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The Prime Business Patterns – Risk Distribution and Value Concetration

Recently read a good book on software patterns. For those of you not aware of what they are, software patterns are higher level of abstraction. You observe the way you are developing software over the years and you find certain patterns. When you try to build new software for a new business, you think in terms of those patterns. It saves time as well as lets you incorporate wisdom people have gained so far.

If you study the business for which you are developing software closely, you mostly find patterns of actions in that business.  Patterns like scheduling a resource, which is used in hospitals, hotels etc. Another pattern is scanning an environment and triggering an action, like sending out an email or message when inventory falls below a certain amount.

What if we could find a few prime patterns that can be used to derive patterns of almost all other business patterns? These would be prime patterns, they would be highly abstract. But indeed any pattern would be a interplay of these patterns in the environment.

After thinking for a while, I have stumbled upon an answer. For the most part, I am convinced that whatever a business does, you can analyze it in terms of these two patterns.

These two patterns are Risk Distribution and Value Concentration.

Risk distribution is simpler to understand. Imagine an insurance business. They take money from everyone for say fire insurance. Not all people have their house burned down. So insurance company pays whosoever is in trouble and gets to keep the rest of the money. They rely heavily on statistics to charge enough premium to make enough money for their own.

Value concentration is somewhat more abstract. For an example, iPhone or iPad. Steve Jobs created a great product, rather created an ecosystem where a lot of value could be concentrated in one device with simple user interface. You can use iPad to book flights, check your bank balance, watch movies, and so on.

In a typical restaurant business, they create good food, that is value concentration. Also they make this food available consistently, at a particular place at a decided time. Thus they take away risk of a patron not finding the food when they want.

Part of the restaurant food cost is to cover material and labor costs, which is value concentration cost. They have to pay chefs, they have to pay waiters, who provide actual food and service.

But part of the cost is to cover uncertainty, which is the biggest challenge in any retail business. One day they get 100 customers and next day the restaurant sits around empty. So their markup is just to cover running business on those days. So basically they help patron mitigate the risk of “not finding the food at  predictable time and place” and in turn charge them a little extra.

Same way airlines deal with scheduling uncertainty, for which they charge you schedule change fees etc. and give you discount to book your ticket in advance. Partly they charge you for value, actual fuel and pilot costs.

Perhaps these two are yin and yang of business world. Covering your risk as well as going forward, capturing value in life, an adventure, new horizons.


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