Pinpointing Patterns.

• Author: Morrison, David J.

Business is like a chess game. Once you can recognize the underlying patterns, you can counter strategic risks.

Strategic risk, which is increasingly important to corpoations, is concerned with one overriding question: Can the firm's business design deliver sustained, above-average growth in shareholder value? Thus, when investors spot strategic risks that a company's health, they react swiftly and decisively -- at times with devastating results.

A recent study by Mercer Management Consulting finds 10 percent of Fortune 1000 companies lost more than one-quarter of their shareholder value in a one-month period at least once between June 1993 and May 1998, a time of relatively low volatility. The drops were almost all triggered by reduced quarterly earnings or reduced expected future earnings. And the majority (58 percent) of these shortfalls were caused by strategic risk factors, such as a drop in customer demand, channels misaligned with customer priorities or increased competitive pressure. But you can avoid or manage these strategic risks -- if you anticipate them.

What it takes is no less than a completely different approach to risk and opportunity identification and strategy setting. The typical strategic planning process is unsuited to this task, as it tends to work incrementally and in parts rather than expansively and holistically. Senior managers too frequently settle for continuous improvement when customer priorities are shifting to a new value space. Pattern thinking represents a new sense-and-respond approach that's more effective in both characterizing risk and identifying and exploiting new profit opportunities.

Crazy Quilts

Pattern recognition is a fundamental cognitive skill. Genetics, seismology, medicine and meteorology all harness pattern thinking to understand and predict complex phenomena; the chess grandmaster uses it to envision possible endgames.

The same is true of business. Every industry is reshaped by patterns of strategic change that can drastically shift profit and power across the landscape. Anyone in business can profitably cultivate the ability to anticipate how and why a company's strategic landscape is changing, connect symptoms to causes and create strategies that lead to significant, sustained value growth.

These patterns can characterize both the ways industries evolve as well as winning business designs that have been proved over and over. We've catalogued over 30 patterns, and have organized them along two dimensions: incidence (from traditional to emerging) and type, which expresses the primary areas of the pattern's impact.

* Value chain patterns describe how industry value chains are compressed, broken and reassembled.

* Customer patterns describe the...