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The Journal of Product Innovation Management, Volume 13, number 6, November 1996
by Adrian J. Slywotzky
Boston, Massachusetts, Harvard Business School Press, 1996
327 plus vii pages, $24.95.
reviewed by John D. Trudel CMC
This is a strong business book from a top publisher and a well credentialed and seasoned consultant. The book's strength is to suggest a renewed focus on strategy, and perhaps a new slant to strategy. If strategy is your "hot button," that is this book's niche.
The book could be read by any practitioners or academics who aspire to a deeper understanding of business. The author's premise is that one should constantly examine business models in the context of competition and alternative moves. (To his list, one should probably add "and emerging technology.") His premise is hard to argue with, but the issue is how compelling the reader will find the author's prepackaged brand of "value migration" strategy.
Others have used the jungle metaphor for Western repetitive process business.1 Imagine a band of loyal workers hacking their way through a dense jungle, supported by trainers and machete sharpeners, and under the watchful eye of Managers. Then a leader climbs a tall tree, looks around, and cries out, "Wrong Jungle!" The frequent reply is, "Shut up, we are making good progress." The key message of Value Migration is to move your firm into the right jungle. This is good advice, and the linkage to product innovation is an overarching corporate strategy.
The author notes correctly that if IBM clings to its "big iron" model of computing, nothing else matters. All the downsizing, reengineering, and other management tricks in the world cannot prop up a firm with an outdated business model. He uses such cases to show the "migration of value" from firms with outdated business models to those with new models.
Those who think business is doing "just fine" will not like this book. The author's core premise has two parts 1) business is in decline, and 2) this decline is caused by beating dead horses, or, in this case, obsolete business models.
The fear of death caused by "missing the next wave" is quite common in high tech business. Still, the author avoids embedding technology in his strategy discussions. He says winning business models are those that better serve customers. Others, like Kodama, would say the winners are those that apply technology to better serve customers.2
Value Migration's own metaphor is that business resembles a chess game. Fixed strategy is not recommended, and the key to victory is strategy rather than tweaking operational performance. He measures winning or losing by the market value of the company.
The book ties corporate value to the use of superior business models, and ranks businesses by the ratio of their market value to gross revenue. The latter viewpoint is popular in Silicon Valley. For example, Upside, a high tech business magazine, has been sorting companies by their annual increases in market valuation for years.
The leap of faith is sorting out cause and effect, but it is plausible that good business planning can help in market value creation. Companies can break out of the pack by refuting the common wisdom and embracing new business models. So it has been from buggy whips and railroads to CD players and Internet browsers, and this is a lesson well worth knowing.
The author suggests moving beyond superficial product needs (e.g., "faster, cheaper") to a deeper understanding of where customers are going in the future. He also suggests the idea of an outside-in focus and a more holistic approach to business.
Perhaps the most appealing thing about the book is what is not said. The major Western management fetishes - downsizing and mergers and acquisitions - are nowhere mentioned in the book. Presumably this is because the author has discovered (as have I) that they do not have a sustainable positive impact on corporate performance or value creation.
The author sorts companies into three groups. Those with market value to revenue ratios greater than unity are "value inflow companies." This is where the action is. You can roughly map the author's "value inflow companies" into what the Japanese call "sunrise industries." The author's laggards are called "value outflow companies," firms with value to revenue ratios below unity. These map into what the Japanese call "sunset industries." (The third group, of course, consists of firms with value stability, those in-between inflow and outflow.)
He wants management to focus on moving their companies back to the value inflow stage. Given this message, it is surprising that the book does not have more Pacific Rim cases. That is the hotbed of value migration success.
Western MBA's do not often think in terms of value migration. Instead, Western governments, managers, and companies usually try to prop up the status quo by improving operational efficiency. The author suggests that value outflow companies can be saved by moving them to more competitive business models. His premise is worth exploring.
Some companies can be helped by new business models, but others cannot. For example, would new business models help bring back Oregon's lumber industry or the U.S. defense sector? It seems unlikely. Also, effective strategy is difficult art and leadership is harder. This is not a place for amateurs, dilettantes, or prescriptive solutions. For every new business model that works, many fail. For every Wal-Mart, Microsoft, Intel, or Netscape, dozens fall by the wayside.
Finally, the hardest part of moving clients to new business models is not new strategy, it is behavioral change. Most firms don't want to change. This challenge is not adequately addressed.
What would Louis Gerstner at IBM would do differently if he read the book? My conclusion, "Probably nothing." Many have said that IBM's business model will lead to disaster. Still, Gerstner is fixated on the exact opposite course to that suggested in the book, and, in fact, he seems to be gaining speed. That may be unfortunate for IBM, but it is typical behavior.
The case studies have the normal problems, "Those whom the Gods would destroy are first given a decade of prosperity and favorable mention in a business book." 3 Some firms touted in Value Migration - EDS, Novell, and Southwest - are starting to struggle. Lotus is already gone, sucked down to support IBM's outdated business model.
Many examples seem superficial. Wal-Mart is cited for low cost distribution, but they did so much more. They invested in information age technology (supercomputers, general aviation, distance learning) to make much better use of assets than competitors. Intel is cited for fast cycles, but their real contribution was exploiting the Moore's Law technology treadmill - doubling performance every two years at the same price point.
There was an opportunity to exploit the mega business model disasters from the software industry as cases. Ashton Tate, WordPerfect, or DRI - all of whom lost vast sums, and eventually their once market-leading companies - come to mind. The author instead chose an obscure firm called Advantage with an equally obscure word processor to make that point, and he spent a chapter on it. His best cases were the steel industry and Merck, in drugs.
The author devoted an entire chapter on business models for the airline industry. The question one must ask is how his methods would have changed products, services, or business results. The answer is not clear. Despite what one reads in the popular press, everything about the airline industry is regulated (except fares). It is held hostage to expensive infrastructure, regulatory bureaucracy, and an archaic hub and spoke-based traffic control system. User fees and taxes have increased at far greater rates than has revenue growth.
Southwest, his best-of-breed example, was the only non-bankrupt, profitable company in the entire industry. As they grow and move through the large hub airports, they will encounter the same costs, taxes, and tariffs that sucked their larger competitors dry. The author admits this. "Recent margin erosion at Southwest raises the question of whether any business design can create sustainable profit and value growth in a hyper-competitive industry characterized by high fixed costs and negligible marginal costs." The conclusion one draws is either that winning in such markets is not possible, or, possibly, that winning depends on more than strategy.
The book's value migration message is useful, and urging due consideration of emerging customer needs and alternative business models is helpful advice. This is certainly much better medicine than prescribing ever more reengineering and downsizing. In summary, the book suggests some useful strategic approaches. New business models can add value.
_________
1. Stephen P. Covey, The 7 Habits of Highly Effective People, Simon and Schuster, 1989.
2. Lewis M. Branscom, "Does America Need a Technology Policy?" Harvard Business Review, March-April 1992, pp. 24-31. (Reprint #92201)
3. John D. Trudel, used on foils in workshops and lectures for many years, usually with reference to the famous book In Search of Excellence, by Peters and Waterman, Harper and Row, 1982.
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