If there’s one constant in these turbulent times, it’s change. The huge shifts in political, economic and social factors that strategists call the “remote environment” are changing the behaviour of customers and competitors, the so-called “task environment”.

To survive, companies have to adapt to their new conditions. People like me study how some do and why some don’t, so we can help companies survive in the business equivalent of the great extinctions that led to the demise of the dinosaurs.

Two recent and contrasting news stories illustrate both the need for change and the barriers to it. British Airways, along with most of its rivals, has reported an 8.2% drop in passengers and an operating loss of £150m. The main cause of this is a decrease in the profitable long-haul, premium customers in business class. As I know from the firms I work with, many executives are now discouraged from travelling unless really necessary and, when they do, have to fly economy. Worse still for the airlines, this doesn’t look like a short-term market blip but a permanent shift in customer behaviour.

BA planes. [image by Matt Hintsa, some rights reserved]

This compares with Intel, the big chip-maker. It too has suffered from the economic conditions, reporting a huge reduction in profits and announcing the closure of 5 plants as both firms and individuals buy fewer computers. Unlike BA, however, Intel is showing some signs of adapting to the future by looking for new markets. One example is its recently announced tie-up with General Electric’s medical division. Together, they plan to create new technology that will reduce healthcare costs by allowing doctors to monitor and diagnose patients remotely.

Since most healthcare spending is on patients with chronic (that is, serious, long term but not life-threatening) conditions who are at home, this looks like a business opportunity that will only grow and be relatively immune to market conditions.

BA and Intel, both global businesses staffed by bright people, seem to have very different abilities when it comes to adapting to the market. In the jargon of academics, they exhibit different adaptive capacities. Why  is this so complicated and interesting? Simply put, adaptive capacity is a combination of obvious practicalities and less obvious embedded habits.

For instance, BA’s primary assets are its planes, routes, airport slots and brand. Intel has some of these “fixed assets” of course but it’s really a “knowledge-based” company. Its biggest asset resides in the kilo or so of grey mushy cells that sits between the ears of its employees. In practice, this means that, whilst Intel can switch where to apply its assets relatively easily (from one area of computing to another in this case). It’s much harder for BA. To attack a new market, they would need to scrap or adapt planes, sell slots and routes and reposition the brand, all of which is difficult and expensive. And those are just the obvious difficulties.

A computer chip. [image courtesy of Intel]

Adaptive capacity is also the result of organisational culture, the embedded habits of the whole company. Intel, for example, is committed to technical excellence but cares less about where it applies that excellence. BA’s culture is all about a premium service, especially on long-haul. This shows in everything it does and would be difficult to change.

Academics have studied the idea of adaptive capacity for many years. They identify as important things like having time to think about change and the ability to make sense of the market. However, as even the best companies find, the complex mix of fixed assets and organisational culture make changing to fit the market a very difficult challenge.

Further reading

BA to Miss 2008 Revenue Targets 

Intel works with GE on healthcare

Formulating adaptive marketing strategies in a global industry, an article by Tung-lung Chan in the June 1995 issue of International Marketing Review.

About the author

Dr Brian D Smith is a Visiting Research Fellow in The Open University’s Marketing and Strategy Research Unit. He is the author of over 100 books and articles and runs PragMedic, a specialist strategy consultancy.

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What’s the difference between trading and investing? Investors have money which they invest; traders have very little capital but borrow in order to invest.

How can this be? The answer is easy. Traders borrow using the security of the securities they are going to buy! How does it work? Well suppose you think Marks & Spencer shares are going to rise in value. You buy them, then immediately pass them to a bank which in return provides cash. You then use this cash to pay for the securities you have just bought! This is called repo (short for ‘sale and repurchase’) and is exactly like secured lending. Everyone is happy. The lender has security in shares to cover the loan, and you have been able to borrow to speculate on shares rising.

But traders are not always bullish. Sometimes they want to bet on shares going down, In this case, the reverse transaction takes place. You sell shares you don’t own – called selling short. You immediately borrow the shares from another institution and hand them the money you’ve received from the share sale. When the price has – you hope – fallen, you buy back the shares at a lower price and close out your position.

Another way of speculating when you don’t have much capital is to use derivatives. These are synthetic securities which can be traded in the same way as shares, but where you only have to pay an initial deposit (margin) which is as little as 1% of the underlying value. If the price goes the way you have bet, then you need put no more money in, just take the profit when you sell the shares. But if the price goes against you, you have to top up the account to cover the losses on a day to day basis. But in general, derivatives allow you to leverage up by factors of 50 or more.

In recent years, hedge funds, who are investors in that they manage a pool of money, saw the profits that could be made through leverage and began to behave like traders. All went well until the credit crunch. But when things go wrong, leveraged traders can be wiped out very easily. The hedge funds run by Madoff used derivatives to enhance return supposedly without taking on too much risk. Yet anyone in the business knew that there is no holy grail. You can make fat profits in the good times only if you take on risk – and that means there is always the chance of going bust.

About the author

Janette Rutterford is Professor of Financial Management at the OU Business School, having previously worked in corporate finance and investment. Jannette's research includes pension funds, equity valuation and investment history, in particular the history of women and wealth.

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Dr Brian D Smith looks at what a market is and why it matters.

Amid all the gloomy stories of lay-offs and losses, it’s hard to find any positive news. Some stories stand out not because they are good or bad, but because they are counter-intuitive, not what you would expect in the current conditions. For example, Harley Davidson has just received a cash injection from Warren Buffet, by many counts the world’s richest man, often known as the “Sage of Omaha”. Now Buffet didn’t get his nickname or his wealth from throwing money at lost causes and one might expect gas-guzzling Harleys to suffer the same fates as SUVs and other big cars, so what’s going on here? And how does management theory throw light on the situation?

Harley Davidson
[image by Eduardo Mueses, some rights reserved]

It turns out that the answer lies in how we choose to define markets. In common parlance, we might talk about the motorbike market, or the holiday market or whatever but this, it turns out, is a handy but misleading shorthand. In a seminal paper almost 50 years ago, Ted Levitt pointed to the fact that we confuse markets with products. Motorbikes and holidays are products by his definition. Markets, on the other hand, are groups of people trying to satisfy a need. Motorbikes are a way of satisfying the transport market, for example, and holidays are way of meeting the relaxation market’s needs.

When I first read this, my healthy Geordie scepticism crept in and I saw it as academic semantics. It wasn’t until years later, when I ran a marketing department, that it dawned on me how useful Levitt’s ideas were, how needs-based definitions of markets help us to explain the competition and why some firms succeed and others don’t. For example, I once advised a large regional development agency on how to grow the embryonic science park they had next to their new University. Situated in the affluent South-East of England, they struggled against heavily subsidised competitors in Eastern Europe and even Northern England. They couldn’t uproot and move to some deprived, de-industrialising region, so what could they do?

The answer lay in market definition. Their rivals were selling space and labour but my client couldn’t compete in either of those markets. But it did have a great University, several world leading research centres and, as a result, the highest concentration of PhDs (in a certain field) in the world. They weren’t in the labour or space market, they were in the knowledge market. This insight made a huge difference to which firms they targeted, how they designed their offer and who they competed against. I’m proud to say that they are now thriving.

It’s market definition that helps explain why Buffet invested in Harley Davidson. They’re not in the ailing motorcycle market, they’re in the “big boys’ toys” market which, whilst not immune to the credit crunch, has much better long term prospects than thirsty bikes. And market definition can have big implications for most other firms too. For example, the market for video recording is actually about “enabling viewing management”, hence the impact of Sky + and other on-demand services. In almost every market, defining the market as customers with needs, not products to be sold, helps firms to understand what they have to do.

Don’t take my word for it; try it for the organisation you work for. What market is it in, if you think of customer needs rather than products? How does that definition help explain what’s happening in the market and who is competing with you? If you’re clever about it, market definition might just help you see your way out of the credit crunch.

Find out more

‘Marketing Myopia’ by Ted Levitt
published in Harvard Business Review, 38, 45-56

Marketing in practice

About the author

Dr Brian D Smith is a Visiting Research Fellow in The Open University’s Marketing and Strategy Research Unit. He is the author of over 100 books and articles and runs PragMedic, a specialist strategy consultancy.

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