Kim and Mauborgne provide a sizeable challenge to the way managers think about and practise strategy. They say the basic element of strategy is not an industry nor a company, but what they call 'smart strategic moves'. Talking to Des Dearlove at INSEAD, they explain more about their challenge to the strategic orthodoxy. Dearlove: You are critical of the language used in discussing business strategy.

Mauborgne: The essence of business strategy can be traced to military strategy. In terrain and war there's only so much land that exists. Fundamentally that explains why business strategy - including competitive strategy - has been predominantly based on how you divide up an existing pie. It's about relative power. It's a zero sum game because you cannot multiply the size of land available.

But, in the realm of business, the new market spaces that can be created are infinite. Historically, real gains came when people created an entirely new area - a whole new market space. You can create a win:win game. You can create new land. Scientifically we know the same amount of chemical compounds that exist has not changed over time. But look at what you had in the beginning - just dinosaurs. And today by creatively combining them in numerous new ways we have - Starbucks. What we can buy today in a 7-Eleven store beats what a king like Louis XIV had. The possibilities are endless.

Q: How does such profusion link to your research?

Kim: We looked back at 150 years of data and found that the pace of industry creation has speeded up. We asked which industries were around in 1900 and are still around today? It turns out that apart from the basic industries such as cars and steel there's almost nothing. The big growth industries in the past 30 years have included the computer industry, software, gas-fired electricity plants, cell phones and the cafe bar concept. But in 1970 not one of those industries existed in a meaningful way, and that's just 30 years back. The pattern continues as you dig into the past. We have a hugely underestimated capacity to create new industries. Everyone assumes that the number of industries stays the same over time, but it doesn't. And if this is where the bulk of wealth has been created, shouldn't the field of strategy systematically explore and understand the path to new market space creation?

The next question we asked was how come some companies rise and fall? Our conclusion is that companies are the wrong unit of analysis. So are industries. Any company can be excellent at a certain point in time. It depends on the leaders and managers. There's no such thing as a permanently great company, nor a permanently great industry. But there are permanently great strategic moves. And the strategic move that we found matters centrally is the creation and capturing of new market space.

Q: What do you mean by a strategic move?

Mauborgne: By strategic move we mean the actions of players in conceiving, launching, and realising their business ideas. In each strategic move, there are winners, losers, and mere survivors.

So, understanding the context and the right strategic moves is the key to success. There will always be a debate about rising and falling companies and industries. What the Body Shop did was absolutely brilliant. It created a new market space in a highly competitive industry. The problem was that they didn't realise what made it a brilliant strategic move and when everyone imitated them they needed to do it again.

Q: Isn't this just industry lifecycle?

Kim: There doesn't have to be an industry lifecycle. Because people say there is an industry lifecycle we accept it. Look at Cemex, the world's third-largest cement producer from Mexico. It is challenging the industry lifecycle by creating cement as an emotional product - which is also helping to address the country's housing issues. In Mexico it usually takes about eight to 10 years to build a house and you build it room by room. Cemex has turned cement into an emotional product by saying if you really love somebody give them cement. They have totally rebranded cement as the best gift you can give someone because you are giving them a home. This has taken a flat industry to higher profit margins and turned it into a growth industry. Similarly, the coffee industry was dead, until Starbucks came along.

The moment you take an industry-deterministic view of your company you are a victim of that industry. The moment you sit back and say how can we create a whole new industry, then you start to break that cycle. All industries are created not by big resources but by big ideas.

Q: You also talk about 'fair process'. What does this mean?

Mauborgne: Value innovation is about strategy; fair process is about management. Transformation requires that companies earn the intellectual and emotional commitment of their employees. To do so requires a degree of fairness in making and executing decisions. All a company's plans will come to nothing if they are not supported by employees. Fair process is based on the simple human need for intellectual and emotional recognition. Without fair process it can be difficult for companies even to achieve something their people generally support.

Q: What are the basic questions companies need to ask themselves if they are to embrace fair process?

Kim: First, they need to ask whether they engage people in decisions that affect them. Fair process is about engagement. Do they ask for input and allow people to refute the merit of one another's ideas? Do they explain why decisions are made and why some opinions have been overridden? And, after a decision is made, are the rules clearly stated so that people understand the new standards, the targets, responsibilities and penalties?

Q: You see fair process as being of very wide importance?

Mauborgne: Indeed, fair process is central to cooperation not only in companies but in world peace. Just look at the current lack of support, if not animosity, America is engendering around the world from its once allies. While there was deep sympathy felt around the world after the tragic events of 9/11 for America, today America has effectively squandered that goodwill and even, some might argue, generated a deficit of support around the globe. And why?

Trace the process by which the war on Iraq was evolved by the Americans. There was no proper explanation for why Iraq was to be targeted or linked to the events of 9/11. Participants at this year's Davos repeatedly asked for sound explanation and proof for the basis of their decisions but feel this was never provided. Hence, violating the fair process principle of 'Explanation'. America and, in particular, the US presidency did not engage world leaders in a dialogue on why it was moving down the trajectory that it was.

The one-on-one face-to-face dialogue between the US presidency and critical world leaders was dismal though a war with Iraq would have economic and security implications for them, hence violating the fair process principle of 'Engagement'. And lastly, the US presidency has not provided 'Expectation Clarity', the third fair process principle, to world leaders on what would be expected of them after a potential fall of Saddam Hussein in the economic and political recovery of Iraq. It is not surprising that world leaders feel resentment at the US and a violation of intellectual and emotional recognition, and with it, goodwill.