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BEST OF HBR 1960

Sustained growth depends on how broadly you define your Myopia business—and how carefully you gauge your customers’ needs. by Theodore Levitt •

Included with this full-text Harvard Business Review article:

1 Article Summary The Idea in Brief—the core idea The Idea in Practice—putting the idea to work

2 Marketing Myopia

15 Further Reading A list of related materials, with annotations to guide further exploration of the article’s ideas and applications

Reprint R0407L

B EST OF HBR 1960 Marketing Myopia

The Idea in Brief The Idea in Practice What business are you really in? A seem- We put our businesses at risk of obsolescence ingly obvious question—but one we when we accept any of the following myths: should all ask before demand for our com- Myth 1: An ever-expanding and more afflu- panies’ products or services dwindles. ent population will ensure our growth. The railroads failed to ask this same ques- When markets are expanding, we often as- tion—and stopped growing. Why? Not be- sume we don’t have to think imaginatively cause people no longer needed transporta- about our businesses. Instead, we seek to tion. And not because other innovations outdo rivals simply by improving on what (cars, airplanes) filled transportation needs. we’re already doing. The consequence: We in- Rather, railroads stopped growing because crease the efficiency of making our products, railroads didn’t move to fill those needs. rather than boosting the value those products Their executives incorrectly thought that deliver to customers. they were in the railroad business, not the Myth 2: There is no competitive substitute transportation business. They viewed them- for our industry’s major product. Believing selves as providing a product instead of that our products have no rivals makes our serving customers. Too many other indus- companies vulnerable to dramatic innova- tries make the same mistake—putting tions from outside our industries—often by themselves at risk of obsolescence. smaller, newer companies that are focusing How to ensure continued growth for your on customer needs rather than the products company? Concentrate on meeting cus- themselves. tomers’ needs rather than selling products. Myth 3: We can protect ourselves through Chemical powerhouse DuPont kept a mass production. Few of us can resist the close eye on its customers’ most pressing prospect of the increased profits that come concerns—and deployed its technical with steeply declining unit costs. But focusing know-how to create an ever-expanding on mass production emphasizes our com- array of products that appealed to cus- pany’s needs—when we should be emphasiz- tomers and continuously enlarged its ing our customers’. market. If DuPont had merely found more uses for its flagship invention, nylon, it Myth 4: Technical research and develop- might not be around today. ment will ensure our growth. When R&D pro- duces breakthrough products, we may be tempted to organize our companies around the technology rather than the consumer. In- stead, we should remain focused on satisfying customer needs. OPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2004 HARVARD PUBLISHING CORPORATION. C

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Sustained growth depends on how broadly you define your business— and how carefully you gauge your customers’ needs.

BEST OF HBR 1960 Marketing Myopia

by Theodore Levitt

We always know when an HBR article hits the big ucts. “Marketing Myopia” won the McKinsey time. Journalists write about it, pundits talk Award in 1960. about it, executives route copies of it around the organization, and its vocabulary becomes famil- Every major industry was once a growth in- iar to managers everywhere—sometimes to the dustry. But some that are now riding a wave of point where they don’t even associate the words growth enthusiasm are very much in the with the original article. Most important, of shadow of decline. Others that are thought of course, managers change how they do business as seasoned growth industries have actually because the ideas in the piece helped them see stopped growing. In every case, the reason issues in a new light. growth is threatened, slowed, or stopped is not “Marketing Myopia” is the quintessential big because the market is saturated. It is because hit HBR piece. In it, Theodore Levitt, who was there has been a failure of management. then a lecturer in business administration at the Harvard Business School, introduced the famous Fateful Purposes question, “What business are you really in?” and The failure is at the top. The executives re- with it the claim that, had railroad executives sponsible for it, in the last analysis, are those seen themselves as being in the transportation who deal with broad aims and policies. Thus: business rather than the railroad business, they • The railroads did not stop growing because would have continued to grow. The article is as the need for passenger and freight transporta- much about strategy as it is about marketing, but tion declined. That grew. The railroads are in it also introduced the most influential marketing trouble today not because that need was filled idea of the past half-century: that businesses will by others (cars, trucks, airplanes, and even tele- do better in the end if they concentrate on meet- phones) but because it was not filled by the rail- ing customers’ needs rather than on selling prod- roads themselves. They let others take custom- OPYRIGHT © 2004 HARVARD BUSINESS SCHOOL PUBLISHING CORPORATION. ALL RIGHTS RESERVED. BUSINESS SCHOOLOPYRIGHT © 2004 HARVARD PUBLISHING CORPORATION. C harvard business review • july–august 2004 page 2

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ers away from them because they assumed while New England textile companies that have themselves to be in the railroad business rather been so thoroughly massacred? The DuPonts than in the transportation business. The reason and the Cornings have succeeded not primarily they defined their industry incorrectly was that because of their product or research orientation they were railroad oriented instead of transpor- but because they have been thoroughly cus- tation oriented; they were product oriented in- tomer oriented also. It is constant watchfulness stead of customer oriented. for opportunities to apply their technical know- • Hollywood barely escaped being totally how to the creation of customer-satisfying uses ravished by television. Actually, all the estab- that accounts for their prodigious output of suc- lished film companies went through drastic re- cessful new products. Without a very sophisti- organizations. Some simply disappeared. All of cated eye on the customer, most of their new them got into trouble not because of TV’s in- products might have been wrong, their sales roads but because of their own myopia. As with methods useless. the railroads, Hollywood defined its business Aluminum has also continued to be a incorrectly. It thought it was in the movie busi- growth industry, thanks to the efforts of two ness when it was actually in the entertainment wartime-created companies that deliberately business. “Movies” implied a specific, limited set about inventing new customer-satisfying product. This produced a fatuous contentment uses. Without Kaiser Aluminum & Chemical that from the beginning led producers to view Corporation and Reynolds Metals Company, TV as a threat. Hollywood scorned and rejected the total demand for aluminum today would TV when it should have welcomed it as an op- be vastly less. portunity—an opportunity to expand the en- Error of Analysis. Some may argue that it is tertainment business. foolish to set the railroads off against alumi- Today, TV is a bigger business than the old num or the movies off against glass. Are not narrowly defined movie business ever was. aluminum and glass naturally so versatile that Had Hollywood been customer oriented (pro- the industries are bound to have more growth viding entertainment) rather than product ori- opportunities than the railroads and the mov- ented (making movies), would it have gone ies? This view commits precisely the error I through the fiscal purgatory that it did? I have been talking about. It defines an industry doubt it. What ultimately saved Hollywood or a product or a cluster of know-how so nar- and accounted for its resurgence was the wave rowly as to guarantee its premature senes- of new young writers, producers, and directors cence. When we mention “railroads,” we whose previous successes in television had dec- should make sure we mean “transportation.” imated the old movie companies and toppled As transporters, the railroads still have a good the big movie moguls. chance for very considerable growth. They are There are other, less obvious examples of in- not limited to the railroad business as such dustries that have been and are now endanger- (though in my opinion, rail transportation is ing their futures by improperly defining their potentially a much stronger transportation purposes. I shall discuss some of them in detail medium than is generally believed). later and analyze the kind of policies that lead What the railroads lack is not opportunity to trouble. Right now, it may help to show but some of the managerial imaginativeness what a thoroughly customer-oriented manage- and audacity that made them great. Even an ment can do to keep a growth industry grow- amateur like Jacques Barzun can see what is ing, even after the obvious opportunities have lacking when he says, “I grieve to see the most been exhausted, and here there are two exam- advanced physical and social organization of ples that have been around for a long time. the last century go down in shabby disgrace for They are nylon and glass—specifically, E.I. du lack of the same comprehensive imagination Theodore Levitt, a longtime professor Pont de Nemours and Company and Corning that built it up. [What is lacking is] the will of of marketing at Harvard Business Glass Works. the companies to survive and to satisfy the 1 School in Boston, is now professor Both companies have great technical compe- public by inventiveness and skill.” emeritus. His most recent books are tence. Their product orientation is unques- Thinking About Management (1990) tioned. But this alone does not explain their suc- Shadow of Obsolescence and The Marketing Imagination cess. After all, who was more pridefully product It is impossible to mention a single major in- (1983), both from Free Press. oriented and product conscious than the erst- dustry that did not at one time qualify for the harvard business review • july–august 2004 page 3

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magic appellation of “growth industry.” In sources. To survive, they themselves will have each case, the industry’s assumed strength lay to plot the obsolescence of what now produces in the apparently unchallenged superiority of their livelihood. its product. There appeared to be no effective Grocery Stores. Many people find it hard to substitute for it. It was itself a runaway substi- realize that there ever was a thriving establish- tute for the product it so triumphantly re- ment known as the “corner store.” The super- placed. Yet one after another of these cele- market took over with a powerful effective- brated industries has come under a shadow. ness. Yet the big food chains of the 1930s Let us look briefly at a few more of them, this narrowly escaped being completely wiped out time taking examples that have so far received by the aggressive expansion of independent a little less attention. supermarkets. The first genuine supermarket Dry Cleaning. This was once a growth in- was opened in 1930, in Jamaica, Long Island. dustry with lavish prospects. In an age of wool By 1933, supermarkets were thriving in Cali- garments, imagine being finally able to get fornia, Ohio, Pennsylvania, and elsewhere. Yet them clean safely and easily. The boom was the established chains pompously ignored on. Yet here we are 30 years after the boom them. When they chose to notice them, it was started, and the industry is in trouble. Where with such derisive descriptions as “cheapy,” has the competition come from? From a better “horse-and-buggy,” “cracker-barrel storekeep- way of cleaning? No. It has come from syn- ing,” and “unethical opportunists.” thetic fibers and chemical additives that have The executive of one big chain announced at cut the need for dry cleaning. But this is only the time that he found it “hard to believe that the beginning. Lurking in the wings and ready people will drive for miles to shop for foods to make chemical dry cleaning totally obsolete and sacrifice the personal service chains have is that powerful magician, ultrasonics. perfected and to which [the consumer] is ac- Electric Utilities. This is another one of customed.”2 As late as 1936, the National those supposedly “no substitute” products that Wholesale Grocers convention and the New has been enthroned on a pedestal of invincible Jersey Grocers Association said there growth. When the incandescent lamp came was nothing to fear. They said that the supers’ along, kerosene lights were finished. Later, the narrow appeal to the price buyer limited the waterwheel and the steam engine were cut to size of their market. They had to draw from ribbons by the flexibility, reliability, simplicity, miles around. When imitators came, there and just plain easy availability of electric mo- would be wholesale liquidations as volume tors. The prosperity of electric utilities contin- fell. The high sales of the supers were said to ues to wax extravagant as the home is con- be partly due to their novelty. People wanted verted into a museum of electric gadgetry. convenient neighborhood grocers. If the How can anybody miss by investing in utili- neighborhood stores would “cooperate with ties, with no competition, nothing but growth their suppliers, pay attention to their costs, and ahead? improve their service,” they would be able to But a second look is not quite so comforting. weather the competition until it blew over.3 A score of nonutility companies are well ad- It never blew over. The chains discovered vanced toward developing a powerful chemi- that survival required going into the supermar- cal fuel cell, which could sit in some hidden ket business. This meant the wholesale de- closet of every home silently ticking off electric struction of their huge investments in corner power. The electric lines that vulgarize so store sites and in established and many neighborhoods would be eliminated. So merchandising methods. The companies with would the endless demolition of streets and “the courage of their convictions” resolutely service interruptions during storms. Also on stuck to the corner store philosophy. They kept the horizon is solar energy, again pioneered by their pride but lost their shirts. nonutility companies. A Self-Deceiving Cycle. But memories are Who says that the utilities have no competi- short. For example, it is hard for people who tion? They may be natural monopolies now, today confidently hail the twin messiahs of but tomorrow they may be natural deaths. To electronics and chemicals to see how things avoid this prospect, they too will have to de- could possibly go wrong with these galloping velop fuel cells, solar energy, and other power industries. They probably also cannot see how

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a reasonably sensible businessperson could obsolescence can cripple even these industries, have been as myopic as the famous Boston it can happen anywhere. millionaire who early in the twentieth century unintentionally sentenced his heirs to poverty Population Myth by stipulating that his entire estate be forever The belief that profits are assured by an ex- invested exclusively in electric streetcar securi- panding and more affluent population is dear ties. His posthumous declaration, “There will to the heart of every industry. It takes the edge always be a big demand for efficient urban off the apprehensions everybody understand- transportation,” is no consolation to his heirs, ably feels about the future. If consumers are who sustain life by pumping gasoline at auto- multiplying and also buying more of your mobile filling stations. product or service, you can face the future Yet, in a casual survey I took among a group with considerably more comfort than if the of intelligent business executives, nearly half market were shrinking. An expanding market agreed that it would be hard to hurt their heirs keeps the manufacturer from having to think by tying their estates forever to the electronics very hard or imaginatively. If thinking is an in- industry. When I then confronted them with tellectual response to a problem, then the ab- the Boston streetcar example, they chorused sence of a problem leads to the absence of unanimously, “That’s different!” But is it? Is thinking. If your product has an automatically not the basic situation identical? expanding market, then you will not give In truth, there is no such thing as a growth in- much thought to how to expand it. dustry, I believe. There are only companies or- One of the most interesting examples of this ganized and operated to create and capitalize is provided by the . Proba- on growth opportunities. Industries that as- bly our oldest growth industry, it has an envi- It is hard for people who sume themselves to be riding some automatic able record. While there are some current con- growth escalator invariably descend into stag- cerns about its growth rate, the industry itself hail the twin messiahs of nation. The history of every dead and dying tends to be optimistic. electronics and chemicals “growth” industry shows a self-deceiving cycle But I believe it can be demonstrated that it of bountiful expansion and undetected decay. is undergoing a fundamental yet typical to see how things could There are four conditions that usually guaran- change. It is not only ceasing to be a growth tee this cycle: industry but may actually be a declining one, possibly go wrong with 1. The belief that growth is assured by an ex- relative to other businesses. Although there these galloping panding and more affluent population; is widespread unawareness of this fact, it is 2. The belief that there is no competitive conceivable that in time, the oil industry industries. substitute for the industry’s major product; may find itself in much the same position of 3. Too much faith in mass production and in retrospective glory that the railroads are the advantages of rapidly declining unit costs now in. Despite its pioneering work in devel- as output rises; oping and applying the present-value 4. Preoccupation with a product that lends method of investment evaluation, in em- itself to carefully controlled scientific experi- ployee relations, and in working with devel- mentation, improvement, and manufacturing oping countries, the petroleum business is a cost reduction. distressing example of how complacency and I should like now to examine each of these wrongheadedness can stubbornly convert conditions in some detail. To build my case as opportunity into near disaster. boldly as possible, I shall illustrate the points One of the characteristics of this and other with reference to three industries: petroleum, industries that have believed very strongly in automobiles, and electronics. I’ll focus on pe- the beneficial consequences of an expanding troleum in particular, because it spans more population, while at the same time having a years and more vicissitudes. Not only do these generic product for which there has appeared three industries have excellent reputations to be no competitive substitute, is that the in- with the general public and also enjoy the con- dividual companies have sought to outdo their fidence of sophisticated investors, but their competitors by improving on what they are al- managements have become known for pro- ready doing. This makes sense, of course, if one gressive thinking in areas like financial control, assumes that sales are tied to the country’s product research, and management training. If population strings, because the customer can

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compare products only on a feature-by-feature fining companies own huge amounts of crude basis. I believe it is significant, for example, oil reserves. These have value only if there is a that not since John D. Rockefeller sent free ker- market for products into which oil can be con- osene lamps to China has the oil industry done verted. Hence the tenacious belief in the con- anything really outstanding to create a de- tinuing competitive superiority of automobile mand for its product. Not even in product im- fuels made from crude oil. provement has it showered itself with emi- This idea persists despite all historic evi- nence. The greatest single improvement—the dence against it. The evidence not only shows development of tetraethyl lead—came from that oil has never been a superior product for outside the industry, specifically from General any purpose for very long but also that the oil Motors and DuPont. The big contributions industry has never really been a growth indus- made by the industry itself are confined to the try. Rather, it has been a succession of different technology of oil exploration, oil production, businesses that have gone through the usual and oil refining. historic cycles of growth, maturity, and decay. Asking for Trouble. In other words, the pe- The industry’s overall survival is owed to a se- troleum industry’s efforts have focused on im- ries of miraculous escapes from total obsoles- proving the efficiency of getting and making its cence, of last-minute and unexpected re- product, not really on improving the generic prieves from total disaster reminiscent of the product or its marketing. Moreover, its chief perils of Pauline. product has continually been defined in the The Perils of Petroleum. To illustrate, I narrowest possible terms—namely, gasoline, shall sketch in only the main episodes. First, not energy, fuel, or transportation. This atti- crude oil was largely a patent medicine. But tude has helped assure that: even before that fad ran out, demand was The history of every dead • Major improvements in gasoline quality greatly expanded by the use of oil in kerosene tend not to originate in the oil industry. The de- lamps. The prospect of lighting the world’s and dying “growth” velopment of superior alternative fuels also lamps gave rise to an extravagant promise of industry shows a self- comes from outside the oil industry, as will be growth. The prospects were similar to those shown later. the industry now holds for gasoline in other deceiving cycle of • Major innovations in automobile fuel mar- parts of the world. It can hardly wait for the keting come from small, new oil companies underdeveloped nations to get a car in every bountiful expansion and that are not primarily preoccupied with pro- garage. undetected decay. duction or refining. These are the companies In the days of the kerosene lamp, the oil that have been responsible for the rapidly ex- companies competed with each other and panding multipump gasoline stations, with against gaslight by trying to improve the illu- their successful emphasis on large and clean minating characteristics of kerosene. Then sud- layouts, rapid and efficient driveway service, denly the impossible happened. Edison in- and quality gasoline at low prices. vented a light that was totally nondependent Thus, the oil industry is asking for trouble on crude oil. Had it not been for the growing from outsiders. Sooner or later, in this land of use of kerosene in space heaters, the incandes- hungry investors and entrepreneurs, a threat is cent lamp would have completely finished oil sure to come. The possibility of this will be- as a growth industry at that time. Oil would come more apparent when we turn to the next have been good for little else than axle grease. dangerous belief of many managements. For Then disaster and reprieve struck again. Two the sake of continuity, because this second be- great innovations occurred, neither originating lief is tied closely to the first, I shall continue in the oil industry. First, the successful develop- with the same example. ment of coal-burning domestic central-heating The Idea of Indispensability. The petro- systems made the space heater obsolete. While leum industry is pretty much convinced that the industry reeled, along came its most mag- there is no competitive substitute for its major nificent boost yet: the internal combustion en- product, gasoline—or, if there is, that it will gine, also invented by outsiders. Then, when continue to be a derivative of crude oil, such as the prodigious expansion for gasoline finally diesel fuel or kerosene jet fuel. began to level off in the 1920s, along came the There is a lot of automatic wishful thinking miraculous escape of the central oil heater. in this assumption. The trouble is that most re- Once again, the escape was provided by an out-

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sider’s invention and development. And when working ratio in the United States, booming that market weakened, wartime demand for demand sent oil explorers searching for more aviation fuel came to the rescue. After the war, without sufficient regard to what the future re- the expansion of civilian aviation, the die- ally promised. In 1952, they “hit” in the Middle selization of railroads, and the explosive de- East; the ratio skyrocketed to 42 to 1. If gross mand for cars and trucks kept the industry’s additions to reserves continue at the average growth in high gear. rate of the past five years (37 billion barrels an- Meanwhile, centralized oil heating—whose nually), then by 1970, the reserve ratio will be boom potential had only recently been pro- up to 45 to 1. This abundance of oil has weak- claimed—ran into severe competition from ened crude and product prices all over the natural gas. While the oil companies them- world. selves owned the gas that now competed with An Uncertain Future. Management cannot their oil, the industry did not originate the nat- find much consolation today in the rapidly ex- ural gas revolution, nor has it to this day panding petrochemical industry, another oil- greatly profited from its gas ownership. The using idea that did not originate in the leading gas revolution was made by newly formed firms. The total U.S. production of petrochem- transmission companies that marketed the icals is equivalent to about 2% (by volume) of product with an aggressive ardor. They started the demand for all petroleum products. Al- a magnificent new industry, first against the though the petrochemical industry is now ex- advice and then against the resistance of the pected to grow by about 10% per year, this will oil companies. not offset other drains on the growth of crude By all the logic of the situation, the oil com- oil consumption. Furthermore, while petro- panies themselves should have made the gas chemical products are many and growing, it is If thinking is an revolution. They not only owned the gas, they important to remember that there are nonpe- also were the only people experienced in han- troleum sources of the basic raw material, intellectual response to a dling, scrubbing, and using it and the only peo- such as coal. Besides, a lot of plastics can be problem, then the ple experienced in pipeline technology and produced with relatively little oil. A 50,000- transmission. They also understood heating barrel-per-day oil refinery is now considered absence of a problem problems. But, partly because they knew that the absolute minimum size for efficiency. But natural gas would compete with their own sale a 5,000-barrel-per-day chemical plant is a leads to the absence of of heating oil, the oil companies pooh-poohed giant operation. thinking. the potential of gas. The revolution was finally Oil has never been a continuously strong started by oil pipeline executives who, unable to growth industry. It has grown by fits and starts, persuade their own companies to go into gas, always miraculously saved by innovations and quit and organized the spectacularly successful developments not of its own making. The rea- gas transmission companies. Even after their son it has not grown in a smooth progression is success became painfully evident to the oil com- that each time it thought it had a superior panies, the latter did not go into gas transmis- product safe from the possibility of competi- sion. The multibillion-dollar business that tive substitutes, the product turned out to be should have been theirs went to others. As in inferior and notoriously subject to obsoles- the past, the industry was blinded by its narrow cence. Until now, gasoline (for motor fuel, any- preoccupation with a specific product and the how) has escaped this fate. But, as we shall see value of its reserves. It paid little or no attention later, it too may be on its last legs. to its customers’ basic needs and preferences. The point of all this is that there is no guar- The postwar years have not witnessed any antee against product obsolescence. If a com- change. Immediately after World War II, the pany’s own research does not make a product oil industry was greatly encouraged about its obsolete, another’s will. Unless an industry is future by the rapid increase in demand for its especially lucky, as oil has been until now, it traditional line of products. In 1950, most com- can easily go down in a sea of red figures—just panies projected annual rates of domestic ex- as the railroads have, as the buggy whip manu- pansion of around 6% through at least 1975. facturers have, as the corner grocery chains Though the ratio of crude oil reserves to de- have, as most of the big movie companies mand in the free world was about 20 to 1, with have, and, indeed, as many other industries 10 to 1 being usually considered a reasonable have.

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The best way for a firm to be lucky is to keep it from being violated wholesale. It is cer- make its own luck. That requires knowing tainly more violated than honored. Take the what makes a business successful. One of the automobile industry. greatest enemies of this knowledge is mass Here mass production is most famous, most production. honored, and has the greatest impact on the entire society. The industry has hitched its for- Production Pressures tune to the relentless requirements of the an- Mass production industries are impelled by a nual model change, a policy that makes cus- great drive to produce all they can. The pros- tomer orientation an especially urgent pect of steeply declining unit costs as output necessity. Consequently, the auto companies rises is more than most companies can usually annually spend millions of dollars on con- resist. The profit possibilities look spectacular. sumer research. But the fact that the new com- All effort focuses on production. The result is pact cars are selling so well in their first year in- that marketing gets neglected. dicates that Detroit’s vast researches have for a John Kenneth Galbraith contends that just long time failed to reveal what customers re- the opposite occurs.4 Output is so prodigious ally wanted. Detroit was not convinced that that all effort concentrates on trying to get rid people wanted anything different from what of it. He says this accounts for singing commer- they had been getting until it lost millions of cials, the desecration of the countryside with customers to other small-car manufacturers. signs, and other wasteful and vul- How could this unbelievable lag behind con- gar practices. Galbraith has a finger on some- sumer wants have been perpetuated for so thing real, but he misses the strategic point. long? Why did not research reveal consumer Mass production does indeed generate great preferences before consumers’ buying deci- pressure to “move” the product. But what usu- sions themselves revealed the facts? Is that not ally gets emphasized is selling, not marketing. what consumer research is for—to find out be- Marketing, a more sophisticated and complex fore the fact what is going to happen? The an- process, gets ignored. swer is that Detroit never really researched The difference between marketing and sell- customers’ wants. It only researched their pref- ing is more than semantic. Selling focuses on erences between the kinds of things it had al- the needs of the seller, marketing on the needs ready decided to offer them. For Detroit is of the buyer. Selling is preoccupied with the mainly product oriented, not customer ori- seller’s need to convert the product into cash, ented. To the extent that the customer is recog- marketing with the idea of satisfying the needs nized as having needs that the manufacturer of the customer by means of the product and should try to satisfy, Detroit usually acts as if the whole cluster of things associated with cre- the job can be done entirely by product ating, delivering, and, finally, consuming it. changes. Occasionally, attention gets paid to fi- In some industries, the enticements of full nancing, too, but that is done more in order to mass production have been so powerful that sell than to enable the customer to buy. top management in effect has told the sales de- As for taking care of other customer needs, partment, “You get rid of it; we’ll worry about there is not enough being done to write profits.” By contrast, a truly marketing-minded about. The areas of the greatest unsatisfied firm tries to create value-satisfying goods and needs are ignored or, at best, get stepchild at- services that consumers will want to buy. What tention. These are at the and on it offers for sale includes not only the generic the matter of automotive repair and mainte- product or service but also how it is made nance. Detroit views these problem areas as available to the customer, in what form, when, being of secondary importance. That is under- under what conditions, and at what terms of scored by the fact that the retailing and ser- trade. Most important, what it offers for sale is vicing ends of this industry are neither owned determined not by the seller but by the buyer. and operated nor controlled by the manufac- The seller takes cues from the buyer in such a turers. Once the car is produced, things are way that the product becomes a consequence pretty much in the dealer’s inadequate hands. of the marketing effort, not vice versa. Illustrative of Detroit’s arms-length attitude is A Lag in Detroit. This may sound like an el- the fact that, while servicing holds enormous ementary rule of business, but that does not sales-stimulating, profit-building opportuni-

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ties, only 57 of Chevrolet’s 7,000 dealers pro- not bother about the costs. The new price vide night maintenance service. forces the costs down. The more usual way is to Motorists repeatedly express their dissatis- take the costs and then determine the price; faction with servicing and their apprehen- and although that method may be scientific in sions about buying cars under the present the narrow sense, it is not scientific in the broad selling setup. The anxieties and problems sense, because what earthly use is it to know they encounter during the auto buying and the cost if it tells you that you cannot manufac- maintenance processes are probably more in- ture at a price at which the article can be sold? tense and widespread today than many years But more to the point is the fact that, although ago. Yet the automobile companies do not one may calculate what a cost is, and of course seem to listen to or take their cues from the all of our costs are carefully calculated, no one anguished consumer. If they do listen, it must knows what a cost ought to be. One of the be through the filter of their own preoccupa- ways of discovering…is to name a price so low tion with production. The marketing effort is as to force everybody in the place to the high- still viewed as a necessary consequence of the est point of efficiency. The low price makes ev- product—not vice versa, as it should be. That erybody dig for profits. We make more discov- is the legacy of mass production, with its pa- eries concerning manufacturing and selling rochial view that profit resides essentially in under this forced method than by any method low-cost full production. of leisurely investigation.5 What Ford Put First. The profit lure of mass Product Provincialism. The tantalizing production obviously has a place in the plans profit possibilities of low unit production costs and strategy of business management, but it may be the most seriously self-deceiving atti- must always follow hard thinking about the tude that can afflict a company, particularly a The marketing effort is customer. This is one of the most important “growth” company, where an apparently as- lessons we can learn from the contradictory sured expansion of demand already tends to still viewed as a behavior of Henry Ford. In a sense, Ford was undermine a proper concern for the impor- necessary consequence of both the most brilliant and the most senseless tance of marketing and the customer. marketer in American history. He was sense- The usual result of this narrow preoccupa- the product—not vice less because he refused to give the customer tion with so-called concrete matters is that in- anything but a black car. He was brilliant be- stead of growing, the industry declines. It usu- versa, as it should be. cause he fashioned a production system de- ally means that the product fails to adapt to signed to fit market needs. We habitually cele- the constantly changing patterns of consumer brate him for the wrong reason: for his needs and tastes, to new and modified market- production genius. His real genius was mar- ing institutions and practices, or to product de- keting. We think he was able to cut his selling velopments in competing or complementary price and therefore sell millions of $500 cars industries. The industry has its eyes so firmly because his invention of the assembly line had on its own specific product that it does not see reduced the costs. Actually, he invented the as- how it is being made obsolete. sembly line because he had concluded that at The classic example of this is the buggy whip $500 he could sell millions of cars. Mass pro- industry. No amount of product improvement duction was the result, not the cause, of his low could stave off its death sentence. But had the prices. industry defined itself as being in the transpor- Ford emphasized this point repeatedly, but a tation business rather than in the buggy whip nation of production-oriented business manag- business, it might have survived. It would have ers refuses to hear the great lesson he taught. done what survival always entails—that is, Here is his operating philosophy as he ex- change. Even if it had only defined its business pressed it succinctly: as providing a stimulant or catalyst to an en- Our policy is to reduce the price, extend the ergy source, it might have survived by becom- operations, and improve the article. You will ing a manufacturer of, say, fan belts or air notice that the reduction of price comes first. cleaners. We have never considered any costs as fixed. What may someday be a still more classic ex- Therefore we first reduce the price to the point ample is, again, the oil industry. Having let oth- where we believe more sales will result. Then ers steal marvelous opportunities from it (in- we go ahead and try to make the prices. We do cluding natural gas, as already mentioned;

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missile fuels; and jet engine lubricants), one that solar-powered cars might be common by would expect it to have taken steps never to let 1980. that happen again. But this is not the case. We As for the oil companies, they are more or are now seeing extraordinary new develop- less “watching developments,” as one research ments in fuel systems specifically designed to director put it to me. A few are doing a bit of power automobiles. Not only are these devel- research on fuel cells, but this research is al- opments concentrated in firms outside the pe- most always confined to developing cells pow- troleum industry, but petroleum is almost sys- ered by hydrocarbon chemicals. None of them tematically ignoring them, securely content in is enthusiastically researching fuel cells, batter- its wedded bliss to oil. It is the story of the ker- ies, or solar power plants. None of them is osene lamp versus the incandescent lamp all spending a fraction as much on research in over again. Oil is trying to improve hydrocar- these profoundly important areas as it is on bon fuels rather than develop any fuels best the usual run-of-the-mill things like reducing suited to the needs of their users, whether or combustion chamber deposits in gasoline en- not made in different ways and with different gines. One major integrated petroleum com- raw materials from oil. pany recently took a tentative look at the fuel Here are some things that nonpetroleum cell and concluded that although “the compa- companies are working on: nies actively working on it indicate a belief in • More than a dozen such firms now have ultimate success…the timing and magnitude advanced working models of energy systems of its impact are too remote to warrant recog- which, when perfected, will replace the inter- nition in our forecasts.” nal combustion engine and eliminate the de- One might, of course, ask, Why should the mand for gasoline. The superior merit of each oil companies do anything different? Would of these systems is their elimination of fre- not chemical fuel cells, batteries, or solar en- quent, time-consuming, and irritating refueling ergy kill the present product lines? The an- stops. Most of these systems are fuel cells de- swer is that they would indeed, and that is signed to create electrical energy directly from precisely the reason for the oil firms’ having chemicals without combustion. Most of them to develop these power units before their use chemicals that are not derived from oil— competitors do, so they will not be companies generally, hydrogen and oxygen. without an industry. •Several other companies have advanced Management might be more likely to do models of electric storage batteries designed to what is needed for its own preservation if it power automobiles. One of these is an aircraft thought of itself as being in the energy busi- producer that is working jointly with several ness. But even that will not be enough if it per- electric utility companies. The latter hope to sists in imprisoning itself in the narrow grip of use off-peak generating capacity to supply over- its tight product orientation. It has to think of night plug-in battery regeneration. Another itself as taking care of customer needs, not company, also using the battery approach, is a finding, refining, or even selling oil. Once it medium-sized electronics firm with extensive genuinely thinks of its business as taking care small-battery experience that it developed in of people’s transportation needs, nothing can connection with its work on hearing aids. It is stop it from creating its own extravagantly collaborating with an automobile manufac- profitable growth. turer. Recent improvements arising from the Creative Destruction. Since words are need for high-powered miniature power stor- cheap and deeds are dear, it may be appropri- age plants in rockets have put us within reach ate to indicate what this kind of thinking in- of a relatively small battery capable of with- volves and leads to. Let us start at the begin- standing great overloads or surges of power. ning: the customer. It can be shown that Germanium diode applications and batteries motorists strongly dislike the bother, delay, using sintered plate and nickel cadmium tech- and experience of buying gasoline. People ac- niques promise to make a revolution in our en- tually do not buy gasoline. They cannot see it, ergy sources. taste it, feel it, appreciate it, or really test it. • Solar energy conversion systems are also What they buy is the right to continue driving getting increasing attention. One usually cau- their cars. The gas station is like a tax collector tious Detroit auto executive recently ventured to whom people are compelled to pay a peri-

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odic toll as the price of using their cars. This Dangers of R&D makes the gas station a basically unpopular in- Another big danger to a firm’s continued stitution. It can never be made popular or growth arises when top management is wholly pleasant, only less unpopular, less unpleasant. transfixed by the profit possibilities of techni- Reducing its unpopularity completely means cal research and development. To illustrate, I eliminating it. Nobody likes a tax collector, not shall turn first to a new industry—electron- even a pleasantly cheerful one. Nobody likes to ics—and then return once more to the oil com- interrupt a trip to buy a phantom product, not panies. By comparing a fresh example with a even from a handsome Adonis or a seductive familiar one, I hope to emphasize the preva- Venus. Hence, companies that are working on lence and insidiousness of a hazardous way of exotic fuel substitutes that will eliminate the thinking. need for frequent refueling are heading directly Marketing Shortchanged. In the case of elec- into the outstretched arms of the irritated mo- tronics, the greatest danger that faces the glamor- torist. They are riding a wave of inevitability, not ous new companies in this field is not that they because they are creating something that is do not pay enough attention to research and de- technologically superior or more sophisticated velopment but that they pay too much attention but because they are satisfying a powerful cus- to it. And the fact that the fastest-growing elec- tomer need. They are also eliminating noxious tronics firms owe their eminence to their heavy odors and air pollution. emphasis on technical research is completely be- Once the petroleum companies recognize side the point. They have vaulted to affluence on the customer-satisfying logic of what another a sudden crest of unusually strong general recep- power system can do, they will see that they tiveness to new technical ideas. Also, their success have no more choice about working on an ef- has been shaped in the virtually guaranteed mar- It is not surprising that, ficient, long-lasting fuel (or some way of deliv- ket of military subsidies and by military orders ering present fuels without bothering the mo- that in many cases actually preceded the exist- having created a torist) than the big food chains had a choice ence of facilities to make the products. Their ex- successful company by about going into the supermarket business or pansion has, in other words, been almost totally the vacuum tube companies had a choice devoid of marketing effort. making a superior about making semiconductors. For their own Thus, they are growing up under conditions good, the oil firms will have to destroy their that come dangerously close to creating the il- product, management own highly profitable assets. No amount of lusion that a superior product will sell itself. It continues to be oriented wishful thinking can save them from the ne- is not surprising that, having created a success- cessity of engaging in this form of “creative ful company by making a superior product, toward the product destruction.” management continues to be oriented toward rather than the people I phrase the need as strongly as this because the product rather than the people who con- I think management must make quite an ef- sume it. It develops the philosophy that contin- who consume it. fort to break itself loose from conventional ued growth is a matter of continued product ways. It is all too easy in this day and age for a innovation and improvement. company or industry to let its sense of purpose A number of other factors tend to strengthen become dominated by the economies of full and sustain this belief: production and to develop a dangerously lop- 1. Because electronic products are highly sided product orientation. In short, if manage- complex and sophisticated, managements be- ment lets itself drift, it invariably drifts in the come top-heavy with engineers and scientists. direction of thinking of itself as producing This creates a selective bias in favor of research goods and services, not customer satisfactions. and production at the expense of marketing. While it probably will not descend to the The organization tends to view itself as making depths of telling its salespeople, “You get rid of things rather than as satisfying customer it; we’ll worry about profits,” it can, without needs. Marketing gets treated as a residual ac- knowing it, be practicing precisely that for- tivity, “something else” that must be done once mula for withering decay. The historic fate of the vital job of product creation and produc- one growth industry after another has been its tion is completed. suicidal product provincialism. 2. To this bias in favor of product research, development, and production is added the bias in favor of dealing with controllable variables.

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Engineers and scientists are at home in the or dislike about service station dealers and oil world of concrete things like machines, test companies, and so forth. Nobody seems as in- tubes, production lines, and even balance terested in probing deeply into the basic sheets. The abstractions to which they feel human needs that the industry might be try- kindly are those that are testable or manipulat- ing to satisfy as in probing into the basic able in the laboratory or, if not testable, then properties of the raw material that the com- functional, such as Euclid’s axioms. In short, panies work with in trying to deliver cus- the managements of the new glamour-growth tomer satisfactions. companies tend to favor business activities that Basic questions about customers and mar- lend themselves to careful study, experimenta- kets seldom get asked. The latter occupy a tion, and control—the hard, practical realities stepchild status. They are recognized as exist- of the lab, the shop, and the books. ing, as having to be taken care of, but not What gets shortchanged are the realities of worth very much real thought or dedicated at- the market. Consumers are unpredictable, var- tention. No oil company gets as excited about ied, fickle, stupid, shortsighted, stubborn, and the customers in its own backyard as about the generally bothersome. This is not what the en- oil in the Sahara Desert. Nothing illustrates gineer managers say, but deep down in their better the neglect of marketing than its treat- consciousness, it is what they believe. And this ment in the industry press. accounts for their concentration on what they The centennial issue of the American Petro- know and what they can control—namely, leum Institute Quarterly, published in 1959 to product research, engineering, and produc- celebrate the discovery of oil in Titusville, tion. The emphasis on production becomes Pennsylvania, contained 21 feature articles pro- particularly attractive when the product can claiming the industry’s greatness. Only one of be made at declining unit costs. There is no these talked about its achievements in market- more inviting way of making money than by ing, and that was only a pictorial record of how running the plant full blast. service station architecture has changed. The The top-heavy science-engineering-production issue also contained a special section on “New orientation of so many electronics companies Horizons,” which was devoted to showing the works reasonably well today because they are magnificent role oil would play in America’s fu- pushing into new frontiers in which the armed ture. Every reference was ebulliently optimis- services have pioneered virtually assured mar- tic, never implying once that oil might have kets. The companies are in the felicitous posi- some hard competition. Even the reference to tion of having to fill, not find, markets, of not atomic energy was a cheerful catalog of how having to discover what the customer needs oil would help make atomic energy a success. and wants but of having the customer volun- There was not a single apprehension that the tarily come forward with specific new product oil industry’s affluence might be threatened or demands. If a team of consultants had been as- a suggestion that one “new horizon” might in- signed specifically to design a business situa- clude new and better ways of serving oil’s tion calculated to prevent the emergence and present customers. development of a customer-oriented market- But the most revealing example of the step- ing viewpoint, it could not have produced any- child treatment that marketing gets is still an- thing better than the conditions just described. other special series of short articles on “The Stepchild Treatment. The oil industry is a Revolutionary Potential of Electronics.” Under stunning example of how science, technol- that heading, this list of articles appeared in ogy, and mass production can divert an entire the table of contents: group of companies from their main task. To • “In the Search for Oil” the extent the consumer is studied at all • “In Production Operations” (which is not much), the focus is forever on • “In Refinery Processes” getting information that is designed to help • “In Pipeline Operations” the oil companies improve what they are now Significantly, every one of the industry’s doing. They try to discover more convincing major functional areas is listed, except market- advertising themes, more effective sales pro- ing. Why? Either it is believed that electronics motional drives, what the market shares of holds no revolutionary potential for petroleum the various companies are, what people like marketing (which is palpably wrong), or the

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editors forgot to discuss marketing (which is already pointed out, selling concerns itself more likely and illustrates its stepchild status). with the tricks and techniques of getting peo- The order in which the four functional areas ple to exchange their cash for your product. It are listed also betrays the alienation of the oil is not concerned with the values that the ex- industry from the consumer. The industry is change is all about. And it does not, as market- implicitly defined as beginning with the search ing invariably does, view the entire business for oil and ending with its distribution from process as consisting of a tightly integrated ef- the refinery. But the truth is, it seems to me, fort to discover, create, arouse, and satisfy cus- that the industry begins with the needs of the tomer needs. The customer is somebody “out customer for its products. From that primal po- there” who, with proper cunning, can be sepa- sition its definition moves steadily back stream rated from his or her loose change. to areas of progressively lesser importance Actually, not even selling gets much atten- until it finally comes to rest at the search for tion in some technologically minded firms. Be- oil. cause there is a virtually guaranteed market The Beginning and End. The view that an for the abundant flow of their new products, industry is a customer-satisfying process, not they do not actually know what a real market a goods-producing process, is vital for all is. It is as if they lived in a planned economy, businesspeople to understand. An industry moving their products routinely from factory begins with the customer and his or her to retail outlet. Their successful concentration needs, not with a patent, a raw material, or a on products tends to convince them of the selling skill. Given the customer’s needs, the soundness of what they have been doing, and industry develops backwards, first concern- they fail to see the gathering clouds over the ing itself with the physical delivery of cus- market. tomer satisfactions. Then it moves back fur- • • • ther to creating the things by which these Less than 75 years ago, American railroads en- satisfactions are in part achieved. How these joyed a fierce loyalty among astute Wall materials are created is a matter of indiffer- Streeters. European monarchs invested in ence to the customer, hence the particular them heavily. Eternal wealth was thought to form of manufacturing, processing, or what be the benediction for anybody who could have you cannot be considered as a vital as- scrape together a few thousand dollars to put pect of the industry. Finally, the industry into rail stocks. No other form of transporta- moves back still further to finding the raw tion could compete with the railroads in materials necessary for making its products. speed, flexibility, durability, economy, and The irony of some industries oriented to- growth potentials. ward technical research and development is As Jacques Barzun put it, “By the turn of the that the scientists who occupy the high execu- century it was an institution, an image of man, tive positions are totally unscientific when it a tradition, a code of honor, a source of poetry, comes to defining their companies’ overall a nursery of boyhood desires, a sublimest of needs and purposes. They violate the first two toys, and the most solemn machine—next to rules of the scientific method: being aware of the funeral hearse—that marks the epochs in and defining their companies’ problems and man’s life.”6 then developing testable hypotheses about Even after the advent of automobiles, solving them. They are scientific only about trucks, and airplanes, the railroad tycoons re- the convenient things, such as laboratory and mained imperturbably self-confident. If you product experiments. had told them 60 years ago that in 30 years The customer (and the satisfaction of his or they would be flat on their backs, broke, and her deepest needs) is not considered to be “the pleading for government subsidies, they would problem”—not because there is any certain be- have thought you totally demented. Such a fu- lief that no such problem exists but because an ture was simply not considered possible. It was organizational lifetime has conditioned man- not even a discussable subject, or an askable agement to look in the opposite direction. question, or a matter that any sane person Marketing is a stepchild. would consider worth speculating about. Yet a I do not mean that selling is ignored. Far lot of “insane” notions now have matter-of-fact from it. But selling, again, is not marketing. As acceptance—for example, the idea of 100-ton

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tubes of metal moving smoothly through the idea (and everything it means and requires) air 20,000 feet above the earth, loaded with into every nook and cranny of the organiza- 100 sane and solid citizens casually drinking tion. It has to do this continuously and with martinis—and they have dealt cruel blows to the kind of flair that excites and stimulates the the railroads. people in it. Otherwise, the company will be What specifically must other companies do merely a series of pigeonholed parts, with no to avoid this fate? What does customer orienta- consolidating sense of purpose or direction. tion involve? These questions have in part In short, the organization must learn to been answered by the preceding examples and think of itself not as producing goods or ser- analysis. It would take another article to show vices but as buying customers, as doing the in detail what is required for specific industries. things that will make people want to do busi- In any case, it should be obvious that building ness with it. And the chief executive has the in- an effective customer-oriented company in- escapable responsibility for creating this envi- volves far more than good intentions or pro- ronment, this viewpoint, this attitude, this motional tricks; it involves profound matters of aspiration. The chief executive must set the human organization and leadership. For the company’s style, its direction, and its goals. present, let me merely suggest what appear to This means knowing precisely where he or she be some general requirements. wants to go and making sure the whole organi- The Visceral Feel of Greatness. Obviously, zation is enthusiastically aware of where that the company has to do what survival de- is. This is a first requisite of leadership, for un- mands. It has to adapt to the requirements of less a leader knows where he is going, any road the market, and it has to do it sooner rather will take him there. than later. But mere survival is a so-so aspira- If any road is okay, the chief executive might tion. Anybody can survive in some way or as well pack his attaché case and go fishing. If other, even the skid row bum. The trick is to an organization does not know or care where it survive gallantly, to feel the surging impulse of is going, it does not need to advertise that fact commercial mastery: not just to experience with a ceremonial figurehead. Everybody will the sweet smell of success but to have the vis- notice it soon enough. ceral feel of entrepreneurial greatness. No organization can achieve greatness with- 1. Jacques Barzun, “Trains and the Mind of Man,” Holiday, February 1960. out a vigorous leader who is driven onward by 2. For more details, see M.M. Zimmerman, The Super Mar- a pulsating will to succeed. A leader has to have ket: A Revolution in Distribution (McGraw-Hill, 1955). a vision of grandeur, a vision that can produce 3. Ibid., pp. 45–47. 4. John Kenneth Galbraith, The Affluent Society (Houghton eager followers in vast numbers. In business, Mifflin, 1958). the followers are the customers. 5. Henry Ford, My Life and Work (Doubleday, 1923). In order to produce these customers, the en- 6. Barzun, “Trains and the Mind of Man.” tire corporation must be viewed as a customer- Reprint R0407L creating and customer-satisfying organism. To order, see the next page Management must think of itself not as pro- or call 800-988-0886 or 617-783-7500 ducing products but as providing customer- or go to www.hbr.org creating value satisfactions. It must push this

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Further Reading ARTICLES provide—further enhancing your credibility Do You Want to Keep Your Customers with buyers. Forever? Co-opting Customer Competence by B. Joseph Pine II, Don Peppers, and by C. K. Prahalad and Venkatram Martha Rogers Ramaswamy Harvard Business Review Harvard Business Review March–April 1995 January–February 2000 Product no. 95209 Product no. R00108 Once you’ve shifted your focus to serving cus- What happens when you take a marketing tomers’ needs, how do you then identify and focus to its logical extreme? You invite cus- meet those needs? Resist any urge to churn tomers to co-create value with you. In a mar- out an increasingly wide variety of offerings ket where technology-enabled customers and bombard consumers with too many now engage in active dialogue with compa- choices. Instead, use technology to become nies—a dialogue that customers control— two things: 1) a mass customizer that provides businesses must include consumers in the individually customized goods and services— value-creation process and rethink the notion efficiently, and 2) a one-to-one marketer that of a company’s core competencies. How to elicits information from each customer about make your customers co-creators of the value specific needs and preferences. As you ac- you offer? Engage them in ongoing dialogue quire these skills, you bind your company and about value. Mobilize customer communities, consumers together in a learning relation- such as user groups. Co-create personalized ship—an ongoing collaboration to meet the experiences with customers—an online flo- customer’s needs over time that will continu- rist, for example, would let customers design ally strengthen their bond. their own floral arrangements. You may also Business Marketing: Understand What need to revise traditional approaches to pric- Customers Value ing and billing, since greater access to infor- by James C. Anderson and James A. Narus mation will give customers unprecedented Harvard Business Review bargaining power in the marketplace. November–December 1998 Product no. 98601 This article offers a method for determining what your products and services are actually worth to your customers. The authors recom- mend gathering market data about custom- ers in the field—then using your findings to To Order build a customer value model. The value model you develop boosts your marketing ef- For Harvard Business Review reprints and fectiveness in varied ways. By understanding subscriptions, call 800-988-0886 or exactly what customers want, you can de- 617-783-7500. Go to www.hbr.org velop more flexible products or services, and better demonstrate how a new offering will For customized and quantity orders of add unprecedented value for your customer. Harvard Business Review article reprints, And presenting value models to your custom- call 617-783-7626, or e-mail ers will allow them to monitor the value you [email protected]

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