Laraine Spector

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Companies Contending With Value Migration: Some Examples

Hardly an industry or a company has escaped the effects of value migration. Some companies have warded it off by transitioning to a more effective business design, but more haven’t been able to do so and most have lost the value they’ve created. No doubt, the transportation industry offers one of the most obvious examples of the phenomenon. In the 1920s, Ford Motor Company experienced a value outflow from its vertically-integrated, single-car-oriented business design [the black model T) as value shifted to GM, whose price-laddered, multi-optioned business design proved superior in meeting customers’ needs and priorities (Slywotzky). An equally compelling example is the railroad industry in the late 19th and early 20th centuries, whose major shortcoming was its failure to understand that its business design possessed only limited value creation potential and that its ability to meet changing customer priorities—for speed, time and location flexibility, and pricing—would be seriously challenged. And it wasn’t intra-industry competition from more competitive incumbents that doomed it but, rather, competition from new entrants and non-traditional competitors—automobiles, trucks, and airplanes—who showed greater sensitivity to emerging customer priorities and greater ability to craft satisfying business designs (Slywotzky). Where will the next threat to the industry come from? To which competitors will value migrate?

In retailing, the winners and losers have been particularly conspicuous. Perhaps no company benefited more from value migration than Wal-Mart, the world’s largest and most profitable retail company (Yoffee and St. George). With net revenues of over $200 billion in 2004, it’s hard to believe the retail giant was only founded in 1962 or that its origins were extremely humble and nontraditional (Bradley, Ghemawat, and Foley). Competing in the burgeoning discount retail segment, Wal-Mart profited from the shortcomings of both the more traditional retailers who dominated the retail scene in the 1950s and 1960s and those of emergent discounters.

No doubt, the failure of those traditional retailers—the Macy’s, Marshall Field’s, and May’s at the high end and the Sears, Montgomery Wards, and JC Penney at the middle and lower ends—to perceive or act upon evolving consumer demands or changing demographic patterns enabled new competitors, including Wal-Mart, to offer business designs that exploited hitherto unmet needs of a number of unserved market segments. Wal-Mart’s strategy, for example, was to locate its stores in areas ignored by everyone else (Bradley, Ghemawat, and Foley). As such, it triggered a value-migration shift by capitalizing on meeting the priorities of this neglected segment—especially, for greater selection and lower prices for branded staples.

Other retailers also benefited from the value outflow from more traditional competitors. These included specialty stores, ‘category killers,’ and superstores that responded to changing consumer demands by innovating on such things as depth or breadth of their offerings. Thus, stores like Best Buy, Home Depot, and Toys ‘R Us offered “time-pressed consumers better prices, greater service expertise, and a virtual guarantee they would leave the store with a product they wanted” (Slywotzky). Sadly, beyond incumbents’ failure to respond to customers’ changing needs more effectively, they were also hampered by their inability to detect and block the new entrants or, more preferably, to lay claim to the new value space for themselves.

For the computer industry, the story is much the same. Giants such as IBM and DEC lost over $50 billion in market value from 1984-1994 while newcomers Microsoft, Intel, EDS, and Novell gained over $80 billion, thus resulting in a rapid and dramatic reallocation of value in the industry (Slywotzky). In effect, IBM and DEC experienced value outflow as customers’ preferences reallocated value toward business designs associated with things that matter to customers—namely, elements of computing functionality such as high-speed processor chips, multi-functional communications, and systems integration--and away from those associated with outmoded business designs—based on proprietary software and minicomputers (Slywotzky). IBM’s response was to change the way it did business—its business design. Among others things, it purchased Lotus and Lotus notes, refocused from a hard- ware orientation to one centered on software, personal computing, and consulting. What IBM changed was not simply its technology, but how it organized itself, how it configured its resources, how it fashioned its approach to the customer, and how it conceptualized the competitive environment (Slywotzky).

A final example is drawn from the telecommunications industry. No industry better exemplifies Levitt’s “growth industry” concept than telecommunications. And, clearly, the industry’s titan was Lucent Technologies. Unfortunately, reflecting the industry’s unexpected and unparalleled collapse in 2002, Lucent’s revenues decreased 72 percent from their peak of $30.6 billion in 1999 to $8.5 billion in 2003. Its business, once a cornerstone of the American industrial landscape, has declined as customers shift to new value paradigms—from Lucent’s large switching-station technology to pizza-box sized routers offered by competitors such as Cisco as well as other new entrants that have introduced innovative and next-generation technologies (Belson, 2004).

Indeed, over the past five years, Lucent’s competitive environment has changed dramatically: for decades, phone calls, data, and video traveled over wire lines, and Lucent made the switches and other equipment that sent those signals around the world. However, the new Internet-based technology and other innovations allow all content to travel over unified digital networks. This shift demands new hardware as well as new approaches to the way data is dispersed, organized, and stored--something Lucent’s rivals understand very well. The latter--Cisco and Nortel Networks, among others—have the upper hand in this new world. To survive, Lucent has had to form partnerships with its competitors. It has also made a substantial effort to develop next generation high-speed data services for networks—something that has paid off. Indeed, in March 2004, Verizon Wireless awarded Lucent a $525 million contract to develop the carrier’s third generation, or 3G, mobile network. Though pulled back from the brink, Lucent is still struggling for survival and hoping demand for the technology it is developing grows faster than the decline in its traditional businesses (Belson).

And, finally…

Value migration is initiated when a critical mass of customers make choices based on their priorities, creating value and opportunities for the businesses from which they buy and shifting value from those whose business designs are outmoded and thus deemed to offer lower utility. The process, which can affect an entire industry, a company, or only specific divisions of a company, is inevitable as companies’ business designs go through cycles that culminate in economic obsolescence. However, it is controllable if companies maintain a customer focus and pay careful attention to the trajectory of changing customer priorities and their impact on the viability of their business designs. Recognition that customers drive the process and that the competitive field must be envisioned broadly enough to uncover and respond to threats from all competitors--traditional and non-traditional, incumbents as well as new entrants--is critical to a company’s survival. This stance should enable a company to structure a defensive response but, more importantly, an offensive with the potential to create major value-growth opportunities. Ultimately, every company should have its eyes focused on creating the next viable business design. Figure 1 summarizes the keys to mastering value migration.

Figure 1 How to Master Value Migration

• Recognize that business designs go through cycles from growth through decline
• Understand that customers drive Value Migration—know their needs and priorities
• Broaden your company’s competitive field of vision to include direct as well as indirect competitors
• Identify competing business designs, assessing their customer appeal and profit potential
• Know the conditions that create opportunities for new, innovative entrants
• Scan the marketplace to identify all companies positioned to act on changing customer priorities
• Always keep focused on the next viable business design-- don’t get stuck on the past!

References

• Belson, Ken (2004), “Lucent is Pulled Back from the Brink,” The New York Times,” (May 20), Section C, 1-2.
• Bradley, Stephen, Ghemawhat, Pankaj, and Foley, Sharon (1996), “Wal*Mart Stores, Inc.,” Harvard Business School (August 6), 1-21.
• Levitt, Theodore (1975), “Marketing Myopia,” HBR (September 1), 2-14.
• Levitt, Theodore (1983), The Marketing Imagination. New York: The Free Press.
• Slywotzky, Adrian (1994), Value Migration: How to Think Several Moves Ahead of the Competition. Boston, MA: Harvard Business School Press.
• Yoffie, David B. and St. George, Anthony (1998), “Wal-Mart, 1997,” Harvard Business School (November 13), 1-5.