John Kay - Sometimes the best that a company can hope for is death

Sometimes the best that a company can hope for is death

The Financial Times has carried an unusual number of obituaries and stories of terminal illness this summer.

There was the bankruptcy of Detroit and the slide into administration of once-ubiquitous companies, such as Jessops, thehigh-street camera retailer. Then there was last week’s announcement of the continuing troubles of BlackBerry, which made the defining business product of the first decade of the 21st century

Humans have always found it hard to cope with the idea that every individual has a lifespan even as life itself goes on. The idea of a natural life cycle for a business, or industrial centre, is even more difficult to accept. So we ask: what can be done to revive Detroit? Can BlackBerry find a new role?

Commentators argue that Jessops had not simply come to the end of its natural life; rather, it was the victim of errors, failing to respond appropriately to the rise of online retailing.

The marketing guru Theodore Levitt elaborated this theme in an article half a century ago. Levitt denounced marketing myopia. There was always, he suggested, a future for a company; the key was to look for a creative answer to the question: “What business are we in?” Manufacturers of buggy whips might still be around as carmakers if they had only understood that they were not simply encouraging faster horses; they were transport companies.

Much of Levitt’s analysis was devoted to urging oil companies to recognise that they were really in the energy business. Some of these companies found his arguments persuasive.

Yet 50 years later, few of their diversifications into other forms of power have worked out – their flirtation with coal in the 1970s and 1980s was particularly unsuccessful – and the traditional oil majors still make most of their money out of oil.

Levitt did not recognise that competitive advantage, rather than a fertile imagination, is the key to success. The whip manufacturers had neither production capabilities nor marketing channels relevant to the automobile industry. The skillset needed to manage coal mines is very different from that required to run an integrated oil company.

Recent history has provided a textbook illustration of the limitations of the Levitt hypothesis – the disastrous remodelling of JC Penney’s dowdy stores by Ron Johnson, brilliant designer of Apple’s retail chain. The outlets of both JC Penney and Apple are shops but the age group and disposable incomes of their customers – and their reasons for visiting the stores – were entirely different: JC Penney and Apple were not really in the same business.

The factors that attracted motor vehicle producers to Detroit a century ago – excellent access to resources and transport links, followed by local skills and specialist suppliers – are no longer competitive advantages in car making nor, indeed, in other industries.

Some urban regenerations succeed. Former dockland areas enjoy waterfront positions that make them attractive locations for apartments and bars. Many cities have redeveloped old markets in exciting ways. But more often, the factors that facilitated old industrial developments are unappealing in a modern age.

The quayside development or the revitalised market hall work because the old source of competitive advantage has a new field of application. The same is true of the most striking recent case of a company that successfully found a second life.IBM was able to reinvent itself as a business services company when its mainframe business declined because its real strength had always been less in its technology than in the quality of support it provided for customers.

But such revivals are rare. At The Washington Post, Jeff Bezos inherits the paper’s irreproducible competitive advantage of reputation and readership – the “moat” that Warren Buffett shrewdly identified in 1975. His challenge is to apply that advantage in a market undergoing radical change.

As Jessops shows, a business in decline can fall into a downward spiral: what would attract young professionals to Detroit, or able technologists to BlackBerry? The problem is not solved by fostering illusions about reinvention.

Merger is often a civilised alternative to bankruptcy, and we live on mainly through our progeny.

 

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