The Idea in Brief
When the market in which you compete gets overcrowded, innovating is the only way to break free from the pack. But how do you begin? Consider value innovation—a strategic concept Kim and Mauborgne introduced in their 1997 Harvard Business Review article. Value innovators create products or services for which there are no direct competitors—and use those offerings to stake out and dominate new market spaces. They don’t possess special vision or prescience; rather, they look across the conventional boundaries of competition for opportunities to provide breakthrough value for customers.
Take Intuit. In 1984, the software company looked beyond its own industry to identify choices available to consumers seeking to manage their personal finances. Buyers’ options? The computer, for which costly, complicated financial management software was available—or the lowly pencil, which didn’t simplify things or save time but was cheap and easy to use. Intuit created a third option: the astoundingly successful Quicken software. With its user-friendly interface, basic functions, and affordable price, Quicken leverages the computer’s advantages (speed and accuracy) and the pencil’s advantages (simplicity of use and affordability).
Operating in markets that initially have no rivals, value innovators enjoy steep growth. Consider Starbucks, which transformed a functional product (coffee) into an emotional one with its chain of “caffeine-induced oases” offering chic gathering places, relaxation, and creative coffee drinks. Starbucks enjoys margins roughly five times the industry average.
The Idea in Practice
To spot additional value innovation opportunities, consider these approaches:
Look across strategic groups. Strategic groups are clusters of companies within an industry that all pursue a similar strategy, such as offering low prices or a glamorous image for consumers. Most companies try to enhance their competitive position within a strategic group. To create a new market space, identify factors that determine buyers’ decisions to trade up or down from one group to another. Example:
Sony created a whole new market: personal portable stereos. Its Walkman combined the virtues of products created by two strategic groups: manufacturers of boom boxes, characterized by great acoustics and “cool” image, and makers of transistor radios, valued for their low prices and convenient size and weight. The Walkman grabbed market share from the two strategic groups, and attracted new groups of customers, such as joggers and commuters.
Look across the chain of buyers. Instead of targeting a single obvious customer group, target other customers involved in the buying decision. Overlooked buyer groups value different features than target customers, suggesting fresh innovation opportunities. Example:
While other on-line financial-information providers served brokerage IT managers, Bloomberg began serving traders and analysts. Bloomberg designed a system to offer these neglected buyers tools for accessing and immediately acting on financial information. The system included keyboards labeled with familiar financial terms, press-of-a-button analytic capability, and dual monitors for multitasking. The system also improved the quality of traders’ personal lives—providing purchasing services that enabled overworked traders to buy flowers, clothing, and jewelry during trading lulls that occurred during the workday.
Look across complementary products and services. Seek untapped value hidden in other industries’ offerings that affect your offerings’ value. Define the total solution buyers seek when choosing a product or service—including what they do before, during, and after using your product. Example:
With their blockbuster superstores, Borders Books & Music and Barnes & Noble transformed their product from books to the pleasure of reading. Coffee bars, wide aisles, and comfy armchairs invite people to linger. Book-savvy staff help customers make selections. And late-night closing times provide evenings of quiet reading away from harried home fronts.
Competing head-to-head can be cutthroat, especially when markets are flat or growing slowly. Managers caught in this kind of competition almost universally say they dislike it and wish they could find a better alternative. They often know instinctively that innovation is the only way they can break free from the pack. But they simply don’t know where to begin. Admonitions to develop more creative strategies or to think outside the box are rarely accompanied by practical advice.
