Gary Kasparov was not beaten by a machine. He was beaten by a team of IBM employees who took patterns so seriously that they invested several years and millions of dollars to build a machine that could recognize and manipulate all of the patterns that they had learned.

The IBM team had three advantages which ensured that it was only a matter of time before Deep Blue won:

• The real contest (learning and applying patterns) was played out between dozens of very smart individuals vs. one genius, long before the physical contest occurred. In the long run, bet on the team.
• The IBM team approached patterns with incredible discipline. They cataloged and set up relationships between every pattern that matters in chess – even Kasparov-specific patterns.
• The IBM team used computing power – which never forgets a pattern and is fast enough to review all necessary patterns before the next move – to create cumulative learning.

In the end, Kasparov found himself facing a far more dangerous foe than he had anticipated. He knew it, and his tirades at the end of several games betrayed his frustration.

Deep Blue’s victory was not a case of machine over man. It was a case of teamwork, of systematic dedication to knowing patterns, and of cumulative learning, over genius. It was a human victory. And it was a parable for business managers and investors everywhere.

PATTERN THINKING APPLIED TO BUSINESS STRATEGY

Deep Blue’s victory was an event that provides a window on the future to every senior manager and investor. With a little imagination, we can see how the IBM chess experience is an early indicator of a critical tool that we will use to do business and investment strategy in the future.

We propose that any company that makes a pattern investment similar in direction (not in cost) to that of the IBM chess team – a combination of management teamwork, systematic pattern development, and cumulative learning – will generate superior innovative strategies, and superior sustained long-term returns. This book aims to help any company jump-start the development of its own database of patterns, thus minimizing both investment and time to payback.

An investment in patterns can empower executives to win in the game of business where – unlike chess – the rivalry never ends. For at the heart of business strategy is pattern recognition. Patterns of how the game has unfolded to date, where it stands today, and where the game is headed.

Masters of business pattern recognition are accustomed to staring at what looks to the newcomer like chaos. Instead of seeing chaos, they see the strategic picture unfolding within the complexity, and discover the pattern behind it all. They "get it."

"Getting it" is all-important. It is like putting on infrared vision goggles on a cloudy, moonless night. It helps you see danger three moves early. It helps you see where the pathway to opportunity lies, and what moves and combinations will turn the game in your favor.

"Not getting it" has all the opposite effects. Blindness to danger, blindness to opportunity, playing the game on the run, reacting rather than creating.

That is why those who know the power of pattern recognition in business play so intensely and study so hard. Those who "get it" use their experiences to build their strategic skills and raise their game to the next level. Those who don’t "get it" lose and fall further behind.

PATTERNS ARE NOT A NEW PHENOMENON

The good news is that all business people are already engaged in pattern thinking. From CEOs to middle managers to securities 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 articulate the characteristics and consequences of the "commoditization" pattern, the "disintermediation" pattern, or the "deregulation" pattern.

Similarly, most players can recognise the "power shift" pattern as power moves from manufacturer to distribution channel. They’ve seen it with Wal-Mart, Home Depot, and Toys "R" Us. They can anticipate what is likely to happen with CarMax, AutoNation, or Amazon.com.

Strategic patterns are neither new nor mysterious. We use them all the time. They are a critical shortcut for capturing and highlighting the essential economic characteristics of a complex, changing picture.

Compared to the late 1980s, the number and complexity of the patterns required to know and understand business have grown. Back then, we all operated, explicitly or implicitly, with a dozen or so strategic patterns at our fingertips. Today, we need to know several times as many. And what we have to know about them, particularly about buyer behaviour and how profit really happens, implies a more detailed and nuanced understanding than was sufficient for effective performance ten years ago.

PATTERN PROLIFERATION- AND IMPORTANCE- IS INCREASING

For most of the twentieth century, the idea of understanding value patterns was irrelevant. Things did not change very quickly. Everyone knew the fundamental formulas for success, because the formulas were straightforward in nature.

In manufacturing, the key pattern to understand was that profit was a function of relative market share. The strategic tools and thought technology needed for this universe where straightforward and extremely useful. The growth/share matrix, the experience curve, Total Quality Management, and a solid knowledge of core competencies all served us well. Many manufacturers became experts at playing the relative market share game.

But today, we see more and more contradictions to these rules, such as smaller automakers being consistently more profitable than much larger automakers, or Starbucks being more profitable than much larger coffee companies. We are not even surprised at the idea that Dell is the most valuable PC maker, even though it doesn’t manufacture its own core products – paying a point or two more to outsource key components because its overall business design saves ten extra points of cost in the way it goes to market.

In retail, another simple pattern reigned: location, location, location. Location closest to home, location in the best shopping malls. In that world, there where no destination superstores, no e-commerce, no kiosks, almost no branded retail, and no "entertainment-while-shopping" to confuse our thinking.

Services also had their own pattern. Good service meant personalized service by someone you knew, someone who called you by name, someone who put a personal touch in to everything they did. In that world, there was no remote service, no 24-hour, seven-day-a-week service, no self-service for a lower price, no service via an intelligent agent.

As the above examples begin to show, knowledge of traditional patterns is no longer adequate. The modes of analysis that developed them – linear, logical, two-dimensional, bottom-up - also don’t work. Even worse, they can fail in spectacular fashion. Traditional market share leaders doing traditional strategic analysis donated $7 000 billion in shareholder value to newcomers in the past decade and a half.

Traditional patterns are not always wrong – they are just no longer right all the time. They should be treated as one value pattern of many, not as our North Star or our compass. There are now many other patterns that supplement them and that explain much of the new value creation in business today. There are companies that break the old rules to their benefits, and in doing so create new rules that can be exploited by others via pattern thinking.

PATTERNS AND LEADERSHIP

Most science fiction fans are familiar with the light-speed travel depicted in movies such as Star Wars and Star Trek. With the flick of a button, our hero’s spaceship hurtles into hyperspace and escapes from the clutches of the enemy. The audience sees an incredible stream of light rushing past. Viewers’ visual and auditory sense are flooded with an overload of impressions.

Any diligent reader of the current business press will also experience a sensory excess, a broad stream of data rushing at us at Mach 2. The psychological effects are confusion, overload, and chaos. Managers today face hyperspace without a map. New and old customers are changing their priorities. New business designs are emerging from all angles, and old competitors are resurfacing as challengers in entirely new ways. Thousands of "inputs" crowd into managers’ decision process, and they have no way to parse them to find the most useful nuggets.

Input overload can lead to chaos in our organization, a sense that everything is changing around us, but a lack of clarity about what to do next. Such chaos is typically a prelude to failure, to shareholder value destruction, and to a black mark on an otherwise successful management career.

Strategic pattern recognition is all about navigating through the on rushing hyperspace (how the world presents itself to us) and working to see the patterns underneath the surface noise. If these skills are gained soon enough, they can help us to make better decisions and take more effective actions. The flood of information can overwhelm decision making. Seeing patterns – superimposing a structure on the chaos – allows us to map the landscape and direct our strategy towards the most profitable opportunities.

Pattern thinking is a manager’s best tool for communicating as well as making sense of chaotic change. Via patterns, management can communicate to others that it has a grasp on how to turn change into opportunity, that it is worthy of employee and investor trust. Establishing such a leadership profile can pay handsome dividends in retaining critical talent and investor enthusiasm.

To those who work for, invest in, or buy from a company, the flood of information can feel even worse. These players must have less direct control over the situation than the manager does. In these cases, pattern thinking is even more important. Understanding the key strategic patterns playing out in an industry can help investors, customers, and employees making more informed decisions and more astute choices.

HOW STRONG IS YOUR PATTERN GAME?

It’s 1999. It’s your industry. Does your company "get it" or not?

Get what?

The patterns of change that describe how the strategic landscape is deforming itself from yesterday’s topology into tomorrow’s. The patterns that describe which business design are becoming economically obsolete. The patterns that describe which business designs are becoming customer – relevant – even customer – compelling – and extremely profitable.

There are dozen examples of "getting it" and "not getting it." Those described in Chapters 4 – 11 are but a few. In each case, several very specific, well – defined patterns were unfolding. Some players "got it," while others did not. "Getting it" allowed the winners to make the strategic decisions that tapped into the enormous economic energy released by the patterns. Those who didn’t "get it" – who didn’t see the patterns – failed to make the right moves and destroyed enormous shareholder value as a result.

How was Nokia able to exploit the "product to solutions" and "product to brand" patterns in order to surpass Motorola and Ericsson as the leading innovator and value creator in wireless communications? What did the founder of SAP "see" years earlier than its established competitors that enabled them to anticipate and take advantage of the "knowledge to products" pattern? How did two consultants foresee that the "product to customer knowledge" pattern would transform the credit card business, and how did they craft a business design that allowed Capital One to become a financial services powerhouse? How did Bang & Olufsen alter its business design to capitalize on the "product to brand" and customer redefinition patterns? We will explore the answers to these questions in Chapters 4-11.

Unfortunately, hindsight is 20/20. In order to succeed, a company must "get it" before the competition, not years later. In case after case, those companies that "got it" earlier than the competition have created the most valued growth and the greatest degree of strategic control in their business.

In your industry today, there are probably between two and five discrete patterns playing out. Shifts from old profit sources to new. Shifts from old business models to new. Does your company "get it?" Do you see and understand the patterns? Can you anticipate how the patterns will unfold to create opportunities and threats? Do your competitors "get it?" Which of you is responding more quickly and accurately to exploit the unfolding patterns of customer and economic change?

PATTERNS AND PROGRESS

Learning patterns and using them to create sustained profit growth will not happen without effort. As in chess, one does not become a grand master overnight. However, the early learning rate is very, very high, and mastery of the basic rules leads to dramatic performance improvements in a short period of time.

Patterns might seem like a daunting subject to tackle to the reader just starting this book. But it is worth remembering that pattern recognition is an approach that has been applied in many fields to anticipate uncertain futures. Among them are:

Seismography Where’s the oil going to be?

Meteorology What’s the weather going to be?

Medical diagnostics How is the patient going to be?

When we systematically exploit pattern recognition technology in business strategy, this is the challenge we face:

Business strategy Where’s the value going to be?

Sorting through the vast data flow from the evolving business landscape is a task very similar to anticipating the weather or approximating the location of oil reserves. Meteorologists and sonar experts work with powerful computer programs that apply patterns to the current data set. As business strategists, we must apply the pattern-trained thinking of our management teams. The human mind is capable of accomplishing this activity effectively. Strategic pattern recognition is a skill that can be learned, but requires a different way of thinking than we’ve been accustomed to, and a different way of building experience.

By investing to learn strategic pattern recognition, you will acquire the basic skills necessary to discern the most important patterns and their implications for the new game of business. With this new skill set, you will be better able to map out a profitable course for your unit or your company in spite of a seemingly chaotic corporate landscape. In fact, superior pattern recognition skills will help you to transform this apparent chaos from a liability to a distinct advantage in the next business game you play.