Flouting conventional wisdom: INSEAD scholars W. Chan Kim and Renee Mauborgne say the key to success isn't about your company or industry. It's about smart strategic moves - Institut Europeen d'Administration des Affaires - research on weath creation

Chief Executive, The, May, 2003 by Des Dearlove, Stuart Crainer

Chief executives in search of strategic inspiration traditionally have had two alternatives. They start with either their industry or their company as the basic building block. The former leads them into the familiar if cold embrace of Michael Porter's Five Forces framework, which posits that different industries can sustain different levels of profitability; the latter nuzzles them seductively towards Gary Hamel and C.K. Prahalad's core competencies of companies.

Over the past two decades, a great deal of intellectual energy has been expended on refining these two worldviews. But according to two leading Europe-based academics, an intellectual irony underlies both. "There's no such thing as a permanently great company or a permanently great industry. All industries rise and fall as do companies," say W. Chan Kim and Renee Mauborgne. "However, there are permanently smart strategic moves."

Kim and Mauborgne are based at INSEAD, the elite business school situated in the beautiful forest of Fontainebleau, just south of Paris. They are methodical people, not prone to hysterical outbursts or wild hypotheses. Their work, characterized by rigorous research and attention to detail, is supported by a substantial database--one that extends all the way back to 1850. As scholars, they are also patient. Some thought leaders of their standing would be on their second or third book. Kim and Mauborgne are currently wrapping up their first. When it does finally see the light of day--probably in 2004--it will be the culmination of more than a decade of work.

In the quiet of Fontainebleau, the Korean and American are preparing their challenge to the strategy hegemony. They want to be sure their theories stand up--that they cannot be dismissed as a passing fad. Stretching their data back 150 years has already taken two years of painstaking research. "We have sleepless nights getting the data right," says Kim, a former University of Michigan Business School professor who studied under Prahalad and alongside Hamel. Mauborgne joined intellectual forces with Kim in Ann Arbor.

So what does all this data show? Kim and Mauborgne believe that the business world has been overlooking one of the key lessons of wealth creation. It's not the industry a company plays in, per se, that leads to wealth creation, according to their research. And they found no permanently great companies that consistently captured wealth. (This contradicts books such as In Search of Excellence and Built to Last, which seek to distill the characteristics of great companies.) Instead, Kim and Mauborgne found that an industry's and a company's ups and downs are substantially attributable to something they call strategic moves. "By 'strategic moves,' we mean the actions of players in conceiving, launching and realizing their business ideas. In each strategic move, there are winners, losers and mere survivors," says Mauborgne.

A snapshot of the auto industry from 1900 to 1940 is instructive. Ford's Model T, for example, launched in 1908, triggered the industry's growth and profitability, replacing the horse-drawn carriage with the car for American households, note Kim and Mauborgne. That move lifted Ford's market share from 9 to 60 percent.

The Model T, then, was the strategic move that ignited the automotive industry. But in 1924, it was overtaken by another innovation, this time by GM. "Contrary to Ford's functional one-color, one-car, single-model strategy, GM created the new market space of emotional, stylized cars with 'a car for every purpose and purse,'" explains Kim. "Not only was the auto industry's growth and profitability again catapulted to new heights, but GM's market share jumped from 20 to 50 percent, while Ford's fell from 60 to 20 percent."

Over the 150-year period, the scholars found a similar pattern in other sectors. In short, the strategic move that matters most to both an industry's and a company's long-run profitable growth is the repeated creation of new market space that embraces the mass market. Kim and Mauborgne call this "value innovation." Without it, whole industries fade into the sunset and are replaced by those that are more innovative. Without it, companies become irrelevant or are overtaken--as Ford was by GM in the 1920s.

"Value innovation occurs across industries, across countries, across companies," says Kim. "It is a universal force. A company, therefore, substantially limits its strategic opportunities and profitable growth potential by narrowly confining its analysis to its own industry. Yet, in most strategy literature, industry boundaries are regarded as central--think of SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis or Michael Porter's Five Forces."

Rather than viewing strategy as enacted in a landscape of dominant companies or industries, Kim and Mauborgne paint a persuasive picture of a commercial world in constant flux, where whole industries rise and then often disappear into oblivion. "Look back to the major industries of 1970, and very few, if any, are now significant," says Kim. "The big growth industries in the past 30 years have been the computer industry, software, gas-fired electricity plants, cell phones and the coffee 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. The big industries of 1940 aren't those of 1910, and so on. We have a hugely underestimated capacity to create new industries."