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What Should Drive Your Strategy?

2013 September 1

In 1960, Harvard professor Theodore Levitt published a landmark paper in Harvard Business Review that urged executives to ask, “What business are you really in?” Even today, a half century later, his challenge still resonates.

By pointing out that no industry grows forever, he gave rise to many concepts we still recognize, such as the customer centered business, Porter’s 5 Forces and value chains.  Many executives who seek to be modern are often merely repeating Levitt’s insights.

Nevertheless, a lot can happen in 50 years and just as we recognize many of Levitt’s concepts as still valid, others have been thoroughly debunked, perhaps none more so than the central question he presented.  In today’s semantic economy, it serves little purpose to ask what business we’re in.  Instead, we must ask why we’re in business in the first place.

A Question of Capability

The central example of Levitt’s narrative is the railroad business.  He argued that if the railroad companies had thought of themselves as being in the transportation business instead of the railroad business, they would remain thriving, growing concerns today.

However, there’s no reason to believe that’s the case.  Most of the companies that entered the fledgling automobile and airplane industries failed and there’s little evidence that the railroad giants would have fared any better.

Railroad companies and their executives bore little resemblance to those who prospered in transportation.  It’s difficult to imagine them tinkering around like Henry Ford or the Wright brothers.  They also had no expertise in core technologies, such as the internal combustion engine, aeronautics, etc.  Capabilities, after all, matter a great deal.

As Warren Buffett once put it:

Take me as an example. I happen to have a talent for allocating capital. But my ability to use that talent is completely dependent on the society I was born into. If I’d been born into a tribe of hunters, this talent of mine would be pretty worthless. I can’t run very fast. I’m not particularly strong. I’d probably end up as some wild animal’s dinner.

And those who have followed their capabilities, rather than their industries, have done well.  It didn’t really matter if Steve Jobs was in hardware, software or even retail.  He simply wanted to design products that were beautifully functional.  It bothered him when products weren’t.  He’d curse, call them “sucky” and set out to change the world.

So it’s hard to see how the railroads would have prospered by defining themselves as a transportation businesses.  Their capabilities would have been more suited to the engineering business or finance or government relations, but it’s hard to see how moving into those industries could have maintained the railroad’s dominance.

All we really know is that the railroads that saw themselves as being in the freight business remain highly profitable even today.

Sometimes Opportunity Knocks

In the early 1980’s, Intel CEO Andy Grove had a problem.  He was in the business of building memory chips and his company had been enormously successful.  Lately, however, they had been facing stiff competition from low cost Japanese suppliers and the company’s future was threatened.

He sat down with Intel’s chairman, the legendary Gordon Moore, to discuss options. They didn’t ask what business they were in, but what business they wanted to be in.  They imagined what would happen if they got fired.  What would the new CEO do?  The answer was clear, get out of memory chips.  They then made a fortune in microprocessors.

Many stories of great success are similar.  Herb Kelleher was a lawyer, but saw great opportunity when a client showed him an interesting concept for an airline.  Sam Walton was a retailer, but became one the world’s richest men by seeing the opportunity to invest in advanced logistics systems (and so, in a sense, got into the transportation business).

As Jim Collins pointed out in his management classic, Built to Last, many highly successful companies, such as Sony and Hewlett Packard, started out with no idea what kind of business they were in, but rather found themselves among a group of people that they wanted to work with.  “First who, then what,” Collins advises.

Finding An Important Job To Be Done

It’s tough to figure out what business Elon Musk is in.  He co-founded PayPal in order to revolutionize payments, then created the SpaceX and has recently turned his first profit at Tesla with electric cars.  Sergey Brin and Larry Page at Google set out to organize the world’s information, but created Google X to do things like build autonomous cars.

Harvard’s Clayton Christensen would approve.  He advises us not to think about what business we are in, but what job needs to be done.  In his famous milkshake example, he argues that while we think in terms of categories, consumers want us to think in terms of their needs.

If the railroads followed Christensen’s advice, they might have gone into adjacent businesses, such as industrial consulting or crop insurance.  Surely, their freight business would have given them ample insight.  As I noted in a previous post, some of the biggest opportunities in big data go to industrial components suppliers and distributors.

Why Are You In Business?

Anybody who even casually reads the business press will come across a variety of provocative questions:  What business are you in?  What is your core competency?  What job needs to be done?  While many of these can provide useful insight, they can also lead you astray.

So perhaps the types of questions we should be asking are: “What business do you want to be in?”  “What motivates you to get up everyday?”  “In what do you take pride?”

Today, the lines between one business and another are blurry at best.  Technology companies are hiring TV development executives, while open source competes with proprietary platforms and biotechnology researchers seek to upend the energy industry. Nothing is assured.  Business models no longer last.

After all, the world has changed profoundly since Theodore Levitt posed his famous question back in 1960.  Scale advantages have greatly diminished, industry barriers to entry have become porous and enterprises serve not so much to organize work, but to direct passion and purpose.

Which brings us to another thing Warren Buffett said, “Without passion, you don’t have energy. Without energy, you have nothing.”  In a world of increasing automation, our ability to perform tasks is not nearly as important as our ability to dream.  The questions we need to ask are not ones of action, but ones of meaning.

– Greg


4 Responses leave one →
  1. david permalink
    September 2, 2013

    I think some reading of Peter Drucker might be in order. The purpose of a business is to create a customer. Only when you decide what business you are in can you know what customer you’re trying to create. That was, after all, the basis for Drucker’s question to Jack Welsh just after Welsh was selected to be CEO of GE. Drucker was the second person to speak with him, having followed the CEO who informed Welsh of his selection. Welsh hadn’t even spoken with his wife, yet. Drucker’s question was simple: For each unit in GE, if you weren’t in it now, would you invest in it, and if not, why haven’t you sold the business already?

    As for business models no longer lasting, tell that to Google, to Facebook, to GM, to Southwest, to United, to… There are lots of business plans out there that seem to be lasting pretty nicely. The problem isn’t the plan, it’s often the management. One shouldn’t confuse the two.

  2. September 2, 2013

    Interesting perspective. Thanks for sharing.

    – Greg

  3. Alberto permalink
    September 3, 2013

    “In a world of increasing automation, our ability to perform tasks is not nearly as important as our ability to dream. The questions we need to ask are not ones of action, but ones of meaning.”

    Fantastic ending for this post! Congratulations.

    It remembers me this TED Talk (one of my favourites)

  4. September 3, 2013

    Thanks Alberto. That’s one TED video I haven’t seen. I’ll be sure to check it out.

    – Greg

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