Chapter 1

1. For discussions on how market boundaries are defined and how competitive rules of the game are set, see Harrison C. White (1981) and Joseph Porac and Jose Antonio Rosa (1996).

2. Gary Hamel and C. K. Prahalad (1994) and James Moore (1996) observed that competition is intensifying and commoditization of business is accelerating, two trends that make market creation essential if firms are to grow.

3. Ever since the groundbreaking work of Michael Porter (1980, 1985), competition has occupied the center of strategic thinking. See also Paul Auerbach (1988) and George S. Day et al. (1997).

4. See, for example, Hamel and Prahalad (1994).

5. See Standard Industrial Classification Manual (1987) and North American Industry Classification System (1998).

6. Ibid.

7. For a classic on military strategy and its fundamental focus on competition over a limited territory, see Carl von Clausewitz (1993).

8. For discussions on this, see Richard A. D'Aveni and Robert Gunther (1995).

9. For more on globalization and its economic implications, see Kenichi Ohmae (1990, 1995a, 1995b).

10. United Nations Statistics Division (2002).

11. See, for example, Copernicus and Market Facts (2001).

12. Ibid.

13. Thomas J. Peters and Robert H. Waterman Jr. (1982) and Jim Collins and Jerry Porras (1994), respectively.

14. Richard T. Pascale (1990).

15. Richard Foster and Sarah Kaplan (2001).

16. Peter Drucker (1985) observes that companies tend to race against each other by looking at what competitors do.

17. Kim and Mauborgne (1997a, 1997b, 1997c) argue that a focus on benchmarking and beating the competition leads to imitative, not innovative, approaches to the market, often resulting in price pressure and further commodization. Instead, they argue, companies should strive to make the competition irrelevant by offering buyers a leap in value. Gary Hamel (1998) argues that success for both newcomers and industry incumbents hinges upon the capacity to avoid the competition and to reconceive the existing industry model. He further argues (2000) that the formula for success is not to position against the competition but rather to go around it.

18. Value creation as a concept of strategy is too broad, because no boundary condition specifies how value should be created. A company could create value, for example, simply by lowering costs by 2 percent. Although this is indeed value creation, it is hardly the value innovation that is needed to open new market space. Although you can create value by simply doing similar things in an improved way, you cannot create value innovation without stopping old things, doing new things, or doing similar things in a fundamentally new way. Our research shows that given the strategic objective of value creation, companies tend to focus on making incremental improvements at the margin. Although value creation on an incremental scale does create some value, it is not sufficient to make a company stand out in the crowd and achieve high performance.

19. For examples of market pioneering that shoots beyond what buyers are ready to accept and pay for, see Gerard J. Tellis and Peter N. Golder (2002). In their decade-long study they observe that fewer than 10 percent of market pioneers became business winners, with more than 90 percent turning out to be business losers.

20. For previous studies that challenged this dogma, see, for example, Charles W. L. Hill (1988) as well as R. E. White (1986).

21. For discussions on the necessity to choose between differentiation and low cost, see Porter (1980, 1985). Porter (1996) uses a productivity frontier curve to illustrate the valuecost trade-off.

22. Our studies revealed that value innovation is about redefining the problem an industry focuses on rather than finding solutions to existing problems.

23. For discussions on what strategy is and is not, see Porter (1996). He argues that although strategy should embrace the entire system of activities a firm performs, operational improvements can occur at the subsystem level.

24. Ibid. Hence, innovations that happen at the subsystem level are not strategy.

25. Joe S. Bain is a forerunner of the structuralist view. See Bain (1956, 1959).

26. Although in different contexts, venturing into the new has been observed to be a risky enterprise. Steven P. Schnaars (1994), for example, observes that market pioneers occupy a disadvantaged position vis-a-vis their imitators. Chris Zook (2004) argues that diversification away from a company's core business is risky and has low odds of success.

27. Inga S. Baird and Howard Thomas (1990) argue, for example, that any strategic decisions involve risk taking.