Value Migration by Adrian Slywotzky
Adrian Slywotzky is not as well known as Clayton Christensen or Geoffrey Moore, but has written about many of the same topics: business model design, disruptive innovation, and business/industry life cycles. He focuses on identifying business model patterns and learning when to apply each type. In this book, he looks at the way that value migrates between companies as markets grow, stabilize, and decline.
He has written nine books including Profit Patterns which is essentially a business model catalog and contains several of the patterns he describes in Value Migration. Like Product Strategy for High Technology Companies, Value Migration was written in the mid-nineties and represents a pre-Internet viewpoint. It’s interesting to see business cycles repeat themselves and look back at previously successful companies who are no longer on the scene.
It is widely acknowledged that products go through cycles, from growth through obsolescence. It is not as well recognized that business designs also go through cycles and reach economic obsolescence.
There are many explanations for why some businesses are successful and others are not. Slywotzky says that business design provides both the competitive advantage and the means to capture value from new market opportunities. He presents business designs in the context of growing, stable, and declining phases. Understanding which phase your business design is in is an important indicator for renewal. Slywotzky provides a high level framework for identifying and capitalizing on value migration, but the best part of this book are his many in-depth examples. His signature style is “profit patterns”–for him, the key to early detection of opportunities are a deep understanding of your cusotmers, a “hypersensitive competitive radar” and “a rich vocabulary of value migration patterns from other industries.”
In the value inflow phase, keeping up with demand makes it hard to even consider the need for change. For those organizations in the stability phase, past success clouds clarity of vision. In value outflow, stemming losses supercedes all other activities.
The core of this book is the idea that new business models can lead to industry disruption and that it’s possible to design and be aware of these changes as they occur. Value migration occurs when customer needs change or a new business design begins to encroach on an existing configuration of providers. Businesses which previously enjoyed a leadership position are now caught in an outflow of value and declining revenue and customer bases. This book portrays a variety of disruptive patterns which result in the ousting of formerly successful business designs. Slywotzky focuses on how business designs (business models) can adapt to changing customer needs and create new demand. He say that creation of new technologies is no longer required for growth, nor is it necessarily the best path.
In the age of business design, success depends on the speed and skill with which competitors understand these designs and improve and adapt them to their particular customers.
Each author who writes about business models has a slightly different definition for what comprises a business model. Here’s what Slywotzky says it takes to construct a business design. Changes to a single element may be sufficient to upend an existing dominant design.
- Fundamental assumptions about your customers’ priorities, how they are changing, and what drives profit in your business
- Which customers you choose to serve
- The scope of services you will provide and how (in-house or outsourced)
- Your points of differentiation
- How you capture value from your customers and compensate your shareholders
- Purchasing strategy (transactional/long term, competitive/partnership)
- Manufacturing/Operating model
- Capital intensity
- R&D/Product Development strategy (in-house or outsourced)
- Organizational model
- Go To Market mechanism
Slywotzky devotes one chapter to tips for expanding your competitive field which he calls moving “from tunnel vision to radar screen”. He points out that many incumbent businesses were caught unaware or unprepared by new competitors because they defined their competitive set too narrowly and failed to see how apparently unrelated business designs were on a intercept course with their own. He cites many examples of industry leaders being toppled by what initially appeared to be “fringe” competitors who were actually business designs that fit with new customer needs. Much of the advice Slywotzky offers in this book boils down to: identify your business model assumptions and look far afield for alternative models that will one day usurp your position.
Be more demanding of the business plans you examine. If you aren’t reading a lot of new business plans, that’s a warning signal in itself.
Slywotzky identifies seven key business model patterns “every manager should know” and uses an in-depth industry case study to illustrate each. A key success factor for anticipating value migration is learning to spot common patterns and take advantage of them. Of course, predictive power is the Holy Grail of business, but Slywotzky does have a valid point: we can learn from past patterns. Chances are they will occur again. Businesses tend to put the blinders on and don’t take a step back to evaluate their business design in relation to the lifecycle and evolution of their industries. This stance prevents them from taking advantage of the natural cycle of growth, stability, and decline.
Multi-Directional Migration: Here, Slywotzky uses the integrated steel mill to mini-mill case study that Clayton Christensen describes in the The Innovator’s Dilemma. Slywotzky gives a breakdown of the business model design elements that helped the mini-mills disrupt established integrated steel mills. In this example, value migrated from large, integrated mills, to low-cost foreign mills, aluminum producers, plastic manufacturers, and mini-mills.
Migration to No-Profit Industry:The example in this case is the airline industry which, after deregulation in 1978, has experienced a heavy value outflow due to increased price sensitivity and intense competition.
Blockbuster Migration: The pharmaceutical industry represents the blockbuster business design due to its need to recoup large R&D expenditures through winning products. Slywotzky notes that initially pharmaceutical companies operated by the “serendipitous discovery” model where success relied on what seemed to be unpredictable discoveries. As in the case of airlines, regulation played a key role in the change from serendipity to blockbuster products developed through a lengthy testing and federal approval process before being brought to market with long-term patent protection.
Multi-Category Migration:Slywotzky documents the tremendous changes in the coffee industry to illustrate an example of a stagnant, commodity market being re-invigorated by new business designs (gourmet coffee roasters, coffee shops).
From Integration to Specialization: An interesting example of this type of migration is the computing industry which evolved from highly integrated providers in its early days to a wide field of specialists which provide various technology layers. This book was written before Apple’s massive resurgence and market dominating transformations, so Slywotzky may well reverse his story on this one.
From Conventional Selling to Low-Cost Distribution: This pattern involves a move from a high-cost, traditional, direct sales force to any distribution method that is lower cost, closer to the customer, and more flexible. Dell, Walmart, and Charles Schwab are Slywotzky’s examples here.
From Conventional Selling to High-End Solutions: Here, value migrates in the opposite direction from the previous pattern: from a direct sales force selling products to a professional services oriented sales effort selling complex solutions. This is analogous to Geoffrey Moore’s volume-operations and complex-systems business architectures. To illustrate this pattern, Slywotzky describes how HP moved from a traditional sales model to a Global Account Management approach which provided their customers with high-value, high-touch solutions.
In addition to giving detailed case studies for the seven patterns, Slywotzky provides some questions to aid awareness of value migration occurring in your industry. For example:
- Who is the customer? Are decision makers and influencers changing?
- How many distinct new business designs have been introduced in your industry in the past five years?
- Identify the value migration event(s) that enabled your company to establish your present position. Who are your defeated incumbents?
- Hypothesize a date at which your current business design will be obsolete and why.
- Compare your [business model] to that of competitors: traditional, newcomers, and non-traditionals. Whose economic logic is more compelling?
Although Slywotzky wrote in 1996 “there is no organization box labeled ‘business design’…There are no individuals with training in ‘business design’” there is today a strong movement to educate leaders and entrepreneurs about business model patterns and design. Alex Osterwalder’s Business Model Generation is at the forefront of teaching techniques for breaking apart current business models and inventing new ones. Open Business Models by Henry Chesbrough is another popular book which discusses approaches to designing business models which take advantage of recent trends toward openness and collaboration.
In this video, Slywotzky talks about why business model design is essential to taking advantage of value migration within markets. He defines a business model as: who are my customers?, why do they buy from me?, what’s my unique value proposition?, how do I make money?, what’s my source of strategic control to protect my profit model?, and what’s my scope?