Learning to define the core business

375

Ted Levitt’s challenge to “define what business you are in” was based in a fundamental confusion between industries and markets.

Granada’s bid for Forte is an audacious attempt to create Britain’s largest leisure business – one that would stretch from Coronation Street to the Savoy Hotel, from Newport Pagnell service area to television rentals. But is there such a thing as a leisure business? Or is there just a range of different things that different people do with their spare time?

In the last decade, many companies have posed the question “what business are we in?” The intellectual spur came from a series of articles by Ted Levitt, the American marketing guru behind Maurice Saatchi’s aspirations to create a global advertising business*

Levitt blasted companies for what he described as “marketing myopia”. Railroads had gone into terminal decline, but only because they had limited their horizons to the tracks. After all, neither people nor goods had stopped moving. If only railroads had seen themselves as being in the transportation business – if they had been customer-oriented rather than product-orientated – they might still be prosperous today. Levitt acknowledged that no amount of product improvement could have saved the buggy whip industry from Henry Ford’s model T. But, he explained, if the buggy whip people had only appreciated that they too were in the transportation business, they might have survived as makers of fan belts or air filters.

Levitt’s analysis of the petroleum industry was particularly forceful. Firms like Exxon and Amoco, BP and Shell, had for too long laboured under the misapprehension that they were oil companies. Levitt told them they were in the energy business. If they continued to confine their attention to oil and gasoline, they risked going the way of the buggy whip manufacturers.

His advice was influential. Oil companies, fearful for the future of their markets after the 1974 oil shock, did indeed buy coal mines and diversify into other energy markets. The results ranged from the disappointing to the disastrous. Few of these activities survive. The major oil companies continue, as they always have, to make their considerable profits out of selling oil.

And this should be no surprise. The Levitt thesis is fundamentally misconceived. The term business – as in the question “what business are we in”, conflates two distinct economic concepts – the market and the industry. The market is defined by consumer needs and markets reflect consumer demands. The industry is defined by related firm capabilities and industries are based on supply technologies.

So washing machines and laundries are in the same market, because both are means of cleaning clothes. Washing machines and refrigerators are products of the same industry, despite their wholly different purposes, because each is a white box with a motor and is sold through similar distribution channels. Confusing the industry with the market is one of the most frequently repeated mistakes in corporate strategy.

There was an energy market – coal and oil served similar purposes. But there was no energy industry – the skills needed to dig for coal were very different from those needed to manage an integrated oil company, as the firms who tried to do both discovered. And Penn Central could have taken to the skies, and the buggy whip manufacturers might have made air filters, but there is no reason to think that they would have been any good at these activities: no reason to think that they would have performed better than any other firm which saw airlines or automobile components as a new market opportunity.

And the examples Levitt used to make his case in fact demonstrated his error. At the time he wrote DuPont and Corning had indeed continued to succeed in the nylon and glass businesses. But they had not done it by diversifying into substitutes like cotton or tinplate. What they had done was to find new uses for their core products and key skills. Levitt had simply confused the evolution of an industry with the evolution of a market.

So how should a firm define its core business? Is BT in the integrated provision of telecommunications products (as it once thought when it bought Mitel, a hardware supplier). Or is it in the international provision of telecommunications services (as it next thought when it bought McCaw, an American cellular phone company)? Or is it in the business of global data transmission for multi-channels (the rationale of its current alliance with MCI)? Or is it just a phone company?

The way to resolve these questions is not by necessarily inconclusive debate about whether buggy whips are instruments of correction or transportation accessories. Even if that question could be resolved, it would not tell their manufacturers whether to diversify into thumbscrews or motor cars. The right approach is to identify what are the distinctive skills and capabilities of the firm and ask what are the markets in which these yield competitive advantage.

Posing the question that way shows why it was right for DuPont to seek out new uses for polyester fibres, but wrong for oil companies to buy coal mines. It shows why it was right for Marks & Spencer to diversify into financial services (because that capitalised on their reputation with customers) but wrong for BT to own an equipment manufacturer.

And it also shows why there is no such thing as the leisure business. We have heard about the leisure business before – from Rank when it attempted to buy Watneys, from Bass when it mistakenly acquired Horizon Holidays. Package tours and an evening in the pub may represent alternative claims on consumer expenditure, but that does not mean that there is a leisure industry of which both are part. Firms should always ask whether a new activity extends the application of their distinctive capabilities? If it does not, it is no more your business than it is anyone else’s.

See T Levitt, The Marketing Imagination, Free Press 1986 for a collection of Levitt’s writings.

Print Friendly, PDF & Email