Findings Rooms for Manoeuvre
 

W. Chan Kim and Renée Mauborgne

W. Chan Kim and Renée Mauborgne on companies that broke out of dead-end competition with rivals 

What do the Sony Walkman, Polo Ralph Lauren, Champion Enterprises, Formule 1, the low-budget hotel chain, and Toyota's Lexus have in common? They are all ideas that created new markets by breaking out of the conventional boundaries of strategic groups in their industries. 

A strategic group is companies within an industry that pursue a similar strategy. Most industries are littered with them. The hotel industry classifies hotels into one of five strategic groups, from five-star to one-star, with companies in each group generally resembling one another closely. 

In almost every industry, companies are obsessed with improving their competitive position within a strategic group. The result is a lot of effort and cost, but hardly any difference. Yet the greatest rewards are gained by companies - be they existing industry players or new entrants - that redefine how they compete. 

The creation of Formule 1 by Accor, the French hotelier, is a classic example. In the mid-1980s, French one and two-star hotels faced a tough situation: growth was stagnant, occupancy rates were low, the best locations were taken and profitability was pitiful. 

To make headway, one-star hotels tried to improve relative to one another, as did two-star hotels. So the result was more of the same. 

Instead of focusing on how to beat rivals in either strategic group, Formule 1 set out to turn the two groups into one. It asked: why do people looking for a cheap place to stay trade up to two- star hotels or trade down to one-star hotels? 

It found that two-star hotel customers traded up for the sleeping environment: "One-star hotels are just too dirty and noisy and the bed qual ity is lousy." The larger rooms and better restaurants and other amenities in two-star hotels were irrelevant: "Who goes to a budget hotel of any kind to enjoy a nice meal or hang out in the lobby?" 

But if the sleeping environment of one-star hotels was so poor, why did one-star hotel customers go there? Because they had no choice: one-star hotels were often half the price of the average two-star hotel. 

Accor saw the market in a fresh light. It focused on the distinctive strengths of both strategic groups and eliminated or reduced everything else. Its Formule 1 hotels offer better beds and cleaner and quieter rooms than the average French two-star hotel - but at the price of a one-star hotel room. 

The chain's cost per room is significantly lower than even the average one-star hotel, because it did away with restaurants and lounges, and pared furniture, amenities and room size to the minimum. 

The result: Accor not only attracted customers from both strategic groups, it expanded the market. At the last count, Accor had more than 300 Formule 1 hotels and a market share greater than the sum of the next five largest players. 

The Sony Walkman combined the distinctive strengths of transistor radios and the popular "boom boxes" of the late 1970s to create the personal stereo. With the acoustics and "coolness" of boom boxes and affordability and size-weight convenience of transistors, the Walkman gained market share at the expense of both these strategic groups. New customers, from joggers to commuters, were drawn to the market. 

Champion Enterprises, based in Michigan, recreated the prefabricated housing market by dramatically increasing demand for its products in much the same way. Why should prefabricated houses be dismally standardised and have a reputation for poor quality. Champion designed prefabricated houses that are inexpensive and quick to build, yet allow buyers to choose options such as carpet colour and skylights. 

In doing so, it changed the meaning of what prefabricated housing stood for. Not only did more lower- to middle-income consumers become interested in buying prefabricated housing instead of renting or buying an apartment, but some affluent people were also attracted to the market. 

Many other successful products can also be understood in similar terms. In the luxury car industry, Toyota positioned the Lexus saloon between the high-end group of Mercedes, BMW and Jaguar and the low-end group of Cadillac and Lincoln. 

Polo Ralph Lauren created a Dollars 5bn (o3bn) market for "high fashion with no fashion" by combining the appeal of haute couture with the distinctive strengths of classic lines such as Burberry and Brooks Brothers. 

Is your company trapped in a strategic group? Are you battling to outdo your rivals but not getting far? To break out of this unrewarding race, begin by asking: what are the key discriminating factors that make buyers trade down and choose a lower price, lower performance strategic group over a higher one in your industry? 

Conversely, what are the factors that make buyers trade up and choose a higher price, higher performance strategic group? By focusing on these factors and eliminating or reducing everything else, companies can open up new market space. A 50-50 compromise between two strategic groups is not the same thing. That is the difference between being stuck in the middle, and creating a new market space that offers buyers a quantum leap in value. 

Next week: how Compaq, Dyson Appliances, Virgin Entertainment Stores and Zeneca's Salick Cancer Centres moved across complementary product and service offerings to break out of known market space. 

W. Chan Kim is the Boston Consulting Group Bruce D. Henderson Chair Professor of International Management at INSEAD, France. Renée Mauborgne is the INSEAD Distinguished Fellow and Affiliate Professor of Strategy and Management. She is also president of ITM Research.