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 / First Quarter 2002 / Issue 26(originally published by Booz & Company)


W. Chan Kim and Renée Mauborgne: The Thought Leader Interview

When we came to Europe, we found companies that were making the move from being supply driven — outcompeting — to demand driven, to actually creating markets, creating new business space. In the U.S., there were companies like Home Depot that were vaunted for being different and that were creating new wealth. When we came to Europe, we discovered a rich new vein of examples; companies that were breaking the mold — companies like the Formule 1 hotel chain or Bert Claeys in Belgium. Formule 1 looked anew at the French low-budget hotel market and created hotels attractive to both truck drivers and businesspeople. The Bert Claeys Group built new market space around Belgium’s cinemas by refusing to accept common perceptions about what was a declining industry. Bert Claeys ignored long-term decline and created the world’s first “megaplex” cinema with 25 screens and seating for 7,600.

When we talked to these companies, their managers said much the same things as their American counterparts. There was a pattern to their strategies. The big issue for them was not necessarily innovating in terms of technology or science, but bringing innovation to bear on the value they delivered to buyers.

S+B: Can you explain that further?

Kim: Companies have tended to concentrate on differences between different groups of customers. They have divided them into ever smaller and neater segments so they can customize their offerings to meet the needs of those segments.

We found that value innovators take a different approach. Instead of looking at differences between customers, they focus on the basic commonalities across customers. When companies create unprecedented value on those commonalities, the core of the market is pulled toward them as customers are willing to forgo their individual preferences. Value innovation desegments and collapses established market boundaries by challenging accepted and assumed market order. Unlike the strategy framework built on environmental determinism driven by competition, value innovation takes a constructionist view of the market, where its focus is on shaping the market by cognitive reorderings in managers’ strategic thinking.

S+B: How can companies use value innovation to create new market space?

Mauborgne: The challenge is to create new demand, what we call market space. New market space is about creating a company’s future. Companies can continue to mine their wealth from an existing market space — that’s maintenance. They can concentrate on market share. But there is something more — the act of creation. Creating new market space will become increasingly vital.

Creating new market space provides growth. There are two paths to growth. One is the mergers-and-acquisitions path, which often leads to growth but rarely leads to profitable growth. The other is organic growth by creating new businesses. While this path is profitable and necessary, in markets where supply exceeds demand, companies are often hesitant because they don’t have a path forward to believe that they could succeed in changing things. They need a bridge to get there. Hopefully, some of the ideas and analytics we have been developing will help companies in building that bridge.

S+B: What else is needed for companies to grow?

Kim: Another element is our concept of “fair process.” This has to do with people. Transformation requires that companies earn the intellectual and emotional commitment of their employees. To do so requires a degree of fairness in making and executing decisions. All a company’s plans will come to nothing if they are not supported by employees.

If you violate fair process it can be devastating. British Airways lost significant ground in employee morale and customer service after it announced a cost-cutting program at a time when its profits were high and planes were full. It violated fair process in making the plans. There was no engagement, explanation, or clarifying of expectations.

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