What Business Are You In: Part I

In the Spring of 2008, David Collis, then of Harvard, and the late Michael Rukstad, coauthored an article in the Harvard Business Review titled Can You Say What Your Strategy Is? Professors Collis and Rukstad challenged executives to distill the objective, scope and advantage of their business to 35 words or less. In the research leading up to the article, they found that few people could and offered the obvious conclusion that if they couldn’t, neither could anyone else.

The business one really is in is often not the same as the business one is apparently in. Many years ago, after acquiring Taylor Wine Company, Coca-Cola subsequently purchased Sterling Vineyards with the idea of vertically integrating into fine wines. While Taylor had successfully fit Coca Cola’s business model, the Sterling acquisition was a misadventure.

Why? Because while Coca Cola well understood that its distribution capability was a core strategic asset, it neglected the fact that it was not adaptable to every beverage. Whereas, Coke, Sprite, Taylor wines and Minute Maid beverages all had common channels in supermarkets and the growing convenience store segment, fine wine was not sold in these channels. It was a classic example of over-estimating the scope of one’s strategic assets.

Similarly, Harry & David, the longtime mail order provider of elegant fruit gift baskets, decided to enter the direct retail segment and opened stores in upscale boutique malls, a move that contributed to the company’s ultimate bankruptcy. Harry and David forgot when and why people bought their products. Potential customers kept the Harry & David catalog on hand and, as needed, ordered gift baskets to be shipped. Besides incurring the learning curve of competing in direct retail, Harry & David failed to consider that shoppers will tend to focus on items that can only be purchased in that particular venue. Thus, the retail outlets became redundant as customers still went home to order by catalog rather than squander shopping time at their favorite boutique before having to pick the kids up at school.

Retailers long ago realized that they were in the business of buying and selling goods. They only needed access to a storefront—they didn’t need to own it. Before that, airlines determined that they were in the business of quickly moving people from one point to another. (Remember, I’m talking about a long time ago.) Similarly, airlines didn’t need to own aircraft but only have access to them. Thus were born the commercial real estate and equipment leasing businesses. Someone’s back office is always someone else’s front office.

Nuances of what seems to be the same business strategy can make the difference between success and failure. Blockbuster designed and marketed itself as a neighborhood storefront provider of films on CD and cassette. Netflix structured and positioned itself as a distributor of films. In this critical distinction, Blockbuster went the way of the telegraph and fax machine, its strategic assets fixed in a passing technology. Netflix, by keeping its focus on being able to most efficiently distribute emerging technologies such as streaming, continues to sidestep obsolescence.

Because of the warp speed of technological change, high-tech companies tend to have short shelf lives. For example, when laptops first emerged, competitive advantages were about speed and performance. Now it’s about battery life and wireless connectivity.

Few companies have the ability to adapt beyond their initial advance or subsequent enhancement thereof; far fewer have the ability to remake themselves completely. In the 90’s as the world moved away from mainframes and stand alone mini-computers to PC’s and server based technologies, IBM was slow to adapt and many gave the company up as a relic. However, IBM was using its considerable resources to carefully determine what business it could endure in.

So while most incumbents in the computer industry chose to compete in the soon-to-be commodity market for personal computers, IBM looked for opportunities where it could create entry barriers with its advantage of enormous cash and technical resources. The result was that while IBM nominally competed in the PC market, it turned its greater attention to developing complex control systems for such diverse applications as manufacturing plants, refineries, railroad traffic and urban traffic management. In this instance, IBM redefined itself from a manufacturer of computer hardware to a provider of software-based solutions for complex systems without regard to an applications niche. Thus, like Netflix, it avoided the trap of technological obsolescence by creating a strategy that naturally evolved with emerging technologies—whether it created those technologies or not.

The underlying principle—for better or for worse—of these examples is the importance of understanding a company’s strategic advantages and how best to deploy them to create entry barriers and sustainable competitive advantage. Most companies nominally define the business they are in which tends to foster obsolescence or misguided expansion. Blockbuster failed to account for the shelf life of its business model while Harry & David forgot when and where people buy. On the other hand, Netflix and IBM matched their business strengths and strategies to the reality of technological and market development.

Part II will look at how this applies to the wine industry.