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HBR 1997 Most campanies focus on matching and beating their rivals. Asa result, their strategies tend to take on similar dimensions. What ensues is head-to-head com- petition based iargely on incremental improvements in cost, quality, or both. W.Chan Kim and Renee Mauborgnefrom Insead study how innovative compa- nies break free from the pack by staking out fundamentally new market space- that is, by creating products or services for which there are no direct competitors. This path to value innovation requires a different competitive mind-set and a systematic way of looking for opportunities. Instead of searching within the con- ventional boundaries of industry competition, managers can look methodically across those boundaries to find unoccupied territory that represents real value innovation. The French hotel chain Accor,for example, discarded conventional notions of what a budget hotel should be and offered what most value-conscious customers really wanted; a good night's sleep at a low price. During the past decade, the authors have developed the idea of value innova- tion, often in the pages of HBR. This article presents the notion in its original, most fundamental form. Value Innovation The Strategic Logic of High Growth by W.Chan Kim and Renee Mauborgne What separates high- growth companies from the pack is the way managers make sense of how they do business. A FTER A DECADE OF DOWNSIZING and increasingly intense competi- tion, profitable growth is a tremendous challenge many companies face. Why do some companies achieve sustained high growth in both revenues and prof- its? In a five-year study of high-growth companies and their less successful com- petitors, we found that the answer lay in the way each group approached strat- egy. 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 as- sumptions about strategy. The less suc- cessful companies took a conventional approach: Their strategic thinking was dominated by the idea of staying ahead ofthe competition. In stark contrast, the high-growth companies paid little atten- tion to matching or beating their rivals. Instead,they sought to make their com- petitors irrelevant through a strategic logic we call value innovation. Consider Bert Claeys, a Belgian com- pany that operates movie theaters. From the 1960s to the 1980s, the movie the- ater industry in Belgium was declining steadily. With the spread of videocas- sette recorders and satellite and cable television, the average Belgian's movie- going dropped from eight to two times per year. By the 1980s, many cinema op- erators (COs) were forced to shut down. The COs that remained in business found themselves competing head-to- head for a shrinking market. All took 172 HARVARD BUSINESS REVIEW
similar actions. They turned cinemas into multiplexes with as many as ten screens, broadened their film offerings to attract all customer segments, ex- panded their food and drink services, and increased showing times. Those attempts to leverage existing assets became irrelevant in 1988, when Bert Claeys created Kinepolis. Neither an ordinary cinema nor a multiplex, Kinepolis is the world's first megaplex, with 25 screens and 7,600 seats. By of- fering moviegoers a radically superior experience, Kinepolis won 50% of the market in Brussels in its first year and expanded the market by about 40%. Today, many Belgians refer not to a night at the movies but to an evening at Kinepolis. Consider the differences between Kinepolis and other Belgian movie the- aters. The typical Belgian multiplex has small viewing rooms that often have no more than 100 seats, screens that mea- sure seven meters byfivemeters, and 35- millimeter projection equipment. View- ing rooms at Kinepolis have up to 700 seats, and there is so much legroom that viewers do not have to move when someone passes by. Bert Claeys installed oversized seats with individual armrests and designed a steep slope in the floor to ensure everyone an unobstructed view. At Kinepolis, screens measure up to 29 meters by ten meters and rest on their own foundations so that sound vibrations are not transmitted among screens. Many viewing rooms have 70- millimeter projection equipment and state-of-the-art sound equipment. And Bert Claeys challenged the industry's conventional wisdom about the impor- tance of prime, city-center real estate by locating Kinepolis off the ring road circling Brussels, 15 minutes from down- town. Patrons park for free in large, well-lit lots. (The company was prepared to lose out on foot traffic in order to solve a major problem for the majority of moviegoers in Brussels: the scarcity and high cost of parking.) Bert Claeys can offer this radically superior cinema experience without increasing ticket prices because the concept of the megaplex results in one of the lowest cost structures in the industry. The average cost to build a seat at Kinepolis is about 70,000 Bel- gian francs, less than half the indus- try's average in Brussels. Why? The megaplex's location outside the city is cheaper; its size gives it economies in purchasing, more leverage with film distributors, and better overall margins; and with 25 screens served by a central ticketing and lobby area, Kinepolis achieves economies in personnel and overhead. Furthermore, the company spends very little on advertising be- cause its value innovation generates a lot of word-of-mouth praise. Within its supposedly unattractive industry, Kinepoiis has achieved spec- tacular growth and profits. Belgian moviegoers now attend the cinema more frequently because of Kinepolis, and people who never went to the movies have been drawn into the mar- ket. Instead of battling competitors over targeted segments of the market, Bert Claeys made the competition irrele- vant. (See the exhibit "How Kinepolis Achieves Profitable Growth.") Why did other Belgian COs fail to seize that opportunity? Like the others, Bert Claeys was an incumbent with sunk investments: a network of cinemas across Belgium. In fact, Kinepolis would have represented a smaller investment for some COs than it did for Bert Claeys. Most COs were thinking-implicitly or TOP-LINE GROWTH JULY-AUGUST 2004 173
Please carefully read the Article 3; then do as follows: - Explain in your own words the differences between Conventional Logic and Value Innovation Logic in each of the 5 dimensions of strategy (as laid out in the table) for firms to create and sustain competitive advantage within their industry. Use an example to illustrate these differences (please use your own examples; do not repeat the same examples used in the article). - How did Accor’s Formule 1 create a new value curve in the budget motel industry? In what specific ways can this formula be replicated in the United States? Your responses in your report need you to well articulate your thoughts and learning, and express your understanding and your position in professional business & marketing language. Simple copy-pastes are not needed; elaboration to clarify and project your comprehension of the issues is required here. Further, there is no exact right or wrong answer; I'm looking for your opinion and how well you can justify your stance.
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