The Indian economy is undergoing major disruptions. Passage of the GST Amendment Bill, Make In India initiatives, Shift from offline to online and demonetization of high-value currency notes mark the beginning of the next phase of India’s evolution. The imminent tectonic shifts in the economic landscape will challenge established models of doing business and coax the emergence of business designs that are better able to satisfy customers’ priorities. In the midst of this, we try to put together all the points in this thematic article, VALUE MIGRATION. Through this article, we attempt to stock up on relevant tools to identify the significant investment opportunities that will emerge from the churn, and as Shakespeare puts it, take the tide at the flood.
Selection of winning business models paramount to investment success
Delivering investment outperformance in stock markets is the holy grail of investment managers. Outperforming has become an increasingly difficult task with the ascent of passive investing. Success in investment management depends on the interplay of multiple factors – research, discipline, patience, emotional quotient, among others. Different approaches have worked in delivering outperformance. What is common to all the approaches, in a nutshell, is picking a winning business model. Picking a winning industry and then picking a winner in that winning industry is a strong combination for achieving investment success, we reckon. This report applies the framework of VALUE MIGRATION, attempts to highlight the disproportionate returns generated by several business models, and also uncovers several potential winners.
What is value migration?
The theory of Value migration was firstly introduced by Adrian Slywotzky in his book Value Migration – How to Think Several Moves Ahead of the Competition published in 1966. Value migration is the transferal of value-creating forces from outdated business models to better able to satisfy consumer demands.
Understanding value migration
In marketing, value migration describes the flow of economic value from obsolete business models to models better suited to satisfying consumer priorities.
Value flows in three ways:
Between industries – For example, in-flight entertainment (IFE) transfers value from the airline industry to the entertainment industry. In India, the value of the rail industry as an affordable means of transport has shifted to the airline industry.
Between companies. – For photographers, value is transferred from Adobe Lightroom to Adobe Photoshop during a processing workflow.
Between business designs within a company – A popular example is the transferring of value from IBM mainframe computers to IBM PCs with system integration. In recent decades, telecom service providers have also seen value migrate from voice to data.
While every organization seeks to satisfy the end-user, Slywotzky argued that the factors determining value are constantly changing. Therefore, the business that can predict value migration ahead of time is the business that can gain a competitive advantage.
The three stages of value migration:
Generally, value migration has three distinct stages:
Value inflow – in the first stage, a company or industry captures value from another company or industry due to a superior value proposition. The profit margin or market share of the entity expands.
Stability – growth rates moderate as competitive equilibrium is established. Market share and margins remain stable.
Value outflow – at some point, value begins to migrate toward companies meeting evolving consumer needs. The original company or industry experiences a decline in market share with contracting margins and a reversal in growth.
Value Migration framework helps in picking winning business models
Through different case studies, we show that Value Migration is underway in India in several industries. A number of businesses have benefitted from Value Migration, delivering consistent stock returns. Businesses that have found themselves on the wrong side of the Value Migration equation have suffered and underperformed significantly. In this report, we have discussed in detail case studies in the Indian investment landscape across Banking, Auto, Consumer, Metals, Pharma, Logistics, Telecom, Transportation, Capital Goods, and Information Technology. These case studies amply demonstrate the power of Value Migration in delivering consistent business outperformance. We also highlight several potential long-term Values.
In the introduction, we noted that competitive advantage could be secured by the early identification of value migration.
This can be anticipated in several ways:
Understanding the customer – Are there observable shifts in the composition of the target audience? Are customer priorities changing due to regulation, increased purchasing power, or technological innovation? Indeed, are customers becoming more powerful or discerning?
Understanding the business design –The organization should understand how flexible its business design is. In other words, can it serve different customer priorities? Does it have the ability to provide value for both the customer and the company? What are the chances the design will become obsolete?
Avoiding commoditization- How can the business avoid a scenario where its goods or services become devalued commodities? Building a strong brand and avoiding heavy, bulk discounting is a good place to start. But commoditized products are often the result of rigid, undifferentiated business design. In this case, the business must revitalize its product offering with a focus on delivering higher value.
- Value migration describes the migration of value from outdated business models to those which are better able to satisfy consumer priorities.
- Value migration occurs in three ways: between industries, between companies, and between business designs within the same organization.
- Anticipating value migration is the key to maintaining or securing a competitive advantage. A deep understanding of the customer and business design reduces the odds that a product becomes devalued through commoditization.
Disclaimer: All the information here in this article is for educational purpose only. Investing of any kind involves risk. While it is possible to minimize risk, your investments are solely your responsibility. It is imperative that you conduct your own research. We are sharing our inputs for to educate traders and investors with no guarantee of gains or losses on investments. Please learn and analyze your stocks by yourself or you can contact to your financial advisor.