Organised Entropy
A Critical Assessment of “Marketing Myopia”
I did this as an assignment on the MBA. Since it is my own work – I chose to declassify it.
A critical assessment of “Marketing Myopia” – Theodore Levitt, Harvard Business Review, 1975 in context of the contemporary Green Energy Industry.
If you have pests in your house, what do you do? Build better and better mousetraps, or actually address the cause of infestation?
For decades many companies have learnt the truth, the hard way. Their focus has largely been towards building more and more sophisticated products, without realising that the problem as to why “growth” is declining actually lies elsewhere. On the other hand many people would argue that if it were not for the narrow and specialised focus of some companies on the products they make, the company would stagnate. In his ground-breaking paper on the short-sightedness of many companies, Theodore Levitt argued that many companies/industries are handicapped by a Marketing Myopia, and that “there is no such thing as a “growth” industry” [1] [A]. He said that cocooning of business objectives by top business executives invariably leads to decline.
In this paper, we shall see examples and exceptions of this concept known as “Marketing Myopia”, with the overall judgement drawing on examples from the Green Energy Industry.
Theodore Levitt in his insightful argument – Marketing Myopia, put forward a simple point – top management is too busy concentrating their energies and resources on the improvement of existing products, rather than on understanding customer needs. Indeed, many industries have fallen victim to this short-sightedness – believing that the industry they think they serve is an infinitely growing one. Haziness over the definition of purpose has sent many companies to their doom. As Lew Platt, former CEO of Hewlett Packard (HP) put it: “If HP knew what HP knows, it would be three times as profitable. [2][A]”
“Green Energy”
Green Energy (another name for renewable energy) refers to the energy generated by sources that are considered to be environment friendly and pollution fee – such that they do not generate non-usable and harmful waste, or by products. Examples include solar, hydel, wind, geothermal energy etc. With the recent fall in oil prices and a crunch in the global economy, there is lesser investment available for the renewable energy sectors. On the other hand, there is more and more need for energy companies to use “green” methods for satisfying the ever increasing hunger for usable, environment-friendly power.
Green Products – Why companies fail to make a first impression
While some companies struggle harder and harder to make more and more “green” products, they fail to look at the big picture. Analysts can’t explain why a product – marketed as completely environmental friendly, efficient and cheap, fails to capture the market. The reason – myopic imagination of corporate management. Most products fail because the marketing strategies of these products fail to answer a simple question from the viewpoint of the consumer – “What’s in it for me?”
According to Levitt, there are four major mistakes that lead to a “self-deceiving cycle of bountiful expansion and undetected decay [1] [A]”. Let’s look at each one of these in the context of the contemporary Green Energy Industry.
1. “Population Myth: Profits are guaranteed by an ever-expanding affluent population” [1] [A].
Or are they? The EV1 was the first modern production electric vehicle from a major automaker and also the first purpose-built electric car produced by General Motors (GM) in the United States. The car was introduced in 1996, production was discontinued after 1999 and eventually it was taken off the road in 2003 by GM [5] [A]. A film by Chris Paine blames the consumers for the failure of the EV1 as a commercial venture. The explanation for the “guilty” verdict is the “unwillingness” of consumers to “compromise on decreased range and increased costs for improvement to air quality [6]. But is it really the consumers to blame? The consumers were not willing to buy EV1 because the top management at GM failed to structure their marketing program in such a way that would offer the consumers the personal benefits of driving an EV1. Green marketing must satisfy two objectives: Improved environmental quality and customer satisfaction [4] [A]. Though GM marketed the EV1 well, including the use of extensive customer surveys, they let the technology languish by focussing on more imminently profitable segments like SUVs. In a critical rebuttal to the accusation, Dave Barthmuss of GM Communications answers that “We did what we felt was right in discontinuing a vehicle that we could no longer guarantee could be operated safely over the long term or that we would be able to repair” [7]. That is hardly a solace for investing more than $1 billion on the EV1, including mass marketing, and having sold less than 800 units of it. Or for the sales force that was laid off, when the assembly line for EV1 was shut down. Had the top management at GM addressed the basic question of owning an EV1 from the long term perspective of the consumer, there would be at least more than 50 people on a waiting list of 5000, willing to lease the EV1. The EV1 offered environmental benefits, but simply failed to meet consumer preferences.
2. “The belief that there is no competitive substitute for the industry’s major product” [1] [A].
One very interesting example is the light bulb. A commodity so prevalent in the modern world, that it is difficult to imagine modern existence without it.
The first patent for what we today know as the compact fluorescent light (CFL) was reserved by General Electric (GE) in 1941. Ed Hammer, an engineer with GE invented the modern CFL in 1973, but GE shelved the idea as it would cost them $25 million to set up the infrastructure to manufacture CFLs [5] [B]. Yet, the need for efficient light energy and more “green” ways of producing it, paved the way for Philips to launch the EarthLight – an environmentally preferable substitute for the long term incandescent bulb, which was nothing but the CFL. The CFL became so popular over time that in California – a US state dedicated towards making phenomenal efforts towards saving the environment, a bill called “How many legislators does it take to change a light bulb Act” was introduced, which proposes to replace all incandescent bulbs with CFLs by the year 2012. Though Edison might be shifting in his grave, many companies that refused to budge from manufacturing the conventional light bulb had to shutdown due to rapid fall in demand for a prototype that was perfected over a hundred years, and used technology even older than that. Had GE been future-oriented, especially considering that the CFL could be an energy saver in the global oil crisis in 1973, it would be an unchallenged monopoly in CFLs today. Not only did they realise their mistake but it took them more investment and resources to enter a market that was quickly captured by Philips. This echoes the sentiment shared by Levitt long back – there is no guarantee against product obsolescence. “If a company’s own research does not make it obsolete, another’s will” [1] [B].
3. “Too much faith in mass production and in the advantages of rapidly declining unit costs as output rises” [1] [A].
Levitt contends that companies become so obsessed with the advantages of mass production, namely low long-term costs, that the purpose of the product and the marketing of the same get completely ignored.
Enter Konarka. A solar-cell start-up based in Lowell, Massachusetts, USA, has opened a commercial-scale factory, with the capacity to produce enough organic solar cells every year to generate one giga-watt of electricity, the equivalent of a large nuclear reactor. By using mass production methods and low cost printing equipment, the company “…reduces both capital and manufacturing costs compared with conventional solar-cell manufacturing [8]”.
What Konarka sees here is the drastic cutting of costs in manufacturing solar cells en masse. What it does not see, however, is that to put its plant to full capacity utilisation three years down the line, it would have to redefine its business objectives for the energy industry rather than the current solar products business that they narrowly market as “Konarka builds products that convert light to energy anywhere[9] .” This is due to many pressing reasons.
Firstly, the solar cells that it manufactures, has a much shorter life span than conventional solar cells. Secondly, conventional solar cells convert up to 15% of solar energy to electricity as opposed to only up to 5% of Konarka’s product [8]. Konarka plans to start using its technology in applications like umbrellas and tents and later diversify. However, what is the incentive for the customer in this? Why would anyone want to use a solar umbrella which would be undoubtedly more expensive than a normal one and would require more care and maintenance, with its electricity generating feature available only for two to three years at the maximum? Konarka fails to address this question in any marketing campaign. What is more, it does not make clear as to how it will keep up with the increasing scarcity of two key materials used in its technology – Ruthenium and Indium, as opposed to Silicon used in conventional solar cells, which is so easily available that it can essentially be obtained from sand. Moreover, Konarka does not address how it is going to steal competitive advantage from China, long known as the “factory” of the world, which exports 90% of its conventional solar panels and has a major deployment plan for solar power by 2020 [10]. It is increasingly dangerous to rely on technologies and market understanding drawn only from your own territory. “Today, every company, whether it aspires to be a national champion or a global competitor, needs to be engaged in and with countries around the world [2] [B]”.
From the point of view of Brand Management, long term effects are even harder to measure.
“Brand Management today is like driving a car by looking only a few feet ahead. The drivers can change direction rapidly but they’re not necessarily on a path that will take them where they want to go [3] [A]”. This lack of sufficient foresight is echoed in a paper in Ivey Business School journal, where the authors say that “What share of all new knowledge relevant to my company’s future am I capturing today? If you don’t like the answer, it’s time to engage with the world in a different way [2] [B].” It is high time for corporate management at Konarka, to start to think on long term brand and marketing management rather than “immediate” uses of their new found technology.
4. “Preoccupation with a product that lends itself to carefully controlled scientific experimentation, improvement and manufacturing cost reduction” [1] [A].
The economist Joseph Schumpeter used the term “creative destruction” to drive home the fact that innovation accompanies radical transformation. In fact, innovation only leads to a temporary market power which ultimately succumbs to competition again. But what if an industry focuses on one particular product to the extent of ignoring the other, seemingly unrelated facets of the product?
For decades the major focus of energy oriented industries has been clean and efficient methods of energy production. They see themselves in the closed business of energy with very few overlaps with any other major industry. However, the challenge in recent times to the energy industry came from a completely unprecedented area – Architecture.
Efficient air-conditioning, heating, ventilation and solar cell panels are being designed and perfected every second by the R&D departments of companies. But have they given enough thought to the fact that to deploy the hi-tech products that they are perfecting overnight, they need hi-tech infrastructure?
The major cities of the world are being expanded at an exponential rate. As more and more researchers are finding out, the buildings that have been made out of reckless under-consideration of their energy needs are now teeming all over the globe and worse – are more and more “energy hungry”. The reason – preoccupation with excessive scientific experimentation of how to achieve more and more energy efficient products, rather than with how to deploy them. Now, more and more critics argue that to meet future carbon emission reduction targets, a far greater degree of collaboration is required so that groups of buildings can tap into local sources of renewable power [11].
The fact that the design of new buildings was ignored, has now led researchers into a dual-challenge. How to reduce energy consumption by older buildings, while keeping up with the ever increasing demand for newer ones? Had, with time, the older cities been “creatively re-structured” and focus shifted from energy efficient products to their implementation as well, the “challenge” for increasing energy demand would perhaps be a challenge no more. Buildings typically last for decades. Many of the attributes that affect energy consumption are costly and difficult to retrofit after initial installation, e.g. wall thickness, insulation, structural tightness, and windows [18] [A].
The older cities now require costly retrofitting to be energy efficient. Mark Williams, director of innovations at the Carbon Trust, a UK-based organisation that encourages low-carbon-policies, says “The gap in energy performance between the existing stock and the types of buildings w need to deliver now is vast. And not only do we have millions of existing buildings, but they are also often more energy hungry. [11]” Only now urban planners are getting a true picture and a “clearer idea” of how to plan efficiently, by using sensors and expensive equipment deployed throughout a city’s energy infrastructure. This is far from being cheap.
The example re-imposes the need to shift the focus from “carefully controlled scientific experimentation, improvement and manufacturing cost reduction” of a product to its related aspects like deployment, interdependence on other areas and future prospects.
Is myopic marketing always destined to send a company to its doom?
Considering the examples listed above can we draw the conclusion that long term planning is built into the very definition of marketing? Is it that Levitt underlined a fundamental concept which if not adhered to, would send the corresponding industry/company to its doom?
W. Chan Kim and Renée Mauborgne ask a fundamental question: “Are there lasting “excellent” or “visionary” companies that continuously outperform the market and repeatedly create blue oceans? (The term “Blue Ocean” is synonymous with “uncontested market space”.) They argue that “…much of the success attributed to some of the model companies … was the result of industry sector performance rather than that of these companies themselves” [12] [A].
Hence it perfectly stands to argue that if the industry is indeed a “growth” industry, at least for a while, does it always hurt a company to make short term profits compromising long term strategy?
Let’s take an example from Levitt’s paper, Marketing Myopia. The Internal Combustion Engine (ICE). The basic principle behind the ICE was described way back in 1204 and the first working model produced in 1806 [5] [A]. The ICE took the efforts of many innovators and engineers to perfect. In his article, Levitt, referring to the petroleum industry argues that “Over dozen such firms now have advanced working models of energy systems which, when perfected, will replace the internal combustion engine and eliminate the demand for gasoline” [1] [C].
Did this happen? Far from it. Is it likely to happen? Hardly. The ICE represents a basic principle of physics, which however hard one tries to eliminate, has its unquestioned advantages. In an article in the Economist, the author dissects various designs and modifications of the ICE and finally comes to the conclusion that “It [ICE] may be old hat, but the internal combustion engine still has a lot of mileage in it” [13]. In 2004, HEC [Hydrogen Engine Centre] introduced the first production hydrogen-fuelled, spark-ignited, internal combustion engine for industrial uses [14]. Even though the demand for gasoline is increasing the global scenario is a complete turnaround. Companies are utilising old technologies to integrate into new products, e.g. ICE running on hydrogen fuel. Hydrogen as fuel for the ICE does not only make it maintenance free, eliminating some parts, but makes it environmental friendly as well. This does not make the ICE redundant, but strengthens its versatility. So the companies that make ICE as their major assembled products do not have to drastically change their production lines, but can rely on short term profits from modifications and tweaks in related sectors, at least for the foreseeable future. The ICE manufacturers are not satisfying a customer need; they are just doing their business as usual. They are banking instead on the fact that research in other related areas matches well with their product. Can they afford to be myopic, yet succeed in maintaining a fairly foreseeable market share? Certainly. However it would do them good to keep tapping into the knowledge of their related sectors like alternative fuels etc. This is so because the demand for the ICE in this case is driven by the technology and improvements in related sectors, rather than newer and newer designs of the ICE. So even if Levitt’s argument applies here, it is only in a very limited manner.
Hence we see that Levitt’s argument insisting that a corporate preoccupation on products rather that consumer needs is doomed to fail, because consumers select products and new innovations that offer benefits they desire, applies largely to those companies which interact directly with the consumers and in a very limited way to an industry that measures its demand by technological changes or advances in a number of secondary but related sectors.
However, in majority of the cases, short-sightedness of the management in defining their businesses relevantly can be held responsible for the loss in market share or loss of “growth” in the market.
SITA UK – A myopic outlook?
Recently, SITA UK, a waste management company gave a presentation at Manchester Business School (MBS). After the presentation the two representatives at SITA, both managers, were open for a casual talk with the students in the Alumni Club Room. In a casual discussion I asked one of the managers, whether SITA is looking forward to diversify into Waste Oil Management. He said that he does not see any relation between domestic waste and waste oil and hence waste oil management does not fit within the domain of SITA. This, I felt, was myopic thinking.
SITA UK lists their services as “…composting, energy from waste, disposal of hazardous waste, metal recycling, recycling, refuse collection and security shredding … [15]” In essence SITA sees itself in the business of collecting waste and utilising the “useful” waste to generate energy. SITA is not the only one in this business. There are competitors (Viridor Waste Management, Veolia Environmental Services, Defra, Biffa just to name a few) which, albeit smaller in business volume per se, do offer customised solutions to bigger companies. One of the supposed targets of SITA is to visualise all waste as having some potential somewhere – hence its vision of “No More Waste”. This is ironical, considering that domestic waste – that is a potential commodity for such a company, and in fact has legislative procedures answering the question “Who owns the waste?” might be in short supply in the not so distant future. After all, the fertiliser industry, which essentially used human or animal “waste” as fertiliser had to resort to chemical and artificial fertiliser when faced with a shortage of “waste” in the face of growing demand for it, in the agriculture industry. Though, SITA does all it can to utilise domestic waste to useful energy, what is the scenario in other sectors? More and more technological advances ensure that domestic waste is now kept within limits. Manufacturers must now make products that make best use of our resources. This reduces the amount of waste produced during the process, and makes life easier on the consumer. Besides this, manufacturers must make provisions to ensure that the non-usable part of any product is recoverable.
With tighter and tighter regulations on landfill laws, recycling technologies and consumer awareness, the noose around domestic waste is tightening.
What use, on the other hand is waste oil? Waste oil can be used to generate energy, although with reduced efficiency. Further, much research is going on in scientific circles to convert waste oil into usable oil – specifically marine diesel. With the imminent and growing threat of global warming, there is a pressing need to find alternative and clean sources of fuel [16].
Even on a very cursory comparison we see that SITA, if it continues to define its business in such narrow terms as waste management can get into trouble from more than one area – competitors, scarcity of owned waste and even new technological developments. On the other hand if it sees itself in the green energy industry – that will open up new avenues for SITA including waste oil management, integration of other technologies into theirs (e.g. solar power), and maybe also taking control of radioactive and bio-hazardous waste from nuclear reactors and medical institutions, then SITA will get to define a broader view of what they already are good at. Limiting scope to domestic waste only is simply a failure on the part of management to address more pressing concerns – whether it be shortage of domestic waste in the future or thinking that they have “nothing to do” with waste oil.
So what can we conclude?
Thus, in conclusion we see that companies or industries have a myopic outlook towards their business, largely due to the fact that they are oblivious of future trends of their resources. This is especially so, because the pressure on resources comes not from their own industry but related ones. However, the dependence of these companies on related sectors is grossly overlooked by top management. What is more is that, as we have seen, competition comes from sectors that might seem totally unrelated to the business in question. In case of efficiency of the energy saving appliances – an imminent threat came from an already existing sector – architecture, which till then seemed completely unrelated to energy saving. To counter such threats top management has no choice but to think “out-of-the-box”. New developments in upcoming industries must be thoroughly analysed and their impact upon ones own business must be thought of. This kind of knowledge comes by “engaging with the world” in an innovative way. In one paper in the Ivey Business School journal, the authors say “As the transportation of goods, information and knowledge becomes more fluid, we must choose to engage with the world; otherwise, it will engage with us” [2] [B].
The advantage obtained by giving more than a passing look to sectors or industries that might seem completely unrelated is immense. An Ivey Business School journal paper recommends a high level strategy for CEOs to “engage with the world.” “Pick a pilot project of strategic importance that is largely outside the realm of existing operational experience. Use the project to get people involved in prospecting the world for new knowledge. Allow the others to lead. Err on the side of excessive interaction and communications among members of the project team. As the project’s deliverable takes shape, forge a direct link between the project team and people in day-to-day operations” [2] [C]. The authors essentially put forward the same idea so as not to fall into the trap of thinking that ones own business/product is invincible and that it can stand or progress with no dependence on any other business/product, however remote the relation might seem. Shutting out the world is a grave mistake. Thomas L. Friedman in his book The World is Flat, says “But what can happen is a decline in our standard of living, if more Americans are not empowered and educated to participate in a world where all the knowledge centres are being connected” [17] [A].
The same applies to companies as well. If top management choose to remain isolated from the knowledge that exchanges hands within seconds in the world, it leads to them being myopic about their own businesses. The vicious cycle of faith in a permanent market share, over-obsession with their own product and the false aura of invincibility of the product starts, and corporate management lose out more and more failing to keep pace with the rapidly changing world. This spells doom in the long run.
References:
[1] Theodore Levitt, Marketing Myopia, Harvard Business Review, September-October 1975.
[A] Page 28
[B] Page 34
[C] Page 44
[2] Yves Doz, Jose Santos, and Peter J. Williamson, Marketing myopia revisited: Why every company needs to learn from the world, Ivey Business Journal, January-February 2004.
[A] Page 2
[B] Page 6
[C] Page 5
[3] Leonard M. Lodish and Carl F. Mela, If Brands Are Built over Years, Why Are They managed over Quarters?, Harvard Business Review, July-August 2007.
[A] Page 112
[4] Jacquelyn A. Ottman, Edwin R. Stafford and Cathy L. Hartman, Avoiding Green Marketing Myopia, Environment – June 2006, Volume 48, Number 5.
[A] Page 24
[5] Wikipedia, http://www.wikipedia.org/
[A] General Motors EV1, http://en.wikipedia.org/wiki/General_Motors_EV1
[B] Compact Fluorescent Lamp, http://en.wikipedia.org/wiki/Compact_fluorescent_lamp
[C] History of the Internal Combustion Engine,
http://en.wikipedia.org/wiki/History_of_the_internal_combustion_engine
[6] Chris Paine, Who killed the electric car?, DVD, Sony Pictures Home Entertainment, released 14th November 2006 for the home market.
[7] Dave Barthmuss, Who ignored the facts about the Electric Car?, GM Blogs, 23rd June 2006, http://fyi.gmblogs.com/2006/06/who_ignored_the_facts_about_th.html
[8] Kevin Bullis, Mass Production of Plastic Solar Cells, Technology Review, Special Reports, 17th October 2008 http://www.technologyreview.com/energy/21574/?nlid=1435
[9] Konarka website, www.konarka.com, Products section: http://www.konarka.com/images/uploads/Konarka-Brochure-2008-v5.pdf
[10] Here comes the sun, Energy | Developing Countries, Financial Times, October 28, 2008
[11] Bright lights – Big problem, Energy | Cities, Financial Times, October 28, 2008
[12] W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, Harvard Business School Press.
[A] Page 9
[13] The old motor roars back, The Economist, 14th August 2008
[14] Hydrogen Engine Center website, Clean Power NOW, http://www.hydrogenenginecenter.com/
[15] SITA UK website, http://www.sita.co.uk/
[16] Al Gore, An Inconvenient Truth, DVD, Paramount Home Entertainment, released 21st November, 2006 for the home market.
[17] Thomas L. Friedman, The world is flat
[A] Page 306
[18] Lee R. Raymond, Andrew Gould, John J. Hamre, David J. O’Reilly and Daniel H. Yergin, Hard Truths: Facing the hard truths about energy, National Petroleum Council, US Department of Energy, July 2007.
[A] Page 12
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