January 30th, 2009
Now the tough get going. The economy will come back—not because it decides to come back, but because we together make it come back. How long this will take to happen, no one can say for sure.
This much is clear: silly season is over. Things like having not one, but two places on your block that serve expensive coffee that takes a long time to make, are over. Things like getting funding for business models that are “cool”, but that have no hope of ever making money, are over.
Value creation doesn’t stop in a recessionary economy like this one—but it does change, sometimes dramatically and very fast. Value can migrate from one economic sector another. This is because each “value chain” interacts, and displacements in one—like you lost your job—cause displacements in another—like cutting out the overpriced coffee.
If you run a business, you need to understand value migration—how it’s happening right now in your industry, and how it’s likely to happen in the near-term future. If you’re an investor, you need the same thing for the industries you invest in. Even if you work inside a company, it’s important to know this—as it could significantly impact your job and career.
The all-important thing—the top of the pyramid—is “customer value”. Whatever that is, however it’s defined, THAT is what your customers are paying you for. Without that, the whole engine doesn’t run.
So you need to understand, completely and clearly, what that value is and how it’s defined. You also need to understand the value dynamics—how it’s changing now, and how it’s likely to change in the future.
So, do you?
Today there are companies making money, who are hiring, and whose stock is going up. That’s because when value migrates, it migrates away from one sector, but toward another sector—which in turn benefits from the change.
Who is winning, who is losing, and why?
Netflix (NFLX), for example, just reported great results – because they understand the economics of entertainment. They’ve had record new user sign-ups, because the economics of seeing movies at home ($19 per month for three movies at a time, plus unlimited streaming, compared to $25 for two to see just one movie—plus gas, car wear and tear, and the baby-sitter. Who loses? Primarily the movie theater chains—but also cable TV providers lose some audience to this.
McDonald’s (MCD) also reported great results—people are still eating out, they’re just scaling back on WHERE they eat. At least one mid-tier mall eatery (Bennigan’s) has gone out, and more will likely follow.
Then there’s the “disruptive technology” of the netbook. Chinese (Taiwan) PC maker ASUS discovered that there is a huge market of people who don’t want a hugely powerful PC—they want one that is good enough for basic tasks (word processing and e-mail), and that has great Web connectivity. Their skinnied-down Eee PC sold for less than $500, created a whole new category, and now has many imitators.
Netbooks typically use the open-source Linux as their operating system, so a major source of cost—the license fee for Microsoft Windows—is eliminated. Value has migrated away from Microsoft (MSFT). Also from Intel (INTC); though their processors are still used, they are the lower-margin Atom processors, not the more powerful Pentiums.
Apple (AAPL) just reported great results, primarily on the strength of their market-defining products the iPhone and the iPod—not to mention their superb retail and web operations. Theirs is a “blue ocean” positive-sum strategy. They repeatedly have been able to create and dominate new categories, leaving any potential rivals to play catch-up, and such that nobody really loses.
Companies who understand how value is shifting in their industries can thrive and GROW, even in a shrinking economy. Did you know that some companies we think of today as world-class leaders were founded and/or grew significantly in recessions or depressions? GE (1876), Hewlett-Packard (1939), Hyatt (1958), Burger King (1958), Lexis-Nexis (1973), FedEx (1973), and Microsoft (1975), to name a few. (See here for a more complete list.)
Do you understand the value shifts under way NOW in your industry, and that will determine the future winners and losers? Think hard, think fast, and execute NOW!
DISCLOSURE: I own Apple common stock. The concept of “value migration” comes from the excellent but largely-overlooked book of the same name by Adrian Slywotzky.