Fluent Essays

Please read this case and submit a 2-page, double-spaced typed summary. Also, Please post any questions, comments or insights you have related case readings this week. www.hbr.org This document is authorized for use only by Liang T customerservi B E S T O F H B R 1 9 6 0 Marketing Myopia by Theodore Levitt • Included with this full-text Harvard Business Review article: The Idea in Brief—the core idea The Idea in Practice—putting the idea to work Article Summary Marketing Myopia A list of related materials, with annotations to guide further exploration of the article’s ideas and applications 15 Further Reading 1 2 Sustained growth depends on how broadly you define your business—and how carefully you gauge your customers’ needs. Reprint R0407L se Hsu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. http://www.hbr.org http://harvardbusinessonline.hbsp.harvard.edu/relay.jhtml?name=itemdetail&referral=4320&id=R0407L B E S T O F H B R 1 9 6 0 Marketing Myopia The Idea in Brief The Idea in Practice C O P Y R IG H T © 2 0 0 4 H A R V A R D B U S IN E S S S C H O O L P U B L IS H IN G C O R P O R A T IO N . A L L R IG H T S R E S E R V E D . sh pa Th tio ca tio (ca Ra rai Th the tra sel ser trie the Ho co tom Ch clo co kn arr tom ma us mi What business are you really in? A seem- ingly obvious question—but one we ould all ask before demand for our com- nies’ products or services dwindles. e railroads failed to ask this same ques- n—and stopped growing. Why? Not be- use people no longer needed transporta- n. And not because other innovations rs, airplanes) filled transportation needs. ther, railroads stopped growing because lroads didn’t move to fill those needs. eir executives incorrectly thought that y were in the railroad business, not the nsportation business. They viewed them- ves as providing a product instead of ving customers. Too many other indus- s make the same mistake—putting mselves at risk of obsolescence. w to ensure continued growth for your mpany? Concentrate on meeting cus- ers’ needs rather than selling products. emical powerhouse DuPont kept a se eye on its customers’ most pressing ncerns—and deployed its technical ow-how to create an ever-expanding ay of products that appealed to cus- ers and continuously enlarged its rket. If DuPont had merely found more es for its flagship invention, nylon, it ght not be around today. This document is authorized for use only by Lian customerse We put our businesses at risk of obsolescence when we accept any of the following myths: Myth 1: An ever-expanding and more afflu- ent population will ensure our growth. When markets are expanding, we often as- sume we don’t have to think imaginatively about our businesses. Instead, we seek to outdo rivals simply by improving on what we’re already doing. The consequence: We in- crease the efficiency of making our products, rather than boosting the value those products deliver to customers. Myth 2: There is no competitive substitute for our industry’s major product. Believing that our products have no rivals makes our companies vulnerable to dramatic innova- tions from outside our industries—often by smaller, newer companies that are focusing on customer needs rather than the products themselves. Myth 3: We can protect ourselves through mass production. Few of us can resist the prospect of the increased profits that come with steeply declining unit costs. But focusing on mass production emphasizes our com- pany’s needs—when we should be emphasiz- ing our customers’. Myth 4: Technical research and develop- ment will ensure our growth. When R&D pro- duces breakthrough products, we may be tempted to organize our companies around the technology rather than the consumer. In- stead, we should remain focused on satisfying customer needs. page 1 g Tse Hsu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. B E S T O F H B R 1 9 6 0 Marketing Myopia by Theodore Levitt C O P Y R IG H T © 2 0 0 4 H A R V A R D B U S IN E S S S C H O O L P U B L IS H IN G C O R P O R A T IO N . A L L R IG H T S R E S E R V E D . harvard business review • july–augus This document is authorized for use o Sustained growth depends on how broadly you define your business— and how carefully you gauge your customers’ needs. We always know when an HBR article hits the big time. Journalists write about it, pundits talk about it, executives route copies of it around the organization, and its vocabulary becomes famil- iar to managers everywhere—sometimes to the point where they don’t even associate the words with the original article. Most important, of course, managers change how they do business because the ideas in the piece helped them see issues in a new light. “Marketing Myopia” is the quintessential big hit HBR piece. In it, Theodore Levitt, who was then a lecturer in business administration at the Harvard Business School, introduced the famous question, “What business are you really in?” and with it the claim that, had railroad executives seen themselves as being in the transportation business rather than the railroad business, they would have continued to grow. The article is as much about strategy as it is about marketing, but it also introduced the most influential marketing idea of the past half-century: that businesses will do better in the end if they concentrate on meet- ing customers’ needs rather than on selling prod- ucts. “Marketing Myopia” won the McKinsey Award in 1960. Every major industry was once a growth in- dustry. But some that are now riding a wave of growth enthusiasm are very much in the shadow of decline. Others that are thought of as seasoned growth industries have actually stopped growing. In every case, the reason growth is threatened, slowed, or stopped is not because the market is saturated. It is because there has been a failure of management. Fateful Purposes The failure is at the top. The executives re- sponsible for it, in the last analysis, are those who deal with broad aims and policies. Thus: • The railroads did not stop growing because the need for passenger and freight transporta- tion declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even tele- phones) but because it was not filled by the rail- roads themselves. They let others take custom- t 2004 page 2 nly by Liang Tse Hsu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Marketing Myopia • • • B EST OF HBR 1960 harvard business review • july–augus Theodore Levitt , a longtime professor of marketing at Harvard Business School in Boston, is now professor emeritus. His most recent books are Thinking About Management (1990) and The Marketing Imagination (1983), both from Free Press. This document is authorized for use o ers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transpor- tation oriented; they were product oriented in- stead of customer oriented. • Hollywood barely escaped being totally ravished by television. Actually, all the estab- lished film companies went through drastic re- organizations. Some simply disappeared. All of them got into trouble not because of TV’s in- roads but because of their own myopia. As with the railroads, Hollywood defined its business incorrectly. It thought it was in the movie busi- ness when it was actually in the entertainment business. “Movies” implied a specific, limited product. This produced a fatuous contentment that from the beginning led producers to view TV as a threat. Hollywood scorned and rejected TV when it should have welcomed it as an op- portunity—an opportunity to expand the en- tertainment business. Today, TV is a bigger business than the old narrowly defined movie business ever was. Had Hollywood been customer oriented (pro- viding entertainment) rather than product ori- ented (making movies), would it have gone through the fiscal purgatory that it did? I doubt it. What ultimately saved Hollywood and accounted for its resurgence was the wave of new young writers, producers, and directors whose previous successes in television had dec- imated the old movie companies and toppled the big movie moguls. There are other, less obvious examples of in- dustries that have been and are now endanger- ing their futures by improperly defining their purposes. I shall discuss some of them in detail later and analyze the kind of policies that lead to trouble. Right now, it may help to show what a thoroughly customer-oriented manage- ment can do to keep a growth industry grow- ing, even after the obvious opportunities have been exhausted, and here there are two exam- ples that have been around for a long time. They are nylon and glass—specifically, E.I. du Pont de Nemours and Company and Corning Glass Works. Both companies have great technical compe- tence. Their product orientation is unques- tioned. But this alone does not explain their suc- cess. After all, who was more pridefully product oriented and product conscious than the erst- while New England textile companies that have been so thoroughly massacred? The DuPonts and the Cornings have succeeded not primarily because of their product or research orientation but because they have been thoroughly cus- tomer oriented also. It is constant watchfulness for opportunities to apply their technical know- how to the creation of customer-satisfying uses that accounts for their prodigious output of suc- cessful new products. Without a very sophisti- cated eye on the customer, most of their new products might have been wrong, their sales methods useless. Aluminum has also continued to be a growth industry, thanks to the efforts of two wartime-created companies that deliberately set about inventing new customer-satisfying uses. Without Kaiser Aluminum & Chemical Corporation and Reynolds Metals Company, the total demand for aluminum today would be vastly less. Error of Analysis. Some may argue that it is foolish to set the railroads off against alumi- num or the movies off against glass. Are not aluminum and glass naturally so versatile that the industries are bound to have more growth opportunities than the railroads and the mov- ies? This view commits precisely the error I have been talking about. It defines an industry or a product or a cluster of know-how so nar- rowly as to guarantee its premature senes- cence. When we mention “railroads,” we should make sure we mean “transportation.” As transporters, the railroads still have a good chance for very considerable growth. They are not limited to the railroad business as such (though in my opinion, rail transportation is potentially a much stronger transportation medium than is generally believed). What the railroads lack is not opportunity but some of the managerial imaginativeness and audacity that made them great. Even an amateur like Jacques Barzun can see what is lacking when he says, “I grieve to see the most advanced physical and social organization of the last century go down in shabby disgrace for lack of the same comprehensive imagination that built it up. [What is lacking is] the will of the companies to survive and to satisfy the public by inventiveness and skill.”1 Shadow of Obsolescence It is impossible to mention a single major in- dustry that did not at one time qualify for the t 2004 page 3 nly by Liang Tse Hsu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Marketing Myopia • • • B EST OF HBR 1960 harvard business review • july–augus This document is authorized for use o magic appellation of “growth industry.” In each case, the industry’s assumed strength lay in the apparently unchallenged superiority of its product. There appeared to be no effective substitute for it. It was itself a runaway substi- tute for the product it so triumphantly re- placed. Yet one after another of these cele- brated industries has come under a shadow. Let us look briefly at a few more of them, this time taking examples that have so far received a little less attention. Dry Cleaning. This was once a growth in- dustry with lavish prospects. In an age of wool garments, imagine being finally able to get them clean safely and easily. The boom was on. Yet here we are 30 years after the boom started, and the industry is in trouble. Where has the competition come from? From a better way of cleaning? No. It has come from syn- thetic fibers and chemical additives that have cut the need for dry cleaning. But this is only the beginning. Lurking in the wings and ready to make chemical dry cleaning totally obsolete is that powerful magician, ultrasonics. Electric Utilities. This is another one of those supposedly “no substitute” products that has been enthroned on a pedestal of invincible growth. When the incandescent lamp came along, kerosene lights were finished. Later, the waterwheel and the steam engine were cut to ribbons by the flexibility, reliability, simplicity, and just plain easy availability of electric mo- tors. The prosperity of electric utilities contin- ues to wax extravagant as the home is con- verted into a museum of electric gadgetry. How can anybody miss by investing in utili- ties, with no competition, nothing but growth ahead? But a second look is not quite so comforting. A score of nonutility companies are well ad- vanced toward developing a powerful chemi- cal fuel cell, which could sit in some hidden closet of every home silently ticking off electric power. The electric lines that vulgarize so many neighborhoods would be eliminated. So would the endless demolition of streets and service interruptions during storms. Also on the horizon is solar energy, again pioneered by nonutility companies. Who says that the utilities have no competi- tion? They may be natural monopolies now, but tomorrow they may be natural deaths. To avoid this prospect, they too will have to de- velop fuel cells, solar energy, and other power sources. To survive, they themselves will have to plot the obsolescence of what now produces their livelihood. Grocery Stores. Many people find it hard to realize that there ever was a thriving establish- ment known as the “corner store.” The super- market took over with a powerful effective- ness. Yet the big food chains of the 1930s narrowly escaped being completely wiped out by the aggressive expansion of independent supermarkets. The first genuine supermarket was opened in 1930, in Jamaica, Long Island. By 1933, supermarkets were thriving in Cali- fornia, Ohio, Pennsylvania, and elsewhere. Yet the established chains pompously ignored them. When they chose to notice them, it was with such derisive descriptions as “cheapy,” “horse-and-buggy,” “cracker-barrel storekeep- ing,” and “unethical opportunists.” The executive of one big chain announced at the time that he found it “hard to believe that people will drive for miles to shop for foods and sacrifice the personal service chains have perfected and to which [the consumer] is ac- customed.”2 As late as 1936, the National Wholesale Grocers convention and the New Jersey Retail Grocers Association said there was nothing to fear. They said that the supers’ narrow appeal to the price buyer limited the size of their market. They had to draw from miles around. When imitators came, there would be wholesale liquidations as volume fell. The high sales of the supers were said to be partly due to their novelty. People wanted convenient neighborhood grocers. If the neighborhood stores would “cooperate with their suppliers, pay attention to their costs, and improve their service,” they would be able to weather the competition until it blew over.3 It never blew over. The chains discovered that survival required going into the supermar- ket business. This meant the wholesale de- struction of their huge investments in corner store sites and in established distribution and merchandising methods. The companies with “the courage of their convictions” resolutely stuck to the corner store philosophy. They kept their pride but lost their shirts. A Self-Deceiving Cycle. But memories are short. For example, it is hard for people who today confidently hail the twin messiahs of electronics and chemicals to see how things could possibly go wrong with these galloping industries. They probably also cannot see how t 2004 page 4 nly by Liang Tse Hsu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Marketing Myopia • • • B EST OF HBR 1960 harvard business review • july–augus It is hard for people who hail the twin messiahs of electronics and chemicals to see how things could possibly go wrong with these galloping industries. This document is authorized for use o a reasonably sensible businessperson could have been as myopic as the famous Boston millionaire who early in the twentieth century unintentionally sentenced his heirs to poverty by stipulating that his entire estate be forever invested exclusively in electric streetcar securi- ties. His posthumous declaration, “There will always be a big demand for efficient urban transportation,” is no consolation to his heirs, who sustain life by pumping gasoline at auto- mobile filling stations. Yet, in a casual survey I took among a group of intelligent business executives, nearly half agreed that it would be hard to hurt their heirs by tying their estates forever to the electronics industry. When I then confronted them with the Boston streetcar example, they chorused unanimously, “That’s different!” But is it? Is not the basic situation identical? In truth, there is no such thing as a growth in- dustry, I believe. There are only companies or- ganized and operated to create and capitalize on growth opportunities. Industries that as- sume themselves to be riding some automatic growth escalator invariably descend into stag- nation. The history of every dead and dying “growth” industry shows a self-deceiving cycle of bountiful expansion and undetected decay. There are four conditions that usually guaran- tee this cycle: 1. The belief that growth is assured by an ex- panding and more affluent population; 2. The belief that there is no competitive substitute for the industry’s major product; 3. Too much faith in mass production and in the advantages of rapidly declining unit costs as output rises; 4. Preoccupation with a product that lends itself to carefully controlled scientific experi- mentation, improvement, and manufacturing cost reduction. I should like now to examine each of these conditions in some detail. To build my case as boldly as possible, I shall illustrate the points with reference to three industries: petroleum, automobiles, and electronics. I’ll focus on pe- troleum in particular, because it spans more years and more vicissitudes. Not only do these three industries have excellent reputations with the general public and also enjoy the con- fidence of sophisticated investors, but their managements have become known for pro- gressive thinking in areas like financial control, product research, and management training. If obsolescence can cripple even these industries, it can happen anywhere. Population Myth The belief that profits are assured by an ex- panding and more affluent population is dear to the heart of every industry. It takes the edge off the apprehensions everybody understand- ably feels about the future. If consumers are multiplying and also buying more of your product or service, you can face the future with considerably more comfort than if the market were shrinking. An expanding market keeps the manufacturer from having to think very hard or imaginatively. If thinking is an in- tellectual response to a problem, then the ab- sence of a problem leads to the absence of thinking. If your product has an automatically expanding market, then you will not give much thought to how to expand it. One of the most interesting examples of this is provided by the petroleum industry. Proba- bly our oldest growth industry, it has an envi- able record. While there are some current con- cerns about its growth rate, the industry itself tends to be optimistic. But I believe it can be demonstrated that it is undergoing a fundamental yet typical change. It is not only ceasing to be a growth industry but may actually be a declining one, relative to other businesses. Although there is widespread unawareness of this fact, it is conceivable that in time, the oil industry may find itself in much the same position of retrospective glory that the railroads are now in. Despite its pioneering work in devel- oping and applying the present-value method of investment evaluation, in em- ployee relations, and in working with devel- oping countries, the petroleum business is a distressing example of how complacency and wrongheadedness can stubbornly convert opportunity into near disaster. One of the characteristics of this and other industries that have believed very strongly in the beneficial consequences of an expanding population, while at the same time having a generic product for which there has appeared to be no competitive substitute, is that the in- dividual companies have sought to outdo their competitors by improving on what they are al- ready doing. This makes sense, of course, if one assumes that sales are tied to the country’s population strings, because the customer can t 2004 page 5 nly by Liang Tse Hsu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Marketing Myopia • • • B EST OF HBR 1960 harvard business review • july–augus The history of every dead and dying “growth” industry shows a self- deceiving cycle of bountiful expansion and undetected decay. This document is authorized for use o compare products only on a feature-by-feature basis. I believe it is significant, for example, that not since John D. Rockefeller sent free ker- osene lamps to China has the oil industry done anything really outstanding to create a de- mand for its product. Not even in product im- provement has it showered itself with emi- nence. The greatest single improvement—the development of tetraethyl lead—came from outside the industry, specifically from General Motors and DuPont. The big contributions made by the industry itself are confined to the technology of oil exploration, oil production, and oil refining. Asking for Trouble. In other words, the pe- troleum industry’s efforts have focused on im- proving the efficiency of getting and making its product, not really on improving the generic product or its marketing. Moreover, its chief product has continually been defined in the narrowest possible terms—namely, gasoline, not energy, fuel, or transportation. This atti- tude has helped assure that: • Major improvements in gasoline quality tend not to originate in the oil industry. The de- velopment of superior alternative fuels also comes from outside the oil industry, as will be shown later. • Major innovations in automobile fuel mar- keting come from small, new oil companies that are not primarily preoccupied with pro- duction or refining. These are the companies that have been responsible for the rapidly ex- panding multipump gasoline stations, with their successful emphasis on large and clean layouts, rapid and efficient driveway service, and quality gasoline at low prices. Thus, the oil industry is asking for trouble from outsiders. Sooner or later, in this land of hungry investors and entrepreneurs, a threat is sure to come. The possibility of this will be- come more apparent when we turn to the next dangerous belief of many managements. For the sake of continuity, because this second be- lief is tied closely to the first, I shall continue with the same example. The Idea of Indispensability. The petro- leum industry is pretty much convinced that there is no competitive substitute for its major product, gasoline—or, if there is, that it will continue to be a derivative of crude oil, such as diesel fuel or kerosene jet fuel. There is a lot of automatic wishful thinking in this assumption. The trouble is that most re- fining companies own huge amounts of crude oil reserves. These have value only if there is a market for products into which oil can be con- verted. Hence the tenacious belief in the con- tinuing competitive superiority of automobile fuels made from crude oil. This idea persists despite all historic evi- dence against it. The evidence not only shows that oil has never been a superior product for any purpose for very long but also that the oil industry has never really been a growth indus- try. Rather, it has been a succession of different businesses that have gone through the usual historic cycles of growth, maturity, and decay. The industry’s overall survival is owed to a se- ries of miraculous escapes from total obsoles- cence, of last-minute and unexpected re- prieves from total disaster reminiscent of the perils of Pauline. The Perils of Petroleum. To illustrate, I shall sketch in only the main episodes. First, crude oil was largely a patent medicine. But even before that fad ran out, demand was greatly expanded by the use of oil in kerosene lamps. The prospect of lighting the world’s lamps gave rise to an extravagant promise of growth. The prospects were similar to those the industry now holds for gasoline in other parts of the world. It can hardly wait for the underdeveloped nations to get a car in every garage. In the days of the kerosene lamp, the oil companies competed with each other and against gaslight by trying to improve the illu- minating characteristics of kerosene. Then sud- denly the impossible happened. Edison in- vented a light that was totally nondependent on crude oil. Had it not been for the growing use of kerosene in space heaters, the incandes- cent lamp would have completely finished oil as a growth industry at that time. Oil would have been good for little else than axle grease. Then disaster and reprieve struck again. Two great innovations occurred, neither originating in the oil industry. First, the successful develop- ment of coal-burning domestic central-heating systems made the space heater obsolete. While the industry reeled, along came its most mag- nificent boost yet: the internal combustion en- gine, also invented by outsiders. Then, when the prodigious expansion for gasoline finally began to level off in the 1920s, along came the miraculous escape of the central oil heater. Once again, the escape was provided by an out- t 2004 page 6 nly by Liang Tse Hsu ([email protected]). Copying or posting is an infringement of copyright. Please contact [email protected] or 800-988-0886 for additional copies. Marketing Myopia • • • B EST OF HBR 1960 harvard business review • july–augus If thinking is an intellectual response to a problem, then the absence of a problem leads to the absence of thinking. This document is authorized for use o sider’s invention and development. And when that market weakened, wartime demand for aviation fuel came to the rescue. After the war, the expansion of civilian aviation, the die- selization of railroads, and the explosive de- mand for cars and trucks kept the industry’s growth in high gear. Meanwhile, centralized oil heating—whose boom potential had only recently been pro- claimed—ran into severe competition from natural gas. While the oil companies them- selves owned the gas that now competed with their oil, the industry did not originate the nat- ural gas revolution, nor has it to this day greatly profited from its gas ownership. The gas revolution was made by newly formed transmission companies that marketed the product with an aggressive ardor. They started a magnificent new industry, first against the advice and then against the resistance of the oil companies. By all the logic of the situation, the oil com- panies themselves should have made the gas revolution. They not only owned the …