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C o p y r i g h t 2 0 0 8 . H a r v a r d B u s i n e s s R e v i e w P r e s s .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

EBSCO Publishing : eBook Subscription Harvard Business Publishing Collection (EBSCOhost) – printed on 1/26/2024 6:21 PM via LIBERTY UNIVERSITY AN: 1044311 ; Theodore Levitt.; Marketing Myopia Account: liberty.main.ehost

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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 that are thought of as sea- soned 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.

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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 transportation declined. That grew. The railroads are in trouble today not because that need was filled by oth- ers (cars, trucks, airplanes, and even telephones) 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 rea-

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son they defined their industry incor- rectly was that they were railroad oriented instead of transportation ori- ented; 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 reorganizations. 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 busi- ness incorrectly. It thought it was in the movie business when it was actually in the entertainment business. “Movies” implied a specific, limited product. This

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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 opportunity—an opportunity to expand the entertain- ment 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 prod- uct 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 resurgence was the wave of new young writers, producers, and

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directors whose previous successes in televi- sion had decimated the old movie companies and toppled the big movie moguls.

There are other, less obvious examples of industries that have been and are now endan- gering 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 management can do to keep a growth indus- try growing, even after the obvious opportu- nities have been exhausted, and here there are two examples that have been around for a long time. They are nylon and glass—specifi- cally, E.I. du Pont de Nemours and Company and Corning Glass Works.

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Both companies have great technical com- petence. Their product orientation is un- questioned. But this alone does not explain their success. After all, who was more pride- fully product oriented and product conscious than the erstwhile New England textile com- panies that have been so thoroughly massa- cred? 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 opportu- nities 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 sophis- ticated eye on the customer, most of their

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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 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

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than the railroads and the movies? This view commits precisely the error I have been talk- ing 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 trans- porters, 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 transpor- tation is potentially a much stronger trans- portation 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

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lacking when he says, “I grieve to see the most advanced physical and social organiza- tion 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 magic appellation of “growth industry.” In each case, the industry’s assumed strength lay in the apparently unchallenged superior- ity of its product. There appeared to be no

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effective substitute for it. It was itself a run- away substitute for the product it so tri- umphantly 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 lav- ish 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 synthetic

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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 en- throned on a pedestal of invincible growth. When the incandescent lamp came along, kerosene lights were finished. Later, the wa- terwheel and the steam engine were cut to ribbons by the flexibility, reliability, simplic- ity, and just plain easy availability of electric motors. The prosperity of electric utilities continues to wax extravagant as the home is

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converted into a museum of electric gad- getry. How can anybody miss by investing in utilities, with no competition, nothing but growth ahead?

But a second look is not quite so comfort- ing. A score of nonutility 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 vul- garize 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 compe- tition? They may be natural monopolies now,

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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 store.” The supermar- ket took over with a powerful effectiveness. Yet the big food chains of the 1930s nar- rowly escaped being completely wiped out by the aggressive expansion of independent supermarkets. The first genuine supermar- ket was opened in 1930, in Jamaica, Long

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Island. By 1933, supermarkets were thriv- ing 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 “cheapy,” “horse-and-buggy,” “cracker-barrel storekeeping,” and “unethi- cal 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 accustomed.”2 As late as 1936, the Na- tional Wholesale Grocers convention and the New Jersey Retail Grocers Association said there was nothing to fear. They said that

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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 atten- tion to their costs, and improve their ser- vice,” 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 super- market business. This meant the wholesale destruction of their huge investments in cor- ner store sites and in established distribution

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and merchandising methods. The companies with “the courage of their convictions” res- olutely 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 chemi- cals to see how things could possibly go wrong with these galloping industries. They probably also cannot see how a reasonably sensible businessperson could have been as myopic as the famous Boston millionaire who early in the twentieth century uninten- tionally sentenced his heirs to poverty by stipulating that his entire estate be forever invested exclusively in electric streetcar

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securities. His posthumous declaration, “There will always be a big demand for effi- cient urban transportation,” is no consola- tion to his heirs, who sustain life by pumping gasoline at automobile 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 con- fronted them with the Boston streetcar ex- ample, they chorused unanimously, “That’s different!” But is it? Is not the basic situa- tion identical?

In truth, there is no such thing as a growth industry, I believe. There are only companies organized and operated to create and capi- talize on growth opportunities. Industries

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that assume themselves to be riding some au- tomatic 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 that usually guarantee this cycle:

1. The belief that growth is assured by an expanding 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 de- clining unit costs as output rises;

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4. Preoccupation with a product that lends itself to carefully controlled sci- entific experimentation, 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 petroleum 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 confidence of sophisticated in- vestors, but their managements have become known for progressive thinking in areas like financial control, product research, and

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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 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 were shrinking. An ex- panding market keeps the manufacturer from having to think very hard or imagina-

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tively. 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 mar- ket, 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. Probably our oldest growth industry, it has an enviable record. While there are some current concerns 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

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is widespread unawareness of this fact, it is conceivable that in time, the oil industry may find itself in much the same position of retro- spective glory that the railroads are now in. Despite its pioneering work in developing and applying the present-value method of in- vestment evaluation, in employee relations, and in working with developing countries, the petroleum business is a distressing ex- ample of how complacency and wronghead- edness 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 sub-

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stitute, is that the individual companies have sought to outdo their competitors by im- proving 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 any- thing really outstanding to create a demand for its product. Not even in product improve- ment has it showered itself with eminence. The greatest single improvement—the devel- opment of tetraethyl lead—came from out- side the industry, specifically from General Motors and DuPont. The big contributions made by the industry itself are confined to

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the technology of oil exploration, oil produc- tion, and oil refining.

Asking for Trouble

In other words, the petroleum industry’s efforts have focused on improving the effi- ciency 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 narrow- est 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. The development of superior alterna-

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tive fuels also comes from outside the oil industry, as will be shown later.

• Major innovations in automobile fuel marketing come from small, new oil companies that are not primarily pre- occupied with production or refining. These are the companies that have been responsible for the rapidly expanding multipump gasoline stations, with their successful emphasis on large and clean layouts, rapid and efficient driveway ser- vice, 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

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will become more apparent when we turn to the next dangerous belief of many manage- ments. For the sake of continuity, because this second belief is tied closely to the first, I shall continue with the same example.

The Idea of Indispensability

The petroleum industry is pretty much convinced that there is no competitive sub- stitute for its major product, gasoline—or, if there is, that it will continue to be a deriva- tive of crude oil, such as diesel fuel or kero- sene jet fuel.

There is a lot of automatic wishful think- ing in this assumption. The trouble is that most refining companies own huge amounts

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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 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 industry. 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 series of miraculous escapes from total obsolescence, of last-minute and unex-

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pected reprieves from total disaster reminis- cent 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 light- ing the world’s lamps gave rise to an extrava- gant 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

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against gaslight by trying to improve the illu- minating characteristics of kerosene. Then suddenly the impossible happened. Edison invented a light that was totally nondepen- dent on crude oil. Had it not been for the growing use of kerosene in space heaters, the incandescent lamp would have com- pletely 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 suc- cessful development of coal-burning domes- tic central-heating systems made the space heater obsolete. While the industry reeled, along came its most magnificent boost yet:

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