Thursday, November 20, 2014

Reading :: Value Migration

Value Migration: How to Think Several Moves Ahead of the Competition
By Adrian J. Slywotzky

Suppose you're an entrepreneur who has just come up with The Next Big Thing. Maybe you have followed blue ocean strategy and discovered a new market to exploit, one that has no competition. Nice work! It's as if you're printing money.

But over time, others see that you have a good thing, and they start competing in the same space. Competition means that your margins become thinner and you have to work harder for each customer. More than that, others are innovating too, because your "new" business model has become established. "Value migrates from outmoded business designs to new ones that are better able to satisfy customers' most important priorities" (p.4).

What do you do?

In this 1996 book, the author discusses value migration. "A business design can exist in only one of three states with respect to Value Migration: value inflow, stability, or value outflow" (p.6). This progression has existed for a while, but "Sometime in the 1980s, the game changed, the pace quickened" (p.8). The "new game of business," Slywotzky says, is founded on a different set of assumptions: not revenue but profit; not share of market but share of market value; not product power but customer power; not technology but business design (p.11). So the new task is to locate value and predict where it will move—toward new activities, skills, and business designs (p.12).

To help you locate value and predict where it will move, Slywotzky provides four heuristics aimed at helping you to map changing customer priorities; identify new business designs; compare business designs; and build new business designs to capture value growth (p.84). Much of the book focuses on how to work through these heuristics, and it illustrates the heuristics with 1996-era case studies.

But it also points out other changes. For instance, Slywotzky argues that "in the age of manufacturing, the sales force was the dominant go-to-market mechanism"; if you wanted to sell something, you would rely on a large, disciplined sales force (p.208). But "in the age of distribution, value has shifted to low-cost distribution and high-end solutions" (p.208): the traditional sales force is bypassed, and enterprises either go to low-cost distribution models (Dell's direct-to-customer model as well as bulk sales such as Costco) or high-end solutions (EDS' and Hewlett-Packard's senior-level selling).

Slywotzky closes by arguing that the relative power of customers influences the direction in which value will flow: a unique product gives the balance of power to the supplier, while a pure commodity gives it to the customer (p.253).

In all, I found this to be an illuminating book. The examples are now almost two decades out of date, but the fundamentals are solid and we can easily apply the lessons to modern cases. If you're interested in business model design or value, take a look.

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