Value Migration:

 Value Migration is the shifting of value creating forces.  Value Migration is to move from outmoded business models to newer business designs that are better able to satisfy customer needs.

Products go through cycles from growth to obsolescence.  Many are unaware that business designs also go through cycles and reach economic obsolescence.  Customer priorities have a natural tendency to change; when the mechanism that matches customer priorities breaks down, value migration begins to take place.

A business design is the entire system of delivery utility to customers and earning profits from that activity.  A company’s product or service is embedded in a comprehensive system of activities and relationships which is the company’s business design.

Three types of Value Migration:

• Value flows between industries. (example: from airline to entertainment).
• Value flows between companies. (example. Coral WordPerfect to Microsoft).
• Value flows between business design within a company.(example: IBM mainframe to IBM PC with system integration)

Three steps of Value Migration: 

• Value inflow stage:  Value is absorbed from other companies and industries.
• Value stability stage:  Competitive equilibrium with stable market shares and stable profit margin.
• Value outflow stage: Companies lose value to other parts of the industry – reduced profit margins – loss of market share – outflow of talents and other resources.

The calculation of value migration is very difficult.  Value is perceived by customers, and hence is subjective. Relative market value is defined as capitalization divided by annual revenue.  It is used as an indication of company’s success at creating value.

Several factors are emerging as reasons for value migration:-

• Customers becoming more sophisticated,
• Expanded competition,
• Advances in technology,
• Reducing barriers to industry entry ( example: outsourcing)
• Customers access to information,
• Easy access to capital and cash flow.

The top management must be aware of the direction and velocity of Value Migration in the industry. Managers must question themselves –

• where in my industry can I make profit?
• how is that changing?
• what is driving that change?
• what my company can do about it?

The ability to measure the relative power of business design provides an understanding the direction and velocity of Value Migration.  This helps in knowing the economic power of the business design changes.

Questions:

• What do you understand by Value Migration?
• What are the 3 types and 3 steps of Value Migration?