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

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

Think for a minute about five-star hotels in London or Paris. Other than their locations, what sets them apart? One could make the case that their offering - food, decor, staff uniforms, toiletries, even the way the toilet paper is folded into little triangles - is similar. The same goes for business-class service on the leading airlines, where food, seating, uniforms, films, even the boring offering 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, telecommunications or business-to-business.

Our research over the past 15 years finds that competition has come to play a central role in defining strategy.

The term that best symbolises this is "competitive advantage". This turn of phrase has become ingrained in companies' vocabulary. Businesses discuss their strategic moves and urge their managers forward under the banner of building advantages over the competition.

This obsession with the competition started in the 1970s with the meteoric rise of the Japanese economy. In industry after industry - from cars and steel to consumer electronics and textiles - leading western companies found their markets under attack. For almost the first time in their histories, customers were deserting western companies.

Against this backdrop a landmark in the field of strategy emerged in the early 1980s: the notion of "competitive strategy". This is the idea that competition is at the core of the success and failure of companies. Competition determines the appropriateness of a company's activities that contribute to its performance.

Assisted by new means to analyse competitors and influence their behaviour, companies placed competition at the centre of strategic thinking, where it has remained ever since.

But should organisations be motivated in this way? Our research suggests not. Focusing on building competitive advantages detracts from reshaping old industries, driving young industries to new frontiers and building entirely new industries. It blocks creativity.

Aiming to beat the competition has the opposite effect to the one intended. It keeps companies focused on the competition. When asked to build competitive advantages, managers typically rate themselves against competitors, assess what they do and strive to do it better.

The standards and actions of the competition implicitly guide what companies do. Businesses expend tremendous effort but often achieve no more than incremental improvement.

Consider the story of the microwave oven and videocassette recorder industries. Companies fought ferociously to offer sophisticated product features. Most products ended up almost identical - and over-designed from the customer's perspective.

Most buyers found the features confusing and irritating. They even expressed fear about using the products because of all the controls and flashing lights. Companies outdistanced one another but were off-target in giving buyers what they wanted - simplified microwave ovens and VCRs at low prices - and achieving a low-cost structure.

To achieve high growth in the future, companies need to break out of this vicious cycle of competitive benchmarking, imitation and pursuit. This calls for a fundamental change in our vocabulary and companies' strategic focus. Companies need to drive their managers to pursue what we call "value innovation".

Value innovation is just what the name implies: value and innovation with equal emphasis. The buyer, not the competition, 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 drive to achieve a leap in value with a low-cost business model that makes companies question everything an industry and competitors are doing. It opens their eyes to the difference between what industries are competing on and what the mass of buyers really value and how they can provide that at a low cost.

Think of Home Depot, Intuit, Pret A Manger, Borders Book Stores, Starbucks, Bloomberg or Ikea. The innovative ideas fuelling these companies' highly profitable growth are not the result of benchmarking the competition or building advantages. None of the creative ideas behind these companies would have been possible if they had got their cues on what to do from the competition.

Rather, they are the result of a push to offer something of exceptional value to buyers with a low-cost business model.

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 in this way, the futility of benchmarking the competition becomes clear.

To quantify the relative impact of value innovation on profit and growth as regards competitive improvements, we studied the business launches of more than 100 companies.*

We found that while 86 per cent of the business launches were line extensions - that is, "me-toos" or incremental value improvements that sought a larger share in the existing market space - they explained only 62 per cent of total revenues and a mere 39 per cent of total profits. The remaining 14 per cent of the business launches - the value innovations that created new market space - explained 38 per cent of total revenues and 61 per cent of total profits.

We also found that unlike value innovations, line extensions were usually the results of competitive improvements that aimed at building advantages over the competition or countering recent strategic moves of rivals.

To create a compelling strategy for an organisation, one that achieves the financial rewards of value innovation, achieving both exceptional value for buyers and low costs for companies, begin by asking four questions: What factors should be eliminated that an industry has taken for granted? What factors should be reduced below the industry standard? What factors should be raised above the standard? And what should be introduced that the industry has never offered? Get those right and the company should be on the path to success.

*Strategy, Value Innovation and the Knowledge Economy, Sloan Management Review, Spring 1999; Value Innovation: The Strategic Logic of High Growth, Harvard Business Review, January-February 1997