Business Models, Commerce, Experimentation, Technology, World of Tomorrow

When Your Core Competency Is No Longer Core to the Business You’re In

The Sears Tower

View of former Sears Tower (now "Willis Tower") from the roof of the author's former apartment building

Ah, Cyber Monday. For those of you not in the United States, the day after Thanksgiving (so, this past Friday) is known as Black Friday – the first day of the annual holiday shopping binge, and the day on which many merchants enter the black for the year, earning their profits in the remaining days between now and January 1st. Cyber Monday is the other consumerist bookend to the weekend. It’s the day people return to the office, fire up their computers, and pull out their credit cards to continue shopping online.

It’s a strange tradition, but here we are.

Cyber Monday — and online retailing more generally — has its roots in the mail order business. Or looked at another way, it is the mail order business, with a new-fangled catalog. I was thinking about this evolution of mail order on a recent trip to Chicago, where I lived for many years. I found myself with a few minutes on my hands and a nice view of the city’s skyline, rising improbably from the astoundingly flat Great Plains. The skyscraper was invented in Chicago, I think mainly because the landscape is so flat (if there are no hills, well then we’ll build some). Anchoring the southern half of the skyline is the iconic, boxy structure formerly known as the Sears Tower. The Sears Tower was once the tallest building in the world and a testament to the influence of a great icon of 20th Century retail.

Just north of the former Sears Tower is another Chicago retail icon, albeit one that is long instead of tall. This is the former Montgomery Ward Catalog House, a 2 million square foot structure stretching a quarter of a mile along the Chicago River. The Catalog House, recently converted to condominiums, was occupied by Montgomery Ward for nearly a century. Two administration buildings, vast structures unto themselves, sit just across Chicago avenue completing a corporate campus of sorts in the midst of the city.

Montgomery Ward has long since closed its doors, and Sears has ceded its once dominant position in both the marketplace and the skyline, its great tower now renamed by its currently owners.

Once upon a time, Sears and Montgomery Ward disrupted the retail industry by combining catalog sales, generous return polices, and rapid shipping (made possible through huge warehouses in Chicago, the central hub of the US rail system). You could order anything from Sears, up to and including an entire house, which would show up on a rail car ready for assembly (these houses were quite nice actually, and there are home buyers even now who seek out Sears Houses).

But both icons have been disrupted by Amazon, their empires having diminished into suburban office parks (in the case of Sears) or vanished altogether (in the case of Montgomery Ward).

So, how did Amazon outflank them? By doing the hard parts of catalog retailing better.

The hard part of the mail order business is building massive warehouses and putting in place an infrastructure and back-end processing systems that can ship anything anywhere in a few days. The hard part is to build a trusted brand and a household name. The hard part is building a customer database extending from the Atlantic to the Pacific and beyond. The hard part is building relationships and supply contracts with thousands of manufacturers.

The easy part is putting a catalog online.

Just think about it for a moment. Sears did just about everything Amazon does now, minus the website, over 100 years ago. Instead of the Web, they used a catalog, which in the late 1990s could have been converted to a website for peanuts relative to what Sears was spending on catalog distribution, warehousing, bricks and mortar stores, marketing, and other ongoing costs.

When the Web came along in the mid-1990s, Sears already had all the infrastructure in place to ship a vast array of inventory anywhere in short order. They invented this business model. They disrupted other retail businesses with using more-or-less the same strategy a century earlier. All they had to do was translate their catalog (once known as “The Consumer Bible”) to the web.

Amazon, by contrast, had to build warehouses, build back-end processing systems, hire and train staff, develop a logistics strategy, build relationships and put in place agreements with suppliers, build a brand from scratch, and market to customers they have never before interacted with and convince them to use a credit card to purchase things online (a novel concept at the time that many customers were wary of) with a business they have never heard of.  Oh, and they had to build a web site.

So how did Sears falter? (I’ll leave Montgomery Ward aside as by the mid-1990s they had a number of fatal problems with their management unrelated to the emergence of the Web).

It’s tempting to just say Sears didn’t understand the Internet, but that is not the case. Sears, after all, developed Prodigy with IBM in the 1980s. They did, in fact, know more about the Internet and the emerging Web than just about any other retailer. What they did not understand was the business they were in. They continued to cling to the wrong core competency (retail stores) while their online business remained secondary.

Sears thought it was in the catalog business and, more recently, in the retail store business. It was not. It was, and remains, in the retail sales and distribution business. The mechanisms of sales and distribution may change over time, and keeping ahead of those trends is the key to remaining successful.

Keeping with the Chicago architectural motif, one might visit the Mercedes dealership at the intersection of North Avenue and Interstate 90/94. It was built on the site of one of the largest Blockbuster stores in the city. Blockbuster, of course, failed to understand that it was in the video distribution business, not the video store business. When DVDs came along, Netflix realized that, unlike bulky tapes, DVDs could be cheaply distributed via the US mail system, with orders placed online. Add a generous return policy and rapid shipping (sound familiar?) and you’ve got a disruptive business model on your hands. By the time Blockbuster woke up and began a reactive strategy, it was too late.

Netflix was itself in danger of rapid obsolescence as the heyday of the DVD has proved short-lived, with video distribution rapidly moving to the web. Netflix, however, understood that DVD rentals is not the business it is in. As CEO Reed Hastings recently put it, “We are very proud to announce that by every measure we are now a streaming company, which also offers DVD-by-mail.”

Of course, there is a lot of potential competition for streaming video (Comcast, Google/YouTube, Hulu, etc.), so Netflix’s success if far from assured, but they are out in front of the trend and making headway instead of sitting in bankruptcy court or selling their DVD-by-mail business for pennies on the dollar.

There has been a lot of focus on core competencies in both business and not-for-profit organizations over the last two decades. Identifying core competencies and focusing on them relentlessly is supposedly the key to success. And 99% of the time, this is probably great advice. However, it ‘s also important to know what your real business is. Because if your core competency is shipping DVDs, or managing retain video stores, or distributing catalogs, that is not going to do you much good if the market changes around you.

The lessons for STM and scholarly publishers are at once obvious and opaque. STM and scholarly publishers moved their content, submission systems, and business models online over a decade ago. No one missed the shift to the web in this industry. But just as Sears understood the web but faltered in shifting its focus, anchored as it was to suburban shopping malls, I think there is a more subtle lesson here. STM and scholarly publishers are in the business of validation, communication, and dissemination of scientific and scholarly information — not the “publishing” business. In fact, I wonder if such a monolithic entity can be said to exist any longer. What do trade books or consumer magazines or newspapers have to do with STM and scholarly information? Does the fact that these various disparate information vehicles used to all utilize printing presses tie them all together in any meaningful way? Are there skill sets that transfer? Common business strategies? Common audiences? Or are these all very different industries that have an common production ancestor? And does this distinction matter?

I think it may. At least in terms of focus. Thinking of what many of the readers of this blog do as “publishing” (and all its associated industry and technology baggage) may cause one to lose focus on the real work: supporting the information and career needs of customers (scientists, physicians, engineers, scholarly, and librarians). It’s a subtle and perhaps overdrawn point, but one that I think is worth pondering as we collectively order our holiday gifts on Amazon and iTunes and Zappos today.

Happy shopping.

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About Michael Clarke

Michael Clarke is the Founder and President of Clarke & Company (www.clarke-company.com), a management consultancy focused on digital information strategy, product development, and marketing related to professional and scholarly publishing. Prior to founding Clarke & Company, he was Executive Vice President for Product and Market Development at Silverchair Information Systems. Additionally, Michael has held positions at the American Medical Association, the American Academy of Pediatrics, and the University of Chicago Press. He currently serves on the board of directors for Silverchair Information System, the Society for Scholarly Publishing, and the Council of Science Editors. A graduate the University of Colorado and the University of Chicago, Michael is a frequent contributor to the Scholarly Kitchen.

Discussion

18 thoughts on “When Your Core Competency Is No Longer Core to the Business You’re In

  1. This issue is sufficiently difficult that I am prepared to question the idea that “STM and scholarly publishers are in the business of validation, communication, and dissemination.”

    I think the principle STM business is aggregation. That is, pulling together the best research on a given topic, especially emerging topics. Communication and dissemination, if there is even a difference, is increasingly being done by others.

    So the question may be how to do a better job of aggregation? For example, does anyone recruit researchers to get their articles? How about looking at grant awards or citations to line up rising stars?

    I would argue that the core competency of STM publishing is understanding where the frontier of science is, and is going, not communication. It is all about getting there first with the most, where “there” is the articles. The Web has a big role to play here, but it is not distribution.

    Posted by David Wojick | Nov 29, 2010, 7:37 am
  2. I think validation is the key. It explains why recommendations have been made, for instance, to consolidate all of the functions of groups of presses (as in the Big Ten) except editorial acquisitions, which connects with the use of the university’s imprint. That’s on the book side. For journals, the publisher’s imprint is less important than the individual journal’s reputation, which rests partly on its rejection rate. In other areas of publishing, which I know less well, branding is still important even if it is not quite the same as validation in scholarly publishing. Here the author is often the brand (Stephen King, John Grisham, etc.) that matters most. Sometimes, as with romance novels, the publisher’s imprint, like Harlequin’s, can be as crucial as the individual author’s. In poetry there are some series that brand the books in them with high distinction.

    Posted by Sandy Thatcher | Nov 29, 2010, 12:07 pm
  3. Nice piece, and it’s true–in my field, the two leading organizations LOVE their journals, and the whole journal publishing model, and they can’t be convinced to rethink it. They can stick components online, but the underlying model is unchanged

    Posted by Mike O'Malley | Nov 29, 2010, 12:20 pm
  4. Good post Michael, though I might quibble that Blockbuster was more disrupted by RedBox than by NetFlix. This represents a different avenue of disruption, someone who does exactly what you do but has eliminated nearly all of the overhead, and can thus offer better pricing.

    The main point though, was something that came up repeatedly in the discussion on this recent post. Commenters variously argued that publishers were not in the “distribution” business nor in the “data” business. And I’m not sure that either is true, at least for any publishers hoping to survive for long.

    Posted by David Crotty | Nov 29, 2010, 1:03 pm
    • RedBox? Is that a New York thing?

      I (and Sandy Thatcher, in a comment above) also mention validation as a key attribute (including, of course validation, or designation, of individuals in terms of career advancement).

      Aggregation can be a powerful strategy, though as you note, aggregation is not the same as “build a big portal” which no one cares about. It must be comprehensive within a subject.

      What do you think the core business for STM and scholarly publisher is?

      Posted by Michael Clarke | Nov 29, 2010, 1:33 pm
      • Redbox is national, but it’s more likely a suburban thing you city-dwellers may not know. Essentially, there’s an automated DVD rental kiosk (a red box) at every 7-11, and in every supermarket. Same movies as Blockbuster, no staff, no buildings to maintain, $1 a day to rent movies and videogames.

        As for your other question, I want to think about it a bit…

        Posted by David Crotty | Nov 29, 2010, 2:47 pm
  5. A very thoughtful piece!
    The problem with writing about disruption is that it takes a selective view of history and often pieces together the winners and disrupted losers into a narrative that always seems to end with some sigh of:

    “why didn’t company X didn’t see they were not in the Y business, but were really in the Z business!”

    From the perspective of Sears or Montgomery Ward (or the railroad), the disruption didn’t take place overnight. Their management saw Amazon, for example, continue to lose money each year and hundreds of other Internet start-ups burn through new venture capital like it was going out of style. From the perspective of a top manager, the decision at the time was pretty clear: stay the course.

    Staying the course generally is the most rational thing to do in business when you are making money. But history doesn’t remember the scores of your competitors whom you beat out. You will only be remembered by the sole competitor that takes your reigns and hundreds of MBA management books that append your name to the list of managers … who just didn’t understand they were really in a different business.

    Posted by Phil Davis | Nov 29, 2010, 1:24 pm
    • Phil – I would normally agree with you on all points. This one particular case stands out to me, however, as Sears had all the expensive things in place – all the things that caused Amazon to plow through millions upon millions of dollars it needed to build its infrastructure. It cost Amazon a fortune in VC funding to get started because they didn’t have warehouses, a brand anyone had heard of, a logistical strategy, back-end processing systems, staff, etc. Sears had all that.

      Also, Sears had already made this same move a century earlier. They disrupted the retail business with precisely the same strategy Amazon used (just substitute “catalog” for “web site”).

      Posted by Michael Clarke | Nov 29, 2010, 1:45 pm
    • I have to disagree with the sentence “[s]taying the course generally is the most rational thing to do in business.” First, there is no course. Every year is different, and customers are changing all the time. What may look to the outside like “staying the course” is usually a lot of change for the business, while the facet the customer sees changes only slightly. Take Cisco, for example. A router company, right? Should keep making routers. So why acquire Scientific Atlanta, a video provider par excellence? To turn it into a multi-billion-dollar adjunct and adjacency. IBM just kept right on making minicomputers, right? No, they still make them, but they do many other things now. Apple should have stayed with cute desktop computers? Amazon should have stuck with books instead of acquiring Zappos? Daimler should have just kept making Mercedes-Benz instead of launching Smart cars? Toyota should have stuck to the Corolla instead of launching Lexus?

      I agree that the “felled by one competitor’s blow” narrative is tired, but often “staying the course” is really the problem, especially when you pick the wrong course. Not knowing what business you’re in is often a prelude to failure, and leads to picking many wrong courses when the trick is to keep picking many correct courses and adjusting as needed.

      Posted by Kent Anderson | Nov 29, 2010, 2:47 pm
  6. Note also that according to CNN, “Cyber Monday” is a myth.

    Posted by David Crotty | Nov 29, 2010, 1:30 pm
    • You know what else I am beginning to suspect is a myth? The Tube. Every time I am in London and go to get on the Tube, I am told it is on strike. I am beginning to suspect that there is no Tube and it just a big joke on visitors.

      Posted by Michael Clarke | Nov 29, 2010, 1:52 pm
      • You are forgetting that if it isn’t on strike, then there’s a signal failure on the line somewhere. Or the wrong kind of snow/leaves/sun/wind/rain… Or an “Earlier Incident”. Also be aware that the tube definition of ‘a minute’ involves an elastic understanding of what time actually is.

        Posted by David Smith | Nov 30, 2010, 5:38 am
  7. OK, so maybe history is not your core competency. But every argument of the they-didn’t-understand-the-business-they-were-in type is a historical argument, so closer approximation on the history can’t hurt.

    Start with the picture. The Sears Tower doesn’t symbolize Sears in the catalog era. You have the wrong tower. You want the Sears Merchandise Building Tower on Homan Avenue. See http://en.wikipedia.org/wiki/Sears_Merchandise_Building_Tower That tower and the numerous warehouses and office buildings that once surrounded it were the Sears empire in the catalog age. The Homan tower was built in 1906 during the heyday of the mail order catalog.

    The Sears catalog was a commercial goldmine when the USA was an agrarian society and railroads and horses delivered freight. With the coming of the automobile the catalog business began to decline. People could travel to the goods rather than have the goods travel to them. So, Sears became a network of retail stores.

    The decline of the Sears retail stores was at the hands of discounters in the 1950s and 60s: Zayre, Ames, Korvettes, Woolco, and K-Mart and hundreds of small chains and standalones that took advantage of cheap global goods. The Sears Tower in the Loop is the last flourish of the great retail era, and really symbolizes the diversification of Sears into manufacturing, finance, insurance, and real estate. Amazon didn’t kill the Sears catalog; the last Sears catalog was printed in 1993, before Amazon appeared and long after the catalog actually made money.

    The point is, the arc of history is long and complex. Core competency is not static. The ground is always shifting. For any business to survive it has to keep changing.

    Posted by Dean | Nov 29, 2010, 2:36 pm
    • Dean – I completely agree with your last sentence, which is a central point of my post. Regarding my history, I don’t think anything you cite is contradictory to my piece. Yes, there were various pressures that drove Sears from the catalog business and into retail – the biggest of them all being the GI Bill and the growth the American suburb. And yes, the discounters (and we didn’t even get into Walmart and Target) play a big role in the Sears narrative.

      All that being said, Sears still missed a huge opportunity that they were uniquely positioned for. Amazon didn’t kill the Sears catalog, but Sears missed the opportunity to translate its catalog to the web, thereby killing Amazon. The last Sears Catalog was printed in the same year the Mozilla browser launched and the web went mainstream. Yes, their catalog business was in a long decline at that point but it had survived just long enough – nearly a century – to make the jump to the web.

      The point of my post is not an exhaustive history of the Sears empire. It is simply that Sears was uniquely positioned for a major role in online retail and failed to capitalize on this obvious (and obvious at the time) transition and the reasons for this failure.

      Posted by Michael Clarke | Nov 29, 2010, 9:50 pm
  8. This book tells the story of a retail business that did innovate, anticipating K-Mart, but went belly up nevertheless: http://www.psupress.org/books/titles/978-0-271-03370-9.html.

    Posted by Sandy Thatcher | Nov 29, 2010, 10:43 pm
  9. I like the Sears/Amazon example as an update to Theodore Levitt’s classic Harvard Business Review Case, “Marketing Myopia”: http://hbr.org/search/marketing%25252520myopia/

    Posted by Laura Cerruti | Nov 30, 2010, 11:57 am

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