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Published: January 1, 1997

 
 

How to Stop Bad Things from Happening to Good Companies

Catching the right moment to take action when successful business models begin to wane requires skilled detection work and the courage to face reality. In the second article of a two-part series on value migration -- the process by which changing markets and new competitors threaten a company's equilibrium -- a system of early-warning diagnostics is recommended.

How do companies retain their competitive lead even as markets change? They do it by constantly rebuilding their businesses around their customers' needs. That requires intense analysis, early warning systems and an ever-widening field of vision.

The first article in this two-part series, appearing in Issue 3 of Strategy & Business, described why bad things happen to good companies. We pointed out that three interrelated factors were at work:

The effects of value migration, usually experienced as a discontinuous change, require a company to develop a more customer-relevant business design.

At the same time, the organization has calcified, making business redesign extremely difficult.

Meanwhile, leadership, the swing variable that determines whether the company will act as it must, fails.

The value migration process -- i.e., the flow of economic and shareholder value away from obsolete business models to new, more effective designs -- reflects changing customer needs that are beginning to be, and ultimately will be, satisfied by new competitive offerings. Market capitalization closely tracks this process, essentially transferring market value from the old to the new. While value migration is itself inevitable, companies can and have taken steps to deal with it.

Our purpose in this article is to help those poised on the brink of value migration to recapture value and energize their organizations so that they can move with -- and ahead of -- their customer base.

We begin by explaining why value migration is difficult to perceive and then introduce a system of diagnostics, which, when applied honestly and with discipline, illuminates the nature, rapidity and amount of value migration in your company. The answers you provide reveal your need to move. We suggest actions based on that assessment. We next explain why organizational calcification is difficult to see, then present another set of diagnostics, whose answers reveal your ability to move. We again suggest actions. Finally, we point out the critical role that leaders play in grappling with value migration and organizational calcification and conclude with examples of those who have succeeded.

Value Migration Is Difficult to Perceive

Value migration is hard to see when you are in the midst of a demanding business situation. The day-to-day tactical activities cloud the longer-term changes. And past success clouds the organization's clarity of vision. The greater the success, the less likely it is that value migration will be perceived. Perception is particularly hard when the new business design comes, as it often does, from beyond traditional competitors. Further, value migration is a complex process whose early phases are silent, subtle and typically asymptomatic. Detecting its signals requires skill and experience.

Narrow Competitive Field of Vision

Every company has a well-defined competitive field of vision, which is usually too narrow. Long periods of equilibrium only exacerbate the problem. A whole raft of "minor little players" operates just at the periphery. They are difficult to see because traditional competitors focus on each other and not on new entrants and "nontraditional" entities lurking at the industry's fringes.

These new competitors are also hard to determine, given such thinking as: we make steel, they make plastic; we produce gross rating points, they install coaxial cable; we sell high-end merchandise, they discount; and so forth. (See Exhibit I.)

Exhibit I 

The Competitive Field of Vision

Narrow Customer Field of Vision

Value migration is triggered when the customer changes, a result of previous needs having been satisfied and new offerings appearing that suggest untried opportunities. Yet companies are often imprisoned by traditional concepts of who the customer is, and out-of-date assumptions about what the customer wants. They miss swings in customer needs and fashions. In the tire industry in the 1970's, the major players failed to note that customers were increasingly attracted to new offerings that promised more durability. Fifty years earlier, the Ford Motor Company was superbly organized to produce durable, reasonably priced cars, in black. When customers decided they wanted "frivolous" colors, Ford refused to comply and the General Motors Corporation stepped in.

 
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