FINDING MEGA TREND UNLOCKING – VALUE MIGRATION

What is Value Migration?

Value Migration is defined by Adrian Slywotzky, author of the book “Value Migration”, as a flow of economic and shareholder value away from obsolete business models to new, more effective designs that are better able to satisfy customers’ most important priorities. The framework tries to identify industries where Value Migration is underway and can help pick potential winners early in the cycle.

Value Migration framework helps in picking winning business models
Let’s understand different case studies, 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. We have discussed in detail case studies on our youtube channel (360 investing) in the Indian investment landscape across Banking, Auto, Consumer, Metals, Pharma, Logistics, Telecom, Transportation, Capital Goods, and Information Technology.

Common catalysts of Value Migration

Our study highlights that common causes of Value Migration in India are – cost, technology, convenience, innovation, lower switching costs. Public Sector to Private Sector Value Migration is a classic umbrella, encompassing several sectors – Banking, Telecom, Aviation. Another commonly observed trend in India is Value Migration from the Unorganized to the Organized Segment due to evolving consumer tastes and the increasing affordability, given rising disposable income.

Adrian Slywotzky – Defines value migration as a flow of economic and shareholder value away from obsolete business models to new, more effective designs that are better able to satisfy customers’ most important priorities. It reflects changing customer needs that will be satisfied by new competitive offerings. Value migration occurs when there is a disconnect between customer priorities and existing business designs. It has several advantages; prominent amongst them being – (a) Gaining and sustaining competitive advantage by outthinking competitors and (b) Creating new growth drivers ahead of fading of existing growth catalysts.

Essentially, value migration has three stages:

A. Value inflow: In this phase, a company or an industry captures value from other industries or companies due to superior value proposition. The market share and profit margins of the company or industry expand.

B. Stability: In this phase, competitive equilibrium is established. Growth rates moderate.

C. Value outflow: Value starts to move away towards companies or industries meeting evolving customer needs. In this phase, market share declines, margins contract, and growth stops.

Types of value migration

Value migration can manifest in several ways.

• Inter-country migration: The Indian IT and Pharmaceutical sectors have seen value migration from western geographies owing to lower cost and niche capabilities.

• Inter-industry migration in same country: In India, value has migrated from Railways to Airlines, facilitated by low-cost, non-frills airlines.

• Inter-company migration in same industry: Value has migrated from the public sector to the private sector in the Indian Banks and Telecom spaces.

• One segment to another in same company: Telecom service operators have seen value migrating from Voice to Data.

How can you detect value migration early? 

Early identification of value migration trends helps in maximizing the investment gains. Naturally, this leads to a critical question – how does one detect value migration early?

Detecting value migration is difficult even for a company/management totally involved in running its business and driving strategies. In the value inflow phase, most of the organization’s energies and resources are concentrated towards meeting consumer demand. In the stability phase, complacency creeps in and prevents early detection of migration. Lastly, in the value outflow phase, the focus is on preventing losses.

The initial phases of value migration are quite subtle, gradual, and hence, difficult to understand. Also, when value migration is driven by new competition (and not the incumbents), it is difficult to detect. For example, in the Two Wheeler industry, Eicher’s Royal Enfield did not create any concern initially, as it was not a traditional competitor. The impact became evident only after few quarters/years of tangible market share gain by Eicher Motors.

Nonetheless, early detection of migration provides an edge in gaining early exposure to potential winners as well as avoids players on the wrong side of the equation. Some of the factors which can help investors in earlier detection of value migration, in our view, are:

A] Market share movements provide a very strong signal of value migration. Consistent share gain trends are usually a harbinger of bigger trends at work. E.g. Indigo’s consistent market share expansion in Airlines, Private Bank’s share gain insavings deposits or Eicher’s rising equities in premium two wheeler space all underscore a distinct value migration shift in the underlying businesses.

B] Innovation – Leadership is another metric to identify potential beneficiaries of value migration. Players that drive innovation and create new categories/sub- categories enjoy tremendous first mover advantages and trigger value migration. In Decorative Paints, Asian Paints is well- entrenched as an industry leader, with 55-56% market share. However, it is innovation leadership that has cemented its position as industry leader and ensured continued share gains over the years (gained 1,500bp market share in ~15 years). It has been a pioneer in introducing several new practices in the industry – tinting machines, home solutions, colour ideas etc. 

C] Customer satisfaction scores – While subjective, can act as a good starting point to understand whether customers are happy. Declining satisfaction scores should alert investors about impending value migration Value migration in Public Sector Banks and Public Sector Telecom companies in India was triggered by dissatisfaction with the incumbents’ services when the industry was witnessing rapid changes triggered by private players.

D] Policy changes: In a regulated industry (Aviation, Power, etc) changes in policy provide a trigger for value migration. While these are difficult to anticipate, close monitoring assumes critical importance in detecting any migration trends. Broad policy changes like GST implementation will hasten value migration from the unorganized to the organized sector.