Strategy, Value Innovation, and the Knowledge Economy

Reading Time: 36 min 


Permissions and PDF

For the past twenty years, competition has occupied the center of strategic thinking. Indeed, one hardly speaks of strategy without drawing on the vocabulary of competition — competitive strategy, competitive benchmarking, competitive advantages, outperforming the competition. In fact, most strategic prescriptions merely redefine the ways companies build advantages over the competition. This has been the strategic objective of many firms, and, in itself, nothing is wrong with this objective. After all, a company needs some advantages over the competition to sustain itself in the marketplace. When asked to build competitive advantage, however, managers typically assess what competitors do and strive to do it better. Their strategic thinking thus regresses toward the competition. After expending tremendous effort, companies often achieve no more than incremental improvement —imitation, not innovation.1

Consider what happened in the microwave oven and VCR industries. As a result of competitive benchmarking, product offerings were nearly mirror images of each other and, from the customer’s perspective, they were overdesigned and overpriced. Most buyers had no use for most of the features and found them confusing and irritating. These companies may have outdone one another, but they missed an opportunity to capture the mass market by offering microwaves and VCRs that were easy to use at accessible prices.

Another classic example is the battle of IBM versus Compaq in the PC market. In 1983, when Compaq launched its IBM-compatible machines with technologically superb quality at a 15 percent lower price than IBM’s, it rapidly won the mass of PC buyers. Once roused by Compaq’s success, IBM started a race to beat Compaq; Compaq likewise focused on beating IBM. Trying to outperform one another in sophisticated feature enhancements, neither company foresaw the emergence of the low-end PC market in which user-friendliness and low price — not the latest technology — were keys to success. Both companies created a line of overly designed and overpriced PCs, and both companies missed the emerging low-end market. When IBM walked off the cliff in the late 1980s, Compaq was following closely.

These cases illustrate that strategy driven by the competition usually has three latent, unintended effects:2

  • Imitative, not innovative, approaches to the market. Companies often accept what competitors are doing and simply strive to do it better.
  • Companies act reactively. Time and talent are unconsciously absorbed in responding to daily competitive moves, rather than creating growth opportunities.



1. W.C. Kim and R. Mauborgne, “When Competitive Advantage Is Neither,” Wall Street Journal, 21 April 1997a, p. 22.

2. W.C. Kim and R. Mauborgne, “On the Inside Track,” Financial Times, 7 April 1997b, p. 10.

3. W.C. Kim and R. Mauborgne, “Value Innovation: The Strategic Logic of High Growth,” Harvard Business Review, volume 75, January–February 1997c, pp. 102–112.

4. W.C. Kim and R. Mauborgne, “Opportunity Beckons,” Financial Times, 18 August 1997d, p. 8.

5. W.C. Kim and R. Mauborgne, “How to Leapfrog the Competition,” Wall Street Journal Europe, 6 March 1997e, p. 10.

6. Kim and Mauborgne (1997c).

7. R.P. Rumelt, D. Schendel, and D.J. Teece, “Strategic Management and Economics,” Strategic Management Journal, volume 12, Winter 1991, pp. 5–29.

8. R.R. Nelson, “Why Do Firms Differ, and How Does It Matter?” Strategic Management Journal, volume 12, Winter 1991, pp. 61–74.

9. For a discussion on the importance and patterns of creating new markets, see W.C. Kim and R. Mauborgne, “Creating New Market Space,” Harvard Business Review, volume 77, January–February 1999, pp. 83–93; also see:

G. Hamel and C.K. Prahalad, Competing for the Future (Boston: Harvard Business School Press, 1994).

10. W.C. Kim and R. Mauborgne, “Value Knowledge or Pay the Price,” Wall Street Journal Europe, 29 January 1998a, p. 6; and

T.A. Stewart, Intellectual Capital (New York: Currency/Doubleday, 1997).

11. P. Romer, “Endogenous Technological Change,” Journal of Political Economy, volume 98, October 1990, pp. S71–S102;

P.M. Romer, “The Origins of Endogenous Growth,” Journal of Economic Perspectives, volume 8, Winter 1994, pp. 3–22; and

G.M. Grossman and E. Helpman, Innovation and Growth (Cambridge, Massachusetts: MIT Press, 1995).

12. C.W.L. Hill, “Differentiation Versus Low Cost or Differentiation and Low Cost,” Academy of Management Review, volume 13, July 1988, pp. 401–412. Hill argues that low cost and differentiation do not have to be an either-or choice.

13. For the most recent research on this, see:

A. Hargadon and R. Sutton, “Technology Brokering and Innovation in a Product Development Firm,” Administrative Science Quarterly, volume 42, December 1997, pp. 716–749.

14. For an excellent discussion on this, see:

E.M. Rogers, Diffusion of Innovations (New York: Free Press, 1995).

15. For more discussion on this, see:

Kim and Mauborgne (1999).

16. For a discussion of “creative destruction,” see:

J.A. Schumpeter, The Theory of Economic Development (Cambridge, Massachusetts: Harvard University Press, 1934).

17. For discussion of the importance of innovators’ monopoly profits, see:

Schumpeter (1934);

Romer (1990); and

W.B. Arthur, “Increasing Returns and the New World of Business,” Harvard Business Review, volume 74, July–August 1996, pp. 100–109.

18. P. Romer, “Increasing Returns and Long-Run Growth,” Journal of Political Economy, volume 94, October 1986, pp. 1002–1037; and

Arthur (1996).

19. K.J. Arrow, “Economic Welfare and the Allocation of Resources for Inventions,” in R.R. Nelson, ed., The Rate and Direction of Inventive Activity (Princeton, New Jersey: Princeton University Press, 1962), pp. 609–626; and

Romer (1990).

It is worth noting that both Arrow and Romer limited their discussions of nonrival and nonexcludable goods to technological innovations as is the tradition of economics. When the concept of innovation is redefined as value innovation, which is more relevant at the microeconomic firm level, the importance of the nonrival and nonexcludable notion is even more striking. This is because technological innovation often has a greater excludable component due to the possibility and relative ease of obtaining patent protection.

20. For a brilliant discussion of this issue, see:

L.C. Thurow, “Needed: A New System of Intellectual Property Rights,” Harvard Business Review, volume 75, September–October 1997, pp. 94–103.

21. The extent to which the idea behind a value innovation is nonexcludable affects the strategic price set by the value innovator. As we have argued, while innovative ideas and processes are usually nonexcludable or only partially so, some value innovators have patentable ideas that are excludable for a given time. In these cases, value innovators may be inclined to price their product the same or higher than rivals’ products and services. However, recognizing the powerful economies of scale, learning, and increasing returns that come with high volumes of knowledge-intensive goods, the strategic price will still be set from the outset with an aim to capture the mass of buyers. In the United Kingdom, Dyson Appliances, for example, created a value innovation in vacuum cleaners with its launch of the Dyson Dual Cyclone, which eliminated vacuum cleaner bags and the hassle of replacing bags for the life of the vacuum. In doing so, Dyson also increased the suction power of its vacuum cleaner dramatically over the industry average. Given the radically superior value of its product and the fact that its value innovation was patentable, Dyson strategically set its price relatively high while still capturing the mass of buyers. Although the vacuum cleaner was priced higher than the competition, it was a leap in value and within the economic reach of the mass of buyers. In this instance, Dyson did not use the conventional monopolist’s practice of restricting supply by establishing a high price.

22. W.C. Kim and R. Mauborgne, “A Corporate Future Built with New Blocks,” New York Times, 29 March 1998b, Section 3, p. 14.

23. For thought-provoking discussions on the implications of a focus on a company’s current capabilities, see:

M.E. Porter, “Towards a Dynamic Theory of Strategy,” Strategic Management Journal, volume 12, Winter 1991, pp. 95–117; and

M.L. Tushman and P. Anderson, “Technological Discontinuities and Organizational Environments,” Administrative Science Quarterly, volume 31, September 1986, pp. 439–465.

24. That a focus on current customers can be detrimental to a firm’s long-run viability is also discussed in:

J.L. Bower and C.M. Christensen, “Disruptive Technologies: Catching the Wave,” Harvard Business Review, volume 73, January–February 1995, pp. 43–53.

25. For a more thorough discussion on this, see:

Kim and Mauborgne (1997c).

26. The critical importance of top management setting clear expectations is highlighted in the works of Kanter and Amabile. See:

R.M. Kanter, “When a Thousand Flowers Bloom: Structural, Collective, and Social Conditions for Innovation in Organizations,” in P.S. Myers, ed., Knowledge Management and Organization Design (Boston: Butterworth-Heinemann, 1996), pp. 169–211; and

T.M. Amabile, “A Model of Creativity and Innovation in Organizations,” in Research in Organizational Behavior (Greenwich, Connecticut: JAI Press, 1988), pp. 123–167.

27. This is consistent with the work of Amabile (1988), who argues that the most important elements of motivating innovation are concise and compelling articulation of the value of innovation, orientation away from the status quo, and activating an offensive leadership strategy aimed at the future, rather than simply trying to protect an organization’s past.

28. Kanter (1996) also argues for the importance of smaller units organized around common business objectives as a catalyst for innovative thinking in organizations.

29. The important work on creativity conducted by Amabile clearly establishes the importance of autonomy in achieving strategic goals to foster creativity. See:

T.M. Amabile, “How to Kill Creativity,” Harvard Business Review, volume 76, September–October 1998, pp. 76–87.

30. The need for diversity or cross-disciplinary contact to spark innovation is also well articulated in the excellent works of:

Kanter (1996); and

Amabile (1998).

31. The roots of our distinction between voluntary and compulsory cooperation originate with:

P. Blau and W.R. Scott, Formal Organizations (San Francisco: Chandler Publishing Company, 1962); and

O.E. Williamson, Markets and Hierarchies (New York: Free Press, 1975).

32. Kim and Mauborgne (1998a); and

W.C. Kim and R. Mauborgne, “Building Trust,” Financial Times, 9 January 1998c, p. 25.

33. W.C. Kim and R. Mauborgne, “Fair Process: Managing in the Knowledge Economy,” Harvard Business Review, volume 75, July–August 1997, pp. 65–75;

W.C. Kim and R. Mauborgne, “Procedural Justice, Strategic Decision Making and the Knowledge Economy,” Strategic Management Journal, volume 19, April 1998, pp. 323–338; and

W.C. Kim and R. Mauborgne, “A Procedural Justice Model of Strategic Decision Making: Strategy Content Implications,” Organization Science, volume 19, January–February 1995, pp. 44–61.

34. W.C. Kim and R. Mauborgne, “Procedural Justice and Managers’ In-role and Extra-role Behavior,” Management Science, volume 42, April 1996, pp. 499–515.

35. For an excellent discussion of how strategy differs from operational improvements, see:

M.E. Porter, “What Is Strategy?” Harvard Business Review, volume 74, November–December 1996, pp. 61–78.

Reprint #:


More Like This

Add a comment

You must to post a comment.

First time here? Sign up for a free account: Comment on articles and get access to many more articles.

Comment (1)
JC Blake
I am not too sure I agree with this. Except that once a company misses the mass direction you are going to be behind the ones that do see the trends.
As an example would put forth the Dyson DC41 Vacuum. It is very much following the "bells and whistles" approach but is also very market directed. I am not sure if that approach will work but it seems to be working.