Five drivers of secular trends
Secular trends are long-term changes that displace the production or consumption of goods and services. The syllabus names five drivers, each with an example the exam reuses.
Other factors can also catalyse a secular trend. Whenever one emerges, it causes value migration between industries or players, and often an inflection point in the business cycle of the industries affected.
Value migration
Value migration is a phenomenon that creates a long-term advantage for some entities at the cost of others: the gainer's shareholder value rises while the loser's falls. Those who adopt the latest technology, capture changing customer preferences or create a disruptive innovation gain; laggard competitors lose. The shift can run in four directions.
| Direction | Syllabus example | |
|---|---|---|
| Geographic | A trend favours one country or region over others | Shale gas shifted value to US oil exploration, since the US had large reserves it could extract cheaply; globalisation let low-cost manufacturer China grow faster than high-cost destinations |
| Cross-industry | One industry gains at another's expense | Digital cameras caused a massive decline in the film roll industry; Kodak had to shut down |
| Across the value chain | The downstream end gains at the expense of the upstream end, or vice versa | Intense competition in Indian telecom cut mobile service prices, destroying telecom shareholder value while boosting consumption of digital products and the digital content providers behind them |
| Between companies in one industry | A disruption creates or removes a competitive advantage | Before 2G, Research in Motion (Blackberry) led corporate mobile users with the best email and internet access; 2G brought smartphone makers offering the same, Blackberry's value fell and competitors such as Apple gained |
Understanding value migration helps an analyst spot investment opportunities ahead of time and exit losing businesses.
The business life cycle
An industry moves through stages from emergence to eventual decline.
- 1Pioneering: the industry is just taking shape, not widely adopted, the concept still being proven or just proven.
- 2Growth: the concept is viable, customers adopt in numbers, and the industry grows steeply.
- 3Matured: the industry has existed for long, most potential customers already use the product, few new customers remain.
- 4Declining: a change in preference or a new technology replaces the product, and the industry loses out to alternatives.
- 5Reinvention and revival: rare, but the product finds a new use in a different application and starts a fresh cycle.
Call taxis took shape at the end of the twentieth century and the start of the twenty-first (the late 20th and early 21st century). Rising telephone penetration and consumer income drove tremendous growth over the next decade. Then app-based taxi aggregators arrived and the industry declined sharply in size: pioneering, growth, maturity and decline inside about two decades.
Every cycle displaces part of the economy: workers in a declining industry must reskill and move, or leave the workforce, and capacity must be redirected. Not every disruptor causes displacement, though: shale gas brought a long-term decline in crude prices without changing what was consumed.
Secular trends give the long-term trajectory of a business. For the medium and short term the analyst must turn to cyclical trends (chapter 5). A question asking which trend explains next year's volumes wants cyclical, not secular.
- Secular trends are driven by technological advancement (horizontal drilling and shale gas cut long-term hydrocarbon prices; digital cameras killed film and phone cameras killed entry-level digital cameras; batteries enable electric vehicles), rising income levels (premium products), demographic change (ageing Japan drinks less beer per head), culture and preferences (western clothing in Asia; sudden shifts from revolution, insurgency or a pandemic response) and regulation (GST made logistics efficient and cut demand for new commercial vehicles).
- A new secular trend causes value migration, a long-term shift of shareholder value from losers to winners, and often an inflection point in industry life cycles. Migration can be geographic, across industries, across the value chain, or between companies in one industry.
- Business life cycle: pioneering, growth, matured, declining, and the rare reinvention and revival. Call taxis in India went through all of them, finished off by app-based aggregators. Each cycle displaces labour and capacity.
- Secular trends explain the long-term trajectory; medium and short-term views need cyclical trends. Some disruptors, such as shale gas, move prices without displacing what is consumed.