Value Innovation—The Strategic Logic of High Growth
Why are some companies able to sustain high growth in revenues and profits—and others are not?
The difference in approach was not a matter of managers choosing one analytical tool or planning model over another. The difference was in the companies’ fundamental, implicit assumptions about strategy. The less successful companies took a conventional approach: their strategic thinking was dominated by the idea of staying ahead of the competition. In stark contrast, the high-growth companies paid little attention to matching or beating their rivals. Instead, they sought to make their competitors irrelevant through a strategic logic we call value innovation.
Managers of the less successful companies followed conventional strategic logic. Managers of the high-growth companies followed what the authors call the logic of value innovation.
Conventional strategic logic and value innovation differ along the basic dimensions of strategy. Many companies take their industry’s conditions as given; value innovators don’t. Many companies let competitors set the parameters of their strategic thinking; value innovators do not use rivals as benchmarks.
Rather than focus on the differences among customers, value innovators look for what customers value in common. Rather than view opportunities through the lens of existing assets and capabilities, value innovators ask, What if we start anew?
Conventional Logic Versus Value Innovation:
The Five Dimensions of Strategy Conventional Logic
=============================== ======================
i) Industry
Assumptions Industry’s conditions are given.
ii) Strategic Focus A company should build competitive advantages. The aim is to beat the competition.
iii) Customers A company should retain and expand its customer base through further segmentation and customization. It should focus on the differences in what customers value.
iv) Assets and
Capabilities A company should leverage its existing assets and capabilities.
v) Product and
Service Offerings An industry’s traditional boundaries determine the products and services a company offers. The goal is to maximize the value of those offerings.
The Five Dimensions of Strategy Value Innovation Logic
============================== =========================
i) Industry
Assumptions Industry’s conditions can be shaped.
ii) Strategic Focus Competition is not the benchmark. A company should pursue a quantum leap in value to dominate the market.
iii) Customers A value innovator targets the mass of buyers and willingly lets some existing customers go. It focuses on the key commonalities in what customers value.
iv) Assets and
Capabilities A company must not be constrained by what it already has. It must ask, What would we do if we were starting anew?
v) Product and
Service Offerings A value innovator thinks in terms of the total solution customers seek, even if that takes the company beyond its industry’s traditional offerings.
Industry Assumptions
Many companies take their industry’s conditions as given and set strategy accordingly. Value innovators don’t. No matter how the rest of the industry is faring, value innovators look for blockbuster ideas and quantum leaps in value. Had Bert Claeys, for example, taken its industry’s conditions as given, it would never have created a megaplex. The company would have followed the endgame strategy of milking its business or the zero-sum strategy of competing for
share in a shrinking market. Instead, through Kinepolis, the company transcended the industry’s conditions.
Strategic Focus
Many companies let competitors set the parameters of their strategic thinking. They compare their strengths and weaknesses with those of their competitors and focus on building advantages. Consider this example. For years, the major U.S. television networks used the same format for news programming. All aired shows in the same time slot and competed on their analysis of events, the professionalism with which they delivered the news, and the popularity of their anchors. In 1980, CNN came on the scene with a focus on creating a quantum leap in value, not on competing with the networks. CNN replaced the networks’ format with real-time news from around the world 24 hours a day. CNN not only emerged as the leader in global news broadcasting—and created new demand around the world—but also was able to produce 24 hours of real-time news for one-fifth the cost of 1 hour of network news.
Conventional logic leads companies to compete at the margin for incremental share. The logic of value innovation starts with an ambition to dominate the market by offering a tremendous leap in value. Value innovators never say, Here’s what competitors are doing; let’s do this in response. They monitor competitors but do not use them as benchmarks. Hasso Plattner, vice chairman of SAP, the global leader in business- application software, puts it this way:
“I’m not interest-ed in whether we are better than the competition. The real test is, will most buyers still seek out our products even if we don’t market them?”
Because value innovators do not focus on competing, they can distinguish the factors that deliver superior value from all the factors the industry competes on. They do not expend their resources to offer certain product and service features just because that is what their rivals are doing. CNN, for example, decided not to compete with the networks in the race to get big-name anchors. Companies that follow the logic of value innovation free up their resources to identify and deliver completely new sources of value. Ironically, value innovators do not set out to build advantages over the competition, but they end up achieving the greatest competitive advantages.
Customers
Many companies seek growth through retaining and expanding their customer bases. This often leads to finer segmentation and greater customization of offerings to meet specialized needs. Value innovation follows a different logic. Instead of focusing on the differences among customers, value innovators build on the powerful commonalities in the features that customers value. In the words of a senior executive at the French hotelier Accor, “We focus on what unites customers. Customers’ differences often prevent you from seeing what’s most important.” Value innovators believe that most people will put their differences aside if they are offered a considerable increase in value. Those companies shoot for the core of the market, even if it means that they lose some of their customers.
Assets and Capabilities
Many companies view business opportunities through the lens of their existing assets and capabilities. They ask, Given what we have, what is the best we can do? In contrast, value innovators ask, What if we start anew? That is the question the British company Virgin Group put to itself in the late 1980s. The company had a sizable chain of small music stores across the United Kingdom when it came up with the idea of megastores for music and entertainment,
which would offer customers a tremendous leap in value. Seeing that its small stores could not be leveraged to seize that opportunity, the company decided to sell off the entire chain. As one of Virgin’s executives puts it, “We don’t let what we can do today condition our view of what it takes to win tomorrow. We take a clean-slate approach.”
This is not to say that value innovators never leverage their existing assets and capabilities. They often do. But, more important, they assess business opportunities without being biased or constrained by where they are at a given moment. For that reason, value innovators not only have more insight into where value for buyers resides—and how it is changing—but also are much more likely to act on that insight.
Product and Service Offerings
Conventional competition takes place within clearly established boundaries defined by the products and services the industry traditionally offers. Value innovators often cross those boundaries. They think in terms of the total solution buyers seek, and they try to overcome the chief compromises their industry forces customers to make—as Bert Claeys did by providing free parking. A senior executive at Compaq Computer describes the approach: “We continually ask where our products and services fit in the total chain of buyers’ solutions. We seek to solve buyers’ major problems across the entire chain, even if that takes us into a new business. We are not limited by the industry’s definition of what we should and should not do.”
Creating a New Value Curve
Ask yourself for the following four questions:
Which of the factors that our industry takes for granted should be eliminated?
Which factors should be reduced well below the industry’s standard?
Which factors should be raised well above the industry’s standard?
Which factors should be created that the industry has never offered?
The first question forces managers to consider whether the factors that companies compete on actually deliver value to consumers. Often those factors are taken for granted, even though they have no value or even detract from value. Sometimes what buyers value changes fundamentally, but companies that are focused on benchmarking one another do not act on—or even perceive—the change. The second question forces managers to determine whether products and
services have been overdesigned in the race to match and beat the competition. The third question pushes managers to uncover and eliminate the compromises their industry forces customers to make. The fourth question helps managers break out of the industry’s established boundaries to discover entirely new sources of value for consumers.
The Trap of Competing, the Necessity of Repeating
What happens once a company has created a new value curve? Sooner or later, the competition tries to imitate it. In many industries, value innovators do not face a credible challenge for many years, but in others, rivals appear more quickly. Eventually, however, a value innovator will find its growth and profits under attack. Too often, in an attempt to defend its hard-earned customer base, the company launches offenses. But the imitators often persist, and the value innovator—despite its best intentions—may end up in a race to beat the competition. Obsessed with hanging on to market share, the company may fall into the trap of conventional strategic logic. If the company doesn’t find its way out of the trap, the basic shape of its value curve will begin to
look just like those of its rivals.
Monitoring value curves may also keep a company from pursuing innovation when there is still a huge profit stream to be collected from its current offering. In some rapidly emerging industries, companies must innovate frequently. In many other industries, companies can harvest their successes for a long time: a radically different value curve is difficult for incumbents to imitate, and the volume advantages that come with value innovation make imitation costly. Kinepolis, Formule 1, and CNN, for example, have enjoyed uncontested dominance for a long time. CNN’s value innovation was not challenged for almost ten years. Yet we have seen companies pursue novelty for novelty’s sake, driven by internal pressures to leverage unique competencies or to
apply the latest technology. Value innovation is about offering unprecedented value, not technology or competencies. It is not the same as being first to market.
When a company’s value curve is fundamentally different from that of the rest of the industry—and the difference is valued by most customers—managers should resist innovation. Instead, companies should embark on geographic expansion and operational improvements to achieve maximum economies of scale and market coverage. That approach discourages imitation and allows companies to tap the potential of their current value innovation. Bert Claeys, for example, has been rapidly rolling out and improving its Kinepolis concept with Metropolis, a megaplex in Antwerp, and with megaplexes in many countries in Europe and Asia. And Accor has already built more than 300 Formule 1 hotels across Europe, Africa, and Australia.
The Three Platforms
The companies we studied that were most successful at repeating value innovation were those that took advantage of all three platforms on which value innovation can take place: product, service, and delivery. The precise meaning of the three platforms varies across industries and companies, but, in general, the product platform is the physical product; the service platform is support such as maintenance, customer service, warranties, and training for distributors and retailers; and the delivery platform includes logistics and the channel used to deliver the product to customers.
Too often, managers trying to create a value innovation focus on the product platform and ignore the other two. Over time, that approach is not likely to yield many opportunities for repeated value innovation.
Driving a Company for High Growth
How can senior executives promote value innovation? First, they must identify and articulate the company’s prevailing strategic logic. Then they must challenge it. They must stop and think about the industry’s assumptions, the company’s strategic focus, and the approaches—to customers, assets and capabilities, and product and service offerings—that are taken as given. Having reframed the company’s strategic logic around value innovation, senior executives must ask the four questions that translate that thinking into a new value curve: Which of the factors that our industry takes for granted should be eliminated? Which factors should be reduced well below the industry’s standard? Which should be raised well above the industry’s standard? What factors should be created that the industry has never offered? Asking the full set of questions—rather than singling out one or two—is necessary for profitable growth. Value innovation is the simultaneous pursuit of radically superior value for buyers and lower costs for companies.
A company’s pioneers are the businesses that offer unprecedented value. They are the most powerful sources of profitable growth. At the other extreme are settlers—businesses with value curves that conform to the basic shape of the industry’s. Settlers will not generally contribute much to a company’s growth. The potential of migrators lies somewhere in between. Such businesses extend the industry’s curve by giving customers more for less, but they don’t alter
its basic shape.
If both the current portfolio and the planned offerings consist mainly of settlers, the company has a low growth trajectory and needs to push for value innovation. The company may well have fallen into the trap of competing. If current and planned offerings consist of a lot of migrators, reasonable growth can be expected. But the company is not exploiting its potential for growth and risks being marginalized by a value innovator. This exercise is especially valuable for managers who want to see beyond today’s performance numbers. Revenue, profitability, market share, and customer satisfaction are all measures of a company’s current position. Contrary to what conventional strategic thinking suggests, those measures cannot point the way to the future. The pioneer-migrator-settler map can help a company predict and plan future growth and profit, a task that is especially difficult—and crucial—in a fast-changing economy.
High growth was achieved by both small and large organizations, by companies in high-tech and low-tech industries, by new entrants and incumbents, by private and public companies, and by companies from various countries.
What did matter—consistently—was the way managers in the two groups of companies thought about strategy. In interviewing the managers, we asked them to describe their strategic moves and the thinking behind them. Thus we came to understand their views on each of the five textbook dimensions of strategy:
industry assumptions, strategic focus, customers, assets and capabilities, and product and service offerings.
We were struck by what emerged from our content analysis of those interviews. The managers of the high-growth companies—irrespective of their industry—all described what we have come to call the logic of value innovation. The managers of the less successful companies all thought along conventional strategic lines.
To Diversify or Not to Diversify
One of the most challenging decisions a company can confront is whether to diversify. The rewards and risks are extraordinary. Success stories such as General Electric, Disney, and 3M abound, but so do stories of failure—consider Quaker Oats’ entry into the fruit juice business with Snapple.
What makes diversification such an unpredictable, high-stakes game? First, companies usually face the decision in an atmosphere that is not conducive to thoughtful deliberation. For example, an attractive company comes into play, and a competitor is interested in buying it. Or the board of directors urges expanding into new markets. Suddenly, senior managers must synthesize mountains of data under intense time pressure. To complicate matters, diversification
as a corporate strategy regularly goes in and out of vogue. In short, there is little conventional wisdom to guide managers as they consider a move that could greatly increase shareholder value or seriously damage it.
But diversification doesn’t need to be quite such a roll of the dice, argues the author. His research suggests that if managers consider six questions, they can reduce the gamble of diversification. Answering the questions will not lead to an easy go-no-go decision, but by helping managers weigh risks and opportunities, it can help them assess the likelihood of success.
The issues that the questions raise, and the discussion they provoke, are meant to be coupled with the detailed financial analysis usually conducted before a diversification decision is made. Together, these tools can turn a complex and often pressured decision into a more structured and well-reasoned one.
The Critical Questions for Diversification Success
Most managers tackle the decision to diversify by using financial analysis. That’s necessary but not sufficient. These six questions are designed to help managers identify the strategic risks—and opportunities—that diversification presents:
1) What can our company do better than any of its competitors in its current market?
Managers often diversify on the basis of vague definitions of their business rather than on a systematic analysis of what sets their company apart from its competitors. By determining what they can do better than their existing competitors, companies will have a better chance of succeeding in new markets.
2) What strategic assets do we need in order to succeed in the new market?
Excelling in one market does not guarantee success in a new and related one. Managers considering diversification must ask whether their company has every strategic asset necessary to establish a competitive advantage in the territory it hopes to conquer.
3) Can we catch up to or leapfrog competitors at their own game?
All is not necessarily lost if managers find that they lack a critical strategic asset. There is always the potential to buy what is missing, develop it in-house, or render it unnecessary by changing the competitive rules of the game.
4) Will diversification break up strategic assets that need to be kept together?
Many companies introduce their time-tested strategic assets in a new market and still fail. That is because they have separated strategic assets that rely on one another for their effectiveness and hence are not able to function alone.
5) Will we be simply a player in the new market or will we emerge a winner?
Diversifying companies are often quickly outmaneuvered by their new competitors. Why? In many cases, they have failed to consider whether their strategic assets can be easily imitated, purchased on the open market, or replaced.
6) What can our company learn by diversifying, and are we sufficiently organized to learn it?
Savvy companies know how to make diversification a learning experience. They see how new businesses can help improve existing ones, act as stepping-stones to industries previously out of reach, or improve organizational efficiency.
For more Information:
* Harvard Business Review Paperback Series, Perfect Phrases Series, A Short Course Series, The Oxford Handbook Series, Inside The Minds Series *
Why are some companies able to sustain high growth in revenues and profits—and others are not?
The difference in approach was not a matter of managers choosing one analytical tool or planning model over another. The difference was in the companies’ fundamental, implicit assumptions about strategy. The less successful companies took a conventional approach: their strategic thinking was dominated by the idea of staying ahead of the competition. In stark contrast, the high-growth companies paid little attention to matching or beating their rivals. Instead, they sought to make their competitors irrelevant through a strategic logic we call value innovation.
Managers of the less successful companies followed conventional strategic logic. Managers of the high-growth companies followed what the authors call the logic of value innovation.
Conventional strategic logic and value innovation differ along the basic dimensions of strategy. Many companies take their industry’s conditions as given; value innovators don’t. Many companies let competitors set the parameters of their strategic thinking; value innovators do not use rivals as benchmarks.
Rather than focus on the differences among customers, value innovators look for what customers value in common. Rather than view opportunities through the lens of existing assets and capabilities, value innovators ask, What if we start anew?
Conventional Logic Versus Value Innovation:
The Five Dimensions of Strategy Conventional Logic
=============================== ======================
i) Industry
Assumptions Industry’s conditions are given.
ii) Strategic Focus A company should build competitive advantages. The aim is to beat the competition.
iii) Customers A company should retain and expand its customer base through further segmentation and customization. It should focus on the differences in what customers value.
iv) Assets and
Capabilities A company should leverage its existing assets and capabilities.
v) Product and
Service Offerings An industry’s traditional boundaries determine the products and services a company offers. The goal is to maximize the value of those offerings.
The Five Dimensions of Strategy Value Innovation Logic
============================== =========================
i) Industry
Assumptions Industry’s conditions can be shaped.
ii) Strategic Focus Competition is not the benchmark. A company should pursue a quantum leap in value to dominate the market.
iii) Customers A value innovator targets the mass of buyers and willingly lets some existing customers go. It focuses on the key commonalities in what customers value.
iv) Assets and
Capabilities A company must not be constrained by what it already has. It must ask, What would we do if we were starting anew?
v) Product and
Service Offerings A value innovator thinks in terms of the total solution customers seek, even if that takes the company beyond its industry’s traditional offerings.
Industry Assumptions
Many companies take their industry’s conditions as given and set strategy accordingly. Value innovators don’t. No matter how the rest of the industry is faring, value innovators look for blockbuster ideas and quantum leaps in value. Had Bert Claeys, for example, taken its industry’s conditions as given, it would never have created a megaplex. The company would have followed the endgame strategy of milking its business or the zero-sum strategy of competing for
share in a shrinking market. Instead, through Kinepolis, the company transcended the industry’s conditions.
Strategic Focus
Many companies let competitors set the parameters of their strategic thinking. They compare their strengths and weaknesses with those of their competitors and focus on building advantages. Consider this example. For years, the major U.S. television networks used the same format for news programming. All aired shows in the same time slot and competed on their analysis of events, the professionalism with which they delivered the news, and the popularity of their anchors. In 1980, CNN came on the scene with a focus on creating a quantum leap in value, not on competing with the networks. CNN replaced the networks’ format with real-time news from around the world 24 hours a day. CNN not only emerged as the leader in global news broadcasting—and created new demand around the world—but also was able to produce 24 hours of real-time news for one-fifth the cost of 1 hour of network news.
Conventional logic leads companies to compete at the margin for incremental share. The logic of value innovation starts with an ambition to dominate the market by offering a tremendous leap in value. Value innovators never say, Here’s what competitors are doing; let’s do this in response. They monitor competitors but do not use them as benchmarks. Hasso Plattner, vice chairman of SAP, the global leader in business- application software, puts it this way:
“I’m not interest-ed in whether we are better than the competition. The real test is, will most buyers still seek out our products even if we don’t market them?”
Because value innovators do not focus on competing, they can distinguish the factors that deliver superior value from all the factors the industry competes on. They do not expend their resources to offer certain product and service features just because that is what their rivals are doing. CNN, for example, decided not to compete with the networks in the race to get big-name anchors. Companies that follow the logic of value innovation free up their resources to identify and deliver completely new sources of value. Ironically, value innovators do not set out to build advantages over the competition, but they end up achieving the greatest competitive advantages.
Customers
Many companies seek growth through retaining and expanding their customer bases. This often leads to finer segmentation and greater customization of offerings to meet specialized needs. Value innovation follows a different logic. Instead of focusing on the differences among customers, value innovators build on the powerful commonalities in the features that customers value. In the words of a senior executive at the French hotelier Accor, “We focus on what unites customers. Customers’ differences often prevent you from seeing what’s most important.” Value innovators believe that most people will put their differences aside if they are offered a considerable increase in value. Those companies shoot for the core of the market, even if it means that they lose some of their customers.
Assets and Capabilities
Many companies view business opportunities through the lens of their existing assets and capabilities. They ask, Given what we have, what is the best we can do? In contrast, value innovators ask, What if we start anew? That is the question the British company Virgin Group put to itself in the late 1980s. The company had a sizable chain of small music stores across the United Kingdom when it came up with the idea of megastores for music and entertainment,
which would offer customers a tremendous leap in value. Seeing that its small stores could not be leveraged to seize that opportunity, the company decided to sell off the entire chain. As one of Virgin’s executives puts it, “We don’t let what we can do today condition our view of what it takes to win tomorrow. We take a clean-slate approach.”
This is not to say that value innovators never leverage their existing assets and capabilities. They often do. But, more important, they assess business opportunities without being biased or constrained by where they are at a given moment. For that reason, value innovators not only have more insight into where value for buyers resides—and how it is changing—but also are much more likely to act on that insight.
Product and Service Offerings
Conventional competition takes place within clearly established boundaries defined by the products and services the industry traditionally offers. Value innovators often cross those boundaries. They think in terms of the total solution buyers seek, and they try to overcome the chief compromises their industry forces customers to make—as Bert Claeys did by providing free parking. A senior executive at Compaq Computer describes the approach: “We continually ask where our products and services fit in the total chain of buyers’ solutions. We seek to solve buyers’ major problems across the entire chain, even if that takes us into a new business. We are not limited by the industry’s definition of what we should and should not do.”
Creating a New Value Curve
Ask yourself for the following four questions:
Which of the factors that our industry takes for granted should be eliminated?
Which factors should be reduced well below the industry’s standard?
Which factors should be raised well above the industry’s standard?
Which factors should be created that the industry has never offered?
The first question forces managers to consider whether the factors that companies compete on actually deliver value to consumers. Often those factors are taken for granted, even though they have no value or even detract from value. Sometimes what buyers value changes fundamentally, but companies that are focused on benchmarking one another do not act on—or even perceive—the change. The second question forces managers to determine whether products and
services have been overdesigned in the race to match and beat the competition. The third question pushes managers to uncover and eliminate the compromises their industry forces customers to make. The fourth question helps managers break out of the industry’s established boundaries to discover entirely new sources of value for consumers.
The Trap of Competing, the Necessity of Repeating
What happens once a company has created a new value curve? Sooner or later, the competition tries to imitate it. In many industries, value innovators do not face a credible challenge for many years, but in others, rivals appear more quickly. Eventually, however, a value innovator will find its growth and profits under attack. Too often, in an attempt to defend its hard-earned customer base, the company launches offenses. But the imitators often persist, and the value innovator—despite its best intentions—may end up in a race to beat the competition. Obsessed with hanging on to market share, the company may fall into the trap of conventional strategic logic. If the company doesn’t find its way out of the trap, the basic shape of its value curve will begin to
look just like those of its rivals.
Monitoring value curves may also keep a company from pursuing innovation when there is still a huge profit stream to be collected from its current offering. In some rapidly emerging industries, companies must innovate frequently. In many other industries, companies can harvest their successes for a long time: a radically different value curve is difficult for incumbents to imitate, and the volume advantages that come with value innovation make imitation costly. Kinepolis, Formule 1, and CNN, for example, have enjoyed uncontested dominance for a long time. CNN’s value innovation was not challenged for almost ten years. Yet we have seen companies pursue novelty for novelty’s sake, driven by internal pressures to leverage unique competencies or to
apply the latest technology. Value innovation is about offering unprecedented value, not technology or competencies. It is not the same as being first to market.
When a company’s value curve is fundamentally different from that of the rest of the industry—and the difference is valued by most customers—managers should resist innovation. Instead, companies should embark on geographic expansion and operational improvements to achieve maximum economies of scale and market coverage. That approach discourages imitation and allows companies to tap the potential of their current value innovation. Bert Claeys, for example, has been rapidly rolling out and improving its Kinepolis concept with Metropolis, a megaplex in Antwerp, and with megaplexes in many countries in Europe and Asia. And Accor has already built more than 300 Formule 1 hotels across Europe, Africa, and Australia.
The Three Platforms
The companies we studied that were most successful at repeating value innovation were those that took advantage of all three platforms on which value innovation can take place: product, service, and delivery. The precise meaning of the three platforms varies across industries and companies, but, in general, the product platform is the physical product; the service platform is support such as maintenance, customer service, warranties, and training for distributors and retailers; and the delivery platform includes logistics and the channel used to deliver the product to customers.
Too often, managers trying to create a value innovation focus on the product platform and ignore the other two. Over time, that approach is not likely to yield many opportunities for repeated value innovation.
Driving a Company for High Growth
How can senior executives promote value innovation? First, they must identify and articulate the company’s prevailing strategic logic. Then they must challenge it. They must stop and think about the industry’s assumptions, the company’s strategic focus, and the approaches—to customers, assets and capabilities, and product and service offerings—that are taken as given. Having reframed the company’s strategic logic around value innovation, senior executives must ask the four questions that translate that thinking into a new value curve: Which of the factors that our industry takes for granted should be eliminated? Which factors should be reduced well below the industry’s standard? Which should be raised well above the industry’s standard? What factors should be created that the industry has never offered? Asking the full set of questions—rather than singling out one or two—is necessary for profitable growth. Value innovation is the simultaneous pursuit of radically superior value for buyers and lower costs for companies.
A company’s pioneers are the businesses that offer unprecedented value. They are the most powerful sources of profitable growth. At the other extreme are settlers—businesses with value curves that conform to the basic shape of the industry’s. Settlers will not generally contribute much to a company’s growth. The potential of migrators lies somewhere in between. Such businesses extend the industry’s curve by giving customers more for less, but they don’t alter
its basic shape.
If both the current portfolio and the planned offerings consist mainly of settlers, the company has a low growth trajectory and needs to push for value innovation. The company may well have fallen into the trap of competing. If current and planned offerings consist of a lot of migrators, reasonable growth can be expected. But the company is not exploiting its potential for growth and risks being marginalized by a value innovator. This exercise is especially valuable for managers who want to see beyond today’s performance numbers. Revenue, profitability, market share, and customer satisfaction are all measures of a company’s current position. Contrary to what conventional strategic thinking suggests, those measures cannot point the way to the future. The pioneer-migrator-settler map can help a company predict and plan future growth and profit, a task that is especially difficult—and crucial—in a fast-changing economy.
High growth was achieved by both small and large organizations, by companies in high-tech and low-tech industries, by new entrants and incumbents, by private and public companies, and by companies from various countries.
What did matter—consistently—was the way managers in the two groups of companies thought about strategy. In interviewing the managers, we asked them to describe their strategic moves and the thinking behind them. Thus we came to understand their views on each of the five textbook dimensions of strategy:
industry assumptions, strategic focus, customers, assets and capabilities, and product and service offerings.
We were struck by what emerged from our content analysis of those interviews. The managers of the high-growth companies—irrespective of their industry—all described what we have come to call the logic of value innovation. The managers of the less successful companies all thought along conventional strategic lines.
To Diversify or Not to Diversify
One of the most challenging decisions a company can confront is whether to diversify. The rewards and risks are extraordinary. Success stories such as General Electric, Disney, and 3M abound, but so do stories of failure—consider Quaker Oats’ entry into the fruit juice business with Snapple.
What makes diversification such an unpredictable, high-stakes game? First, companies usually face the decision in an atmosphere that is not conducive to thoughtful deliberation. For example, an attractive company comes into play, and a competitor is interested in buying it. Or the board of directors urges expanding into new markets. Suddenly, senior managers must synthesize mountains of data under intense time pressure. To complicate matters, diversification
as a corporate strategy regularly goes in and out of vogue. In short, there is little conventional wisdom to guide managers as they consider a move that could greatly increase shareholder value or seriously damage it.
But diversification doesn’t need to be quite such a roll of the dice, argues the author. His research suggests that if managers consider six questions, they can reduce the gamble of diversification. Answering the questions will not lead to an easy go-no-go decision, but by helping managers weigh risks and opportunities, it can help them assess the likelihood of success.
The issues that the questions raise, and the discussion they provoke, are meant to be coupled with the detailed financial analysis usually conducted before a diversification decision is made. Together, these tools can turn a complex and often pressured decision into a more structured and well-reasoned one.
The Critical Questions for Diversification Success
Most managers tackle the decision to diversify by using financial analysis. That’s necessary but not sufficient. These six questions are designed to help managers identify the strategic risks—and opportunities—that diversification presents:
1) What can our company do better than any of its competitors in its current market?
Managers often diversify on the basis of vague definitions of their business rather than on a systematic analysis of what sets their company apart from its competitors. By determining what they can do better than their existing competitors, companies will have a better chance of succeeding in new markets.
2) What strategic assets do we need in order to succeed in the new market?
Excelling in one market does not guarantee success in a new and related one. Managers considering diversification must ask whether their company has every strategic asset necessary to establish a competitive advantage in the territory it hopes to conquer.
3) Can we catch up to or leapfrog competitors at their own game?
All is not necessarily lost if managers find that they lack a critical strategic asset. There is always the potential to buy what is missing, develop it in-house, or render it unnecessary by changing the competitive rules of the game.
4) Will diversification break up strategic assets that need to be kept together?
Many companies introduce their time-tested strategic assets in a new market and still fail. That is because they have separated strategic assets that rely on one another for their effectiveness and hence are not able to function alone.
5) Will we be simply a player in the new market or will we emerge a winner?
Diversifying companies are often quickly outmaneuvered by their new competitors. Why? In many cases, they have failed to consider whether their strategic assets can be easily imitated, purchased on the open market, or replaced.
6) What can our company learn by diversifying, and are we sufficiently organized to learn it?
Savvy companies know how to make diversification a learning experience. They see how new businesses can help improve existing ones, act as stepping-stones to industries previously out of reach, or improve organizational efficiency.
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