On the Inside Track
 

W. Chan Kim and Renée Mauborgne

Do not waste time and energy trying to beat your competitors, say  W. Chan Kim and Renée Mauborgne
 

After more than a decade of restructuring and downsizing, the pressure now on companies is to achieve growth in both revenue and profits. But what drives high-growth companies and distinguishes them from their less successful competitors?

We have spent the past five years studying more than 30 companies around the world in both groups in an effort to understand what drives high growth. We have built detailed strategic, organizational, and performance profiles of the companies.

We have looked at a number of factors that are often thought to be related to a company's potential to achieve high growth. We asked, for example, is high growth a function of young, radical managers? Of being a small entrepreneurial upstart? Of big financial investments in the latest technologies? Of operating in a favorable competitive or industry environment?

No systematic differences were spotted along any of these lines. But what we did find was a fundamental difference in the way the two groups approached strategy.

The less successful companies were stuck in the trap of competing. Their strategic logic centered around building competitive advantages. They benchmarked the competition and focused on outperforming rivals. The result was a perpetual cycle of offering a little more for a little less than competitors. The competition, not the customer, set the parameters of their strategic thinking.

Consider the classic case of Compaq versus International Business Machines in the personal computing industry. When Compaq launched its PCs in 1983 it rapidly won the mass of PC buyers. Not only were its PCs the first IBM-compatible machines, but they were priced 15 per cent below IBM's and were technologically superb. Within three years of its startup, Compaq had risen to the ranks of the Fortune 500, making it the fastest company in history to get there.

Compaq's success, however, woke up IBM. As IBM started to race to beat Compaq, Compaq became focused on surpassing IBM. As the two fought to outdo one another in sophisticated feature enhancements, neither detected that user-friendliness and low price, not the latest technology, were emerging as critical to success. The result: both companies created a line of PCs that were overdesigned and overpriced for most buyers. When IBM walked off the cliff in the late 1980s, Compaq was following close behind.

The strategic thinking driven by the competition had three latent effects - effects that were the exact opposite of companies' intentions. First, it put companies in a reactive mode. Time and talent was unconsciously absorbed in responding to daily competitive moves, rather than creating growth opportunities. Second, it led to imitative, not innovative, approaches to the market. Companies accepted what competitors were doing and simply strove to do it better. Third, it clouded these companies' understanding of what customers were seeking and how that was changing.

So when, for example, Callaway Golf, the US golf club manufacturer, launched its "Big Bertha" golf club in 1991, it rapidly rose to dominate the market. This was not because Callaway had no competitors - in fact, it had venerable competition. But the golf clubs of all the main manufacturers looked alike and were out of line with what players wanted: a golf club with a larger head that made playing more rewarding and fun.

Callaway broke away from the pack with Big Bertha and earned high growth in revenues and profits. The competition, by contrast, so focused on one another, failed both to perceive and act on this opportunity.

By contrast, high-growth companies in our study paid little heed to matching or beating the competition. Instead, they sought to make the competition irrelevant by offering buyers a quantum leap in value. The question they posed was not what would it take to be better than the competition, but what would it take to win the mass of buyers even without marketing?

The drive for this type of innovation pushes these companies to question everything an industry and competitors are doing, opening their eyes to the differences between what companies are competing on and what buyers actually value.

This is not only the route to high creativity, but to tremendous cost savings. Just think of home products retailer Ikea; Direct Line Insurance; Home Depot, the US DIY and home improvement retailer; news organizations CNN and Bloomberg, or Starbucks, the US coffee shops chain. The innovative ideas fueling these companies' highly profitable growth are not the result of aiming to build advantages over the competition. They are the result of a relentless drive to offer radically superior value to buyers. That is how Compaq found its way out of the trap of competing in the early 1990s and re-emerged as a global leader in the computer industry.

Are innovative companies whizzing by knocking the air out of your companies' products and services? How many of the greatest value innovations that have occurred over the past 10 years were spearheaded by your company rather than a competitor? If your answers are less than inspiring, your company, too, may have fallen into the trap of competing.  To get out of the trap and generate high growth in revenues and profit, companies should begin by asking four questions - the same four questions that the high-growth companies in our study asked themselves.

First, what factors that our industry takes for granted should be eliminated? Second, what factors that our industry competes on should be reduced well below the standard? Third, what factors that our industry competes on should be raised well above the standard? Finally, what factors should be created that our industry has never offered?

By answering these, companies can begin to find ways to break away from the pack rather than incrementally improve, discover superior ways to serve existing markets, and create new markets. This is the path to high growth in both revenues and profits.