Marketing Myopia
Every major industry was once a growth industry. But some that are now riding a wave of growth enthusiasm are very much in the shadow of decline. Others, which 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 responsible 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 transportation declined. That grew. The railroads are in trouble today not because others (cars, trucks, airplanes, and even telephones) did fill the need, but because it was not filled by the railroads themselves. They let others take customers 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 wrong was because they were railroad-oriented instead of transportation-oriented; they were product-oriented instead of customer-oriented.
Hollywood barely escaped being totally ravished by television. Actually, all the established film companies went through drastic reorganisations. Some simply disappeared. All of them got into trouble not because of TV's inroads but because of their own myopia. As with the railroads,
Hollywood defined its business incorrectly. It thought it was in the movie business when it was actually in the entertainment business. "Movies" implied a specific, limited product. This produced a fatuous contentment, which from the beginning led producers to view TV as a threat. Hollywood scorned and rejected TV when it should have welcomed it as an opportunity - an opportunity to expand the entertainment business.
Today TV is a bigger business than the old narrowly defined movie business ever was. Had Hollywood been customer-oriented (providing entertainment), rather than product-oriented (making movies), would it have gone through the fiscal purgatory that it did? I doubt it. What ultimately saved Hollywood and accounted for its recent resurgence was the wave of new young writers, producers, and directors whose previous successes in television had decimated the old movie companies and toppled the big movie moguls.
There are other less obvious examples of industries that have been and is now endangering their futures by improperly defining their purposes. I shall discuss some 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 management can do to keep a growth industry growing, even after the obvious opportunities have been exhausted; and here there are two examples that have been around for a long time. They are nylon and glass specifically, e.g. Dupont de Nemours & Company and Corning Glass Works.
Both companies have great technical competence. Their product orientation is unquestioned. But this alone does not explain their success. After all, who was more pridefully product-oriented and product-conscious than the erstwhile 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 customer-oriented also. It is constant watchfulness for opportunities to apply their technical know-how to the creation of customer-satisfying uses, which accounts for their prodigious output of successful new products. Without a very sophisticated eve 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, which deliberately set about creating new customer-satisfying uses. Without Kaiser Aluminum & Chemical Corporation and Reynolds Metals Company, the total demand for aluminum today would be vastly less than it is.
Error of Analysis
Some may argue that it is foolish to set the railroads off against aluminum 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 movies? 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 narrowly as to guarantee its premature senescence. 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 railroad lacks are not opportunity, but some of the same 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."
Shadow of Obsolescence
It is impossible to mention a single major industry that did not at one time qualify for the magic appellation of "growth industry." In each case its 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 substitute for the product it so triumphantly replaced. Yet one after another of these celebrated 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 industry with lavish prospects. In an age of wool garments, imagine being finally able to get them safely and easily clean. The boom was on.
Yet here we are 30 years after the boom started and the industry is in trouble. Where has the competition comes from? From a better way of cleaning? No. It has come from synthetic fibers and chemical additives that have cat the need for dry cleaning. But this is only the beginning. Lurking in the wings and ready to make chemical dry cleaning totally obsolescent is that powerful magician, ultrasonic.
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 water wheel and the steam engine were cut to ribbons by the flexibility, reliability, simplicity, and just plain easy availability of electric motors. The prosperity of electric utilities continues to wax extravagant as the home is converted into a museum of electric gadgetry.
How can anybody miss by investing in utilities, with no competition, nothing but growth ahead?
But a second look is not quite so comforting. A score of non-utility companies are well advanced toward developing a powerful chemical 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 will be eliminated. So will the endless demolition of streets and service interruptions during storms. Also on the horizon is solar energy, again pioneered by non-utility companies.
Who says that the utilities have no competition? They may be natural monopolies now, but tomorrow they may be natural deaths. To avoid this prospect, they too will have to develop 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 establishment known as the "corner grocery store." The supermarket has taken over with a powerful effectiveness. Yet the big food chains of the 1930's 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 California, Ohio, Pennsylvania, and elsewhere. Yet the established chains pompously ignored them. When they chose to notice them, it was with such derisive descriptions as "cheaply," "horse-and-buggy," "cracker-barrel storekeeping," 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 Mrs. Consumer is accustomed. 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' narrowly 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 current high sales of the supers were said to be partly due to their novelty. Basically people wanted convenient neighborhood grocers. If the neighborhood stores "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.
It never blew over. The chains discovered that survival required going into the supermarket business. This meant the wholesale destruction 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.
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 bow a reasonably sensible businessman could have been as myopic as the famous Boston millionaire who 50 years ago unintentionally sentenced his heirs to poverty by stipulating that his entire estate be forever invested exclusively in electric streetcar securities. 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 automobile filling stations.
Yet, in a casual survey I recently took among a group of intelligent business executives, nearly half agreed that it would be bard 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 industry, I believe. There are only companies organized and operated to create and capitalize on growth opportunities. Industries that assume themselves to be riding some automatic growth escalator invariably descend into stagnation. The history of every dead and dying "growth" industry shows a self-deceiving cycle of bountiful expansion and undetected decay. There are four conditions, which usually guarantee this cycle:
- The belief that growth is assured by an expanding and more affluent population.
- The belief that there is no competitive substitute for the industry's major product.
- Too much faith in mass production and in the advantages of rapidly declining unit costs as output rises.
- Preoccupation with a product that lends itself to carefully controlled scientific experimentation, improvement, and manufacturing cost reduction.
I should like now to begin examining 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 - particularly petroleum, because it spans more years and more vicissitudes. Not only do these three have excellent reputations with the general public and also enjoy the confidence of sophisticated investors, but their management's have become known for progressive 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 expanding and more affluent population is dear to the heart of every industry. It takes the edge off the apprehensions everybody understandably 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 is shrinking.
An expanding market keeps the manufacturer from having to think very hard or imaginatively. If thinking is an intellectual response to a problem, then the absence 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 bow to expand it.
One of the most interesting examples of this is provided by the petroleum industry. Probably our oldest growth industry, it has an enviable record. While there are some current apprehensions 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 business.
Although there is widespread unawareness of it, I believe that within 25 years 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 developing and applying the present-value method of investment evaluation, in employee relations, and in working with backward countries, the petroleum business is a distressing example of how complacency and wrong headedness 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 being industries with a generic product for which there has appeared to be no competitive substitute, is that the individual companies have sought to outdo their competitors by improving on what they are already doing. This makes sense, of course, if one assumes that sales are tied to the country's population strings, because the customer can compare products only on a feature-by-feature basis.
I believe it is significant, for example, that not since John D. Rockefeller sent free kerosene lamps to China has the oil industry done anything really outstanding to create a demand for its product. Not even in product improvement has it showered itself with eminence. The greatest single improvement, namely, 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, production, and refining.
Asking for Trouble
In other words, the industry's efforts have focused on improving the efficiency of getting, and making its product, not really on improving the generic product or its marketing. Moreover, its chief product has continuously been defined in the narrowest possible terms, namely, gasoline, not energy, fuel, or transportation. This attitude has helped assure that:
- Major improvements in gasoline quality tend not to originate in the oil industry. Also, the development of superior alternative fuels comes from outside the oil industry, as will be shown later.
- Major innovations in automobile fuel marketing are originated by small new oil companies that are not primarily preoccupied with production or refining. These are the companies that have been responsible for the rapidly expanding multi-pump 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 inventors and entrepreneurs, a threat is sure to come. The possibilities of this will become more apparent when we turn to the next dangerous belief of many management's. For the sake of continuity, because this second belief is tied closely to the first, I shall continue with the same example.
Idea of Indispensability
The petroleum industry is pretty much persuaded 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 refining companies own huge amounts of crude oil reserves. These have value only if there is a market for products into which oil can be converted - hence the tenacious belief in the continuing competitive superiority of automobile fuels made from crude oil.
This idea persists despite all historic evidence against it. The evidence not only shows that oil has never been a superior product for any purpose for very long, but it also shows that the oil industry has never really been a growth industry. It has been a succession of different businesses that have gone through the usual historic cycles of growth, maturity, and decay. Its over-all survival is owed to a series of miraculous escapes from total obsolescence, of last minute and unexpected reprieves from total disaster reminiscent of the Perils of Pauline.
Perils of Petroleum
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 illuminating characteristics of kerosene. Then suddenly the impossible happened. Edison invented a light, which was totally nondependent on crude oil. Had it not been for the growing use of kerosene in space beaters, the incandescent 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. The successful development of coal-burning domestic central-heating systems made the space heater obsolescent. While the industry reeled, along came its most magnificent boosts yet - the internal combustion engine, also invented by outsiders. Then when the prodigious expansion for gasoline finally began to level off in the 1920's, along came the miraculous escape of a central oil heater. Once again, the escape was provided by an outsider'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 dieselization of railroads, and the explosive demand for cars and trucks kept the industry's growth in high gear.
Meanwhile centralized oil heating - whose boom potential had only recently been proclaimed - ran into severe competition from natural gas. While the oil companies themselves owned the gas that now competed with their oil, the industry did not originate the natural 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 ardour. 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 companies themselves should have made the gas revolution. They not only owned the gas; they also were the only people experienced in handling, scrubbing, and using it, the only people experienced in pipeline technology and transmission, and they understood heating problems. But, partly because they knew that natural gas would compete with their own sale of heating oil, the oil companies pooh-poohed the potentials of gas.
The revolution was finally started by oil pipeline executives who, unable to persuade their own companies to go into gas, quit and organized the spectacularly successful gas transmission companies. Even after their success became painfully evident to the oil companies, the latter did not go into gas transmission. The multibillion-dollar business, which should have been theirs, went to others. As in the past, the industry was blinded by its narrow preoccupation with a specific product and the value of its reserves. It paid little or no attention to its customers' basic needs and preferences.
The post-war years have not witnessed any change. Immediately after World War 11 the oil industry was greatly encouraged about its future by the rapid expansion of demand for its traditional line of products. In 1950 most companies projected annual rates of domestic expansion of around 6% through at least 1975.
Though the ratio of crude oil reserves to demand in the Free World was about 20 to 1, with 10 to 1 being usually considered a reasonable working ratio in the United States, booming demand sent oil men searching for more without sufficient regard to what the future really promised. In 1952 they "hit" in the Middle East; the ratio skyrocketed to 42 to 1. If gross additions to reserves continue at the average rate of the past five years (37 billion barrels annually, then by 1970 the reserve ratio will be up to 45 to 1. This abundance of oil has weakened crude and product prices all over the world.
Uncertain Future
Management cannot find much consolation today in the rapidly expanding petrochemical 'industry, another oil-using idea that did not originate in the leading firms. The total United States production of petrochemicals is equivalent to about 2% (by volume) of the demand for all petroleum products. Although the petrochemical industry is now expected to grow by about 10% per year, this will not offset other drains on the growth of crude oil consumption.
Furthermore, while petrochemical products are many and growing, it is well to remember' that there are non-petroleum sources of the basic raw material, such as coal. Besides, a lot of plastics can be produced with relatively little oil. A 50,000-barrel-per-day oil refinery is now considered the absolute minimum size for efficiency. But a 5,000-barrel-per-day chemical plant is a giant operation.
Oil has never been a continuously strong growth industry. It has grown by fits and starts, always miraculously saved by innovations and developments not of its own making. The reason it has not grown in a smooth progression is that each time it thought it had a superior product safe from the possibility of competitive substitutes, the product turned out to be inferior and notoriously subject to obsolescence. Until now, gasoline (for motor fuel, anyhow) has escaped this fate. But, as we shall see later, it too may be on its last legs.
The point of all this is that there is no guarantee against product obsolescence. If a company's own research does not make it obsolete, another's will. Unless an industry is especially lucky, as oil has been -until now, it can easily go down in a sea of red figures - just as the railroads have, as the buggy whip manufacturers have, as the comer grocery chains have, as most of the big movie companies have, and indeed as many other industries have.
The best way for a firm to be lucky is to make its own luck. That requires knowing what makes a business successful. One of the greatest enemies of this knowledge is mass production.
Cont.
Page 1 of 2 [ 1 2 ]
