BookWatch: Winning investors focus on what sells, not what sizzles

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This year’s surge in the U.S. stock market has cheered many investors. The rapid growth, soaring market valuations, and media coverage of companies like Facebook, Amazon, Apple, and Netflix and Google (FAANG, as these stocks are called collectively) — all of which seem to be defying the tough day-to-day reality other businesses face – have led many to see technology innovation as the answer.

As business scholars, our research revolves around the organizations and individuals that go beyond competition to create new frontiers of opportunity, growth, and jobs, where success is not about dividing up an existing, often shrinking pie, but about creating a larger economic pie for all — what we refer to as “blue oceans.” Blue oceans are uncontested market spaces.

We first outlined our research in “Blue Ocean Strategy,” a book that went on be translated to 44 languages. Since blue oceans have become a more understood concept, many people have wondered how you get there. Our new book, “Blue Ocean Shift,” answers that. If Blue Ocean Strategy is the “what” of creating new markets rather than competing in crowded ones,Blue Ocean Shiftis the “how.”

When we speak to audiences around the world about market creation and innovation, we often begin by asking them to consider Motorola’s Iridium satellite phone and Segway’s personal transporter. “Were these market-creating moves technology innovations?” And “Were they commercial successes or failures?” Audiences usually answer “yes” to the first question and “failures” to the second.

Then we ask another set of questions: “Who invented the personal computer?” And “Who invented the home VCR?” When it comes to PCs, people most often reply Apple AAPL, -0.03% or IBM IBM, +0.75% As for VCRs, people come up with all sorts of consumer electronics companies, the most common being Sony 6758, -0.65%  or JVC. The right answers, we then tell them, are actually MITS and Ampex, respectively. Most people are not only surprised when they find that out, but also appear to be unfamiliar with either company.                       

Putting these conversations together reveals an important point about market creation. While technology innovators may lay extraordinary eggs, they are seldom the ones who ultimately hatch them. The focus of a successful market-creating strategy should be not on how to lay a technology egg per se, but rather on how to hatch the egg for its commercial success. Thus although MITS invented the first personal computer, it was Apple and IBM , among others, that dominated the new mass market for PCs by adapting the technology to produce a leap in buyer value.

Likewise, although Ampex invented video recording technology in the 1950s, companies such as Sony and JVC dominated the home VCR industry by adopting the technology and making video recorders easy to use and affordable for the mass of buyers; in essence, converting a technology innovation into what we called “value innovation.”

There’s no inherent reason that an organization can’t capitalize on its own inventions, and certainly some companies have succeeded in doing both. But history shows that egg-laying and egg-hatching are often performed by different players. This, we suggest, may be one reason so many people don’t even recognize the names of technology innovators now gone from their markets and instead mistakenly believe the value innovators — the ones that hatch new markets — are the technology pioneers as well.

It’s a win for everyone if a market player lays the technology egg, hatches it, and opens up a new market space that others may eventually enter. But the key lesson to remember here is that to succeed in creating a new market, your focus must be on offering a quantum leap in value for buyers, not on technology innovation per se. For example, Google GOOGL, -0.33%  Glass, Motorola’s MSI, +0.00%  Iridium, and Apple’s AAPL, -0.03%  Newton all suffered by getting this wrong.

Google Glass was considered unattractive, nerdish, expensive, and raised hugely uncomfortable privacy issues. The Iridium satellite phone was a technological feat that worked in the Gobi desert but not in buildings or cars, where people needed it most. As for Apple’s Newton PDA, well, it just didn’t do what it said it would, so it’s not surprising that buyers didn’t see value in it.

The fact is, successful market-creating strategies often don’t rely on technology innovation at all. Think of Grameen Bank’s micro-financing, Starbucks SBUX, +0.96%  , or the National Youth Orchestra of Iraq — all created new markets with little or no bleeding-edge technologies. Even where technology is heavily involved, as with Salesforce.com CRM, -0.26%  or Groupe SEB’s ActiFry, the reason buyers love these offerings isn’t because of the technology. Buyers adore them because they are so simple, easy to use, fun, and effective. That is, they love them because the technology is fundamentally linked to a leap in buyer value.

Economics has long taught us that R&D and technology innovation, as measured by R&D spending and numbers of patents, are the central drivers of innovation and growth. This may be true at the macro level of the economy, which could be one reason people tend to think of technology innovation first when they think about creating new markets.

But such reasoning does not necessarily hold true when we apply it to the micro level of the individual organization. To take one example, Apple’s R&D spending-to-sales ratio has been among the lowest of its IT peers over the last decade. Microsoft MSFT, +0.33%  , on the other hand, has one of the highest rates of R&D expenditures and impressive research centers the world over. But while Apple has been one of the most — if not the most — innovative companies in the commercial world, it’s hard to think of a single market Microsoft created in the last 10 years.

As a prescient article in Time magazine on Dean Kamen, the inventor of the Segway Personal Transporter, noted at the time of the Segway’s launch: “One of the hardest truths for any technologist to hear is that success or failure in business is rarely determined by the quality of the technology.”

The Segway was an engineering marvel, one of the most talked-about technology innovations of its day when it was launched in 2001. But that did not convince enough people to pay $4,000–$5,000 for a product that left them in a quandary over where to park it, how to take it in a car, whether it could be brought on a bus or a train, and where it could be used — on sidewalks or roads? While the Segway was expected to reach breakeven six months after its launch, the company continued to lose money until it was sold in 2009.

When companies mistakenly assume new market creation hinges on breakthrough technologies, their organizations tend to push for products or services that are either too “out there” — ahead of their time, too esoteric, too complicated — or, like the Segway, lack the complementary ecosystem needed to open up a new market.

In fact, many technology innovations fail to create and capture new markets even as they win accolades for their organizations. Think of TiVo TIVO, +0.26%  , whose original DVR garnered a lot of fanfare and is in the U.S. Patent and Trademark Office National Inventors Hall of Fame, but which left most people wondering what it did and why they would want it.

Blue ocean shift is built on this insight. Just as value innovation is a cornerstone of market-creating strategy, a successful blue ocean shift occurs only when unprecedented buyer value is created by opening up a value-cost frontier that didn’t exist before. Value innovation anchors innovation to the value it gives buyers, not to the cleverness of the technology. It can be achieved with or without new technology. This holds true whether your blue ocean market-creating efforts set out to provide a breakthrough solution to an existing industry problem, to redefine the problem your industry focuses on, or to identify and solve a brand-new problem or create a brand-new opportunity.

W. Chan Kim and Renee Mauborgne are are professors of strategy at INSEAD and codirectors of the INSEAD Blue Ocean Strategy Institute. They are the authors of Blue Ocean Strategy, (Harvard Business Review Press), and the follow-up Blue Ocean Shift: Beyond Competing — Proven Steps to Inspire Confidence and Seize New Growth, (Hachette Books).