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Strategy, Value Innovation, and the Knowledge Economy

April 15, 1999 | W. Chan Kim , Ren̩e Mauborgne | Strategy

Managers typically assess what competitors do and strive to do it better. Using this approach, companies expend tremendous effort and achieve only incremental improvement -- imitation, not innovation. By focusing on the competition, companies tend to be reactive, and their understanding of emerging mass markets and changing customer demands becomes hazy.

During the past decade, Kim and Mauborgne have studied companies of sustained high growth and profits. All pursue a strategy, value innovation, that renders the competition irrelevant by offering new and superior buyer value in existing markets or by enabling the creation of new markets through quantum leaps in buyer value.

Value innovation places equal emphasis on value and innovation, since innovation without value can be too strategic or wild, too technology-driven or futuristic. Hence, value innovation is not the same as value creation. Although value creation on an incremental scale creates some value, it is not sufficient for high performance.

To value innovate, managers must ask two questions: "Is the firm offering customers radically superior value?" and "Is the firm's price level accessible to the mass of buyers in the target market?" A consequence of market insight gained from creative strategic thinking, value innovation focuses on redefining problems to shift the performance criteria that matter to customers.

Kim and Mauborgne ask five key questions contrasting conventional competition-based logic with that of value innovation and describe the type of organization that best unlocks its employees' ideas and creativity.

Rather than follow conventional practices for maximizing profits, successful value innovators use a different market approach that consists of (1) strategic pricing for demand creation and (2) target costing for profit creation.

Value innovation as strategy creates a pattern of punctuated equilibrium, in which bursts of value innovation that reshape the industrial landscape are interspersed with periods of improvements, geographic and product-line extensions, and consolidation.

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