Laraine Spector

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At least since the mid-1960s, conventional wisdom has held that corporate success requires a customer focus. More recently, it’s become clear that value migrates from companies that fail to understand the changing patterns of customers’ wants, needs, and willingness to pay and migrates toward others that possess superiority in satisfying those changing priorities. A critical challenge most companies face is combating institutional memory, which can impede the latter’s ability to recognize and respond to those changing customer priorities.

Like Marcel Proust, whose reverence for the past is legendary, many companies focus too narrowly on their past patterns of success. And, regrettably, these companies ignore changing customer needs and priorities while institutionalizing norms and values that end up dominating the organization’s mind-set and culture. Ultimately, they lose sight of their customers—who move from center stage to the periphery--and, even, lose them to competitors who are better able to satisfy the changing patterns of customer needs, wants, and willingness to pay (Slywotzky, 1994). Value migration, as this process is called, arises from a company’s inability to understand that just as products experience a lifecycle extending from growth to obsolescence so, too, do business designs—i.e., the activities in which businesses engage and the relationships they cultivate in order to deliver utility to customers and earn profits. What happens to a company when its business design reaches economic obsolescence? In brief, customers move, staff moves, and value migrates from these companies and toward others that are better designed to maximize customer utility and company profits (Slywotzky).

Antecedents

The phenomenon of value migration is hardly new. In the early 1990s, Adrian Slywotzky, the guru of “value migration” brilliantly fleshed out the economic conditions for, and implications of, value migration and a number of works dating back to the 1960s have also made significant contributions to this area. Among the most important of these was Theodore Levitt’s ground-breaking, 1960 article, “Marketing Myopia,” which challenged then-traditional thinking about the process of organizational obsolescence. In that work and in a 1975 retrospective commentary of the original, Levitt argues that in order to take advantage of growth opportunities and ensure continued growth, organizations must define their industries—i.e., purposes—broadly (Levitt, 1975). To support his case, he charges that by focusing narrowly on the railroad business instead of more broadly on the transportation business, the railroads hastened their own decline. The real stumbling block, he argues, was that the industry was product-oriented when it should have been customer-oriented. This engendered a myopic view of the true nature of their business, leaving the railroads incapable of taking advantage of opportunities for growth (Levitt, 1975).

Levitt also takes aim at so-called growth industries, vigorously denying their existence. Marshalling a variety of examples--the above-mentioned railroads, dry cleaners, grocery stores, the U.S. automobile industry, computers, the film industry, among others—he ominously warns that “industries that assume themselves to be riding some automatic growth escalator invariably descend into stagnation” (Levitt, 1975). How can companies ward off decline and extend growth? According to Levitt, by ascertaining their customers’ needs and desires and, above all, by focusing their actions on helping customers solve their problems (Levitt, 1983). Customers, he contends, buy solutions to problems, they don’t buy things. To continue growing, therefore, companies must be “customer-creating,” “customer-satisfying organisms;” that is, they must do the things that induce people to do business with them (Levitt, 1975).

The Value Migration Perspective

Fast-forward to the mid-1990s where we find many of Levitt’s key concepts have been reworked and refined by Slywotsky. Like Levitt, Slywotzky emphasizes the importance of a customer orientation to a company’s success. However, Slywotzky’s perspective is more technical, more focused on the financial and managerial aspects of economic obsolescence. His concern is with process—the process whereby changing customer needs and priorities influence their product/service choices, resulting in the development of potential value for certain businesses from which they buy and, eventually, the reallocation of value to various business designs (Slywotzky, 1994). Describing the ongoing impact of changing customer priorities, Slywotzky posits the following scenario:

As customers’ priorities change and new designs present customers with new options, they make new choices. They reallocate value. These changing priorities, and the way in which they interact with new competitors’ offerings, are what trigger, enable, or facilitate the Value Migration process (Slywotzky).

Fending Off Value Migration

The value migration process is complex and avoiding or, even, reversing it requires that companies act decisively to implement more effective business designs. To meet the challenges value migration presents, management must understand both the direction and velocity of change in their industry. It must determine which business design elements will be most important in the future and which competitors will present the greatest threats (Slywotzky). More importantly, it must recognize that the key to value migration is the customer, who drives the entire process. For that reason, it is critical that companies understand the customer’s decision-making system and his/her resulting priorities. Knowledge of the latter will determine the business design that maximizes customer utility and profit for the provider (Slywotzky).

Not surprisingly, value migration has its winners as well as its losers. The losers—those from whom value shifts as customers’ priorities change—become economically vulnerable as value moves toward new business designs whose superiority in satisfying customer priorities makes profit realizable. The winners--new companies and newly-created competitors that satisfy a specific customer priority better than incumbents or that are more effective at reaching unserved segments—benefit and flourish from the newly-created opportunities. However, value migration can be controlled if management can distinguish its basic patterns, identify threats to the current business designs, and initiate actions that enable it to benefit from the next cycle of value growth, thus creating the next viable business design (Slywotzky).