The tough get going

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.

2 Responses to “The tough get going”

  1. Great article! An elaboration of the “value” principle I write about often. In fact, if you don’t mind, I may add a link to my newsletter, which is about to go out, to this blog, as my article is almost an intro to it.

  2. Excellent article, with lots of great examples. And what you are suggesting also sounds like one of Michael E. Porter’s industry five forces: substitutes, and their relative attractiveness in tough times.

    Although it’s hard to reach conclusions about hundreds of industries (lines of business) with one broad brush, it seems that online services, in general, will do relatively better “when the going gets tough” than traditional brick-and-mortar businesses. Do you agree?

Leave a Comment

  • Latest Posts

  • Topics

  • Archives

  • About this site

    COMPETING IN THE KNOWLEDGE ECONOMY is written by Timothy Powell, an independent researcher and consultant in knowledge strategy. Tim is president of The Knowledge Agency® (TKA) and serves on the faculty of Columbia University's Information and Knowledge Strategy (IKNS) graduate program.


    "During my more than three decades in business, I have served more than 100 organizations, ranging from Fortune 500s to government agencies to start-ups. I document my observations here with the intention that they may help you achieve your goals, both professional and personal.

    "These are my opinions, offered for your information only. They are not intended to substitute for professional advice."


    We typically publish monthly on or about the 15th of each month, subject to our client workload. Use the RSS feed links below to subscribe to posts and/or comments. Better yet, follow us on Twitter @twpowell to be notified of new posts and related developments.

    Thanks for reading! Please mention us to others and add your non-spam comments and suggestions -- we value your input.


    COMPETING IN THE KNOWLEDGE ECONOMY is sponsored by the Knowledge Value Chain® (KVC), a methodology that increases the value and ROI of Data, Information, Knowledge, and Intelligence.

    The contents herein are original, except where otherwise noted. All original contents are Copyright © TW Powell Co. All rights reserved.

    All KVC trademarks, trade names, designs, processes, manuals, and related materials are owned and deployed worldwide exclusively by The Knowledge Agency®. Reg. U.S. Pat. & TM Off.


    E SCIENTIA COPIA. Knowledge is the Engine of Value.