From the s to the s, the movie theater industry in Belgium was declining steadily. By the s, many cinema operators COs were forced to shut down. The COs that remained in business found themselves competing head-to-head for a shrinking market. All took similar actions. They turned cinemas into multiplexes with as many as ten screens, broadened their film offerings to attract all customer segments, expanded their food and drink services, and increased showing times.
Those attempts to leverage existing assets became irrelevant in , when Bert Claeys created Kinepolis. 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 theaters. The typical Belgian multiplex has small viewing rooms that often have no more than seats, screens that measure seven meters by five meters, and millimeter projection equipment.
Viewing rooms at Kinepolis have up to 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 millimeter projection equipment and state-of-the-art sound equipment. 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. Furthermore, the company spends very little on advertising because its value innovation generates a lot of word-of-mouth praise.
Within its supposedly unattractive industry, Kinepolis has achieved spectacular 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 market. Instead of battling competitors over targeted segments of the market, Bert Claeys made the competition irrelevant.
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 explicitly—along these lines: The industry is shrinking, so we should not make major investments—especially in fixed assets. But we can improve our performance by outdoing our rivals on each of the key dimensions of competition. We must have better films, better services, and better marketing.
Bert Claeys followed a different strategic logic. The company thought as if it were a new entrant into the market. It sought to reach the mass of moviegoers by focusing on widely shared needs. In order to give most moviegoers a package they would value highly, the company put aside conventional thinking about what a theater is supposed to look like. And it did that while reducing its costs.
Conventional strategic logic and the logic of value innovation differ along the five basic dimensions of strategy. Those differences determine which questions managers ask, what opportunities they see and pursue, and how they understand risk. No matter how the rest of the industry is faring, value innovators look for blockbuster ideas and quantum leaps in value. 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. Many organizations let competitors set the parameters of their strategic thinking.
They compare their strengths and weaknesses with those of their rivals and focus on building advantages. Consider this example. For years, the major U. 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 , CNN came on the scene with a focus on creating a quantum leap in value, not on competing with the networks. CNN not only emerged as the leader in global news broadcasting—and created new demand around the globe—but also was able to produce 24 hours of real-time news for one-fifth the cost of one 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. They monitor competitors but do not use them as benchmarks.
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, even though value innovators do not set out to build advantages over the competition, they often end up achieving the greatest competitive advantages.
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 between customers, value innovators build on the powerful commonalities in the features that customers value.
Those companies shoot for the core of the market, even if it means losing some of their customers. 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 s. The company had a sizable chain of small music stores across the United Kingdom when it came up with the idea of music and entertainment megastores, 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.
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. 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. Consider the case of Accor. In the mids, the budget hotel industry in France was suffering from stagnation and overcapacity. The managers were urged to forget everything they knew about the existing rules, practices, and traditions of the industry.
They were asked what they would do if Accor were starting fresh. In , when Accor launched Formule 1, a line of budget hotels, there were two distinct market segments in the industry. One segment consisted of no-star and one-star hotels, whose average price per room was between 60 and 90 French francs. Customers came to those hotels just for the low price. The other segment was two-star hotels, with an average price of Fr per room. Those more expensive hotels attracted customers by offering a better sleeping environment than the no-star and one-star hotels. They asked themselves the following four questions: Which of the factors that our industry takes for granted should be eliminated?
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. In answering the questions, Accor came up with a new concept for a hotel, which led to the launch of Formule 1. First, the company eliminated such standard hotel features as costly restaurants and appealing lounges.
Accor reckoned that even though it might lose some customers, most people would do without those features. On those, Formule 1 offers less than many no-star hotels do. For example, receptionists are on hand only during peak check-in and checkout hours. At all other times, customers use an automated teller.
Rooms at a Formule 1 hotel are small and equipped only with a bed and the bare necessities—no stationery, desks, or decorations. Instead of closets and dressers, there are a few shelves and a pole for clothing in one corner of the room. The rooms themselves are modular blocks manufactured in a factory, a method that results in economies of scale in production, high quality control, and good sound insulation. Formule 1 gives Accor considerable cost advantages. Those cost savings have allowed Accor to improve the features customers value most to levels beyond those of the average French two-star hotel, but the price is only marginally above that of one-star hotels.
Customers have rewarded Accor for its value innovation. The company has not only captured the mass of French budget hotel customers but also expanded the market. From truck drivers who previously slept in their vehicles to businesspeople needing a few hours of rest, new customers have been drawn to the budget category. Formule 1 made the competition irrelevant. Like Accor, all the high-performing companies we studied created fundamentally new and superior value curves.
They achieved that through a combination of eliminating features, creating features, and reducing and raising features to levels unprecedented in their industries. Take, for example, SAP, which was started in the early s by five former IBM employees in Walldorf, Germany, and became the worldwide industry leader. While most software companies were focusing on improving the performance of particular application products, SAP took aim at the mass of buyers.
The company correctly hypothesized that for most customers, the performance advantages of highly customized, individual software modules had been overestimated. Such modules forfeited the efficiency and information advantages of an integrated system, which allows real-time data exchange across a company. A sales manager, for example, can find out when a product will be delivered and why it is late by cross-referencing the production database.
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. When Compaq Computer launched its first personal computer in , most PC buyers were sophisticated corporate users and technology enthusiasts. Within three years of its launch, Compaq joined the Fortune No other company had ever achieved that status as quickly.
How did IBM respond? And Compaq, determined to defend itself, became focused on beating IBM. But while IBM and Compaq were battling over feature enhancements, most buyers were becoming more sensitive to price.
User-friendliness was becoming more important to customers than the latest technology. When IBM walked off the cliff in the late s, Compaq was following close behind. Could Compaq have foreseen the need to create another value innovation rather than go head-to-head against IBM?
And by the late s, the curves were nearly identical. That should have been the signal to Compaq that it was time for another quantum leap. 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.
Figure 1. What is also important for a firm which chooses Wait and See is to take great care with its external communications as the main objective of the strategy is to control the cost of compliance and avoid taking action until it can be shown to be in the medium- and long-term interest of the firm. Figure 1. What potentially confuses things is that, in some cases, these entrepreneurs have enjoyed significant market success and naturally find causality in their approach to life and business and their later success. There are also strategic risks to pursuing Break the Law that may outweigh any legal issues associated with the strategy.
Corporate strategic logic. Upcoming SlideShare. Like this presentation? Why not share! Embed Size px. Start on.