The Stock Market: Value Migration

There are major disruptions in the Indian economy. Demonetization of high-value currency notes, GST amendments, Make in India initiatives, and the shift from offline to online constitute the next era of India’s development. Business models that are better able to meet customer priorities may emerge because of imminent shifts in the economic landscape. The aim of this thematic article, VALUE MIGRATION, is to attempt to synthesize all these points in order to better understand possible investment opportunities that may arise from the churn. To paraphrase Shakespeare, let us take advantage of the tide while it is rising.

Successful investments require the selection of winning business models

Outperforming the stock market with investments is the holy grail of investment managers. As passive investing gains in popularity, outperforming has become harder to achieve. An investment manager’s success is the result of a complex interaction of elements – including research, discipline, patience, and emotional quotient. A variety of approaches has produced success. Picking a winning business model is what all approaches have in common. It is our belief that selecting a winning industry and then picking a winner in that industry will result in successful investing. As part of the VALUE MIGRATION framework, this report aims to highlight the disproportionate returns generated by different business models and identify several potential winners.

Value migration – what is it?

Adrian Slywotzky published Value Migration – How to Think Several Moves Ahead of the Competition in 1966, which is considered the first book to introduce the Value Migration theory. The concept of value migration is the process of shifting value-creating forces from outdated business models to models that better meet consumer demands.

Customer priorities are sometimes out of sync with existing business models, resulting in value migration. In addition to being a universal concept, it has been shown to explain the success or failure of business trends in different markets. The priorities of customers change at a fast pace. Organizations that recognize this and take proactive measures to end up on the right side of the equation with their customers.   

How to understand value migration?

The concept of value migration in marketing refers to the transfer of economic value from outdated business models to models more responsive to consumer needs.

Flows of value are characterized by three factors:

Industry-to-industry  Inflight entertainment (IFE) is an example of how an airline industry can depend on the entertainment industry. Airlines have taken over the role of rail as the most affordable means of transport in India.

Company-to-company  During the course of processing, photographers are able to transfer value from Adobe Lightroom to Adobe Photoshop.

Internal business design – A common example is a transition from IBM mainframe computers to IBM PCs through systems integration. Telecommunication service providers have also witnessed value migration from voice to data in recent decades.

Slywotzky argued that value is formed by evaluating factors that are constantly changing rather than satisfying the end-user, which is what every organization seeks to do. Thus, the business that anticipates value migration ahead of time will have a competitive advantage.

Value migration has three phases:

There are three distinct stages of value migration:

  • The inflow of valueAn industry or company captures value in the first stage with the help of a superior value proposition from another industry or company. This increases the entity’s market share or profit margin.
  • Steady Growth Rates of growth moderate as competition settles. Both margins and market share continue to remain stable.
  • The outflow of value As consumers become more demanding, value begins to make its way toward companies meeting those needs. The company or industry originally associated with the decline is experiencing declining market share and contracting margins and seeing a reversal in growth.

Business models that win can be picked based on the Value Migration framework

Value Migration is underway in several industries in India, as demonstrated by different case studies. The Value Migration strategy has brought consistent stock returns to a number of businesses. Value Migration has led to significant underperformance for companies that find themselves on the wrong side of the equation. The case studies in this report examine the Indian investment landscape in Banking, Auto, Consumer, Metals, Pharma, Logistics, Telecom, Transportation, Capital Goods, and Information Technology. Value Migration delivers consistent business outperformance as demonstrated in these case studies. In addition, several potential extended benefits are mentioned.

The early identification of value migration can make a company competitive. This was mentioned in the introduction.

A variety of factors can contribute to this:

  • Analyzing the customer  Have there been any noticeable shifts in the type of customer you are targeting? Do regulations, increased purchasing power, or technological innovation affect customer priorities? If so, are customers increasingly powerful and discerning?
  • Business Model Understanding An organization needs to understand how flexible its business model is. How does it meet the needs of different customers? Can it provide value to the organization and the customer, both at the same time? Can it become outdated in the near future?
  • Compromising – How can businesses avoid becoming commodities by reducing the value of their goods and services? A good place to start is to build a strong brand and avoid heavy, bulk discounting. Product commoditization results from rigid, undifferentiated business models. In this case, the business needs to revitalize its product offering and deliver higher value to its customers.

Conclusion

  • Migration of value refers to the process of moving from outdated business models to ones better suited to meet consumer demands.
  • A value migration arises from three directions: migrations between industries, migrations between companies, and migrations between business models within the same organization.
  • A competitive advantage can be maintained or secured by anticipating value migration. Through a deep understanding of a customer and their business, you can reduce the chances of commoditization devaluing a product.

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