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Kim, W. C. and R. Mauborgne. 1999. Creating new market space: A systematic approach to value innovation can help companies break free from the competitive pack. Harvard Business Review (January-February): 83-93.

Summary by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida

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The purpose of this article is to describe how companies can pursue value innovation by looking for potential innovations across the six boundaries of competition. These six boundaries include:

1. Substitute industries,
2. Strategic groups within industries,
3. The chain of buyers,
4. Complementary product and service offerings,
5. Functional or emotional appeal to buyers, and
6. Time.

The table below provides an overview of the concepts discussed in the article. It is based on Kim and Mauborgne's illustration on page 92 and the various examples drawn from their research in a broad range of industries and competitive environments.

Conventional Boundaries
of Competition
Head-To-Head Competition Creating New
Market Space
Innovative
Company Examples
Industry Focuses on rivals within its industry. Looks across substitute industries. Home Depot, Intuit's Quicken Software, Federal Express, UPS, and Southwest Airlines.
Strategic Group Focuses on the competitive position within a strategic group. Looks across strategic groups within its industry. Polo Ralph Lauren, Toyota's Lexis, Sony Walkman, and Champion prefab housing.
Buyer Group Focuses on better serving the buyer group. Redefines the buyer group of the industry. Bloomberg business information, and Philips Lighting Company.
Scope of Product and
Service Offerings
Focuses on maximizing the value of product and service offerings within the bounds of its industry. Looks across to complementary product and service offerings that go beyond the bounds of its industry. Borders Books & Music, Barnes & Noble, Virgin Entertainment, Dyson vacuum cleaners, and Zeneca Cancer Centers.
Functional-Emotional
Orientation
of an
Industry
Focuses on improving price-performance in line with the functional-emotional orientation of its industry. Rethinks the functional-emotional orientation of its industry. Starbucks coffee bars, Swatch watches, the Body Shop and Direct Line Insurance.
Time Focuses on adapting to external trends as they occur. Participates in shaping external trends over time. Enron, and Cisco Systems.

Looking Across Substitute Industries

Companies compete with companies that offer substitute products as well as companies within their own industry. The space between substitutes provides opportunities for value innovation. Home Depot created a market of do-it-yourselfers in the space between choosing contractors and going to the hardware store. The idea is to discover new opportunities by asking the four questions in the graphic below.

Key to Discovering a New Value Curve

Answering the four questions above lead Intuit to create a new value curve combining the low price and ease of use of the lowly pencil with the speed and accuracy of personal financial software.

Quicken's Value Curve

Looking Across Strategic Groups Within Industries

The term "strategic groups" refers to companies within the same industry that pursue a similar strategy. Rather than competing within a strategic group, value innovators create new market space by understanding what causes buyers to trade up or down from one group to another. For example, Toyota's Lexus created new space by providing the high quality of a Mercedes, BMW, or Jaguar at a price closer to the lower-end Cadillac or Lincoln. Sony Walkman provides the cool image of a boom box with the low price and convenient size of a transistor radio.

Looking Across the Chain of Buyers

Rather than looking at a target customer, value innovators pursue the chain of customers that includes purchasers, users, and influencers. For example, Philips Lighting shifted emphasis from purchasers to influencers by producing the Alto (an environmentally friendly light bulb) that it promoted to CFO's and public relations people. Product sales grew rapidly as traditional fluorescent lamps that contain toxic mercury were replaced in schools, stores and office buildings.

Looking Across Complementary Product and Service Offerings

Value innovators also tap hidden opportunities by defining the total solution that buyers seek. The idea is to think about what happens before, during and after your product or service is purchased. For example, Borders Books & Music and Barnes & Noble created book superstores that focused on lifelong learning and discovery where the product includes the pleasure of reading and intellectual exploration as well as the book itself. These superstores provide a large selection of books, as well as knowledgeable staff, armchairs, reading tables, sofas, coffee bars and classical music to enhance the buyers total book buying experience (see their book retailing value curve below).

Borders and Barnes & Noble Value Curve in Book Retailing

Looking Across Functional or Emotional Appeal to Buyers

Value innovators also find opportunities by competing on the basis of emotion, as well as price and function. Starbucks introduced a new concept - the coffee bar, to provide coffee drinkers with an emotional experience rather than just a cup of coffee. The Body Shop created new market space by shifting its emphasis from an emotional appeal to a functional appeal in the cosmetics industry (see their value curve below).

Body Shop's Value Curve

Looking Across Time

There are three critical principles related to assessing trends across time. To develop a new value curve, the trend must be decisive to your business, be irreversible, and have a clear trajectory. For example, Cisco Systems created new market space by identifying a trend that satisfied the three principles above, i.e., the growing demand for high-speed data exchange. At a time when internet users were doubling every 100 days, Cisco created break-through value by producing routers, switches and other networking equipment that provided rapid data interchanges in a seamless networking environment. According to the authors, by 1999, Cisco had 80% of the internet traffic flowing through its products.

Conclusion

Creating new market space and value curves is critical in a demand-starved economy for both small and large companies. Maintaining profitable growth is only sustainable by creating and recreating new space, new markets and new value.

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