Companies offering the powerful combination of low prices and high quality are capturing the hearts and wallets of consumers in Europe and in the United States, where more than half of the population now shops weekly at mass merchants like Wal-Mart and Target, up from 25 percent in 1996. These and similar value players, such as Aldi, ASDA, Dell, E*Trade Financial, JetBlue Airways, Ryanair, and Southwest Airlines, are broadly transforming the way consumers of nearly every age and income purchase their groceries, apparel, airline tickets, financial services, and computers.

The market share gains of value-based players give their higher-priced rivals definite cause for alarm (Exhibit 1). After years of near-exclusive sway over all but the most discount-minded consumers, many mainstream companies now face steep cost disadvantages and lack the product and service superiority that once set them apart from low-priced competitors. This "shift to value" had its roots in the 1970s and '80s, when Japanese automakers and consumer electronics manufacturers thrived by selling cheaper and initially inferior products that eventually became more reliable than those of the competition—and remained cheaper. Today, as value-driven companies in a growing number of industries move from competing solely on price to catching up...