channel distribution net-
credit bureaus and uses incentives to steer cus- works for a new customer experience. Instead
tomers toward the product and behavior most of managing a collection of channel silos, pro-
likely to yield profits. At the same time, NextCard vide integrated, customer-driven capability that
provides the online capability for customers to allows for easy navigation across channels and
craft their own offers—creating for the company products. At the very least, be your own
a valuable reservoir of customer choice insights. aggregator! Improved productivity and better
customer experience can go hand-in-hand.
These turbocharged category killers don’t only
operate online. Cendant’s home-buying • Re-allocate resources away from low-value
businesses combine capabilities in relocation activities and customer groups. Understand
assistance, real estate sales, and mortgage bro- which customer groups warrant the creation
kering with such services as insurance and shop- of new business designs and which value
ping for appliances or furnishings. This offers an chain activities the market will pay you for.
“end-to-end” solution to the stress of a family With this information, shed low-value legacy
move. In the process, Cendant creates relation- assets and low-potential customer groups.
ships with new homeowners, an attractive target Avoid across-the-board cost-cutting—it invari-
for additional financial services. ably damages the profitable customer’s
experience.
The other emerging business design, the Online
Aggregator, threatens to commoditize all other • Develop and prototype digital business
participants in the financial services value chain. designs. Focus these prototypes on customer
By offering an array of third-party products, an value by targeting the value growth opportu-
online aggregator can claim the unique position nities of key customer segments and their
of being on the customer’s side of the table, with unmet and undermet needs. Then test multi-
Patterns no product of its own to push. The goal of ple value propositions in real time, learn from
in Action E-Loan or InsWeb is to become a customer rela- the test, and do it again.
tionship gatekeeper, both a trusted advisor and
an intelligent agent, which can scan the Web for • Develop a management model for the multiple
the product that best suits the customer’s needs. business design enterprise. The multi-pattern
By providing a truly interactive experience, one environment requires managing multiple busi-
where customers believe they are controlling the ness designs in a portfolio. This requires a will-
interaction, such players raise the bar of customer ingness to support smaller exploratory initia-
expectations. tives as well as core businesses, and to
consider partnerships as well as acquisitions.
How can incumbent traditional players respond
to the threat posed by new business designs? We Investors are already placing their bets on which
believe that a strong program will include five of the competing business designs will succeed.
elements: Although traditional players will undoubtedly sur-
vive in the near future, the next champions of
• Transform supply-side scale into demand-side value growth will be those that recognize the key
advantages. Understand which elements of patterns playing out and capitalize on that insight
today’s scale-driven value chain—product by creating smarter, customer-centered business
manufacturing, distribution, customer informa- designs.
tion, brand—have all of the following charac-
teristics: sufficient scale relative to third-party
suppliers and the potential merger of your top
two competitors; market-tested value (what a
buyer would pay for your position); and the
potential to transfer your brand equity to
cyberspace. Those are the elements that war- Corey Yulinsky is a vice president of Mercer
rant continued investment. Management Consulting based in New York.
and economies of scale. Market share and cost-cutting strategies

are not sufficient, however. In the U.S. banking industry, consoli-
dation has created only short-lived gains in shareholder value.
While banks there have protected their share of industry value,
they have seen dramatic erosion of their share of assets.
Prospectively, there will be fewer opportunities to drive value

through consolidation and cost-cutting. The winners will launch
value propositions built around the understanding of individual
customer segments. But this strategy is difficult for large incum-
bents to execute, as many of the recently merged banks in the
United States are discovering.
Against such assaults, financial institutions operating in Europe

have the advantage—but also the hindrance—of incumbency.
Besides the natural inertia that slows change in any organization,
it can be difficult in a currently profitable company to create the
sense of urgency necessary to overcome satisfaction with business
as usual.
Rapid Emergence of New Business Models

in Other Industries Patterns
With banks being the principal source of finance in Europe, in Action
innovation among European companies has been constrained.
Large incumbents have little incentive to innovate if they already
enjoy large market shares and reasonable margins, and it would
be imprudent for banks to finance attackers, especially if they
hold equity in the incumbents. In addition, public policy across
Europe tends to promote producer interests, especially those of
large employers of unionized labor, over the interests of share-
holders and consumers. Bank-centered systems, especially where
there are extensive cross-shareholdings and board memberships
between lenders and borrowers, thus dampen the flow of value to
innovative business designs. As a result, it is difficult to think of
many large, continental European firms that were not well estab-
lished thirty years ago.
These characteristics have erected high barriers to entry for

upstart firms. But the euro will knock down most of the barriers,
fueling business design innovation in virtually every industry.
Innovation will arrive quickly, not only because of the capital
market technical infrastructure developed in the United States
over the past several decades, but also because of new technolo-

gies that enable greater customer intimacy, such as data mining
and electronic commerce via the Internet.
If the U.S. example is any guide, entire industries will be

reshaped by the emergence of business models that more effec-
tively serve customer priorities. Many of the upstart competitors
will spot inefficiencies in the value chain or poorly met customer
needs and use those opportunities to poach the most profitable
customers.
In the United States, customer priorities, not producer interests,

drive the engine of innovation. Innovative business designs that
attack incumbent offerings have relatively open access to venture
capital, development capital, initial public offerings, commercial
paper markets and securitization of assets for working capital,
and derivative transactions for risk management. Capital con-
stantly seeks to maximize returns and, at the margin, accepts
substantial risk for the chance to benefit from powerful new
business designs. This is true not only of venture capital but also
of institutional money, as evidenced by the appetite for high-
yield debt. In contrast to the European experience, many of the
The euro will knock down U.S. companies with the highest market capitalizations did not
Patterns exist or were tiny players in 1970.
in Action barriers to entry in most
The specific patterns of value flow vary by industry, as do the
industries, so incumbent triggers of rapid change. However, across industries as diverse as
retailing, computers, telecommunications, and health care, the
firms must shed their market-centered financial system has accelerated the flow of
value by facilitating the emergence of new business models.
ossified ways of doing
We expect to see a similar proliferation of new business designs
business and act on the across a range of industries in Europe as the market-centered
financial system takes hold. The “American model” of driving
new opportunities. investment based on consumer interests rather than producer
interests will be difficult to contain as the euro removes many
traditional market distortions. While the development of this
model is dependent on an energetic entrepreneurial class, there is
reason to believe this will not be an obstacle. American and
Asian entrepreneurs have become increasingly global in their
search for new opportunities. And the migration of many conti-
nental entrepreneurs to the United States over the past decade
could presumably be reversed.
First movers may be richly rewarded by the new market. Indeed,

examples of business design innovation already have cropped up
60
throughout Europe. Nokia has blossomed from its roots in a
small Scandinavian economy by undertaking two major reinven-
tions. First, Nokia transformed itself from a diversified conglom-
erate into a highly customer-centered telecommunications group;
later, it leveraged its superior wireless phone handset design to
create a powerful consumer brand faster and earlier than its key
competitors.
In another electronics sector, Bang & Olufsen has transformed

itself from a lackluster audiophile stereo equipment manufacturer
into an integrated designer, producer, and retailer of a branded
luxury good. Nokia, Bang & Olufsen, and other reinventors,
with their focus on customer relevance and superior execution of
new strategies, have driven superior shareholder value growth
(Exhibit 5).
Most of the European value growth successes to date have come

in niche plays in global markets. These firms, by definition, have
access to global capital markets. After the euro raises the level of
competitive intensity, firms that have been most innovative with-
in the constraints of the old system should rank among the
world’s most aggressive and formidable competitors.
Patterns
2,000
in Action
Exhibit 5 Rise of the
reinventors CAGR
1,800 1986 - 1997
Eurotop FTSE 300 Index 11.5%
1,600
Market share leaders1 13%
1,400
European reinventors2 27.9%
Stock Market Value
1,200
(1987=100)
1,000
800
600
400
200
0
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997

1
Top 3 European companies in a number of sectors, based on turnover.
2
ABB; Adidas; Bang & Olufsen; Canal+; Carrefour; Dassault Systèmes; Fresenius; Grandvision; H&M; Hugo Boss;
Lloyds TSB; LVMH; Marscholleck, Lautenschläger & Partner (MLP), Nokia; Rentokil; Reuters; Swatch; and Valeo.

Harnessing Patterns to Win
The pace and the complexity of change in the European market
will be accelerated dramatically by the euro’s introduction. True
leaders earn their stripes in such situations. Forward-looking
senior managers should lay plans today to reinvent their firms
around customer-relevant business designs that will reach their
full potential only as European financial markets evolve further.
They can start by answering a set of questions:
• What patterns are emerging that we can anticipate now?
• What can we learn from studying patterns in other markets?
• What are the best profit opportunities created by the euro?
• How well-positioned is our business design to capture those

opportunities?
• How vulnerable are we to competitors in our industry and to

potential competitors outside our industry?
• What changes must we make to seize the opportunities?

Patterns
in Action • How do we get our people and organization to make the
necessary changes?
The number of incumbents that successfully make the transition

to a new business model is surprisingly small. Yet incumbents do
start with customer relationships, the ability to access market
information, and the resources to initiate change. Their challenge
is to overcome institutional memory and to act on the new
opportunity. Anticipating change early, and understanding where
to look for the next profit zones, is a start. But ultimately it is
effective leadership in the face of change that will determine
success.
An Idea Whose Time Has Come

The whole European project going back to the Treaty of Rome
in 1957 was intended to create a social market economy that
embodies European values, yet can compete in a global economy.
The governments of Europe still support this vision of a “third
way” alternative to “ruthless” Anglo-Saxon capitalism; their elec-
torates seem willing to pay a high price in employment and pros-
perity to maintain social solidarity.
62
One move in the “action repertoire”
Credit card firms in the U.K. can emulate winning business designs
By Matthew Piasecki
Companies confronted with patterns triggered by advantage by appropriating and modifying some
the arrival of the euro have an array of possible of the weapons of the newcomers.
moves and countermoves they can make. Certain
types of moves crop up frequently across a range During the first half of the 1990s, a few upstarts
of patterns and form a basic action repertoire for captured a quarter of the U.S. market and
managers: achieved significant growth in shareholder value.
When the economy turned down and loan losses
• Preempt competition by inventing a new rose sharply, the best players were able to com-
business design. pete on terms broader than price and sustain
• Outdo rivals by moving quickly to execute a their margins. For example, MBNA focused on
move. identifying and serving multiple affinity groups
• Hedge with a double bet. with value-added services. First USA rapidly fol-
• Emulate someone else’s business design and lowed, creating pseudo-affinities by tailoring
improve it. offerings to specific lifestyle and interest seg-
• Block a competitor from making its best move. ments. Capital One, while substantially a price
• Intervene to take over key activities that affect player, extended information-based management
your position. beyond new customer acquisition into customer
• Concede today to win tomorrow. development and retention, risk management,
and collections.
Industries that are behind the curve, for example, Patterns
may have to emulate successful business designs, The profitability of incumbent players, mean- in Action
with modifications tailored to their own situation. while, declined as they had their card portfolios
In doing so, incumbents can borrow fruitfully systematically stripped of their most valuable cus-
from winning companies in other geographies. tomers. What the incumbents failed to notice
was that the traditional measures of growth—
The U.K. credit card market, which offers the number of accounts and outstanding balances—
prospect of significant growth, provides a case in were no longer valuable. Instead, the relevant
point. A rapidly expanding and price-insensitive measures now involved the growth and share
market has allowed all players to ride the tide. of high-value customers—a lesson that remains
Now, however, new approaches are required. relevant for managers in the U.K.
Products have proliferated, including store cards,
point-of-sale installment lending, and electronic This suggests that the most effective approach
money. Moreover, new, strong brands and coin credit cards probably will incorporate hybrid
brands—many from the United States—are designs, combining the strengths of traditional
entering the market, often imaginatively linking players, namely good “information scale” and
credit cards with their main business proposition. strong brands, with those of modern “informa-
Traditional mass-market approaches are increas- tion management engine” providers. Emulation
ingly losing out, as some of the more innovative and modification of an existing business design,
players have grown quickly and seized share from rather than creation of a new design from
the incumbent banks. scratch, can provide U.K. credit card issuers a
quick route to the new profit zones created by
These incumbents have a crucial advantage, for a the changes sweeping their industry.
short time at least, as they fend off the new
entrants: historical customer data. This allows
them to pursue information-intensive strategies
such as sophisticated targeting, risk modeling, Matthew Piasecki is a vice president of Mercer
and behavior prediction. They can bolster this Management Consulting based in London.

But companies increasingly will face the pressures of a global,
electronic financial market that relentlessly seeks higher returns
on capital. The euro will accelerate the penetration of these
forces into all corners of economic life. People everywhere have
increasingly more in common as consumers than they do as citi-
zens of a particular country, and a worldwide brand culture
increasingly overlaps local customs and preferences.
The euro is a risky venture, and many still insist it is a bad idea.
But practical business people, whatever their political views,
should recognize that it is an idea whose time has come. U.S.
corporations, being more accustomed to an environment of pow-
erful consumers, have certain advantages at the starting gate.
European firms, with their large customer base and extensive
supplier and channel networks, have other advantages. But they
delay at their peril. If they do not quickly start assessing the new
opportunities and reinvent their business designs accordingly, a
new set of innovative competitors will drive the incumbents
into oblivion.
Kevin Mellyn, William Stevenson, and César Paiva are vice presi-
dents of Mercer Management Consulting based in New York, Boston,
Patterns and Paris, respectively.
in Action
64
Bring on the recession!
Preparing now can improve a firm’s competitive position
By Robert G. Atkins,
Laurence H. Alberts,
and August Joas
I n the United States, inflation is low, employment is high, the

government is running a surplus, and the stock market has
been bullish for more than a decade. What a perfect moment for
business owners and managers to look toward the inevitable next
recession and embrace it with alacrity.
Good times carry with
Embrace the recession? Yes, and it’s about time. Most Western
them the danger of com- economies have been humming along for more than seven
years—so long that some business people have almost forgotten
placency. Managers who what a recession looks like. But with the protracted crisis in Asia
and instability in Brazil and other countries, Western economies
wait until the recession is remain vulnerable.
upon them will have little Good times carry with them the danger of complacency.
Managers who wait until the recession is upon them will have
flexibility to turn it to their very little flexibility to turn it to their advantage. Many will then
reach into their management textbook arsenal of defense: cut
advantage. Six smart compensation and discretionary spending, hoard cash, delay Using Pattern
product development, exact fixed cuts across the board. Nothing
Thinking
moves can create opportu- could be more shortsighted than relying on this defensive “circle
the wagons” approach. Certain spending, of course, may need to
nities before it’s too late. be reined in. But that tactic, by itself, could squander sharehold-
er value during the tough times ahead. Cutting the wrong
10 percent of costs (in customer service, for example) could cut
100 percent of a firm’s value proposition.
The discipline of pattern thinking offers lessons for managers

trying to stay ahead of the economic curve. A recession, of
course, is not a profit pattern. Profit patterns signal structural
shifts in the flow of value among specific competitors and a lim-
ited set of industries, while recessions—as part of the economy-
wide business cycle—generally have an influence across entire
economies. But the two phenomena have many things in com-

mon, and there are similarities in how companies can take
advantage of both. One common denominator: Both recessions
and profit patterns recur and demand preparation; yet, paradoxi-
cally, few companies ready themselves for either.
Just as seeing the profit pattern about to unfold enables business

leaders to make the key moves necessary to seize advantage in
the new game, anticipating and preparing for recession can offer
substantial benefits. While precisely predicting the onset of the
next recession is impossible, its eventual unfolding is inevitable.
The key is to have a plan to turn a recession to your advantage:

to understand its impact on customers, competitors, and talent
and to draw up winning battle plans to take advantage of the
opportunities that will be created. Part of this task is understand-
ing the profit patterns that are likely to play out in your industry
and the strategic moves you should be making, with the aim of
identifying ways in which the next recession could dramatically
expand your options.
Smart managers should be getting ready for the recession now in

order to improve their competitive position by broadening the
range of possible moves when it arrives. They should develop a
recession strategy that can be put in place before the company is
boxed in by rapidly deteriorating economic conditions.
Six Moves to Make

Companies can prepare for the next recession on several fronts:
Using Pattern Prepare a shopping list

Thinking A recession can make the impossible dramatically possible. The
recent investor flight to quality has already reduced the prices of
both companies and assets, and the next recession will drive
down prices even further, as well as lower the cost of real estate
and construction. Forward-looking managers can plan a set of
moves that would be prohibitively expensive during the high
points of the business cycle.
During the last recession, Intel made two calculated moves along
these lines: It increased its capital spending on chip fabrication
plants and equipment, and it initiated the “Intel Inside” market-
ing campaign. Those investments helped Intel lengthen its
product development lead and build its brand. Both were moves
that increased the company’s strategic control—that is, helped it
protect its profit stream from being diverted by competitors and
66
powerful customers. Andy Grove, then CEO, said that Intel
wanted to move “not when the competition becomes palpable
but well before it does. For us to have the opportunities that we
have today and not bet on them, I don’t want to lose that way.”
A recession can make the
A number of companies today are exploiting recession-related
impossible dramatically pos- opportunities. Merrill Lynch’s approach to the economic crisis
that has spread across Asia is instructive. In Japan, regulations
sible, by lowering the price long favored Japanese firms that followed government guidelines
focused more on high savings than on investor returns. That hin-
of companies and assets. dered entry by foreign firms to local financial services markets.
Financial deregulation in the mid-to-late 1990s lowered barriers
in theory, but Merrill Lynch and other foreign firms had
achieved only limited success in entering niches of this increas-
ingly attractive market.
All that changed in November 1997 when the president of

Yamaichi Securities announced that the country’s fourth-largest
stock brokerage would shut down. By February 1998, Merrill
Lynch had committed to take over more than thirty Yamaichi
branches and to invest $155 million over two years to build up
its presence. Merrill Lynch thus became the first, and remains
the only, foreign brokerage serving individual Japanese investors,
after years of being shut out. Despite recent losses in emerging
markets brought about by the financial turmoil, Merrill Lynch
remains committed to global expansion. “The playing field has
changed since the last time,” said an official at a competing for-
eign securities firm. “That gives them an advantage they didn’t
have in the past.”
Using Pattern
Hongkong Telecom is another firm that was prepared to capital-
Thinking
ize on opportunities presented by the severe Asian recession.
Hongkong Telecom realized early on that, with deregulation of
its core international long-distance telephone business, competi-
tion would drive down prices to unattractive levels. Hence, future
profits would have to be derived from other offerings. So, taking
advantage of the Cornerstoning pattern, the firm targeted several
adjacent, potentially larger markets and went shopping when the
time was right.
In January 1998, Hongkong Telecom acquired wireless telecom

operator Pacific Link Telecommunications, relaunched it in May,
and positioned it as a low-end, mass-market offering that’s
attractive to the growing price-sensitive customer segment. This

Customer-centered firms thrive in tough times
Amidst the crisis in Asia, a recipe for profitable growth
By R. Kirk Kramer
Even the most severe recessions hold out oppor- nized brand image in order to strengthen its
tunities for prepared companies. For proof, look strategic control. This business design reinvention
to Asia, where some companies have prospered has paid off handsomely: From 1992 to 1998,
amidst the worst economic crisis in decades. Vtech increased its shareholder value by 36 per-
Mercer looked at four major markets—Hong cent per year. Even In 1998, while the Hong
Kong, Singapore, Taiwan, and Japan—to find Kong market index fell 6 percent, Vtech’s value
publicly traded companies that created share- rose 48 percent.
holder value in the period 1992-1997, before the
Asian market crashes, and that continued to do Varitronix, another Hong Kong firm, made an
so in 1998. Of the more than 800 companies we equally impressive transformation over the past
examined, only a few continuously created share- decade. Once a high-volume, low-cost producer
holder value. of liquid crystal displays for watches, the compa-
ny now excels in designing and building cus-
What did these winning companies have in com- tomized LCDs for mobile phone companies and
mon? All had reinvented themselves within the other demanding OEM customers. Senior man-
past decade, replacing a product-centered focus agers realized that Varitronix could not compete
with customer-centered business designs. During in this increasingly commoditized business, and
the Asian crisis, the they sought out a
best defense has 600 Asian Value Creation Winners
select group of cus-
been a good tomers to become
offense—having part of their product
500
the right business development process.
design going into Reinventors By integrating its
Stock Market Value
400
the downturn. services into the first
(1992=100)
links of the value

The best known of 300 chain, Varitronix has
these companies, Taiwan built a formidable
Weighted
Vtech Holdings of 200 Index competitive barrier.
Hong Kong, is a Hang Seng
Working with its cus-
world leader in 100 tomers, the firm has
Using Pattern Nikkei 500
Thinking electronic and com- Straits begun to develop the

Times
puting toys for 0
Industrial standards for high-
young children. In 1992 1993 1994 1995 1996 1997 1998 end LCDs, which fur-
the early 1990s, ther raises the barrier
Chairman Allan Through Sept. 1998 to entry. Varitronix
Reinventors include: Cathay Life, CDC, UMC, Varitronix, Vtech, Venture Manufacturing
Wong took the Source: Mercer Management Consulting Value Growth Database. flourished during the
bold step of start- 1992-1998 period,
ing to exit the firm’s computer operation busi- raising shareholder value by 14 percent per year,
ness, which he recognized was becoming a including an increase of 9 percent in 1998.
no-profit zone. Wong focused instead on an
emerging opportunity for profitable growth. The stunning collapse of markets and economies
Reasoning that, as PCs proliferated around the across Asia has thrust many business owners and
world, parents would seek ways to teach their managers into a survivalist frame of mind. But
children about computers, Wong and his staff set the examples above show that companies with
about reinventing Vtech to stake out a powerful powerful, innovative business designs can thrive,
position in that market. Vtech created new prod- not just survive.
ucts for an emerging set of customers and court-
ed new distribution channels (including retailers
such as Toys R Us) to reach them. In recent years, R. Kirk Kramer is a vice president of Mercer
Vtech has stepped up efforts to develop a recog- Management Consulting based in Hong Kong.
offering complements the firm’s existing high-end wireless serv-
ices, which are marketed under different brands.
Late last year, Hongkong Telecom also acquired the number two
internet service provider in the market, Star Internet. This move
not only grows the customer base, but also strengthens
Hongkong Telecom’s strategic control in its interactive-television
businesses—all at a bargain price.
Secure financing now

Rates are low and funds are still plentiful. At the margins, some
bankers may be tightening standards to smaller borrowers, but
they have a long way to go. Money could become more expensive
over the next year and, once the recession starts, the spigot might
be suddenly shut off as it was during the “credit crunch” of the
last recession. So companies with acquisition or brand-building
plans may need to start pulling in cash now through traditional
and creative channels.
Hutchison Whampoa, a conglomerate based in Hong Kong,

issued $2 billion in Yankee bonds during July 1997, right before
the market crash in October. Demand for the offer was far high-
er than the target amount, and the average cost of the loan is
substantially lower than most other deals of comparable size and
duration today. Hutchison invested the capital in wireless servic-
es and equipment, hotels, and ports in several countries. The
subsequent financial crisis has caused a credit crunch so that
Hutchison is among the few companies in the region with a suf-
ficient cash reserve to take advantage of cheaper land and assets.
Using Pattern
Assess the roster and trade up
Thinking
It’s not only companies and assets that become more attractive to
acquire during an economic downturn. Staff talent that’s unavail-
able today also tends to get freed up when employees grow
uncertain about their company’s future. Strong players at compa-
nies with weak strategies tend to leave first.
Smart managers can prepare for that opportunity in several ways.

They can convey their recession strategy to employees so that
star employees are less likely to jump ship to competitors. Rather
than across-the-board headcount reductions, which breed anxiety
and antagonism among remaining employees, smart executives
can identify and cull only the lowest-value-added employees.
This minimizes the need later for recession-driven cuts.

Microsoft, for example, periodically suggests alternate employ-
ment to the bottom 5 percent of its performers. While cutting
poor performers, Microsoft continues to recruit the best and
brightest. In that way, Microsoft will emerge from the eventual
recession with the talent necessary to execute its next business
design.
Cull your customers

Managers have to determine whether today’s most profitable
customers will still be the most profitable once the recession hits
(Exhibit 1). Certain credit card companies in the United States,
for instance, have reaped high profits from the “revolver” cus-
tomers who carry a substantial balance from month to month.
But will a recession push many of these customers into default,
and should a credit card firm drop some of them to maintain
profitability? Should it help other customers weather the reces-
sion by easing payment terms? What would be the effect on cus-
tomer loyalty?
The first step for a company to take in determining customer

value is to audit the customer base, identifying the strongest,
most profitable segments. Then the firm can ask these customers
how their needs will change when the recession comes. If they
can’t articulate those changes, the firm should determine the role
Managers should assess its products or services play in the customers’ overall economics,
how a recession might affect their economics, and the likely
their employees and impact on the firm’s offering.
customers, culling the The firm should convince these customers that it will be healthy
Using Pattern and eager to solve their problems during and after the downturn.
Thinking worst and embracing It should then kill them with kindness, easing payment terms or
lending its staff to achieve solutions, so they’ll remember the
the best. help and repay it with loyalty. In this way, back-shop operations
such as receivables and financing can be turned into competitive
tools. As for today’s unprofitable customers, they should perhaps
be weeded out if a recession will make them even more
unattractive.
Singapore Airlines’ customer audit identified its most profitable

segment as full-fare business- and first-class travelers, who typi-
cally take long-haul, transcontinental overseas routes. The airline
reconfigured its value proposition to fulfill these customers’ pri-
orities, shifting much of its capacity away from its short-haul
Asian routes to long-haul routes. It also invested $300 million
to improve seat comfort, entertainment systems, meals, flight
70
Exhibit 1 The shifting All customers are profitable.
profitability of customer
segments
Do you know who your unprofitable

customers are?
What happens when your unprofitable

customers become extremely unprofitable?
Can you perform a customer audit dit

s?
to find your largest value destroyers?
attendant training, and other aspects focused primarily on first-

and business-class service. Culling its customers has helped
Singapore Airlines to maintain its unbroken record of profitabili-
ty, even during the downturn, and to achieve a much higher Using Pattern
market value/sales ratio than its Asian competitors (Exhibit 2).
Thinking
Cut selectively—for long-term value

Some companies may conclude that, in fact, they do need to curb
spending or reduce assets—but want to do this before the reces-
sion hits and their options become more limited. Their cuts,
however, must be consistent with creating long-term shareholder
value. Traditional across-the-board cuts do not create long-term
value, and in fact may destroy it if critical areas are pruned.
Mercer Management Consulting analyzed the strategies and

performance of eight hundred companies in numerous industries
during the period from 1987 to 1992, which included the last
recession, and identified 120 “cost-cutters.” Of those cost-cutting
firms, fully 68 percent did not go on to achieve profitable rev-

Exhibit 2 Singapore 160 3.0
Airlines’ recession-resistant
Market-Value-to-Revenue Ratio
140
performance 2.5
Stock Market Value

120
2.0
(1994=100)
100
80 1.5
60
1.0
40
0.5
20
0 0.0
1994 1995 1996 1997 1998 1994 1995 1996 1997 1998
Singapore Airlines Cathay Pacific

JAL Korean Air
Thai Air China Airlines
Sources: Wright Research Center, Mercer analysis
enue growth during the following five years. To set the stage for
growth, cuts must be selective, based on an understanding of
where value within the company resides, both now and in the
future.
An up-front diagnosis should identify what cuts are both pru-

dent and possible given the company’s culture. Accounting num-
bers by themselves are not sufficient indicators of opportunity.
Managers need to understand the company’s costs and assets,
particularly in the areas that generate significant value for the
firm, such as product development, customer management, and
information management. A review of these processes may, in
fact, uncover a need for additional investments.
The cost-cutting levers in these important areas typically involve

Using Pattern a combination of operational improvements (for example, reduc-
Thinking ing material costs through better sourcing), organizational
improvements (improving structure and staffing levels), and busi-
ness design improvements (outsourcing or partnering in the dis-
tribution chain). All initiatives must be scrutinized for their
effect on the ability of the company to create and structure cus-
tomer value.
Lafarge Braas Roofing, one of Europe’s largest suppliers of

building materials, was enjoying prosperous times when it set out
one year ago to cut fixed costs. Despite dominance of most
European markets and margins typical of a computer software
company, Lafarge Braas realized that it should increase efficiency
in preparation for potential competitive and economic threats.
The company’s aim was to reduce its fixed costs by at least
10 percent, lower its fixed-cost-to-revenue ratio, and achieve
72
greater flexibility in managing fixed costs by outsourcing func-
tions currently performed in-house. But it wanted to achieve this
without jeopardizing its product performance and relationships
with its customers and employees. Judicious pruning would be
required.
Instead of imposing typical across-the-board cuts, Lafarge Braas

used internal and external benchmarking and its understanding
of the fifteen European markets it served to define differentiated
cost-reduction targets, country by country and function by func-
tion. For example, the fixed-cost ratio of the largest operating
unit would be lower than that of the smallest, which had similar
fixed-cost requirements despite its lower revenue. Within four
months, the company had identified reductions totaling 14 per-
cent of its fixed costs, ranging from a targeted consolidation of
the sales forces to capacity rationalization in certain stagnating
markets. Within a year, over half of those savings had been real-
ized, with the remainder to be achieved by the end of 1999,
making the company particularly well positioned to weather an
economic downturn.
Get the story out

Executing these recession-ready strategies well isn’t sufficient. A
company must also make sure that the people who matter under-
stand what it’s doing and why. Investors and lenders who are
well informed will raise the share price and lines of credit, broad-
ening the scope of possible acquisitions. Reaching them directly
and through the media is critical to capturing “mindshare” early
and securing a position that allows a company to break away
from the pack. Using Pattern
Thinking
During economic upheavals, investors and lenders need ample
information to remain confident about the balance between pru-
dent cutting and risk-taking. But communicating the firm’s
recession-ready strategy has the added benefits of helping main-
tain employee morale and retaining long-term customers.
Employee attrition drops with wins in the marketplace. Top
employees at other companies send in their resumes as the stock
market begins to recognize a company’s potential. The culture
strengthens around the elements of success, and alignment with-
in the organization tends to increase. These factors boost morale,
productivity, and competitive performance.

Pouring It On
With recession on the horizon, many businesses tend to hunker
down and take strictly defensive actions, erring on the side of
under-investment. This puts their customers up for grabs and
thus puts their enterprise at extreme risk of value collapse.
Conversely, great companies love recessions because of the
opportunities they present. They appreciate the competitive risk
of not investing. By focusing on the six fronts discussed above,
they are able to improve their competitive position once the hard
times arrive.
Timing, therefore, is important. The right moves during this

pre-recession period can uniquely help a company to seize the
next market opportunities. But early recognition and early action
are not enough. The third variable is intensity—pouring on the
investments to capture the new opportunities and protect them
from competitors who try to catch up. Think of Intel pouring it
on with its chip development and branding campaign. Think of
Merrill Lynch pouring it on with its bid in Japan. First, fast, and
furious: Being the first to anticipate the recession’s impact allows
a company to act quickly and launch a set of moves that will win
in the next stage of the business cycle.
Robert G. Atkins, Laurence H. Alberts, and August Joas are vice pres-
idents of Mercer Management Consulting based in Boston, Hong
Kong, and Munich, respectively.
Using Pattern
Thinking
74
Chance favors the prepared mind
Spotting the leading indicators of change through Strategic Anticipation®
By Charles P. Hoban
and Eric Almquist
S ome companies just seem to “get it.” They spot the emerging
patterns reshaping their industries and capitalize on them
early, leaving competitors struggling to catch up.
• Starbucks saw that lead users in Seattle and San Francisco

Patterns don’t strike with- were creating a coffeehouse subculture—a new manifesta-
tion of the consumer’s increasing focus on quality foods and
out warning. But anticipat- retail experiences. They took this insight to the bank, com-
mercializing the upscale coffeehouse across the United
ing them requires a disci- States and into Europe.
plined search for leading • Staples saw an inefficient office supplies industry ill-suited
to serving the rapidly-growing small-business market. The
indicators. Here is a blue- firm combined scale, convenience, inventory expertise, and
low prices into a winning retail concept.
print for building an early
• Charles Schwab realized some Americans were willing to do
warning system. their own stock trading, giving up service for lower fees.
Schwab refined and re-refined this concept, and then
embraced online trading and investment information as a
further customer convenience—one for which customers
would pay a premium.
These moves, which generated enormous wealth for investors

(Exhibit 1), seem obvious in hindsight, but at the time ran Using Pattern
Thinking
counter to conventional wisdom. So how did Starbucks,
Staples, and Charles Schwab do it? In a world of dynamically
shifting opportunities, they couldn’t afford the years or even
months required by the traditional strategic planning process—
one that, in any case, typically yields only incremental adjust-
ments to the status quo. They couldn’t wait to be certain, but
had to place a bet based on their best assessment of the way
their industries would evolve. They had to anticipate changes in

Exhibit 1 Anticipating the 1200
opportunities of the future Charles
Schwab
1000
Stock Market Value

800
(1992=100)
Staples
600
Starbucks
400
S&P 500
200
0
1992 1993 1994 1995 1996 1997 1998
the business landscape that would create opportunity—in their

cases, opportunity that revolutionized their markets.
Finding Meaning in Chaos

How can other companies achieve similar breakout success?
Clearly, it isn’t easy. For each of these examples of success, the
landscape is littered with companies that didn’t see the early
warning signs of change in their businesses—at least until that
“chilling moment” when they suddenly realized it was almost too
late to respond. They may have been looking at the wrong things
or not looking for signals at all. Some of the companies that
missed the changes had enjoyed an extended period of success,
which may have bred complacency—a near guarantee of stagnat-
ing, or even collapsing, shareholder value. Some of the compa-
nies may have counted on keeping up with the changes in their
industry by being nimble “fast followers.” But that tactic is often
no longer enough, as breakout players gain momentum quickly
and leave competitors far behind.
Strategic Anticipation® is a structured process that can help

managers to see such changes coming. “In the fields of observa-
tion, chance favors only the prepared mind,” said Louis Pasteur.
Using Pattern The insight applies as much to business as to science. Today’s
Thinking
executive, like the researcher, faces vast amounts of data. A
diligent but unfocused search cannot hope to yield meaning in
this flood of information in time to gain advantage from the
insights. Both executives and researchers need methods to glean
meaning from the data. The Strategic Anticipation process
equips an executive with a set of tools—Value Mapping,
Strategic Choice Analysis®, and Information Acceleration,
among others—that allow for forward-looking decisionmaking.
76
Another key Strategic Anticipation tool provides a discipline for
spotting emerging patterns. We call this tool Strategic Pattern
Recognition.
A Rigorous Approach
Pattern thinking is an inherent part of our information-gathering
and decisionmaking processes. In its simplest form, it is what
keeps us from making the same mistake twice. Applying this
natural thought process to business strategy, however, requires a
structured and rigorous approach. Taking the time to learn and
repeatedly practice this process can build a manager’s capability
to see the leading indicators of emerging new patterns, identify
the patterns most likely to occur, and craft the most effective
strategic response (Exhibit 2).
Exhibit 2 Strategic Identification

of the Leading What conditions in the market could trigger a new
Pattern Recognition profit pattern in my market?
Indicators
Pattern Factor Which patterns are likely to result from observed

Analysis conditions? How will those patterns affect my existing
business?
Strategic Which response(s) to an emerging pattern will allow

Response me to create value?
Step 1: Identify leading indicators. A systematic scan of the strate-

gic landscape can reveal pattern leading indicators, or “triggers,”
that point to the emergence of one or more new patterns. Most
of these early warning signs fall into one of three groups:
• Dysfunctionality. Economic inefficiency, latent unmet

customer needs, or transactional friction that inconveniences
customers and prevents suppliers from maximizing their
profits
Using Pattern
Thinking
• Variability. Significant current differences among customer
segments (for example, in their priorities and relative
attractiveness to suppliers) and across value chain steps
(for example, in their relative profitability and shareholder
value generation)

• A Shift in the Rate or Direction of Change. Important trends
that could serve to intensify or diminish the industry’s cur-
rent variability or dysfunctionality
The identified triggers are a subset of the information and sig-

nals that the marketplace generates every day. They are the key
factors suggesting the emergence of a new pattern. A series of
questions can help determine if any of these pattern triggers
exists in a given industry (Exhibit 3).
Step 2: Pattern Factor Analysis. Having identified one or more

leading indicators, the manager can compare the potential trig-
gers with a library of patterns. This analysis will suggest the pat-
terns most likely to unfold. A manager’s pattern library will
Exhibit 3 Looking for the
triggers include the 30 patterns described in the book Profit Patterns. It
Pattern leading indicators

A careful analysis of the economic neighborhood can reveal a variety of pattern leading
indicators. Refracted through the lens of Pattern Factor Analysis, these can point to emerging
patterns. As new indicators emerge, new patterns will evolve.
Rate/Direction of Change Variability Dysfunctionality

How are customers changing? What variability exists in my customer Are there mismatches between the
base in terms of: customer’s current options and the
• Key priorities
required functionality?
• Sophistication
• Relative ratings of competing suppliers
• Features, skills, inefficiency, slow
on most important priorities • Preferences (brands or products)
response times
• Rising expectations/sophistication • Levels/distribution of wealth
• Level/distribution of wealth • Media usage
Are the economics of this marketplace
deteriorating or fundamentally
unattractive?
How are competitors changing? What variability exists among my
competitor set? • Commoditization
• Business design innovation
• Levels of financial performance • Irrational competition
- New investments/skill sets
• Levels of operating performance • Asset intensity
- Adjacent economic neighborhood
(customer satisfaction, cycle time,
• Regulation/other externalities
• New actors or redistribution of power response time, quality)
- Competitors, customers/channels, • Levels of business design innovation
investors/analysts Are there inefficiencies along the value
chain (that the customer may recognize)?
What variability in economics exists (in
• Oversupply
How are the economics of my business profitability, cost position, asset intensity,
Using Pattern changing? shareholder value creation)? • Bottlenecks (information, supply chain)
Thinking • Along value chain • Along value chain • Channel fragmentation
• Among customer types • Among customer types
• Across geographies • Across geographies Are there organizational impediments?
• As a result of specialization economics • Leadership
Is technology or regulation changing? • Institutional memory
• Capabilities/skill sets
Is new infrastructure expected in the
marketplace?
78
should also include patterns that have been identified by the
management team based on their experience; the richer the data-
base, the more powerful the results.
Step 3: Craft a strategic response. Having identified potential pat-

Pattern thinking offers a terns, the manager needs to assess both the likelihood of the pat-
terns’ occurrence and the effect those patterns would have on the
process for profitably profitability of the business. If both are significant, managers
need to consider an array of strategic moves and countermoves
addressing an old problem: based upon the type of pattern and how early in the lifecycle it
has been spotted.
how to serve the needs of
For example, managers can try to preempt competitors by invent-
small-business customers. ing a new business design. They can try to outdo competitors by
moving more rapidly to a winning business design. If they are
behind the curve, they may be able to emulate and modify a suc-
cessful business design from another geography or industry. If
they are too far behind the curve, they can concede defeat today in
order to prepare for victory when the next pattern emerges.
Throughout the process, managers need to continually monitor
the environment to see if other triggers are spawning even newer
patterns.
Equipped with the core elements of this three-step approach—a

process for identifying the triggers that signal potential new pat-
terns, a database of pattern knowledge that helps to anticipate
the types of strategic moves that might be most valuable, and a
disciplined approach to rapid response—managers can have con-
fidence that they will “get it” well ahead of the competition.
Case Study: Serving the Small-Business Customer

Strategic Pattern Recognition is best illustrated by looking at the
evolution of a market over time. Doing this highlights the trig-
gers and resulting patterns that have defined competitive success
in the past; it also can help identify current and future patterns
and the business designs able to exploit them. A compelling
example involves the significant challenge of developing a busi- Using Pattern
Thinking
ness design to serve the computing needs of small-business
customers.
The small-business customer is the Holy Grail for large parts of

American business, a source of potentially tremendous but elu-
sive value. Small businesses account for a large portion of total
employment and business spending. But they are also notoriously
difficult to serve. Selling to them offers no economies of scale.

Their decisionmakers are often hard to reach because they are
stretched thin by performing multiple roles. As a result, small
businesses often have been poorly and expensively served, and
suppliers have missed out on a large and attractive market. This
has been especially true for the computer companies, which have
struggled to create value in this space. The evolution of the mar-
ket for information technology for small-business customers
illustrates how patterns play out and then recede as new patterns
emerge.
Round 1: Reaching the Small-Business Customer

Computing began as a large-company phenomenon. In the age
of mainframes and, later, minicomputers, only large companies
and institutions, such as universities, could afford to implement
computing in support of their businesses. The large computer
companies such as IBM and Digital focused on delivering robust
computing to these larger customers. Small businesses participat-
ed in computing in only selected areas—for example, travel
agents’ use of computerized airline reservation systems—and
were largely left out of the general purpose computing world.
They couldn’t afford the technology, and the technology wasn’t
well suited to their smaller scale needs.
Leading Indicators. This situation began to change in the late

1970s and early 1980s with the advent of the personal computer.
A scan of the market environment at that time would have iden-
tified triggers suggesting that new patterns would unfold, offer-
ing new market opportunities to those that anticipated the
changes first (Exhibit 4).
Exhibit 4 Strategic Pattern Identification New customer- High need for

Inefficient-to-serve
Recognition: Small business of the Leading customer set
relevant computer information surrounding
Indicators technology purchase and use of PC
IT market—Round 1
Dysfunctionality Shift in rate / Dysfunctionality
direction of change
Pattern Factor
Analysis Channel Channel
Using Pattern Reintermediation Multiplication
Thinking
Strategic
Response Develop reseller/ Launch small
dealer channel business divisions
EXAMPLES: Computerland, IBM dealer network

Businessland
80
One set of triggers involved the customer base. The advent of
the PC promised many potential new uses for small businesses
(shift in the rate and direction of change). At the same time,
small-business customers, most of them inexperienced buyers of
computers, wouldn’t be able to select the right product, train
their users, or troubleshoot problems without local help (dys-
functionality). The counterpoint to these conditions in the cus-
tomer base was the rapid change in supplier economics that the
PC signaled. While the modest scale and relatively low cost of
PC technology made computing relevant to a broad new set of
small-business customers, these same factors reduced the margin
dollars available to support the traditional selling models built
for mainframes and minicomputers (dysfunctionality).
Patterns and Strategic Responses. The leading indicators suggested

that there was a new market opportunity. The PC was accelerat-
ing changes in expectations and in economics. But what patterns
would emerge and what business designs would create value as a
result of them? Pattern thinking would have yielded a set of pos-
sibilities. In retrospect, we know that two patterns emerged:
• Channel Reintermediation. The combination of new comput-

er technology relevant to the small-business customer and
the needs of those new customers for an interactive selling
and support process created the need for new steps in the
distribution value chain. Channel reintermediation—the cre-
ation of new value-added steps—was the logical result.
Tremendous value was created for new businesses that saw
the pattern and acted quickly. The dramatic growth of deal-
ers and resellers such as Businessland and Computerland
illustrated how quickly a new pattern can take hold.
• Channel Multiplication. Some of these same triggers launched

another pattern—channel multiplication. This pattern
emerged from the computer industry’s desire to reach this
new customer base directly. IBM and others launched new
channels focused on the small business marketplace. These Using Pattern
Thinking
IBM dealer stores competed with the resellers mentioned
above, trying to meet the needs of this new market.
Interestingly, these responses were much less effective in cre-
ating value: solving one dysfunctionality (the customer’s need
for value-added sales) created another one (low profitability).
Eventually, this direct-to-small-business approach was large-
ly abandoned by the computer industry in favor of the rein-
termediated channels.

The growth of a channel structure to reach the small-business
customer was one of the patterns that reshaped the computer
industry in the 1980s. The channel evolved, becoming more
robust and capable of delivering to small businesses sophisticated
technology such as networking. Computer suppliers benefited,
reaching the market and participating (albeit indirectly) in the
growth of small business computing.
Even while the patterns described above were playing out, how-
ever, the channel structure that developed to serve small busi-
nesses began to come under pressure from a number of direc-
tions. The PC market matured rapidly in the late 1980s as more
experienced customers required less training and support. As the
dealer no longer added value, it could no longer justify the added
price to the customer. The pattern that emerged—Channel
Concentration—often happens when products commoditize and
the economics reward scale. CompUSA and other computer
superstores responded to this pattern and hastened the demise of
the local PC dealers. The value-added channel structures were
becoming irrelevant for the parts of the market where there was
Sophisticated small firms little value to add—that is, the basic PC purchase.
demand to be treated Round 2: Delivering and Capturing Greater Value

The small business computing market has proven a rich labora-
individually, not lumped tory for triggers, new patterns, and aggressive business responses.
It illustrates the speed with which the game can change and the
together. Internet tech- need for constantly scanning the environment for the next trig-
ger. As we look at the environment today, we can anticipate the
nology allows smart next key patterns that are likely to emerge.
suppliers to do that. Leading Indicators. While the PC channels have continued to

evolve in ways that reflect the economics of commoditization, a
new set of triggers has emerged in the small-business market-
place that may signal new patterns (Exhibit 5).
One category of triggers involves the evolving priorities of the

Using Pattern small business customer. Over the past ten years, the growth rate
Thinking
of small-businesses has consistently outpaced the overall econo-
my as major corporations have downsized and as venture capital
and other funding have become abundant. At the same time,
there has been a shift in the composition of the small business
category. It no longer comprises simply convenience stores, dry
cleaners, restaurants, and the like, that provide a comfortable liv-
ing for the owner/operator. Many are small technology, consult-
ing, or specialty service companies experiencing rapid growth.
82
Exhibit 5 Strategic Pattern Identification Increased customer Internet-enabled new
Desire for more
of the Leading expectation for “state of distribution and
Recognition: Small business customized IT solutions
the art” IT relationship models
Indicators
IT Market—Round 2 Dysfunctionality; Variability Variability
shift in rate/
direction of change
Pattern Factor Disintermediation Microsegmentation Conventional to Digital

Analysis
Virtual “Digitization” of
Strategic Direct-to-customer segmentation/intelligent intellectual
Response electronic channels agent-driven customer capital/physical
management products
Because of this, talented people are eschewing jobs at large cor-

porations to join these start-ups, making the small firms sophis-
ticated enterprises with demanding expectations of their suppli-
ers (shift in the rate and direction of change).
The growing number of firms, along with their increasing

sophistication and more demanding IT needs, make the small-
business market increasingly attractive for IT vendors. In fact,
technology is a key element of many start-ups’ business designs,
fully integrated throughout the business process rather than bolt-
ed on in the form of an IT department. Such companies have
outgrown the lowest-common-denominator reseller models
(dysfunctionality). But as small businesses become more sophisti-
cated, they also demand to be treated as “individual” customers
rather than as a “type” of customer. Their relatively complex
business designs have unique needs—often central to their
efforts to create competitive advantage—making companies
resistant to being grouped by suppliers into a generic “small-
business” category (variability).
At the same time that customers are getting more sophisticated

and demanding, the rise of Internet technology may trigger new
opportunities on many levels. The Internet allows for direct, real-
time exchange of information that traditionally had to take place
in person. It also allows for the distribution of certain types of
products in digital rather than physical form, as well as for new Using Pattern
Thinking
types of supplier/customer relationships that are not based on
proximity (variability).
Taken as a whole, these triggers have the potential to once again

change the prevailing patterns in the small-business IT market.
Customer priorities can no longer be addressed with existing
offerings, and new types of offerings are becoming more viable.

Executive Perspective
“Pulling yourself out

of day-to-day thinking”
Michael McDonough is senior vice president/marketing and sales
of GTE Wireless, a subsidiary of GTE Corporation. One of the lead-
ing providers of cellular services and products in the United States,
GTE Wireless serves nearly 5 million subscribers. The Atlanta-based
business, which has 8,500 employees, had revenue of $3.07 bil-
lion in 1998. He spoke recently with Mercer Management Journal
about the benefits of identifying and applying strategic patterns.
How has GTE Wireless used pattern thinking How did that pattern shed light on your
in developing its strategy? situation?
Several years ago, we began working to improve At the upper end are companies with national
the financial performance of the company, and footprints—mainly AT&T and Sprint—starting to
we made dramatic improvements in a fairly short exercise the advantages that they have in terms
time. But that was only the first step. Next, we of serving customers across those national foot-
had to look to the future and realize that, prints. Generally, those are customers who roam
although we were still in a growing industry, we a lot and use their wireless phones extensively for
had to change our business model to participate long distance when they are away from their
actively in that growth. That led to the work office or home. As the footprints of AT&T and
around pattern recognition. We examined other Sprint have grown, that has been reflected in the
industries and identified patterns that had played offers that they make. At the low end, compa-
out there, trying to see the implications for our nies like PrimeCo are starting to specialize in pre-
business model and how we needed to change. paid service, in response to customers seeking
something other than what the traditional play-
What patterns proved relevant? ers are selling. So you have new competitors tak-
One was this whole idea of the “collapse of the ing advantage of this shift and attacking those
middle.” We asked, “What has been the source segments in new ways, with new business mod-
Using Pattern of our success in the wireless business?” And the els, with new capabilities. The old generic middle
Thinking answer was, “We’ve been ‘riding the tide’ with is collapsing.
the other all-purpose players, simply participating
in the rapid growth of the business.” But we Did other patterns provide relevant insights?
looked around and realized this isn’t going to The “deintegration of the value chain.” The
continue, partly because we have achieved sig- computing industry was especially instructive. We
nificant penetration rates. That raised the possi- saw an industry that had been vertically integrat-
bility of a collapse of the middle. In retailing, ed transformed into one where the most prof-
those players that stayed in the middle and took itable companies specialized in different parts of
a more generic approach to the marketplace— the value chain—from manufacturing, to supply
for example, department stores like Montgomery logistics, to distribution, to the components of
Ward—didn’t do very well, in terms of both the manufacturing business itself. We see that
long-term survival and the ability to capitalize on deintegration happening in the wireless industry.
the growth opportunities that existed. They
found themselves facing competitors who started What struck you most as you worked
out in specialized niches but rapidly grew to take through this process?
away significant parts of their business. What stood out was the tremendous improve-
ment in market valuations achieved by those
companies that recognized patterns and took [wireless technology to provide cars with features
advantage of them. It wasn’t a small change in such as digital positioning maps]. Another exam-
terms of performance; there was tremendous ple is asset tracking of oil wells and pumping sta-
leverage compared to competitors. You had a tions, where wireless communications can moni-
series of companies that stayed fairly close to the tor and transmit information about the activity of
horizontal axis and then you had others that those stations, such as the level of fluids in a par-
broke away in a relatively short period of time. ticular tank.
That is going to happen in the wireless business.
We’re seeing consolidation. Everybody’s getting What’s the next big challenge in identifying
scale and scope; everybody’s trying to build foot- and meeting customer priorities?
prints to compete on a national, and eventually You have to move from a strategy where you
on an international, basis. But one or two com- identify a group of customers, draw a circle
panies will become breakout players. Why? They around them and say, “There’s the target,” and
will have identified the patterns playing out in then develop a channel to reach them. In the
the industry and then developed the right busi- new model, there will still be clearly defined tar-
ness models to respond to those patterns. gets, but rather than having a point-to-point
solution, you’re going to have a complex array of
How did pattern thinking help determine “intercept points” where you can make contact
your next move? with targeted customers as they go about their
As the team developed a strategy, it became lives. To do this, you need to understand how
apparent that we weren’t talking about some- those customers live and work: What puts some-
thing that we might have to do, or something one into the mode of considering wireless ser-
that represented a relatively incremental change. vice? What triggers the purchase decision itself?
People came to realize, “Hey, if you want to win, Are there other decisions that the customer is
you’re going to have to operate differently.” So making at the time such a trigger occurs? For
that was probably the biggest impact, psychologi- example, once there’s a pregnancy in a family,
cally. It forced us to think outside the boundaries people become more concerned about security. A
of our current business model. And that led to wireless communication service can help provide
our developing a fairly detailed segmentation that security. So that could lead us to develop
scheme. relationships with other players who also see a
purchase decision triggered by that particular
Can you give an example of that? event in the life of the customer.
We’ve focused on families, targeting the family
as a unit as opposed to individuals or even So you’ll become a partner with HMOs and
households. The idea is to offer a bundle of prod- hospitals?
ucts and services—inexpensive mobile-to-mobile Well, that’s the type of thing we’re thinking
calling within a particular family, for example— about. I think it’s a big opportunity for us. Using Pattern
that respond to the needs of a particular commu- Thinking
nity of interest. What are the challenges in getting people in
an organization to think about the radical
Segmentation requires understanding reinvention that pattern thinking can
the priorities of existing and potential require?
customers? How are these changing? First is the recognition that you won’t win with
For one thing, customers increasingly are looking incrementalism. Second, and closely related, is
for ease of access to information, which involves pulling yourself out of day-to-day thinking. Third
not only voice but also data communications is synthesizing all of the information that’s avail-
capabilities. That requires moving from a model able on the patterns, down to the few key points
that is primarily person-to-person communication of applicability to your business. And finally, once
to one that is also machine-to-person or person- you have identified those key leverage points,
to-machine or even machine-to-machine. This is communicating them to the organization and
more than paging and messaging. For example, maintaining the focus you need to drive rapid,
we provide the networking and the communica- major change.
tions capabilities for General Motors’ OnStar

Anticipated Patterns and Strategic Responses. While we cannot pre-

dict with certainty the patterns that will reshape small-business
computing in the future, the identified triggers imply certain pat-
terns. These patterns, in turn, suggest business design moves that
should be considered.
• Channel Disintermediation. The multi-step distribution

model that has served the small business so well may be
coming to the end of its useful life. In the PC market, the
low end of the marketplace, this pattern is already well under
way. Seeing increasingly sophisticated buyers in the PC mar-
ket, Dell recognized the dysfunctionality inherent in the
added cost of the multi-step model. It built a powerful
direct-to-customer business model that allowed customers
to buy over the telephone exactly what they needed.
As time is short and The recent evolution of Dell’s business design gives a hint of
how broad the impact of this pattern will be. As the Internet
resources scarce, companies has increased the amount of information about product per-
formance, configuration, and comparative prices available to
need an informed set of the customer during the purchase process, Dell’s online busi-
ness has exploded. While Dell has focused on commoditized
options that raise the products such as PCs, the same conditions are likely to trig-
ger the pattern in other sectors. Indeed, in software, methods
chance of success. for distributing products electronically will ultimately elimi-
nate the need for direct physical distribution.
• Microsegmentation. The desire of small businesses to be treat-

ed as individual customers, along with the rise of “intelligent
agent” technology that builds a database of an individual
customer’s tastes and preferences, will spur digital suppliers
to target individual customers with tailored offerings. Instead
of investing heavily in the creation of products targeted at
the “small-business segment,” IT vendors will use technology
to achieve “virtual” segmentation of offerings, with customers
Using Pattern themselves doing the segmenting and receiving a customized
Thinking
product. This type of customization will be enhanced by
technology that allows vendors to monitor the “clickstream,”
or online activity, of Internet users. By embedding “cookies”
that provide information about users’ online behavior into
their Internet browsers, the most advanced online suppliers
are already building this capability.
86
• From Conventional to Digital Business Design. Instead of
selling physical products that are inherently difficult to deliv-
er cost-effectively, IT suppliers are starting to make digital
facsimiles of their products that can be distributed electroni-
cally. One manifestation of this is the concept of “network-
delivered applications,” computing capabilities that small
business customers can access via the Internet, instead of
purchasing the necessary software and running the applica-
tion on their own machines. Computing suppliers, essentially
operating a utility, would no longer be selling products, but
rather computing functions on a “per-click” basis. While still
an unproven concept technically, this type of digital business
design—using digital capabilities to change what a company
does rather than simply how it does business—will become
an area of rich experimentation.
A Window on the Future

Do we know exactly what business design moves will be the win-
ners in small-business computing? Can we predict with certainty
It’s your move

Anticipating the emerging patterns in retail medical products
Medical products stores are a timeworn fixture But what if that owner were to exercise his
of the American retail scene. With their lacklus- skills in Strategic Anticipation? Can he spot any
ter window displays of dusty wheelchairs, pattern leading indicators, or triggers, in his
orthopedic devices, trusses, and bedpans, business landscape—any significant “dysfunc-
they’re a treasure trove for the standup comic. tionality,” “variability,” or “shift in the direction
For the shopper, however, they’re a nightmare or rate of change”? If so, what emerging pat-
of inconvenience. The stores are usually located terns are suggested by these triggers? And
in rough neighborhoods surrounding urban what are some likely business design responses
hospitals or in out-of-the-way, low-rent retail to these patterns? In short, where and how is
districts with inadequate parking, poor selec- there money to be made in the retail medical
tion, haphazard floor layouts, and little cus- products industry?
tomer service.
This exercise provides useful practice in pattern
The owner of such a store, however, is likely to thinking. We encourage you to work through
Using Pattern
see things differently—not surprisingly, since the process and create a set of patterns and Thinking
managers of most companies fail to see the business design responses that may emerge in
business through their customers’ eyes. He the retail medical products market. In addition,
believes he is providing a necessary product to we’d like to share with you our thoughts on
customers at a reasonable price. He works hard the subject. You can submit your ideas and see
toward this end. Business is steady and people ours at the Profit Patterns website
rarely complain. In fifteen years, he’ll probably (www.profitpatterns.com/yourmove).
sell the business and retire to a seaside resort.
What he doesn’t realize is that a tectonic shift
in his industry may well level his business
sometime in the near future.

the next Starbucks, the next Staples, the next Schwab? No. But
Strategic Pattern Recognition does gives managers an informed
set of options as they make the tough resource allocation deci-
sions that are the task of management.
Thus, it is one of the most valuable tools an executive can

possess in today’s constantly shifting, discontinuous business
environment. It isn’t a crystal ball, but it raises the odds of suc-
cess. It helps both the opportunistic upstart and the savvy
incumbent avoid being blindsided by events. It helps managers
recognize unfolding patterns, then make preemptive moves
before competitors do—before it is too late.
Too often, the information diet of executives is shaped by their

companies’ history and heredity. They look for the kind of infor-
mation that has proved useful in the past and will (they hope)
prove useful again. But this information, at best, will help them
in the game they’re playing today; it won’t help them to see a
new game.
That approach is fraught with risk, for a new game has already
begun. And the winners will have triumphed before many com-
petitors have even taken the field.
Charles P. Hoban and Eric Almquist are vice presidents of Mercer

Management Consulting based in Boston.
Using Pattern
Thinking
88
Executive summaries
The strategic shortcut: Harnessing pattern thinking to seize the value growth
advantage
ENGLISH
Overview Tr a d i t i o n a l P a t t e r n
Countering strategic risk with pattern A classic pattern transformed: Capturing
thinking: How to identify tomorrow’s profit value as a new “middle” collapses
zones before the competition By Ted Moser
By Adrian J. Slywotzky, James A. Quella, For more than a decade now, value in many
and David J. Morrison industries has been moving away from the “average”
Companies face numerous types of risk, and they product offering to one of two extremes: low-cost
hedge or insure against them in a variety of ways. offerings, often focused on a particular category of
However, the largest potential risk to a product, and high-cost offerings, distinguished by
corporation—strategic risk—must be borne directly superior product benefits, design, or brand image.
by managers and shareholders. They face the This occurred in retailing, where price discounters
consequences if a company’s shareholder value and category “superstores” at one end of the
collapses, stagnates, or becomes dwarfed by a spectrum and up-market specialty retailers at the
competitor’s. Pattern thinking can help managers other generated tremendous shareholder value—at
both foresee risk and identify new profit the expense of the moderate-cost, all-things-to-all-
opportunities that will lead to sustained, above- people department store. But the pattern has taken
average value growth. Mercer Management on a new wrinkle as information, both about the
Consulting research has described thirty patterns customer and used by the customer, has become
that, over the past two decades, have drastically increasingly available and important. Now value is
shifted profit and power in numerous industries; we flowing away from product-centric business designs
expect that number to increase as new patterns are to those that focus either on low-cost offerings
discerned. The ability to identify strategic patterns customized to meet individual customer needs or
helps managers see beneath the surface chaos of high-cost offerings that provide total solutions to
today’s business environment to the underlying customer problems. Businesses must decide whether
drivers of customer and economic behavior. It also to focus on one or both of these profitable extremes
provides a shortcut to managers who, in a world and then how far to go along the spectrum in either
where the useful life of business designs is growing direction.
ever shorter, must rapidly assess options and place
bets on future moves.
Executive
Summaries

Emerging Pattern of customer needs. Eventually, entire industries in
The real point of going digital: It’s not about Europe will be reshaped by the emergence of
your website—it’s about rethinking the business models that more effectively serve customer
business basics priorities.
By John F. Marshall, Richard S. Christner,
and Erich Almasy Using Pattern Thinking
Corporate information technology and Internet Bring on the recession: Preparing now can
initiatives are proliferating. But most of these improve a firm’s competitive position
investments will produce only moderate results. By Robert G. Atkins, Laurence H. Alberts,
That’s because they use technology to automate and August Joas
current business processes rather than to create a Recessions are not exactly “patterns,” but there are
new business design that will generate order-of- similarities in the way that both of them unfold—
magnitude improvements. Creating a digital business and in the need to prepare for them before they
design—rather than simply a digitized version of a occur. Thus, pattern thinking, which involves
conventional business design—means that a spotting and responding to patterns, can help
company must be prepared to change not just how it managers turn the next recession to their advantage.
performs activities, but also what it does, which Mapping out a set of moves in advance gives
customers it serves, and how it makes a profit from companies a one-time opportunity to improve their
its offering. The experiences of companies ranging competitive position by broadening the range of
from Charles Schwab, the financial services firm, to possible moves when the downturn arrives. They can
Cemex, a Mexican cement company, suggest that prepare on several fronts: drawing up a target list of
incumbents as well as start-ups can harness digital strategic acquisitions of companies, assets, and
capabilities to achieve significant improvements in people; securing financing while it’s relatively cheap
productivity, customer insight, and financial leverage. and plentiful; auditing the customer base in order to
cultivate the most profitable customers and weed out
Patterns in Action the worst ones; and communicating the recession-
Shifting value in the new euro zone: How ready strategy to investors, key customers, and
the single market will accelerate business employees. Waiting until the arrival of the next
design innovation recession—which is inevitable if not imminent—to
By Kevin Mellyn, William Stevenson, and César Paiva address these issues will mean missing an important
The arrival of a single European currency, by opportunity.
creating a single enormous capital market, represents
a powerful catalyst for change in the strategic Using Pattern Thinking
landscape. The new regime creates exciting Chance favors the prepared mind: Spotting
opportunities for upstarts and unprecedented threats the leading indicators of change through
to the survival of incumbents. Two major patterns Strategic Anticipation®
likely will drive the flow of value in the new euro By Charles P. Hoban and Eric Almquist
zone. One is the movement of European finance Learning to see strategic patterns can help managers
from a bank-centered model to a more dynamic, identify the next “profit zone” ahead of competitors
market-centered model. This will lead to a second and, ultimately, create a business design that will tap
pattern, the deintegration of the value chain in the latent value there. Numerous companies are
financial services. Shareholder value will move away testament to the tremendous shareholder value that
from traditional universal banks to institutions that can be generated by seeing tomorrow’s profit zone
Executive have adopted an effective specialist role, typically today. But how do you do it? In an economy
Summaries
structured around a well-defined customer and set characterized by information overload, merely
90 Executive Summaries
searching is not enough; you will be inundated with of these conditions suggests that one or more new
information, with conflicting observations, with patterns may emerge. Small-business customers,
evidence of all types. Instead, you need to keep an which traditionally have been poorly served by
eye out for three categories of “pattern leading suppliers because they haven’t generated huge
indicators”: dysfunctionality, variability, and a shift in profits, provide a good testing ground for pattern
the direction or rate of change. The presence of any thinking and methods.
***
FRANÇAIS
Panorama Te n d a n c e t r a d i t i o n n e l
Contrer le risque stratégique en identifiant Un scénario classique transformé: capturer la
avant la concurrence valeur quand le "milieu" s'effondre à
les zones de profit de demain nouveau.
Par Adrian J. Slywotzky, James A. Quella Par Ted Moser
et David J. Morrison Depuis maintenant plus d’une décennie, la valeur
Les sociétés sont confrontées à de nombreux types dans de nombreux secteurs d’activité délaisse les
de risques dont elles se couvrent ou s’assurent de fournisseurs d’une offre « moyenne » pour favoriser
multiples manières. Le risque le plus grand pour une des modèles situés aux extrêmes, offrant soit un coût
société, le risque stratégique, doit cependant être réduit, soit des offres à coût élevé, basées sur des
supporté directement par les dirigeants et les avantages de produit, de concept ou de marque. Ce
actionnaires. Ils ont à faire face aux conséquences si phénomène s’est produit dans la distribution où les
la valeur boursière s’effondre, stagne ou est éclipsée discounters et des superstores spécialisés d’une part,
par celle d’un concurrent. La compréhension des et les distributeurs haut de gamme d’autre part, ont
tendances stratégiques peut leur permettre généré une valeur boursière énorme aux dépens des
d’anticiper ce risque et de repérer de nouvelles zones grandes surfaces généralistes. Cette tendance se
de profit susceptibles de créer une valeur boursière généralise désormais avec l’accessibilité et
supérieure à la moyenne de façon durable. Les l’augmentation des informations concernant le client
travaux de Mercer Management Consulting ou utilisées par lui. La valeur reflue des concepts
décrivent trente tendances qui ont radicalement d’entreprise ou business designs axés sur le produit
modifiés les zones de profit et les rapports de force pour affluer soit vers ceux qui se concentrent sur les
dans de nombreux secteurs d’activités. La faculté de offres à coût réduit, soit sur les offres haut de
déceler des tendances stratégiques aide les dirigeants gamme apportant des solutions complètes aux
à découvrir au-delà du chaos apparent les véritables problèmes du client. Il revient aux entreprises de
moteurs du comportement du marché et des clients. décider si elles doivent choisir entre ces extrêmes
Cette faculté facilite également le travail des rentables ou opter pour les deux à la fois et
dirigeants qui doivent rapidement évaluer des déterminer ensuite jusqu’où aller dans l’une ou
options et miser sur l’avenir dans un environnement l’autre direction.
où le cycle de vie des concepts d’entreprises
(business designs) devient de plus en plus court.
Executive
Summaries

Te n d a n c e é m e r g e n t e européenne d’un modèle axé sur le crédit bancaire à
Devenir numérique : il ne s’agit pas de créer un modèle plus dynamique axé sur le marché. Cela
un site Internet mais de repenser les amènera à un second courant impliquant la
fondamentaux de votre activité désintégration de la chaîne de valeur dans les services
Par John F. Marshall, Richard S. Christner financiers. La valeur boursière refluera des banques
et Erich Almasy généralistes traditionnelles pour affluer vers les
Les initiatives institutionnelles dans le domaine des institutions spécialisées, structurées autour de
technologies de l’information et de l’Internet segments de clientèle bien définis et d’un ensemble
prolifèrent. Cependant, la plupart de ces de priorités client. A terme en Europe, des secteurs
investissements ne produiront que de médiocres d’activité entiers seront remodelés par l’émergence de
résultats car ils sont employés pour automatiser les modèles d’entreprise mieux adaptés aux priorités des
processus existants au lieu de créer un nouveau clients.
business design « numérique » permettant une
amélioration exponentielle. Pour créer un business Un nouveau mode de réflexion
design « numérique », plutôt qu’une simple version stratégique
numérisée d’un business design traditionnel, une Que la récession commence !
entreprise doit être prête à changer non seulement sa En se préparant dès maintenant, une
manière d’exercer ses activités, mais aussi ce qu’elle entreprise peut renforcer sa compétitivité
fait, sa clientèle, et sa façon de tirer un profit de son Par Robert G. Atkins, Laurence H. Alberts
offre. Les expériences de sociétés comme Charles et August Joas
Schwab dans les services financiers aux ou Cemex Les crises ne sont pas exactement des « courants »,
dans la cimenterie indiquent que les entreprises mais il existe des similitudes dans leur déroulement
établies, tout comme les nouveaux entrants, peuvent et dans la nécessité de s’y préparer avant qu’elles
exploiter des compétences numériques pour obtenir n’adviennent. Une réflexion stratégique fondée sur
des améliorations significatives en matière de l’observation et la prise en compte de ces courants,
productivité, de compréhension des clients et de peut aider les dirigeants à tirer avantage de la
performances financières. prochaine crise. Planifier à l’avance une série
d’actions offre aux entreprises une opportunité
Te n d a n c e s e n a c t i o n unique d’améliorer leur compétitivité en leur offrant
Les modes émergents dans la nouvelle zone un plus grand choix d’options quand la crise
Euro : comment le marché unique va survient. Les entreprises peuvent se préparer sur
accélérer l’émergence de nouveaux concepts plusieurs fronts. A titre d’exemple : rédiger une liste
d’entreprise (business designs) ciblée d’acquisitions stratégiques de sociétés, d’actifs
Par Kevin Mellyn, William Stevenson et César Paiva et de personnes ; assurer le financement lorsqu’il est
L’arrivée d’une monnaie européenne unique, en relativement bon marché et abondant ; auditer la
créant un seul marché gigantesque des capitaux base de clientèle afin de cultiver les clients les plus
constitue un puissant catalyseur de changements rentables et de se délester des moins rentables ;
stratégiques. Cette nouvelle donne crée des communiquer, en cas de crise, sa stratégie de survie à
opportunités excitantes pour de nouvelles entreprises ses investisseurs, clients importants et collaborateurs.
et des menaces sans précédent pour les sociétés en Attendre que la prochaine crise - inévitable sinon
place. Il est probable que deux courants principaux imminente—soit là pour traiter ces questions, revient
orienteront le flux de valeur dans la nouvelle zone à rater une réelle opportunité.
Euro : le premier est l’évolution de la finance
Executive
Summaries
Un nouveau mode de réflexion une valeur boursière considérable. Mais comment
stratégique faire ? Dans une économie caractérisée par une
La chance sourit à ceux qui se sont préparés, surabondance d’informations, chercher simplement
ou comment l’Anticipation Stratégique® ne suffit pas, car on serait submergé de données
permet de balayer l’environnement pour contradictoires et d’hypothèses de toutes sortes. En
identifier les leviers de changement revanche, il faut avoir à l’oeil trois catégories
Par Charles P. Hoban et Eric Almquist d’indicateurs de courants émergents. La présence de
Apprendre à voir les courants stratégiques peut aider l’un de ces indices révèle des conditions pouvant
les dirigeants à identifier la prochaine “zone de donner naissance à un ou plusieurs nouveaux
profit” avant les concurrents et ainsi créer un courants. Le segment des petites et moyennes
business design qui captera la valeur potentielle entreprises, traditionnellement négligé par les
qu’elle recèle. Nombreuses sont les entreprises qui fournisseurs du fait de la relative faiblesse des profits
illustrent de façon tangible le fait que la capacité de générés, est un bon terrain d’essai pour réfléchir à
détecter aujourd’hui la zone de profit de demain crée une stratégie en de nouveaux termes.
***
DEUTSCH
Übersicht Industriezweigen geführt haben; die Entdeckung

Durch Mustererkennung strategische Risiken weiterer, bisher unbekannter Muster wird erwartet.
minimieren: Wie Sie zukünftige Die Fähigkeit, strategische Gewinnmuster zu
Gewinnzonen schneller erreichen als der erkennen, hilft Unternehmenslenkern dabei, die
Wettbewerb Triebkräfte für Kunden- und Marktverhalten
von Adrian J. Slywotzky, James A. Quella nachzuvollziehen, die den scheinbar verwirrenden
und David J. Morrison und unstrukturierten Veränderungen in den
Unternehmen sind mit einer Vielzahl von Risiken heutigen Märkten zugrunde liegen. In einer Zeit, da
konfrontiert und sichern sich auf unterschiedliche der Lebenszyklus eines Business Designs immer
Weise dagegen ab. Strategische Risiken sind die kürzer wird, können diese Muster den
größten potentiellen Gefahren, denen die Entscheidungsprozeß über neue Chancen und die
Unternehmensführung und Aktionäre unmittelbar erforderlichen strategischen Schritte erheblich
ausgesetzt sind, da sie die Konsequenzen tragen beschleunigen.
müssen, wenn der Unternehmenswert stagniert oder
sinkt bzw. weit hinter dem Wert anderer Tr a d i t i o n e l l e s M u s t e r
Wettbewerber zurückbleibt. Das Erkennen von sich Ein klassisches Muster breitet sich aus: Wie
wiederholenden Mustern, nach denen sich Wert aus der zunehmenden Polarisierung Wert
verschiebt, unterstützt Manager dabei, Risiken erzielt werden kann
vorwegzunehmen und neue Gewinnchancen zu von Ted Moser
erkennen, die zu einer nachhaltigen, Seit mehr als 10 Jahren ist in vielen
überdurchschnittlichen Steigerung des Industriezweigen Wert von “durchschnittlichen”
Unternehmenswertes führen. Mercer Management Produkten abgeflossen und hat sich in zwei
Consulting hat in seinen Untersuchungen 30 entgegengesetzte Richtungen verschoben: einerseits
Muster identifiziert, die in den letzten 20 Jahren zu zu kostengünstigen Produkten und zwar oft auf eine
revolutionären Veränderungen der Macht- und ganz bestimmte Produktkategorie, und andererseits
Executive
Summaries
Gewinnstrukturen in einer Vielzahl von auf hochpreisige Produkte, die sich durch einen

hohen Produktnutzen, ein besonderes Design oder seine Zielkunden und seine
Markenimage auszeichnen. Davon ist vor allem der Gewinnerzielungsmechanismen auf den Prüfstand
Einzelhandel betroffen, wo Billigmärkte am einen zu stellen. Die Erfahrungen von Unternehmen wie
Ende des Spektrums stehen und exklusive Charles Schwab im Bereich Finanzdienstleistungen
Spezialgeschäfte am anderen Ende. Beide haben bis zur mexikanischen Zementfabrik Cemex machen
einen sprunghaften Anstieg ihres deutlich, daß sowohl etablierte Anbieter wie
Unternehmenswertes erfahren, auf Kosten des Newcomer digitale Fähigkeiten entwickeln können,
mittleren Segments, das alle Kunden undifferenziert um bedeutende Steigerungen in Produktivität,
bedient. Mit wachsender Informationsfülle und Kundenverständnis und finanziellen Ergebnissen zu
deren Bedeutung hinsichtlich der Kunden wie der erzielen.
Anbieter, hat das Polarisierungsmuster eine neue
Dimension erhalten. Wert fließt nun von So breiten sich Muster aus
produktzentrierten Business Designs ab und Im Euro-Binnenmarkt bilden sich neue
verschiebt sich zu Designs, die entweder auf Muster heraus: Die europäische Währung als
kostengünstige, individuell auf den Kunden Motor für die Entwicklung innovativer
zugeschnittene Produkte ausgerichtet sind, oder auf Business Designs
hochpreisige Komplettlösungen fokussieren. von Kevin Mellyn, William Stevenson und César Paiva
Unternehmen müssen sich für eine der beiden Die Einführung des Euro hat nicht nur einen
profitablen Richtungen entscheiden und festlegen, riesigen europäischen Binnenkapitalmarkt
an welchem Ende des Spektrums sie sich geschaffen, sondern löst auch umwälzende
positionieren wollen. Veränderungen aus. Für Newcomer tun sich
ungeahnte Möglichkeiten auf, viele etablierte
Ein neues Muster Unternehmen müssen dagegen um ihre Existenz
Digitalisierung ist mehr als Internet: fürchten. Wertverschiebungen werden in dem neuen
Die Neuausrichtung der gesamten Euro-Binnenmarkt höchstwahrscheinlich nach zwei
Unternehmensarchitektur Mustern stattfinden: Zum einen verschiebt sich der
von John F. Marshall, Richard S. Christner Wert im europäischen Finanzmarkt von einem
und Erich Almasy bankzentrierten zu einem dynamischeren,
In wachsendem Umfang halten marktzentrierten Modell. Und das führt zu einem
Informationstechnologien und Internetaktivitäten in zweiten Muster, nämlich der Aufspaltung der
Unternehmen Einzug. Die Ergebnisse dieser Wertschöpfungskette im Sektor
Investitionen sind jedoch meistens eher dürftig. Der Finanzdienstleistungen. Traditionelle
Grund liegt darin, daß viele Unternehmen diese Universalbanken werden an Wert verlieren, während
Instrumente in erster Linie zur Verbesserung ihrer Institutionen, die sich auf die spezifischen
Geschäftsprozesse, aber nicht zur Entwicklung eines Bedürfnisse eng umgrenzter Kundensegmente
neuen Business Designs nutzen, das einen ausgerichtet haben, einen Wertzufluß erfahren. Die
Quantensprung in Effizienz herbeiführt. Ein Notwendigkeit zur Entwicklung von
digitales Business Design ist nicht gleichzusetzen Unternehmenskonzepten, die paßgenau auf
mit einer digitalisierten Version eines Kundenbedürfnisse zugeschnitten sind, wird zur
konventionellen Business Designs. Es bedeutet viel einer Restrukturierung ganzer Industriezweige in
mehr, daß ein Unternehmen bereit sein muß, seine Europa führen.
Unternehmensaktivitäten, seine Herangehensweise,
Executive
Summaries
Muster erkennen und anwenden Muster erkennen und anwenden
Keine Angst vor der Rezession! Wer vorbereitet ist, kann schnell reagieren:
Eine frühzeitige Vorbereitung kann die Strategische Antizipation® als Meldesystem
eigene Wettbewerbsposition stärken für sich anbahnende Veränderungen
von Robert G. Atkins, Laurence H. Alberts von Charles P. Hoban und Eric Almquist
und August Joas Strategische Muster zu erkennen lernen, kann
Rezessionen sind keine eigentlichen Muster, aber sie Unternehmenslenker dabei unterstützen, früher als
weisen in ihrem Auftreten und der Art, wie sie sich der Wettbewerb zukünftige Gewinnzonen zu
ausbreiten, gewisse Ähnlichkeiten auf. Und auf beide identifizieren und ein Business Design zu
müssen sich Unternehmen rechtzeitig vorbereiten. entwickeln, daß darauf ausgerichtet ist, die
Wenn es Unternehmen gelingt, Gewinnpotentiale vollständig auszuschöpfen. Viele
Wertverschiebungsmuster zu erkennen und danach Unternehmen haben das bereits erfolgreich
zu handeln, können sie die nächste sich anbahnende umgesetzt und beeindruckende Wertsteigerungen
Rezession zu ihren Gunsten nutzen. Durch die erzielt. Wie können Sie den Wert Ihres
Vorwegnahme möglicher strategischer Schritte Unternehmens konkret steigern? In einem
erhalten Unternehmen die einmalige Chance, ihre Wirtschaftsumfeld, das von Überinformation
Wettbewerbsposition durch eine Ausweitung ihrer gekennzeichnet ist, ist die Informationssuche allein
strategischen Optionen zu verbessern, wenn sich der nicht ausreichend. Die geradezu erdrückende
Abschwung einstellt. Sie können ihre Stellung an Informationsflut enthält eine Vielzahl von
mehreren Fronten stärken, indem sie eine Liste Widersprüchen und für jede These eine Vielzahl von
strategischer Akquisitionskandidaten (Unternehmen, Argumenten. Drei Kategorien von Indikatoren, die
Vermögenswerte und qualifizierten Nachwuchs) auf sich herausbildende Muster hinweisen, sollten
vorbereiten, in guten Zeiten die Finanzierung Unternehmenslenker beachten: Disfunktionalität,
absichern, den Kundenstamm revidieren, um sich auf Unbeständigkeit und ein Richtungswechsel. Das
die profitabelsten Segmente zu konzentrieren und Auftreten eines dieser Indikatoren kündigt ein oder
sich von unprofitablen Kunden zu trennen, und mehrere neue Muster an. Kleinkunden, die
indem Unternehmen ihre rezessionsstabile Strategie traditionell von Anbietern vernachlässigt wurden,
an Investoren, Schlüsselkunden und Mitarbeiter weil sie keine großen Gewinne versprechen, sind ein
kommunizieren. Wer abwartet, bis sich die gutes Testfeld für das Erkennen und Anwenden von
unvermeidliche—und möglicherweise kurz Wertverschiebungsmustern.
bevorstehende—nächste Rezession einstellt, um erst
dann aktiv zu werden, vergibt wichtige Chancen.
***
Executive
Summaries

E S PA Ñ O L
Visión general en una categoría concreta de producto, y ofertas de

Contrarrestando el riesgo estratégico con el alto coste, caracterizadas por sus superiores ventajas
uso de patrones para el análisis de negocios: de producto, diseño o imagen de marca. Esto sucedía
Cómo identificar las áreas de rentabilidad del en comercios, donde las tiendas que ofrecían
mañana antes que sus competidores descuentos y “grandes almacenes” de categoría, en un
Por Adrian J. Slywotzky, James A. Quella extremo, y comerciantes especializados en artículos
y David J. Morrison de primera calidad, en el otro, generaban un
Las empresas se enfrentan a numerosos tipos de tremendo valor de la acción (a costa del gran almacén
riesgo, los cuales se cubren o aseguran de diversas que ofrecía una gran variedad de artículos baratos
maneras. Sin embargo, el mayor riesgo potencial de para todos). Pero al patrón le salió una nueva fisura
una sociedad anónima (el riesgo estratégico) debe ser cuando la información, sobre el cliente y la que él
asumido directamente tanto por los directivos como recibe y emplea, se hizo cada vez más accesible e
por los accionistas, ya que ellos son quienes sufren las importante. Ahora el valor está desplazándose de los
consecuencias si el valor de la acción de la empresa se diseños empresariales centrados en productos bien a
hunde, se estanca, o se reduce en relación con el de los que se centran en ofertas personalizadas de bajo
un competidor. El uso de patrones puede ayudar a los coste que satisfacen las necesidades particulares del
directivos a prever el riesgo e identificar nuevas cliente o en ofertas de alto coste que ofrecen
oportunidades de rentabilidad que produzcan un soluciones integradas a los problemas de éste. Las
crecimiento del valor sostenido por encima de la empresas deben decidir si centrarse en uno o en
media. El análisis de Mercer Management ambos extremos rentables y, luego, en qué punto
Consulting ha descrito treinta patrones que en las posicionarse en la dirección tomada.
últimas dos décadas han cambiado drásticamente los
beneficios y la influencia de numerosas industrias; Patrón emergente
estimamos que ese número aumentará a medida que La clave de ser digital: No se trata sólo de
se descubran nuevos patrones. La capacidad de tener web site. Tiene que volver a plantearse
identificar patrones estratégicos ayuda a los directivos las bases de su negocio.
a ver más allá del aparente caos del entorno Por John F. Marshall, Richard S. Christner
empresarial de hoy día y a descubrir las fuerzas y Erich Almasy
motoras básicas del cliente y del comportamiento La informatización de la empresa y el uso de Internet
económico. También ofrece una herramienta a los están proliferando. Pero la mayor parte de estas
directivos que, en un mundo donde la vida útil de los inversiones solo producirán resultados modestos. La
diseños empresariales es cada vez más corta, deben razón es que se emplea tecnología para automatizar
valorar rápidamente las posibilidades y apostar por los procesos comerciales actuales en vez de crear un
acciones futuras. nuevo diseño empresarial que genere mejoras de gran
magnitud. Crear un diseño empresarial digital (en
P a t r ó n Tr a d i c i o n a l vez de simplemente una versión digitalizada de un
Transformación de un patrón tradicional: diseño convencional) significa que una empresa debe
Creación de valor en el colapso del punto estar preparada para cambiar no sólo la forma de
medio realizar sus actividades, sino también lo que hace, a
Por Ted Moser qué clientes atender y cómo obtener un beneficio de
Desde hace ya más de una década, el valor de muchas su oferta. Las experiencias de empresas como Charles
Executive industrias ha venido distanciándose de las ofertas de Schwab, la firma de servicios financieros, o Cemex,
Summaries
producto “medio” para adoptar uno de estos dos una empresa de cementos mejicana, sugiere que tanto
extremos: ofertas de bajo coste, a menudo centradas las empresas consolidadas como las emergentes
pueden aprovechar las capacidades digitales para un conjunto de acciones anticipadamente ofrece a las
lograr mejoras significativas de productividad, empresas una oportunidad única de mejorar su
servicio al cliente y apalancamiento financiero. posición competitiva, ampliando la gama de acciones
posibles cuando llegue el declive económico. Se
Patroness en acción pueden preparar en varios aspectos: elaborando una
Patrones emergentes en la nueva zona del lista inicial de adquisiciones estratégicas de empresas,
euro: Cómo el mercado único agilizará la activos y personal; obteniendo financiación mientras
innovación de diseños empresariales sea relativamente barata y abundante; auditando la
Por Kevin Mellyn, William Stevenson y César Paiva base de clientes con objeto de conservar a los clientes
La llegada de la moneda única europea, que creará un más rentables y deshacerse de los menos rentables; y
enorme mercado único de capitales, representa un comunicando a los inversores, clientes clave y
potente catalizador que producirá un cambio del empleados la estrategia lista para la recesión. Esperar
panorama estratégico. El nuevo régimen crea hasta la llegada de la próxima recesión (que es
excelentes oportunidades para las empresas inevitable, si no inminente) para abordar estas
emergentes y amenazas sin precedente para la cuestiones supondrá perder una importante
supervivencia de las ya establecidas. Dos patrones oportunidad.
importantes impulsarán probablemente el flujo de
valor en la nueva zona del euro: Uno es que el Utilizando patrones para el análisis de
entorno financiero europeo pasará de un patrones los negocios
centrado en bancos a un modelo más dinámico La empresa preparada a lo que está por venir
enfocado en el mercado. Esto llevará a un segundo saldrá ganando: “Strategic Anticipation”
patrón: la desintegración de la cadena de valor en ayuda a descubrir los elementos que
servicios financieros. El valor de la acción pasará de dispararán el cambio
los bancos universales tradicionales a entidades que Por Charles P. Hoban y Eric Almquist
hayan adoptado una función especializada efectiva, Aprender a ver patrones estratégicos puede ayudar a
normalmente estructurada en torno a un cliente bien los directivos a identificar la próxima “área de
definido y a un conjunto de necesidades de éste. Con beneficio” antes que la competencia y, en última
el tiempo, se dará una transformación en sectores instancia, crear un diseño empresarial que explote el
enteros europeos debido al surgimiento de patrones valor latente allí. Muchas empresas son testigos del
empresariales que atienden más eficazmente las tremendo valor de capital que puede generarse si se
prioridades del cliente. percibe hoy el área de rentabilidad del mañana. Pero,
¿cómo lo hacemos? En una economía caracterizada
Utilizando patrones para el análisis de por el exceso de información, sólo buscar no es
los negocios suficiente, pues nos veremos inundados de
Se acerca la recesión ! Estar preparado puede información, con observaciones contradictorias y
mejorar la posición competitiva de un pruebas de toda índole. En cambio, hay que vigilar de
empresa cerca tres categorías de “indicadores principales de
Por Robert G. Atkins, Laurence H. Alberts y August Joas patrones:” disfuncionalidad, variabilidad y cambio de
Las recesiones no son precisamente “patrones,” pero dirección o tasa de cambio. La presencia de
existen similitudes en la forma que uno y otro tienen cualquiera de estas condiciones sugiere que pueden
de desplegarse (y en la necesidad que existe de surgir uno o más patrones nuevos. Los clientes de
prepararse antes de que éstas ocurran). Así pues, el pequeñas empresas, a los cuales los proveedores no
enfoque de patrones, que implica localizar y han atendido bien porque no generaban grandes
responder a modelos, puede ayudar a los directivos a beneficios, representan un buen campo de prácticas
Executive
Summaries
aprovechar la próxima recesión en su favor. El diseñar para enfoques y métodos con patrones.
***
PORTUGUÊS
Síntese superioridade dos benefícios, design, ou imagem de

Contrariar o Risco Estratégico com “Pattern marca do produto. Isto verificou-se no sector de
Thinking”: Como identificar as “Profit Zones” retalhistas, onde “price discounters” e “category
de amanhã antes da concorrência. superstores” num lado da escala e lojas especializadas
por Adrian J. Slywotzky, James A. Quella, no outro, geraram um elevadíssimo valor
e David J. Morrison accionista—às custas de “department stores”
As empresas enfrentam diversos tipos de riscos, generalistas de custo médio. Contudo, o padrão
procurando proteger-se ou evitá-los das mais altera-se à medida que a informação (sobre o cliente
variadas formas. No entanto, o maior risco potencial e aquela usada pelo cliente) se torna cada vez mais
para uma empresa—o risco estratégico—é suportado importante e disponível. Neste momento, o valor
directamente pelos gestores e accionistas. São estes accionista está a afastar-se de desenhos de negócio
que enfrentam as consequências se o valor da centrados no produto para aqueles que focalizam a
empresa cai, estagna ou é ameaçado pelos oferta de baixo custo adaptada às necessidades
competidores. “Pattern Thinking”, auxilia os gestores individuais dos clientes, bem como a oferta de
tanto na previsão dos riscos como na identificação de elevado custo que fornece soluções completas aos
novas oportunidades que permitam alcançar um problemas dos clientes. As empresas terão de decidir
crescimento sustentado de valor acima da média. A em qual (ou em ambos) dos extremos rentáveis se
Mercer Management Consulting identificou e devem concentrar e até que ponto se devem deslocar
descreveu trinta padrões que, ao longo das últimas ao longo do espectro.
duas décadas, provocaram alterações de fundo na
distribuição de valor e poder em numerosos sectores; Padrão Emergente
a Mercer prevê que esse número aumente à medida A verdadeira necessidade da digitalização:
que se reconhecem novos padrões. No complexo Não basta um “web site”. Há que repensar
ambiente de negócios actual, a capacidade de as bases do negócio.
reconhecer padrões estratégicos ajuda os gestores a por John F. Marshall, Richard S. Christner
desvendar os determinantes do comportamento e Erich Almasy
económico e dos clientes. Proporciona igualmente As tecnologias de informação empresarial e as
aos gestores um suporte eficaz para a rápida iniciativas relacionadas com a Internet estão a
avaliação de opções e tomada de futuras decisões proliferar. No entanto, a maioria destes
estratégicas, num mercado caracterizado pelos cada investimentos produzirão apenas resultados
vez menores ciclos de vida dos desenhos de negócio. moderados, uma vez que a tecnologia é utilizada na
automatização de processos de negócio existentes e
Padrão Clássico não no desenvolvimento de novos desenhos de
Um Padrão Clássico Transformado : Capturar negócio que gerem melhorias significativas. A
valor face ao colapso de "soluções criação de um desenho de negócio digital—em lugar
intermédias" de uma versão digitalizada do desenho de negócio
por Ted Moser convencional—requer a preparação da empresa para
Ao longo de mais de uma década que se tem alterar, não só a forma como desenvolve as suas
registado em diversos sectores um afastamento do actividades, mas também o âmbito do seu negócio, a
valor da oferta do produto “médio” em direcção a um base de clientes e a forma de realizar valor com a sua
dos extremos: ofertas de baixo custo, frequentemente oferta. As experiências de empresas tão diversas
Executive focalizadas numa determinada categoria de produtos, como a Charles Schwab (serviços financeiros) ou a
Summaries
e ofertas de elevado custo, caracterizadas pela Cemex (cimenteira mexicana), sugere que tanto
empresas tradicionais como as emergentes, podem benefício. Planear e definir antecipadamente um
aproveitar as capacidades digitais para alcançar conjunto jogadas, oferece às empresas uma
melhorias significativas na sua produtividade, no oportunidade única de melhorar a sua posição
entendimento dos clientes, e estrutura financeira. competitiva, uma vez que aumenta o número de
possíveis iniciativas para contornar a recessão. A
Padrões em Acção preparação pode ser alargada a diversas frentes:
Padrões emergentes na “Zona Euro”: elaborar uma lista de alvos de aquisições estratégicas
Como poderá o mercado único acelerar a de empresas, activos, e recursos humanos; assegurar
inovação de desenhos de negócio. financiamentos quando são relativamente baratos e
por Kevin Mellyn, William Stevenson e César Paiva abundantes; compreender a base de clientes por
Através do resultante mercado de capitais único de forma a desenvolver os mais rentáveis em detrimento
grande dimensão, a introdução da moeda única dos menos rentáveis; e comunicar a estratégia de
representa um poderoso catalisador para as mudanças preparação para a recessão aos investidores, clientes
no ambiente estratégico europeu. O novo regime críticos, e trabalhadores. Aguardar a chegada da
monetário criará fortes oportunidades para empresas próxima recessão—que é inevitável, se não mesmo
emergentes ao mesmo tempo que lança desafios sem iminente—para abordar estas questões, significa a
precedentes para os competidores tradicionais. Dois perda de uma importante oportunidade.
grandes padrões surgem como prováveis
determinantes no fluxo de valor na nova “Zona Utilizar “Pattern Thinking”
Euro”: O primeiro será a transição do sistema A oportunidade favorece as empresas
financeiro europeu de um modelo centrado na banca preparadas: “Strategic Antecipation®”ajuda
para um modelo mais dinâmico, centrado no na identificação das causas da mudança.
mercado. Desta alteração resulta o segundo padrão, a por Charles P. Hoban e Eric Almquist
desintegração da cadeia de valor do sector de serviços Aprender a reconhecer padrões estratégicos pode
financeiros. O valor accionista tende a transferir-se da ajudar os gestores a identificar a próxima “Profit
tradicional banca universal para instituições Zone” antes da concorrência e, em último caso, a
efectivamente especializadas, tipicamente estruturadas desenvolver um desenho de negócio que capture o
em volta de um conjunto de clientes/necessidades valor aí presente. Diversas empresas são testemunho
bem definido. Eventualmente, a emergência de do enorme valor accionista que pode ser gerado
modelos de negócio inovadores que satisfaçam as através do reconhecimento antecipado das “Profit
prioridades dos clientes de forma mais eficaz, Zones” de amanhã. Mas como o fazer? Numa
reformulará inteiros sectores de actividade europeus. economia caracterizada pela sobrecarga de
informação, realizar simples pesquisas é insuficiente;
Utilizar “Pattern Thinking” o resultado seria uma inundação de informação, com
A chegada da recessão! observações incoerentes e indicações divergentes. É
A preparação antecipada pode melhorar a necessário não perder de vista três “principais
posição competitiva da empresa. indicadores de padrões”: disfuncionalidade,
por Robert G. Atkins, Laurence H. Alberts e Ausgust Joas variabilidade, e uma mudança de direcção ou de
Não podemos considerar as recessões como “padrões”, ritmo das alterações. A presença de qualquer destas
mas não há dúvida que existem semelhanças na forma condições sugere que um ou mais novos padrões
como ambos se revelam—e na necessidade das podem emergir. Os pequenos clientes empresariais,
empresas se prepararem antes da sua ocorrência. que tradicionalmente recebem um pior serviço dos
Assim, “Pattern Thinking”, que envolve a seus fornecedores por não gerarem grandes receitas,
identificação e resposta a padrões, pode ajudar os representam uma boa base para testar “Pattern
Executive
Summaries
gestores a aproveitar as recessões futuras em seu Thinking” e os métodos relacionados.
***
Executive
Summaries

Executive
Summaries

The Periodic Table of Strategy
T he enclosed poster features the strategic patterns described

in Mercer Management Consulting’s new book, Profit
Patterns: 30 Ways to Anticipate and Profit from Strategic Forces
Reshaping Your Business (Times Business/Random House, April
1999). Learning to recognize and apply these patterns can help
executives, employees, and investors find the meaning that
underlies the surface chaos of today’s business landscape and
identify tomorrow’s “profit zones.” The table plots the 30 pat-
terns along two dimensions: incidence and type. Incidence cap-
tures the fact that, while some patterns have been seen over and
over again, others are just emerging. Type expresses the primary
areas of the pattern’s impact. Like the Periodic Table of the
Elements, this table is not static: New patterns, including vari-
ants of existing ones, continue to be identified. For the latest
thinking on patterns, visit the Profit Patterns website,
www.profitpatterns.com.
102
Mercer Management Consulting, Inc.
Boston Munich
Buenos Aires New York
Chicago Paris
Cleveland Pittsburgh
Hong Kong San Francisco
Lisbon Toronto
London Washington, DC
Madrid Zurich
Montréal
www.mercermc.com
An elaboration
on the themes
of Mercer’s
new book,
Profit Patterns
Number 11
1999

An elaboration
on the themes
of Mercer’s
new book,
Profit Patterns
Number 11
1999


Pattern Thinking

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Mercer Management Journal

The Strategic Shortcut:

Overview 11 Countering strategic risk with pattern thinking

Traditional Pattern 27 A classic pattern transformed

Emerging Pattern 37 The real point of going digital

Using Pattern 65 Bring on the recession!

Using Pattern 75 Chance favors the prepared mind

For the latest thinking

Mercer Management Journal

Mercer Management Journal is published twice yearly by Mercer

Strategic Anticipation®, Strategic Choice Analysis®, and

All rights reserved. Excerpts can be reprinted with attribution

For information on reprinting articles and all other correspondence,

Mercer Management Journal

Pattern recognition is a fundamental human skill. From the

Patterns exist in business, too. Mercer Management Consulting’s

• Grow to Be Great, which in 1995 made the case for profitable

• Value Migration, the 1996 business bestseller, described a

All these books have espoused an “outside-in” approach to strate-

This issue of the Mercer Management Journal elaborates on and

We believe learning to recognize and apply profit patterns is a

James W. Down James A. Quella

Countering strategic risk with pattern thinking

T he primary task of senior executives seeking sustained value

Each of these risks, however, pales in comparison to strategic

Mercer Management Journal 11

When investors spot strategic risks that threaten a company’s

The elements of a business design

A mismatch between an enterprise’s current business design and

Value Collapse. Weighed down by low customer relevance and

Value Stagnation. More subtle than value collapse, value stagna-

Mercer Management Journal 13

Source: Mercer Management Consulting Value Growth Database.

that left it a leaner business with improved products, failed to

Silver Medalist in a Polarization Game. It used to be the case that

zones,” the places where customers allow enterprises to earn

We refer to this new disproportionality as polarization. With

Mercer Management Journal 15

Source: Mercer Management Consulting Value Growth Database.

Lowe’s got a late start in consolidating the home improvement

The process of polarization typically unfolds in two phases.

As these three manifestations of strategic risk illustrate, the

predicting the future with Strategic Planning is Not Strategic

• It’s Everyone’s Job. Assessing and responding to strategic risk

What is required is no less than a completely different approach

Mercer Management Journal 17

Pattern Thinking as a Strategic Shortcut

Pattern recognition is also crucial to many sciences. Genetics,

Our research suggests that the same is true of business. Great

It is also a skill that is crucial in a world where the half-lives of

Even if patterns are not new, they are growing in importance.

Pattern recognition is part of a process that we call Strategic

“I HAVE A SNEAKING SUSPICION”

“I’M TOTALLY OBLIVIOUS”

In the late 1980s, IBM found itself in the unfortunate position

In the glory days of the mainframe, an integrated model drove

Mercer Management Journal 19

Mainframe World PC World

IBM understood the priorities of personal computer customers,

Percent of Total Shareholder Value

Source: Mercer Value Growth Database.

experience this pattern better prepared than IBM to benefit

There are presently seven discrete pattern types:

• Mega Patterns. These patterns play out across many areas of