Wells Fargo assessment between growth and value

Our discussion for this week is focused on assessing the relationship between Value and Growth in your company. How does Wells Fargo company create Value that is different from its closest competitors? In other words, what elements give Wells Fargo an edge? Think specifically about: production advantages, consumer advantages, geographical advantages, and governmental or other regulatory advantages. Given the characteristics of your market and your competitive strengths, is your company a Value or Growth investment? Explain.

Grade A work and Plagiarism Free. 1 and 1/2 to 2 pages Pleases provide sources

Sources to look at is Buffet, Beyond Value Chapters 1 – 4 and view attached source

www.hbr.org

E S T

O F

H B R 1 9 9 7

Value Innovation

The Strategic Logic of High Growth

by W. Chan Kim and

Renée Mauborgne

•

What separates high-growth

companies from the pack is

the way managers make sense

of how they do business

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E S T

O F

H B R 1 9 9 7

Value Innovation

The Strategic Logic of High Growth

by W. Chan Kim and Renée Mauborgne

harvard business review • top-line growth • july–august 2004 page 1

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What separates high-growth companies from the pack is the way

managers make sense of how they do business.

Most companies focus on matching and beating
their rivals. As a result, their strategies tend to
take on similar dimensions. What ensues is head-
to-head competition based largely on incremen-
tal improvements in cost, quality, or both. W.
Chan Kim and Renée Mauborgne from Insead
study how innovative companies break free from
the pack by staking out fundamentally new mar-
ket space—that is, by creating products or ser-
vices for which there are no direct competitors.
This path to value innovation requires a different
competitive mind-set and a systematic way of
looking for opportunities. Instead of searching
within the conventional boundaries of industry
competition, managers can look methodically
across those boundaries to find unoccupied terri-
tory that represents real value innovation. The
French hotel chain Accor, for example, discarded
conventional notions of what a budget hotel
should be and offered what most value-conscious
customers really wanted: a good night’s sleep at
a low price.

During the past decade, the authors have de-
veloped the idea of value innovation, often in the

pages of HBR. This article presents the notion in
its original, most fundamental form.

After a decade of downsizing and increasingly
intense competition, profitable growth is a tre-
mendous challenge many companies face.
Why do some companies achieve sustained
high growth in both revenues and profits? In a
five-year study of high-growth companies and
their less successful competitors, we found
that the answer lay in the way each group ap-
proached strategy. The difference in approach
was not a matter of managers choosing one
analytical tool or planning model over an-
other. The difference was in the companies’
fundamental, implicit assumptions about
strategy. The less successful companies took a
conventional approach: Their strategic think-
ing was dominated by the idea of staying
ahead of the competition. In stark contrast,
the high-growth companies paid little atten-
tion to matching or beating their rivals. In-
stead, they sought to make their competitors
irrelevant through a strategic logic we call

This document is authorized for use only by Familia Herring in Financial Management II at Strayer University, 2018.

Value Innovation

•

EST

HBR 1997

harvard business review • top-line growth • july–august 2004 page 2

W. Chan Kim

is the Boston Consulting
Group Bruce D. Henderson Chair Pro-
fessor of International Management at
Insead in Fountainebleau, France.

Renée Mauborgne

is the Insead Dis-
tinguished Fellow and a professor of
strategy and management. She is also
the president of ITM, a strategy re-
search group in Fountainebleau.

value innovation.
Consider Bert Claeys, a Belgian company

that operates movie theaters. From the 1960s
to the 1980s, the movie theater industry in Bel-
gium was declining steadily. With the spread of
videocassette recorders and satellite and cable
television, the average Belgian’s moviegoing
dropped from eight to two times per year. By
the 1980s, many cinema operators (COs) were
forced to shut down.

The COs that remained in business found
themselves competing head-to-head for a
shrinking market. All took similar actions.
They turned cinemas into multiplexes with as
many as ten screens, broadened their film of-
ferings to attract all customer segments, ex-
panded their food and drink services, and in-
creased showing times.

Those attempts to leverage existing assets
became irrelevant in 1988, when Bert Claeys
created Kinepolis. Neither an ordinary cinema
nor a multiplex, Kinepolis is the world’s first
megaplex, with 25 screens and 7,600 seats. By
offering moviegoers a radically superior experi-
ence, Kinepolis won 50% of the market in
Brussels in its first year and expanded the mar-
ket by about 40%. Today, many Belgians refer
not to a night at the movies but to an evening
at Kinepolis.

Consider the differences between

Kinepolis

and other Belgian movie theaters. The typical
Belgian multiplex has small viewing rooms
that often have no more than 100 seats, screens
that measure seven meters by five meters, and
35-millimeter projection equipment. Viewing
rooms at Kinepolis have up to 700 seats, and
there is so much legroom that viewers do not
have to move when someone passes by. Bert
Claeys installed oversized seats with individual
armrests and designed a steep slope in the
floor to ensure everyone an unobstructed view.
At Kinepolis, screens measure up to 29 meters
by ten meters and rest on their own founda-
tions so that sound vibrations are not transmit-
ted among screens. Many viewing rooms have
70-millimeter projection equipment and state-
of-the-art sound equipment. And Bert Claeys
challenged the industry’s conventional wisdom
about the importance of prime, city-center real
estate by locating Kinepolis off the ring road
circling Brussels, 15 minutes from downtown.
Patrons park for free in large, well-lit lots. (The
company was prepared to lose out on foot traf-
fic in order to solve a major problem for the

majority of moviegoers in Brussels: the scarcity
and high cost of parking.)

Bert Claeys can offer this radically superior
cinema experience without increasing ticket
prices because the concept of the megaplex re-
sults in one of the lowest cost structures in the
industry. The average cost to build a seat at Ki-
nepolis is about 70,000 Belgian francs, less
than half the industry’s average in Brussels.
Why? The megaplex’s location outside the city
is cheaper; its size gives it economies in pur-
chasing, more leverage with film distributors,
and better overall margins; and with 25 screens
served by a central ticketing and lobby area,
Kinepolis achieves economies in personnel and
overhead. Furthermore, the company spends
very little on advertising because its value in-
novation generates a lot of word-of-mouth
praise.

Within its supposedly unattractive industry,
Kinepolis has achieved spectacular growth and
profits. Belgian moviegoers now attend the cin-
ema more frequently because of Kinepolis, and
people who never went to the movies have
been drawn into the market. Instead of bat-
tling competitors over targeted segments of
the market, Bert Claeys made the competition
irrelevant. (See the exhibit “How Kinepolis
Achieves Profitable Growth.”)

Why did other Belgian COs fail to seize that
opportunity? Like the others, Bert Claeys was
an incumbent with sunk investments: a net-
work of cinemas across Belgium. In fact, Kine-
polis would have represented a smaller invest-
ment for some COs than it did for Bert Claeys.
Most COs were thinking—implicitly or explic-
itly—along these lines: The industry is shrink-
ing, so we should not make major invest-
ments—especially in fixed assets. But we can
improve our performance by outdoing our ri-
vals on each of the key dimensions of competi-
tion. We must have better films, better ser-
vices, and better marketing.

Bert Claeys followed a different strategic
logic. The company set out to make its cinema
experience not better than that at competitors’
theaters but completely different—and irresist-
ible. The company thought as if it were a new
entrant into the market. It sought to reach the
mass of moviegoers by focusing on widely
shared needs. In order to give most moviegoers
a package they would value highly, the com-
pany put aside conventional thinking about
what a theater is supposed to look like. And it

This document is authorized for use only by Familia Herring in Financial Management II at Strayer University, 2018.

Value Innovation

•

EST

HBR 1997

harvard business review • top-line growth • july–august 2004 page 3

did that while reducing its costs. That’s the
logic behind value innovation.

Conventional Logic Versus Value
Innovation

Conventional strategic logic and the logic of
value innovation differ along the five basic di-
mensions of strategy. Those differences deter-
mine which questions managers ask, what op-
portunities they see and pursue, and how they
understand risk. (See the exhibit “Two Strate-
gic Logics.”)

Industry Assumptions.

Many companies
take their industries’ conditions as given and
set strategy accordingly. Value innovators
don’t. No matter how the rest of the industry
is faring, value innovators look for blockbuster
ideas and quantum leaps in value. Had Bert
Claeys, for example, taken its industry’s condi-
tions as given, it would never have created a
megaplex. The company would have followed
the endgame strategy of milking its business
or the zero-sum strategy of competing for
share in a shrinking market. Instead, through
Kinepolis, the company transcended the in-
dustry’s conditions.

Strategic Focus.

Many organizations let
competitors set the parameters of their strate-

gic thinking. They compare their strengths
and weaknesses with those of their rivals and
focus on building advantages. Consider this ex-
ample. For years, the major U.S. television net-
works used the same format for news pro-
gramming. All aired shows in the same time
slot and competed on their analysis of events,
the professionalism with which they delivered
the news, and the popularity of their anchors.
In 1980, CNN came on the scene with a focus
on creating a quantum leap in value, not on
competing with the networks. CNN replaced
the networks’ format with real-time news
from around the world, 24 hours a day.
CNN not only emerged as the leader in global
news broadcasting—and created new demand
around the globe—but also was able to pro-
duce 24 hours of real-time news for one-fifth
the cost of one hour of network news.

Conventional logic leads companies to com-
pete at the margin for incremental share. The
logic of value innovation starts with an ambi-
tion to dominate the market by offering a tre-
mendous leap in value. Value innovators never
say, Here’s what competitors are doing; let’s do
this in response. They monitor competitors but
do not use them as benchmarks. Hasso Platt-
ner, vice chairman of SAP, the global leader in

Researching the Roots of High Growth

During the past five years, we have studied
more than 30 companies around the world in
approximately 30 industries. We looked at
companies with high growth in both reve-
nues and profits and companies with less suc-
cessful performance records. In an effort to
explain the difference in performance be-
tween the two groups of companies, we inter-
viewed hundreds of managers, analysts, and
researchers. We built strategic, organiza-
tional, and performance profiles. We looked
for industry or organizational patterns. And
we compared the two groups of companies
along dimensions that are often thought to
be related to a company’s potential for
growth. Did private companies grow more
quickly than public ones? What was the im-
pact on companies of the overall growth of
their industry? Did entrepreneurial start-ups
have an edge over established incumbents?
Were companies led by creative, young radi-
cals likely to grow faster than those run by

older managers?
We found that none of those factors mat-

tered in a systematic way. High growth was
achieved by both small and large organiza-
tions, by companies in high-tech and low-
tech industries, by new entrants and incum-
bents, by private and public companies, and
by companies from various countries.

What did matter—consistently—was the
way managers in the two groups of compa-
nies thought about strategy. In interviewing
the managers, we asked them to describe
their strategic moves and the thinking be-
hind them. Thus we came to understand
their views on each of the five textbook di-
mensions of strategy: industry assumptions,
strategic focus, customers, assets and capa-
bilities, and product and service offerings.
We were struck by what emerged from our
content analysis of those interviews. The
managers of the high-growth companies—
irrespective of their industry—all described

what we have come to call the logic of value
innovation. The managers of the less success-
ful companies all thought along conventional
strategic lines.

Intrigued by that finding, we went on to
test whether the managers of the high-
growth companies applied their strategic
thinking to business initiatives in the market-
place. We found that they did.

Furthermore, in studying the business
launches of about 100 companies, we were
able to quantify the impact of value innova-
tion on a company’s growth in both revenues
and profits. Although 86% of the launches
were line extensions—that is, incremental
improvements—they accounted for 62% of
total revenues and only 39% of total profits.
The remaining 14% of the launches—the true
value innovations—generated 38% of total
revenues and a whopping 61% of total profits.

This document is authorized for use only by Familia Herring in Financial Management II at Strayer University, 2018.

Value Innovation

•

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HBR 1997

harvard business review • top-line growth • july–august 2004 page 4

business application software, puts it this way:
“I’m not interested in whether we are better
than the competition. The real test is, will most
buyers still seek out our products even if we
don’t market them?”

Because value innovators don’t focus on
competing, they can distinguish the factors
that deliver superior value from all the factors
the industry competes on. They do not expend
their resources to offer certain product and ser-
vice features just because that is what their ri-
vals are doing. CNN, for example, decided not
to compete with the networks in the race to
get big-name anchors. Companies that follow
the logic of value innovation free up their re-
sources to identify and deliver completely new
sources of value. Ironically, even though value
innovators do not set out to build advantages
over the competition, they often end up
achieving the greatest competitive

advantages.

Customers.

Many companies seek growth
through retaining and expanding their cus-
tomer bases. This often leads to finer segmen-
tation and greater customization of offerings
to meet specialized needs. Value innovation
follows a different logic. Instead of focusing on
the differences between customers, value in-

novators build on the powerful commonalities
in the features that customers value. In the
words of a senior executive at the French hote-
lier Accor, “We focus on what unites custom-
ers. Customers’ differences often prevent you
from seeing what’s most important.” Value in-
novators believe that most people will put
their differences aside if they are offered a con-
siderable increase in value. Those companies
shoot for the core of the market, even if it
means losing some of their customers.

Assets and Capabilities.

Many companies
view business opportunities through the lens
of their existing assets and capabilities. They
ask, Given what we have, what is the best we
can do? In contrast, value innovators ask,
What if we start anew? That is the question
the British company Virgin Group put to itself
in the late 1980s. The company had a sizable
chain of small music stores across the United
Kingdom when it came up with the idea of
music and entertainment megastores, which
would offer customers a tremendous leap in
value. Seeing that its small stores could not be
leveraged to seize that opportunity, the com-
pany decided to sell off the entire chain. As
one of Virgin’s executives puts it, “We don’t let
what we can do today condition our view of
what it takes to win tomorrow. We take a clean
slate approach.”

This is not to say that value innovators
never leverage their existing assets and capabil-
ities; they often do. But, more important, they
assess business opportunities without being bi-
ased or constrained by where they are at a
given moment. For that reason, value innova-
tors not only have more insight into where
value for buyers resides—and how it is chang-
ing—but also are much more likely to act on
that insight.

Product and Service Offerings.

Conven-
tional competition takes place within clearly
established boundaries defined by the prod-
ucts and services the industry traditionally of-
fers. Value innovators often cross those bound-
aries. They think in terms of the total solution
buyers seek, and they try to overcome the
chief compromises their industry forces cus-
tomers to make—as Bert Claeys did by provid-
ing free parking. A senior executive at Com-
paq Computer describes the approach: “We
continually ask where our products and ser-
vices fit in the total chain of buyers’ solutions.
We seek to solve buyers’ major problems

Kinepolis

Company’s Perspective Customers’ Perspective

Industry’s conditions
can be transcended.

Economies
of personnel
and overhead

Cost
savings

Cost
additions

Low
marketing
costs

Low cost
position

High
volume

Expanded
market

High growth in revenues and profits

Quantum leap
in value

Competitive
price

Radically superior
cinema experience

Low
land
costs

Better
overall
margins

Free and easy
parking

Superior screens,
sound, and seats

Best pick of
blockbusters

Go for a quantum leap
in value; competition
is not the benchmark.

Go for the mass of
moviegoers; let some
customers go.

Think beyond
existing assets
and capabilities.

Think in terms of the total
solution buyers seek.

How Kinepolis Achieves Profitable Growth

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This document is authorized for use only by Familia Herring in Financial Management II at Strayer University, 2018.

Value Innovation

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HBR 1997

harvard business review • top-line growth • july–august 2004 page 5

across the entire chain, even if that takes us
into a new business. We are not limited by the
industry’s definition of what we should and
should not do.”

Creating a New Value Curve

How does the logic of value innovation trans-
late into a company’s offerings in the market-
place? Consider the case of Accor. In the mid-
1980s, the budget hotel industry in France was
suffering from stagnation and overcapacity.
Accor’s cochairmen, Paul Dubrule and Gérard
Pélisson, challenged the company’s managers
to create a major leap in value for customers.
The managers were urged to forget everything
they knew about the existing rules, practices,
and traditions of the industry. They were
asked what they would do if Accor were start-
ing fresh.

In 1985, when Accor launched Formule 1, a
line of budget hotels, there were two distinct
market segments in the industry. One segment
consisted of no-star and one-star hotels, whose
average price per room was between 60 and 90
French francs. Customers came to those hotels
just for the low price. The other segment was
two-star hotels, with an average price of 200 Fr
per room. Those more expensive hotels at-
tracted customers by offering a better sleeping
environment than the no-star and one-star ho-
tels. People had come to expect that they

would get what they paid for: Either they
would pay more and get a decent night’s sleep,
or they would pay less and put up with poor
beds and noise.

Accor’s managers began by identifying what
customers of all budget hotels—no star, one
star, and two star—wanted: a good night’s
sleep for a low price. Focusing on those widely
shared needs, Accor’s managers saw an oppor-
tunity to overcome the chief compromise that
the industry forced customers to make. They
asked themselves the following four questions:
Which of the factors that our industry takes for
granted should be eliminated? Which factors
should be reduced well below the industry’s
standard? Which factors should be raised well
above the industry’s standard? Which factors
should be created that the industry has never
offered?

The first question forces managers to con-
sider whether the factors that companies
compete on actually deliver value to consum-
ers. Often those factors are taken for granted,
even though they have no value or even de-
tract from value. Sometimes what buyers
value changes fundamentally, but companies
that are focused on benchmarking one an-
other do not act on—or even perceive—the
change. The second question forces managers
to determine whether products and services
have been overdesigned in the race to match
and beat the competition. The third question
pushes managers to uncover and eliminate
the compromises their industry forces cus-
tomers to make. The fourth question helps
managers break out of the industry’s estab-
lished boundaries to discover entirely new
sources of value for consumers.

In answering the questions, Accor came up
with a new concept for a hotel, which led to
the launch of Formule 1. First, the company
eliminated such standard hotel features as
costly restaurants and appealing lounges.
Accor reckoned that even though it might lose
some customers, most people would do with-
out those features.

Accor’s managers believed that budget ho-
tels were overserving customers along other
dimensions as well. On those, Formule 1 offers
less than many no-star hotels do. For exam-
ple, receptionists are on hand only during
peak check-in and checkout hours. At all
other times, customers use an automated
teller. Rooms at a Formule 1 hotel are small

Two Strategic Logics

The Five
Dimensions Conventional Value Innovation
of Strategy Logic Logic

Industry Industry’s conditions are given. Industry’s conditions can be shaped.
assumptions

Strategic A company should build competitive Competition is not the benchmark.
focus advantages. The aim is to beat A company should pursue a quantum

the competition. leap in value to dominate the market.

Customers A company should retain and A value innovator targets the mass of
expand its customer base through buyers and willingly lets some existing
further segmentation and custom- customers go. It focuses on the key
ization. It should focus on the commonalities in what customers value.
differences in what customers value.

Assets and A company should leverage its A company must not be constrained by
capabilities existing assets and capabilities. what it already has. It must ask, What

would we do if we were starting anew?

Product and An industry’s traditional boundaries A value innovator thinks in terms of
service determine the products and services the total solution customers seek, even
offerings a company offers. The goal is to if that takes the company beyond its

maximize the value of those offerings. industry’s traditional offerings. C
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This document is authorized for use only by Familia Herring in Financial Management II at Strayer University, 2018.

Value Innovation

•

EST

HBR 1997

harvard business review • top-line growth • july–august 2004 page 6

and equipped only with a bed and the bare
necessities—no stationery, desks, or decora-
tions. Instead of closets and dressers, there are
a few shelves and a pole for clothing in one
corner of the room. The rooms themselves
are modular blocks manufactured in a fac-
tory, a method that results in economies of
scale in production, high quality control, and
good sound insulation.

Formule 1 gives Accor considerable cost ad-
vantages. The company cut in half the average
cost of building a room, and its staff costs
dropped from between 25% and 35% of sales—
the industry average—to between 20% and
23%. Those cost savings have allowed Accor to
improve the features customers value most to
levels beyond those of the average French two-
star hotel, but the price is only marginally
above that of one-star hotels.

Customers have rewarded Accor for its
value innovation. The company has not only
captured the mass of French budget hotel cus-

tomers but also expanded the market. From
truck drivers who previously slept in their vehi-
cles to businesspeople needing a few hours of
rest, new customers have been drawn to the
budget category. Formule 1 made the competi-
tion irrelevant. At last count, Formule 1’s mar-
ket share in France was greater than the sum
of the five next largest players.

The extent of Accor’s departure from the
standard thinking of its industry can be seen in
what we call a value curve—a graphic depic-
tion of a company’s relative performance
across its industry’s key success factors. (See
the exhibit “Formule 1’s Value Curve.”) Accord-
ing to the conventional logic of competition,
an industry’s value curve follows one basic
shape. Rivals try to improve value by offering a
little more for a little less, but most don’t chal-
lenge the shape of the curve.

Like Accor, all the high-performing compa-
nies we studied created fundamentally new
and superior value curves. They achieved that
through a combination of eliminating features,
creating features, and reducing and raising fea-
tures to levels unprecedented in their indus-
tries. Take, for example, SAP, which was started
in the early 1970s by five former IBM employ-
ees in Walldorf, Germany, and became the
worldwide industry leader. Until the 1980s,
business application software makers focused
on subsegmenting the market and customizing
their offerings to meet buyers’ functional
needs, such as production management, logis-
tics, human resources, and payroll.

While most software companies were focus-
ing on improving the performance of particu-
lar application products, SAP took aim at the
mass of buyers. Instead of competing on cus-
tomers’ differences, SAP sought out common-
alities in what customers value. The company
correctly hypothesized that for most custom-
ers, the performance advantages of highly cus-
tomized, individual software modules had
been overestimated. Such modules forfeited
the efficiency and information advantages of
an integrated system, which allows real-time
data exchange across a company.

In 1979, SAP launched R/2, a line of real-
time, integrated business application software
for mainframe computers. R/2 has no restric-
tion on the platform of the host hardware; buy-
ers can capitalize on the best hardware avail-
able and reduce their maintenance costs
dramatically. Most important, R/2 leads to

El
em

en
ts

o
f p

ro
du

ct
o

r s
er

vi
ce

Relative level

Eating facilities

Architectural
aesthetics

Lounges

Room size

Availability
of receptionist

Furniture and
amenities in rooms

Bed quality

Hygiene

Room quietness

Price

average
two-star
hotel’s
value
curve

average
one-star
hotel’s
value
curve

Formule 1’s
value
curve

Low High

Formule 1’s Value Curve

Formule 1 offers unprecedented value to the mass of budget hotel cus-
tomers in France by giving them much more of what they need most
and much less of what they are willing to do without.

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Value Innovation

•

EST

HBR 1997

harvard business review • top-line growth • july–august 2004 page 7

huge gains in accuracy and efficiency because
a company needs to enter its data only once.
And R/2 improves the flow of information. A
sales manager, for example, can find out when
a product will be delivered and why it is late by
cross-referencing the production database.
SAP’s growth and profits have exceeded its in-
dustry’s. In 1992, SAP achieved a new value in-
novation with R/3, a line of software for the cli-
ent-server market.

The Trap of Competing, the
Necessity of Repeating

What happens once a company has created a
new value curve? Sooner or later, the competi-
tion tries to imitate it. In many industries,
value innovators do not face a credible chal-
lenge for many years, but in others, rivals ap-
pear more quickly. Eventually, however, a
value innovator will find its growth and profits
under attack. Too often, in an attempt to de-
fend its hard-earned customer base, the com-
pany launches offenses. But the imitators
often persist, and the value innovator—de-
spite its best intentions—may end up in a race
to beat the competition. Obsessed with hang-
ing on to market share, the company may fall
into the trap of conventional strategic logic. If
the company doesn’t find its way out of the
trap, the basic shape of its value curve will
begin to look just like those of its rivals.

Consider this example. When Compaq Com-
puter launched its first personal computer in
1983, most PC buyers were sophisticated corpo-
rate users and technology enthusiasts. IBM
had defined the industry’s value curve. Com-
paq’s first offering—the first IBM-compatible
PC—represented a completely new value
curve. Compaq’s product not only was techno-
logically superb but also was priced roughly
15% below IBM’s. Within three years of its
launch, Compaq joined the

Fortune

500. No
other company had ever achieved that status
as quickly.

How did IBM respond? It tried to match
and beat Compaq’s value curve. And Compaq,
determined to defend itself, became focused
on beating IBM. But while IBM and Compaq
were battling over feature enhancements,
most buyers were becoming more sensitive to
price. User-friendliness was becoming more
important to customers than the latest tech-
nology. Compaq’s focus on competing with
IBM led the company to produce a line of PCs

that were overengineered and overpriced for
most buyers. When IBM walked off the cliff in
the late 1980s, Compaq was following close
behind.

Could Compaq have foreseen the need to
create another value innovation rather than go
head-to-head against IBM? If Compaq had
monitored the industry’s value curves, it would
have realized that by the mid- to late 1980s,
IBM’s and other PC makers’ value curves were
converging with its own. And by the late 1980s,
the curves were nearly identical. That should
have been the signal to Compaq that it was
time for another quantum leap.

Monitoring value curves may also keep a
company from pursuing innovation when
there is still a huge profit stream to be col-
lected from its current offering. In some rap-
idly emerging industries, companies must in-
novate frequently. In many other industries,
companies can harvest their successes for a
long time; a radically different value curve is
difficult for incumbents to imitate, and the vol-
ume advantages that come with value innova-
tion make imitation costly. Kinepolis, Formule
1, and CNN, for example, have enjoyed uncon-
tested dominance for a long time. CNN’s value
innovation was not challenged for almost ten
years. Yet we have seen companies pursue nov-
elty for novelty’s sake, driven by internal pres-
sures to leverage unique competencies or to
apply the latest technology. Value innovation
is about offering unprecedented value, not
technology or competencies. It is not the same
as being first to market.

When a company’s value curve is funda-
mentally different from that of the rest of the
industry—and the difference is valued by most
customers—managers should resist innova-
tion. Instead, companies should embark on
geographic expansion and operational im-
provements to achieve maximum economies
of scale and market coverage. That approach
discourages imitation and allows companies to
tap the potential of their current value innova-
tion. Bert Claeys, for example, has been rapidly
rolling out and improving its Kinepolis concept
with Metropolis, a megaplex in Antwerp, and
with megaplexes in many countries in Europe
and Asia. And Accor has already built more
than 300 Formule 1 hotels across Europe, Af-
rica, and Australia. The company is now target-
ing Asia.

Ironically, even though

value innovators do not

set out to build

advantages over the

competition, they often

end up achieving the

greatest competitive

advantages.
This document is authorized for use only by Familia Herring in Financial Management II at Strayer University, 2018.

Value Innovation

•

EST

HBR 1997

harvard business review • top-line growth • july–august 2004 page 8

The Three Platforms

The companies we studied that were most suc-
cessful at repeating value innovation were
those that took advantage of all three platforms
on which value innovation can take place: prod-
uct, service, and delivery. The precise meaning
of the three platforms varies across industries
and companies, but in general, the product
platform is the physical product; the service
platform is support such as maintenance, cus-
tomer service, warranties, and training for dis-
tributors and retailers; and the delivery plat-
form includes logistics and the channel used to
deliver the product to customers.

Too often, managers trying to create a value
innovation focus on the product platform and
ignore the other two elements. Over time, that
approach is not likely to yield many opportuni-
ties for repeated value innovation. As custom-
ers and technologies change, each platform
presents new possibilities. Just as good farmers
rotate their crops, good value innovators rotate
their value platforms. (See the sidebar “Virgin
Atlantic: Flying in the Face of Conventional
Logic.”)

The story of Compaq’s server business,
which was part of the company’s successful

comeback, illustrates how the three platforms
can be used alternately over time to create
new value curves. (See the exhibit “How Has
Compaq Stayed on Top of the Server Indus-
try?”) In late 1989, Compaq introduced its first
server, the SystemPro, which was designed to
run five network operating systems—SCO
UNIX, OS/2, Vines, NetWare, and DOS—and
many application programs. Like the System-
Pro, most servers could handle many operating
systems and application programs. Compaq ob-
served, however, that the majority of custom-
ers used only a small fraction of a server’s ca-
pacity. After identifying the needs that cut
across the mass of users, Compaq decided to
build a radically simplified server that would
be optimized to run NetWare and file and
print only. Launched in 1992, the ProSignia
was a value innovation on the product plat-
form. The new server gave buyers twice the
SystemPro’s file-and-print performance at one-
third the price. Compaq achieved that value in-
novation mainly by reducing general applica-
tion compatibility—a reduction that translated
into much lower manufacturing costs.

As competitors tried to imitate the Pro-
Signia and value curves in the industry began

Virgin Atlantic: Flying in the Face of Conventional Logic

When Virgin Atlantic Airways challenged its
industry’s conventional logic by eliminating
first-class service in 1984, the airline was sim-
ply following the logic of value innovation.
Most of the industry’s profitable revenue
came from business class, not first class. And
first class was a big cost generator. Virgin
spotted an opportunity. The airline decided
to channel the cost it would save by cutting
first-class service into value innovation for
business-class passengers.

First, Virgin introduced large, reclining
sleeper seats, raising seat comfort in business
class well above the industry’s standard. Sec-
ond, Virgin offered free transportation to and
from the airport—initially in chauffeured
limousines and later in specially designed
motorcycles called LimoBikes—to speed busi-
ness-class passengers through snarled city
traffic.

With those innovations, which were on the
product and service platforms, Virgin at-
tracted not only a large share of the indus-

try’s business-class customers but also some
full economy fare and first-class passengers of
other airlines. Virgin’s value innovation sepa-
rated the company from the pack for many
years, but the competition did not stand still.
As the value curves of some other airlines
began converging with Virgin’s value curve,
the company went for another leap in value,
this time from the service platform.

Virgin observed that most business-class
passengers want to use their time produc-
tively before and between flights and that,
after long-haul flights, they want to freshen
up and change their wrinkled clothes before
going to meetings. The airline designed
lounges where passengers can take showers,
have their clothes pressed, enjoy massages,
and use state-of-the-art office equipment.
The service allows busy executives to make
good use of their time and go directly to
meetings without first stopping at their ho-
tels—a tremendous value for customers that
generates high volume for Virgin. The air-

line has one of the highest sales per em-
ployee in the industry, and its costs per pas-
senger mile are among the lowest. The
economics of value innovation create a posi-
tive and reinforcing cycle.

When Virgin first challenged the industry’s
assumptions, its ideas were met with a great
deal of skepticism. After all, conventional wis-
dom says that in order to grow, a company
must embrace more, not fewer, market seg-
ments. But Virgin deliberately walked away
from the revenue generated by first-class pas-
sengers. And it further rejected conventional
wisdom by conceiving of its business in
terms of customer solutions, even if that took
the company well beyond an airline’s tradi-
tional offerings. Virgin has applied the logic
of value innovation not just to the airline in-
dustry but also to insurance, music, and en-
tertainment retailing. The company has al-
ways done more than leverage its existing
assets and capabilities. It has been a consis-
tent value innovator.

This document is authorized for use only by Familia Herring in Financial Management II at Strayer University, 2018.

Value Innovation

•

EST

HBR 1997

harvard business review • top-line growth • july–august 2004 page 9

to converge, Compaq took another leap, this
time from the service platform. Viewing its
servers not as stand-alone products but as ele-
ments of its customers’ total computing needs,
Compaq saw that 90% of customers’ costs were
in servicing networks and only 10% were in the
server hardware itself. Yet Compaq, like other
companies in the industry, had been focusing
on maximizing the price/performance ratio of
the server hardware, the least costly element
for buyers.

Compaq redeployed its resources to bring
out the ProLiant 1000, a server that incorpo-
rates two innovative pieces of software. The
first, SmartStart, configures server hardware
and network information to suit a company’s
operating system and application programs. It
slashes the time it takes a customer to config-
ure a server network and makes installation
virtually error free so that servers perform reli-
ably from day one. The second piece of soft-
ware, Insight Manager, helps customers man-
age their server networks by, for example,
spotting overheating boards or troubled disk
drives before they break down.

By innovating on the service platform, Com-
paq created a superior value curve and ex-
panded its market. Companies lacking exper-

tise in information technology had been
skeptical of their ability to configure and man-
age a network server. SmartStart and Insight
Manager helped put those companies at ease.
The ProLiant 1000 came out a winner.

As more and more companies acquired serv-
ers, Compaq observed that its customers often
lacked the space to store the equipment prop-
erly. Stuffed into closets or left on the floor
with tangled wires, expensive servers were
often damaged, were certainly not secure, and
were difficult to service.

By focusing on customer value—not on
competitors—Compaq saw that it was time for
another value innovation on the product plat-
form. The company introduced the ProLiant
1000 rack-mountable server, which allows com-
panies to store servers in a tall, lean cabinet in
a central location. The product makes efficient
use of space and ensures that machines are
protected and are easy to monitor, repair, and
enhance. Compaq designed the rack mount to
fit both its products and those of other manu-
facturers, thus attracting even more buyers and
discouraging imitation. The company’s sales
and profits rose again as its new value curve di-
verged from the industry’s.

Compaq is now looking to the delivery plat-
form for a value innovation that will dramati-
cally reduce the lead time between a customer’s
order and the arrival of the equipment. Lead
times have forced customers to forecast their
needs—a difficult task—and have often re-
quired them to patch together costly solutions
while waiting for their orders to be filled. Now
that servers are widely used and the demands
placed on them are multiplying rapidly, Com-
paq believes that shorter lead times will provide
a quantum leap in value for customers. The
company is currently working on a delivery op-
tion that will permit its products to be built to
customers’ specifications and shipped within 48
hours of the order. That value innovation will
allow Compaq to reduce its inventory costs and
minimize the accumulation of outdated stock.

By achieving value innovations on all three
platforms, Compaq has been able to maintain
a gap between its value curve and those of
other players. Despite the pace of competition
in its industry, Compaq’s repeated value inno-
vations are allowing the company to remain
the number one maker of servers worldwide.
Since the company’s turnaround, overall sales
and profits have almost quadrupled.

By following its first value innovation… …with another …and then another.

Reliability

El
em
en
ts
o
f p

ro
d

uc
t o

r s
er
vi
ce

Configurability

Manageability

Expandability

General application
compatibility

File and print
compatibility

Performance

Price

Storability

Serviceability

Security

low � high low � high low � high

Relative Level

1989:
SystemPro

1992:
ProSignia

1993:
ProLiant 1000

Feature
innovations

Feature
innovations
1992:
ProSignia

1994:
ProLiant 1000

rack-mountable
server

How Has Compaq Stayed on Top of the Server Industry?

Value Innovation

•

EST

HBR 1997

harvard business review • top-line growth • july–august 2004 page 10

Driving a Company for High Growth

One of the most striking findings of our re-
search is that despite the profound impact of a
company’s strategic logic, that logic is often
not articulated. And because it goes unstated
and unexamined, a company does not neces-
sarily apply a consistent strategic logic across
its businesses.

How can senior executives promote value
innovation? First, they must identify and artic-
ulate the company’s prevailing strategic logic.
Then they must challenge it. They must stop
and think about the industry’s assumptions,
the company’s strategic focus, and the ap-
proaches—to customers, assets and capabili-
ties, and product and service offerings—that
are taken as given. Having reframed the com-
pany’s strategic logic around value innovation,
senior executives must ask the four questions
that translate that thinking into a new value
curve: Which of the factors that our industry
takes for granted should be eliminated? Which
factors should be reduced well below the in-
dustry’s standard? Which should be raised well
above the industry’s standard? Which factors
should be created that the industry has never
offered? Asking the full set of questions—
rather than singling out one or two—is neces-
sary for profitable growth. Value innovation is
the simultaneous pursuit of radically superior
value for buyers and lower costs for companies.

For managers of diversified corporations,
the logic of value innovation can be used to

identify the most promising possibilities for
growth across a portfolio of businesses. The
value innovators we studied all have been pio-
neers in their industries, not necessarily in de-
veloping new technologies but in pushing the
value they offer customers to new frontiers. Ex-
tending the pioneer metaphor can provide a
useful way of talking about the growth poten-
tial of current and future businesses.

A company’s pioneers are the businesses
that offer unprecedented value. They are the
most powerful sources of profitable growth. At
the other extreme are settlers—businesses
with value curves that conform to the basic
shape of the industry’s. Settlers will not gener-
ally contribute much to a company’s growth.
The potential of migrators lies somewhere in
between. Such businesses extend the industry’s
curve by giving customers more for less, but
they don’t alter its basic shape.

A useful exercise for a management team
pursuing growth is to plot the company’s
current and planned portfolios on a pioneer-
migrator-settler map. (See the exhibit “Testing
the Growth Potential of a Portfolio of Busi-
nesses.”) If both the current portfolio and the
planned offerings consist mainly of settlers, the
company has a low growth trajectory and
needs to push for value innovation. The com-
pany may well have fallen into the trap of com-
peting. If current and planned offerings consist
of a lot of migrators, reasonable growth can be
expected. But the company is not exploiting its
potential for growth and risks being marginal-
ized by a value innovator. This exercise is espe-
cially valuable for managers who want to see
beyond today’s performance numbers. Reve-
nue, profitability, market share, and customer
satisfaction are all measures of a company’s
current position. Contrary to what conven-
tional strategic thinking suggests, those mea-
sures cannot point the way to the future. The
pioneer-migrator-settler map can help a com-
pany predict and plan future growth and
profit, a task that is especially difficult—and
crucial—in a fast-changing economy.

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Current portfolio Planned portfolio

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trajectory

Pioneers
Businesses
that represent
value innovations

Migrators
Businesses
with value
improvements

Settlers
Businesses that
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products and
services

Testing the Growth Potential
of a Portfolio of Businesses

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