Opportunity Beckons
 

W. Chan Kim and Renée Mauborgne

Europe is ripe for growth, argue W. Chan Kim and Renée Mauborgne

European companies are often pessimistic about the continent's economic prospects. They point to sluggish growth, high unemployment, rigid labour markets and the sort of destructive overcapacity that led to the closure of Renault's Belgian plant. 

But if Europe is really so badly off, why are venture capitalists increasingly setting up shop there? Why is there a growing presence of North American investors in continental Europe's capital markets? And why did Microsoft recently decide to build an $80m (£53.3m) research centre in the UK where it believes some of the most exciting research for the future is being conducted? 

The answer is that Europe has many advantages that make it ripe for growth.  It has the European Union, intent upon becoming the world's biggest market;  it has an education level unmatched in many parts of the world; and it has one of the world's greatest collections of cultural resources in art, music and literature. It also has German production technology, French and Italian design flair and London's strong capital markets. Europe's proximity to promising and growing eastern European economies and the opening of Easdaq, the European stock exchange, to raise funds for start-up companies are other strong assets.  European companies face potentially destabilising forces in global competition, deregulation and changes in technology, but these developments are also creating opportunities for innovative businesses to solve the problems of others. 

Hasso Plattner, vice-chairman and co-founder of Sap, the German-based business application software producer, put it like this: "For every weakness Europe may have to compete in the information age, it also has numerous strengths which give Europe an edge." 

In spite of Europe's sluggishness in responding to the information age, Sap has run out in front, setting the standard in business application software and earning an estimated 67 per cent of world market share. 

But Sap is exceptional. Why do many other European companies appear to have difficulty exploiting new business opportunities? 

In research running for the past five years, we found certain discernible factors that distinguish those companies that are surging ahead from those that are not. Partly it is to do with attitude and approach. 

Instead of seeing themselves as victims of Europe's depressing industry conditions, the more successful companies focus on how their own actions create the opportunities of their industry. The question they pose is not "What should we do to improve performance in light of the industry?" but "What should we do to offer buyers a quantum leap in value which will create soaring profitable growth irrespective of the economy?" As a result, they explore a far wider range of strategic options than their rivals. This opens up their creative scope and allows them to see opportunities where other European companies can perceive only obstacles. 

The Bert Claeys Group, a Belgian cinema operator, is a case in point. The Belgian cinema industry had been declining for more than three decades and was going through an industry shake-out in the late 1980s. As videos, cable and satellite TV came into Belgian homes and film distributors shortened the time between the release of a film at the cinema and on video, the fate of the industry seemed sealed. 

Acting on the assumption that industry conditions are a given, Belgian cinema operators tried to maximise their share of shrinking demand by splitting cinemas into multiple screens, improving marketing and avoiding large, fixed-cost investments. That is, all except Bert Claeys. 

Bert Claeys saw how its competitors' responses were abetting the downfall of the industry. With small screens, old seats, poor projection equipment, higher prices and lower choice than home entertainment, was it surprising that the industry was collapsing?  Bert Claeys refused to accept that decline was irreversible and set out to put the magic back into cinema. In 1988 it built Kinepolis, the world's first "megaplex" with 25 screens and 7,600 seats. With wide screens, spectacular sound, comfortable seating, the best pick of blockbusters and easy parking, Bert Claeys not only won more than 50 per cent of the Brussels' market in its first year, but revitalised the industry.  Cinema demand increased by over 40 per cent and the company achieved a profit margin that was double the industry average. This was all made possible by Bert Claeys' willingness to challenge common perceptions. 

A second barrier that often blocks European companies from seeing growth opportunities is a focus on defending the existing order, rather than creating the future. Rather than seeing economic changes as an opportunity to innovate and grow, many European companies see change as a threat.  High-growth companies, however, do the exact opposite and as a consequence find opportunities in the midst of what others see as treacherous industry conditions. 

The Swiss watch industry is a classic case. In the early 1980s the industry was on the brink of collapse. From being the worldwide leader of the watch industry, by the early 1980s Swiss watches accounted for a mere 2 per cent of the 500m watches sold per year. Swiss watches had been almost completely driven out of the low- and mid-range of the market by the low-cost, highly accurate quartz watches made by Hong Kong and Japan. With Switzerland's high labour costs the end of its watch industry seemed inevitable. 

But, as Nicholas Hayek, the newly appointed chairman of SMH, the largest Swiss watchmaker, was to prove, the Swiss were losing not because of low-cost Asian imports or high-cost labour in Switzerland. They were failing because, while the Asians had been concentrating on the future, the Swiss had been defending the present. 

The quartz movement was not an Asian invention. It was Swiss. Although the quartz movement improved accuracy to unheard of levels and reduced costs, the Swiss did not act on, let alone register, this opportunity. Their focus was on defending the traditional art of watchmaking based on skill-intensive mechanical movements. When Mr Hayek reoriented the industry towards the future and introduced the highly innovative, low-priced, high-quality quartz watch, the Swatch, the Swiss once again achieved world leadership. 

The Swiss reflected Europe's historical strength in innovation. Where many European companies fail, however, is where the biggest opportunities are.  That is, in linking innovation to what most buyers value. As innovation moves from science to technology to emerging market opportunities to mass markets, European companies' success rate plummets. 

Commercialisation of new discoveries is often a shunned topic. It could be argued that, in some senses, European companies are too intellectual. Often it has been the Japanese that cash in on Europe's scientific efforts by taking its innovations and translating them into mass-market products - as Japan and Hong Kong did with the Swiss watch industry's quartz movement. 

To seize the future, European companies have to go beyond technological  innovation to what we term "value innovation" - linking innovation to what the mass of buyers value. 

That is what Hayek did with the launch of the Swatch and what Renault did with the 1993 launch of the Twingo - the economical and stylish small car - creating a selling sensation in stark contrast to its recent plant closing.  Managements must ask themselves how their companies' products and services can offer consumers radically superior value. How do they make buyers' lives more productive, more fun, less complex, less troublesome and more profitable? At the same time, are their products and services priced at a level easily accessible to the mass of buyers? High-growth companies understand that offering a new and better product or service at a price most customers cannot afford is like laying an egg another company will hatch. 

We have outlined what we consider to be three important areas of strategic thinking which companies need to adopt if they are to prosper - moving from industry determinism to determining industry, from defending the present to creating the future, and from technological innovation to value innovation. 

It is not only Sap, the Bert Claeys Group or SMH Swatch that can prosper in a mature marketplace. The opportunity for European companies is out there.  The question is: will they seize the advantage by shifting their strategic thinking or will they be left behind?