Measuring Tape for a Business Model - A Company's Value Migration Ratio

It’s not uncommon for a Competitive Intelligence or a Strategy organization to be asked to measure the relative strengths of a set of competitors or to determine the health of a one industry vs. another.

While there are a variety of ways to tackle this problem one elegant way is given to us by Adrian Slywotsky in his book Value Migration. In short Adrian tells us to focus on what he calls the value migration ratio – which we’ll abbreviate to VMR.

VMR is market cap / revenue. Adrian illustrates in his book that this can point toward whether a business design is experiencing value Inflow, it has reached Stability, or whether the design is experiencing Outflow.

Inflow – VMR is greater than 2.0
Stability – VMR is between 0.8 and 2.0
Outflow – VMR is below 0.8

However a slightly better metric to use than revenue in this case is Enterprise Value (EV). As shown by some of the examples laid out below.

Microsoft – 2.83 v.s Apple – 3.99
Verizon – 1.48 vs. Sprint – 0.87
Intel – 2.02 vs. AMD – 0.45
Best Buy – 0.38 vs. Amazon – 2.05

In short VMR’s tend to mimic the reality that we know about certain business models – for example RIM’s is 0.11.

What makes this powerful though is the way in which it allows you to compare and aggregate findings. For example you could:

Compare the VMR’s for the leaders in your industry
Compare the VMR’s for the leaders in your industry vs. another industry
Compare two or three (or more) industries in aggregate (VMR’s for top players, a mix of players, etc.) to support future moves your company might make
Take VMR and include it with other measures to determine who is truly a winner or loser in a given industry.

One caution is that calculating VMR for companies with multiple distinct business models becomes a trickier proposition. But even here VMR tends to be illustrative as many companies have a division(s) that drives much of their value creation (think Windows + Office for Microsoft or the iPhone for Apple) and their market cap and revenue tends to be somewhat reflective of the strength or weaknesses of these larger division(s).

In sum, we’ve found when putting together strategy focused efforts that a tool like VMR can be quite valuable. All the more so when VMR is paired up with other frameworks and measures to paint a comprehensive picture of an industry or a competitive landscape.

By Sean Campbell
By Scott Swigart