The Book Value Migration: How to Think Several Moves Ahead of the Competition written by Adrian J Slywotzky is an interesting take on Business strategy. Though it was first written in 1995 and includes slightly dated examples from the US Markets I believe the concepts may very well hold true even in today’s AI and technology age. Value migration beautifully explains how Business designs go through cycles and how customer priorities change over time. Business design doesn’t depend on size of the company. At times smaller firms with innovative Business designs have surprised the traditional established players. 

The Book mentions three phases of Business Design: 

Value Inflow: Superior business economics and power to satisfy the changing customer needs lead to value inflow for any organization. 

Stability: While companies are able to match the customer priorities. The length of this phase may vary depending on ever evolving customer preferences.

Value outflow: Value flows out of traditional business designs if they do not adapt to the changing business environment. As industries evolve only companies which are able to match changing customer priorities attract value inflow.

If we relate the concepts from this book to current context we may be able to find and relate many  disruptions done by new business designs e.g Food Delivery to Home services to Payments, Investments, Airline, Telecom etc…

Value migration can happen from multiple reasons, manufacturing, marketing, sales, specific R&D from Products etc. I can think of examples like..

• Traditional Mom and Pop stores to large departmental stores
• Traditional Taxi on hire to Online cab apps

The undermentioned line in the Book very well captures this: 

“It’s not that the value disappears, but that it moves—rapidly at times—toward new activities and skills and toward new business designs whose superiority in meeting customer priorities makes profit possible. In some cases, customers are the only beneficiaries of Value Migration because the industry’s current business designs offer customers high utility but fail to recapture any of that utility in the form of pricing and profits.”

The learning is that it is extremely important to understand what the customers need and what they are willing to pay for. Also it is equally important to assess how are the existing business designs equipped to handle these changing customer priorities. In a nutshell changing customer priorities can trigger value migration. 

The author cites changes in computer industry as a very powerful example of Value migration (proprietary mainframes & minicomputer systems to workstations and PC’s). This has further evolved in current context with evolution of processors, chips and operating systems. The way I comprehend this: as technology evolved and miniaturization of chips happened the dependency on systems increased hence leading to constant innovation on technology front.. This continues even till date and has moved from personal computers to mobiles, laptops, tablets etc…

Knowing the customer: It is helpful if a manufacturer  / service provider knows much more about a customer’s business than the customer himself. Understanding the customers decision making patterns can help anticipate value migration. 

Technology can create value till it remains scare. Imitation of technology leads to value outflow and hence the necessity of constant innovation. Eg.. While Xerox, Sony Betamax VCR failed Walmart, Intel thrived and grew. 

An Organization has to define its scope, customers and boundaries and excel in its offerings. Some examples in the book used to explain this.

• United and Southwest airlines. While United preferred to have a national scope, Southwest preferred to be regional and low cost. 
• How Ray Kroc redesigned the manufacturing / operations and logistics for Mc Donalds to transform the fast-food chain depicts how competitive advantage can be created by redesigning the operational framework and create value. And it was not just the technology but aligning the relationships between suppliers and franchisees that created the difference. 

Organizations need to keep identifying break points in the value cycle and questioning their existing assumptions on changing customer priorities. The Book compares this with a Business Chess where value migration will create winners and losers. In this process organizations need to rework on their business designs and make transitions. 

Knowing the competitors and industry is important to expand from a Tunnel vision to Radar screen. Hence expanding the competitive field becomes important and often competitive moves through changing business designs can trigger value migration. The author beautifully cities the eg of how traditional cable TV Industry was challenged by the on demand video leading to value migration. In the current context I can think of how OTT platforms have disrupted many traditional forms of entertainment. From an Indian context I can relate this concept to Auto Industry (Japanese & Korean vs American Automakers), Airline Industry.

Migrate to No profit zone: In the quest to create value how Industries can migrate to a no profit zone is explained in detail through the case of Airline Industry in US. The book details about how Airline Industry in US scaled up and how business designs evolved from full service to low cost. 

• What led to growth of Southwest Airlines as they pioneered the low cost airline segment while building on scalable and profitable routes. 
• How Peoples Express scaled up to become one of the fastest growing airlines and eventually failed in an effort to grow too fast.  
• How full service airlines kept on losing money as air travel became a commodity over the years.

The Case of Airline Industry mentions a very Interesting line in the lessons learnt “Finally, when customers indicate a product or service is a commodity, even a successful business design will be profitable only as long as it presents a unique choice.”

Multidirectional migration needs to be addressed to prevent Value migration. Eg:  

• Shift from steel to alternate materials (plastic, aluminium etc) in Auto Industry very nicely depicts the same. After oil crisis in 1973 customer priorities changed towards fuel efficient cars. Plastics and other low cost materials were an alternate and hence suppliers (like GE Plastics) who were early to spot these trends and started providing solutions to Auto companies witnessed strong value inflow in the changing cycle. With changing customer patterns Auto makers were no longer the sole decision makers. OEM’s providing relevant solutions had a strong say in the entire value chain..
• The Coffee Experience: When coffee was perceived a profitless commodity Starbucks revolutionized the whole café model by creating the coffee experience. Howard Schultz’s innovative business design was not only providing the customer experience but also focussed on employee welfare at Starbucks.  While Starbucks was leading in café opening Boyer Brothers a seller of gourmet coffee bean scaled up parallelly by putting up whole bean coffee dispensers and later on through acquisitions however it could never come up close with the business design of Starbucks.  The detailed analysis of how value migration happened in coffee industry is worth a read in understanding how small facets of business can revolutionize the entire industry. Where traditional coffee roaster got it wrong and where Starbucks got it right along with close competition from Boyer Brothers.  

Evolution of Low cost model. As information becomes more readily available and accessible customer knowledge scales up. This reduces the need for traditional direct sales model and shifts the preference towards low cost distribution. For high end product it becomes more of a solution oriented approach. The examples of Walmart and Aldi explain this well. As customers become busy with work and evolved in knowledge their shopping time started coming down. This led Walmart to start huge stores as a one stop shop eventually turning out to be a  massive success story. 

Solution oriented approach for high end products: With evolving Technology, regulations, globalization customer priorities are also changing. This also increases the challenges for customers to navigate the evolving Business environment. Hence it is critical to change the approach for high end products. Eg of HP explains this very well. HP redesigned its approach from selling based to solution based. Customer relationship levels were scaled up from sales agents to senior management interactions. Even the then HP CEO Lew Platt was personally responsible for discussions with large clients of HP in order to strengthen the client relationship.    

Anticipating value migration is a key element in value creation and hence becomes critical to detect in time. While it is difficult to detect early the book mentions the undermentioned points to keep in mind: 

• Understanding your customers: As customers create wealth and evolve so do their priorities.
• Expanding the competitive field of vision: While monitoring traditional competitors is important it is equally critical to keep an eye on new product innovations and new competitors. Eg: 
  • Entry of Japanese Automakers posed a strong competition for traditional US automakers. 
  • Retailing: Walmart, Kmart, Target became serious value migrators for Sears, JC Penny. 
• Applying strategic pattern recognition: While premium coffee chains were losing out in America in the 1980’s Howard Schultz created Starbucks making coffee an affordable luxury. From store design to choosing the best coffee to customer experience and training of Baristas everything put together was a strong proposition for value migration. Not only was the Coffee and training outstanding the HR policies of caring for employees was a strong value proposition for satisfied employees and created a strong growth engine.     

Concept of Institutional Memory: While creating value it is essential to keep monitoring the early signs of value migration in Industry. Sticking to assumptions and conventional wisdoms can be disastrous and is referred to as Institutional memory. I liked how it was illustrated by referring to: 

• Jack Welch: A well respected leader who never stuck to one single belief of past and led GE to become a global giant with multiple lines of business. 
• Andy Grove: How he led to change in business design for Intel to move from DRAM memory chips to microprocessors and navigate the changing customer priorities. 

Develop culture and process to combat the institutional memory: Well-illustrated by eg of global conglomerate 3M comparing it to a virtual start up. At 3M employees are motivated to spend 15 percent time on innovation and independent projects. Also the organization aims at generating 25 percent of its revenues from products innovated in the last 5 years.    

Value Migration should not only protect the existing Business but also look at upgrading the Business design considering the future. Considering shortening of Business cycles it is important to be visionary and future proof for survival and growth. Large revenue stream my not suffice with evolution. Value creation needs to be looked at from all angles by asking the right questions. 

• Good product without the right go to market strategy may not succeed. 
• Low price strategy without low costs may fail. 

Profit Generation: It is extremely important to see that strategic business design should focus on generation of profit  while doing a value recapture. The book argues undermentioned points based on the real life examples: 

• Bring Customer directly in design process
• Use Models and precedents from other industries: While innovation is important it is also critical to look at how other product lines ca help create value. Well explained through eg of GE and Disney. 
  • How Disney leveraged the concept by expanding beyond their parks to other lines of business and recaptured value
  • Unlike Disney, the Coca Cola example is a stark difference where it couldn’t capitalize on certain new Business lines. 
• Acquire new competencies 
• Protect existing Business design: Well explained through the Toyota (launch of Lexus) and Honda (launch of Acura) cases. 

While Value recapture is critical it is essential to Protect existing business design and Limit Value outflow. Hence as evolution happens Innovation becomes needs of the hour along with focus on costs. It is important to keep evaluating and weeding out redundant and cost inefficient functions and units. Well explain through the example of how P&G partnered with Walmart to balance of power started moving from manufacturers to retailers.

Towards the end the book describes how Five moves (or fewer) are needed to capture the Industry value. The comparison is akin to business chess where moves can lead to loss or victory. The book mentions multiple examples quoting IBM, Intel, Ford etc.. Some quoted examples in the book which I liked: 

GE: How GE identified the need to create GE Capital when their products entered “I don’t care” zone.  

Microsoft: How Bill Gates focused on ease of use and applications to scale up Windows as one of the most widely used operating systems. 

Every move may not be perfect but Industry Leaders also learn from their mistakes. Best of the organizations make mistakes but as long as there is a positive resolution to the mistakes it leads to meaningful value creation and scale up. Well explained through example of how certain formats of Walmart didn’t work but Sam Walton ensured to take learnings from the errors and work the way up.  

To understand the concepts in detail I would strongly recommend reading this book. It’s a fantastic read for Sales, Strategy and business enthusiasts. The book clarifies concepts with several real-life examples which are helpful in refining the thought process. The examples may seem dated but to may understanding these concepts can be very well related to many companies which have navigated and grown across the timeline from the time this book was written till date.