The Central Question for Your Business

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Almost 60 years ago, an article appeared in the Harvard Business Review that posed the most important question for any business – and a question that is essential for advisors to address today.

Research by Harvard Business School’s Ted Levitt dug into the reasons that once-dominant industries like railroads, movie theaters and corner grocery stores had fallen on hard times. In 1960, his answer appeared in Marketing Myopia, among the most reprinted HBR articles ever. In that article Levitt raised the fundamental question that advisors need to ask themselves today: “What business are you really in?”

Operationally-focused or customer-focused

When he looked at historically successful industries that had fallen on tough times, Levitt concluded that the key problem was an internal operational focus rather than an external customer-driven mindset. Companies in failed industries concentrated on achieving incremental improvement in the things they were already doing – so in the case of railroads reducing delays due to mechanical malfunction, making ticket taking more efficient or generating cost savings by consolidating the companies that manufactured locomotives.

While those changes made train travel more pleasant for customers, the key impetus for these initiatives was to improve profitability while continuing to operate within the industry’s comfort zone. In operating within an overall “business as usual” mindset, these changes failed to fundamentally address the broader issue of what customers wanted.

Here’s Levitt’s perspective on the railroad industry:

The railroads did not stop growing because the need for passenger and freight transportation declined …. The railroads allowed (competitors) to take business away from them because they assumed themselves to be in the railroad business rather than the transportation business. The reason that they defined their business incorrectly was that they were railroad-oriented rather than transportation oriented; they were product oriented rather than customer oriented.

When you look at the topics that have preoccupied advisors over the past number of years, you see some parallels with railroads in the early 1900s. High on the list of issues for many advisors have been things like positioning businesses for succession planning and adjusting to a higher level of regulatory scrutiny while maintaining practice profitability.

While these are important issues, they are much more relevant to advisors than to clients.

Or take the shift from a transaction-driven business to a fee-based model, something that has typically framed to clients as aligning interests between advisors and clients. Beyond the goal of aligning interests, for many advisors this has also been driven by the prospect of creating more stable income streams, annuitizing revenue and increasing overall profits. At one conference I attended a few years back, an executive from a wirehouse firm said that the major impetus at his firm for the shift to fee-based was the experience that after a move to a fee based model, on average revenue as a percentage of assets more than doubled.