Successful companies no longer just add value, they invent it. To invent value, managers must reverse the traditional value-chain thinking (inside-out models) by which businesses define themselves in terms of the product they produce. In the traditional model, managers concentrate on being effective and competitive by putting well-understood products on the market. In the new world, however, the business design is outside in.

In the outside-in approach, the strategy revolves around the customer. This is crucial because from time to time, conditions suddenly change direction, causing industries to completely rethink the way they do business. Often, a business condition change is due to a new entrant that poses a challenge for the existing companies.

Traditional coffee companies such as Folgers and Maxwell House experienced this change firsthand when they failed to see the shirting consumer trend toward gourmet coffee. Starbucks saw it and created a business around the gourmet coffee drinker. If the management at the established coffee companies had stayed focused on changing customer tastes, they would have migrated toward gourmet coffee, changed delivery system and restructured prices.

The need for an outside-in approach becomes essential in times of great structural transition when old categories suddenly become obsolete. Businesses must define new offerings that satisfy customer needs. Dell, American Express, Microsoft and Wal-Mart are shining examples of firms that seem to understand what the customer wants.