Strategic Innovation
How to Grow Much Faster than the Competition?
Published in Hebrew in Status - Management
Thinking Magazine, Issue 161, November 2004
By Ari Manor, CEO, ZOOZ
Strategy, as most of you realize, is not about doing what your competitors already do - only better, but rather about doing things differently than your competitors. How different is a matter of personal preference and daring. This article describes a method for developing an unorthodox strategy, enabling those who choose it to grow substantially and even increase the size of the market they are operating in.
The article is based on the results of the research described by: Kim at Mauborgne, Value Innovation, HBR on Breakthrough Thinking, pp. 189-217, Harvard Business School Press 1999.
An alternative to Michael Porter
When executives work on the development of a strategic plan, they usually concentrate on the active forces in the market (competitors, suppliers, customers...); on achieving a competitive advantage through cost leadership, differentiation or focus; in short - they work according to Michael Porter's doctrine. The Model developed by Porter, which is based on economic observations, was first presented in 1980, and has been used by most leading organizations and consulting firms in the world in their efforts to develop a strategy. Michael Porter himself was recently chosen as the most important business thinker in a poll among American and European CEOs. But is there a true alternative to his methodology? Can it produce better results? Apparently there is.
A comparative research by two INSEAD professors, covering 30 firms over a time span of 5 years, has led them to conclude that precisely because most of the world is working according to principles laid out by Porter, it is better to choose a different approach. According to the study, in order to increase income and profit at a much higher rate than normal in a given market, the rules of the strategic game must be changed:
- Reshape the market (instead of being subject to its constraints).
- Ignore the competition (that is operating according to existing market rules).
- Ignore existing assets and capabilities (instead of trying to utilize them).
- Focus on what most of the customers want (instead of catering to segments by making adaptations).
- Develop an extraordinary solution for the customers (even if it is above and beyond the market standard).
Value Innovation in Inexpensive Hotels
One of the examples analyzed by the researchers was the inexpensive hotel market in France in the year 1985. At the time, the market suffered a recession, intense competition, and a decrease in income. What would you have done if you were the manager of a mid-sized inexpensive hotel chain (one or two stars), at that time in France? The market dictates and the competition would have forced you to lower prices (while attempting to improve operations and lower costs). You might have offered an improved service to chosen segments (such as entertainment activities for families with children, or a service catering to tourists). If the recession were to continue, you'd probably have to get rid of non-profitable hotels as quickly as possible, and hold on to the more successful ones. These would have been the steps taken by...your competition. Therefore, your fate would not have been much different than theirs.
This is precisely the dilemma the managers of the French firm Accor faced in 1985. However, these managers wanted to grow more than their competitors and therefore decided to follow a more innovative and bold strategy. They began by asking themselves "what do most of the customers of inexpensive hotels want more than anything?" Their answer was simple: "A good night's sleep!" They continued by developing a new kind of inexpensive hotel that promised a very sound sleep. They did it by ignoring common market practices, or the hotels they owned at the time. The first question on the way to implementation was: "which components can we enhance or add, in order to ensure a good sleep?" Their conclusions were:
- It is important to have a good bed and a quality mattress
- The room must be very clean (so it is pleasant to sleep in).
- The room should be isolated from noise (it is difficult to fall asleep with noise).
The second question on the agenda was: "which components can we minimize or eliminate, since they are not imperative to ensure a good sleep?" The idea here was to save costs on non-essential things in order to cover the costs of the above-mentioned additions. Their conclusions were:
- There is no need for a restaurant or lobby (hotel guests may dine outside).
- There is no need for room service (when you sleep you don't need service).
- No window view is necessary (when you sleep you don't look at the view).
- Only minimal furniture is required (clothes hangers), and the rooms may be smaller.
Several meetings later, the management of Accor decided to open a new chain of inexpensive hotels, in which good sleep is assured, and to sell and get rid of all the inexpensive hotels it owned at the time. The new chain, Formula1 (now quite renown), was inaugurated in 1985 in France, and has experienced constant growth ever since. When it was first launched, the chain offered an innovative and unique mix of what was customary in the inexpensive hotel market at the time:
- Check-in and checkout times were at midday only.
- No lobby or restaurant, small rooms without furniture or closets.
- The rooms were modular units made in factories.
- High quality beds, noise isolation, impeccable cleanliness.
- A rate that was only slightly higher than one star hotels (and half the rate of 2 star hotels).
Formula1 hotels offered costumers true value innovation. The results were soon to follow:
- A market share bigger than the next 5 competitors combined (!!!)
- Employee costs 20%-23% of income (compared to 25%-35% in the market).
- 50% savings on room construction.
- A growth in the entire market, as new clients turned to inexpensive hotels, including:
- Truck drivers that stopped sleeping in trucks.
- Business people that needed a few hours rest.
- Couples that looked for a clean and isolated rendezvous.
Almost 20 years later, Formula1 hotels are still a major growth driver for the Accor group. The hotels can now be found all over Europe and other continents, and are changing the rules of the game in the inexpensive hotel markets in every country they enter.
Value Innovation Strategy
In order to offer customers what they want most of all, one should develop an innovative product/service mix that is fundamentally different from the common market standard. The new mix should include enhanced or new components, and minimize or eliminate others. In such a way, in spite of the high added value, the price customers pay is not necessarily higher. Other examples mentioned in the article clarify this point:
- Compaq has grown in three value innovation waves (in the relatively high change rate of the computer market). In the first wave in 1989, Compaq developed servers for businesses that offered excellent document storage and printing at a much lower cost than the standard (which was what most customers wanted at the time), at the expense of lower compatibility to all types of existing software. It was so successful that all the competitors were quick to follow with similar servers within two years.
- Kinepolis opened the first mega cinema complex in the world in 1988, offering larger screens, improved sound, more comfortable chairs, wider aisles, and a larger selection of movies and halls, all for a lower ticket price and with free parking - but at a location outside Brussels' city center (saving enormous costs). The result: capturing 50% of the Brussels' market and enlarging the market by 40%.
Value Innovation Strategy gives those who choose it a significant relative advantage, since the competitors are nearly always trying to adhere to market rules rather than break them. Those who manage to break away from convention are expected to gain major growth not only at the expense of the competition (drawing away customers and enlarging market share), but also by enlarging the entire market (new customers that never bought before). Indeed, a follow up study of 100 new firms from various markets supports this. This research showed that companies that made true value innovation, gained on average 4 times more income (!) and made 10 times more profits (!!!) than companies that did not chose value innovation.
In recent years we have helped several firms to develop value innovation strategies. Strategy, by nature, calls for real changes, and more so a strategy that aims to change the rules of the game. Therefore, implementing value innovation strategy is not always easy or immediate, and highly depends on the firm and the senior management's commitment. However, in our experience, it is a practical and easy-to-use method that helps reach fascinating market insight in a short time, and arrive at very unorthodox and promising strategic directions. Here are some of the questions we asked in these consulting processes:
Here are some of the questions we asked in these consulting processes:
- What do bank customers want most of all?
- What do Health Insurance Funds want more than anything (from pharmaceutical firms)?
- What do Internet news portal surfers want most of all?
And how about your company? What do your customers want more than anything? How can you provide it? What can be enhanced? Added? What should be minimized? Eliminated? What rules of the game may be broken? Good luck!
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Written by Ari Manor, CEO, ZOOZ. All rights reserved.
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The above article is based on the research results published by:
Kim at Mauborgne,Value Innovation,
HBR on Breakthrough Thinking; pp. 189-217, Harvard Business School Press 1999
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