Strategy, Value Innovation, and the Knowledge Economy

Review by: Michael J. Gaffney You have been taught to think that business is about the competition. You benchmark; you calculate market share, look for competitive advantages and try to outperform them, the competition, the bad guys. As long as you're ahead of the competition, the boss and the shareholders stay off your back. You are asked to build competitive advantage, you look at the competition, whip out a new set of features, and bingo! - a new product, incrementally better than the competitors. This is imitation, not innovation. Can you identify the feature differences between similarly priced microwaves or VCR's? How many of the features do you really use? There are no clear dominant players in these markets because benchmarking and re-benchmarking the competition left all competitors with virtually identical products. This is one result of competition-driven strategy. In the early 80's, Compaq and IBM fought a David and Goliath battle for market share in the PC business. Compaq had superb quality at a 15% lower price. IBM responded aggressively and back and forth they went with sophisticated feature enhancements. Meanwhile, back at the PC watering hole, thirsty customers were filling up on low priced, user-friendly PC's from low-end manufacturers. By the late 80's IBM's and Compaq's PC businesses almost went the way of the Dodo bird. In their article "Strategy, Value Innovation and the Knowledge Economy", Chan Kim and Renee Mauborgne argue that strategy driven by competition usually has three latent, unintended effects: 1. Imitative, not innovative, approaches to the market. Companies often accept what the competitors are doing and simply strive to do better. 2. Companies act reactively. Time and talent are unconsciously absorbed in responding to daily competitive moves, rather than creating growth opportunities. 3. A company's understanding of emerging mass markets and changing customer demands become hazy. Chan and Mauborgne argue that 'value innovation' is the key to sustaining high growth and profits. Being a value innovator it is not about building layers of competitive advantage, nor is it about striving to outperform the competition. It is not about segmentation and positioning. Value innovation is about creating new markets through fundamentally new and superior buyer value in existing markets. For example, take the golf equipment market. Imagine trying to tell venture capitalists that you had thoroughly analyzed the competition i.e., golf club manufacturers, and you knew exactly the kind of technical improvements required to build new golf clubs that would take over the market and make investors millionaires. In 1991 this is what Callaway did not do. Instead of focusing on the competition, Callaway focused on the buyer and came up with the rationale that more people would play golf if golf balls were easier to hit. Hence 'Big Bertha', a golf club with a bigger striking surface. Callaway not

only brought new golfers into the market but also captured an overwhelming share of the existing market. The key to 'value innovation' is that your emphasis on value creation must place the buyer, not the competition, at the centre of your strategic thinking. Kim and Mauborgne's research have examples of value innovation in diverse industries; from Compaq (after their turnaround) to SAP, Barnes and Noble, Wal-Mart and many others. The key message for us in the business of creating and introducing new technologies is that these companies do not pursue innovation in technology, but in value. Are there many substitutes for your goods and services on the market? If so, perhaps you just have a 'me too' product backed by a great sales force. Is there more supply than demand in your business? Then competing for a share in a contracting market is a cutthroat strategy that does not create new wealth. Instead, you must focus on the demand side of the equation. How can you expand your current market or create new ones? The competition becomes irrelevant if you, like Callaway, create fundamentally new and superior value. 'Value innovation places equal emphasis on value and innovation'. Just focusing on value may cause you to end up in the incremental improvement pond, just like the other fish. Just focusing on innovation may cause you to get way ahead of the market and lose sight of what customers are willing to buy today. 'Value innovation anchors innovation with buyer value.' Value innovation does not necessarily require technology innovation. There are thousands of examples of companies with innovative new technologies that never captured significant market share, allowing some other company capitalized on their technology. For example: GUI software was developed by Xerox but leveraged by Apple; the PC was created by IBM and marketed by everyone and their dog; Ampex created VCR technology and JVC opened the mass market; Gates acquired DOS and started Microsoft. Being a technology pioneer earns you bragging rights, but being a value pioneer provides for a much more comfortable life-style. One of the keys to value innovation is the mass market and what the mass of buyers value. It therefore follows that volume is critical to a 'value pioneers', which underscores the importance of pricing. A value innovation strategy must thus be guided by two questions: 1. Are we offering customers radically superior value? 2. Is our price level accessible to the mass of buyers in our target market? In their article, Kim and Mauborgne make some compelling arguments for pricing to the mass market to prevent 'free-riders' from copying your successes. Ask yourself these questions:

How can you ensure that your investment into innovative technology (and hopefully customer value) will lay the golden egg? How can you keep the golden egg? Even better, how can you keep the egg and the goose that laid it?

The last thing you need is for someone else to hatch your egg and steal your goose! The authors rationale for strategic pricing to protect your investment is covered in much greater detail in their publication. Are you starting to think like a 'value pioneer' instead of a 'technology pioneer'? The authors of this article (both Professors at INSEAD) provide more tools to help you make the switch, as well as checklists and pricing models. Order a reprint with our secure online order form. Strategy, Value Innovation, and the Knowledge Economy, Sloan Management Review W. Chan Kim and Renee Mauborgne