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Ram Sehgal

Frame plans keeping the consumer, not the competitor, in mind. Then, provide the former with value and innovation.

Mr Ram Seghal

WHILE most companies aim to stand out in the market, it seems customers can find fewer differences between them.

What went wrong with the strategy? How is it that while companies invest in getting their strategies right, they increasingly look like mirror images of one another, facing mounting cost and price pressures?

Think for a minute about five-star hotels in North Mumbai. At one time their location set them apart. Today most of the newcomers are located within walking distance of each other. One could make the case that their offering — food, decor, toiletries, and even the way the toilet paper is folded into little triangles — is similar.

The same goes for business-class services of leading airlines, where food, seating, uniforms, films, even the boring offerings of orange juice, champagne and water before take-off are almost universal.

Yet, companies are increasingly claiming that their cost structures are rising and their margins shrinking. This holds true for most industries, be they consumer products, financial services, industrial products, information technology, telecommunication or business-to-business. My view is that over the past 15 years, competition has come to play a central role in defining strategy. The term that best symbolises this is `competitive advantage'. This term of phrase has become ingrained in companies' vocabulary.

Businesses discuss their strategy moves and urge their managers forward under the banner of building advantages over the competition. I believe the background to this obsession started in the '70s with the meteoric rise of the Japanese economy. In industry after industry — from cars and steel to consumer electronics to textiles, leading Western companies found their markets under attack. For almost the first time in their histories, customers were deserting Western companies. In this background, emerged the principle of `competitive advantage'. This is the idea which suggests that competition is at the core of the success and failure of companies.

But should organisations be motivated in this way? Perhaps the time has come for reshaping of old industries to new frontiers and building entirely new industries.

The continuous focus on building competitive advantages detracts and blocks creativity. When asked to build competitive advantages, managers typically put themselves against competitors, assess what they do and strive to do it better.

Consider the story of the videocassette recorder or mobile phone industries. Companies fought ferociously to offer sophisticated product features. Most products ended up being almost identical and over-designed from the customer's perspective. Most buyers find the features confusing and even, at times, irritating. They even express fear about using the product because of all the controls and flashing lights. Companies outdistance one another constantly but are off-target in giving buyers what they want — low prices. To achieve high growth in the future, companies need to break out of this vicious cycle of competitive benchmarking, imitation and pursuit.

I believe companies need their managers to pursue what I call `value innovation'. Value innovation is just what the name implies — value and innovation with equal emphasis. The buyer and not the competitor should be placed at the centre of strategic thinking. And managers should aim for leapfrogging advancements, not mere incremental advantages over market rivals.

It is the consumer who matters, not the competition.

It is the drive to achieve a leap in value with a low-cost business model that makes companies question everything the industry and competition are doing. How can companies break out of the grip of competitive thinking? Perhaps the best way to start is to ask what it takes to win the mass of buyers even without marketing! When companies frame their strategic thinking this way, the futility of benchmarking the competition becomes clear.

In order to quantify the relative impact of value innovation on profits and growth as regards competitive improvement, the two co-founders of `value innovation network', W. Chan Kim and Renee Mauborgne, undertook a massive study of business launches of more than 100 companies. What they found was this: While 86 per cent of the business launches were line extensions — `me-toos' or incremental value improvement that sought larger share in the existing market space — they explained that only 62 per cent of total revenues and a mere 39 per cent of total profits (the value innovations that created new market space) explained 38 per cent of total revenues and 61 per cent of total profits. Therefore, it seems imperative that value innovations are just the route to take.

To create a compelling strategy for an organisation — one that achieves the financial reward of value innovation, achieving both exceptional value for buyers and low costs for companies — begin by asking four questions:

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