Great Companies Don’t Adapt, They Prepare

In 1960, Harvard professor Theodore Levitt published a landmark paper in Harvard Business Review that urged executives to adapt by asking themselves, “What business are we really in?” He offered the both the railroad companies and Hollywood studios as examples of industries that failed to adapt because they defined their business incorrectly.

Yet today, the railroads don’t seem to be doing too badly. Union Pacific, the leading railroad company has a market capitalization of over $80 billion, about 60% more than Ford or GM. Disney, the leading movie studio company, has a market capitalization of about $150 billion. That doesn’t seem too shabby either.

While nimble startups chasing the next trend are exciting, the truth is that companies rarely succeed by adapting to market events. Rather, successful firms prevail by shaping the future. That can’t be done through agility alone, but takes years of preparation to achieve. The truth is that once you find yourself in a position where you need to adapt, it’s usually too late.

How Microsoft Missed Mobile And Won The Cloud

Consider the case of Microsoft, which failed horribly to adapt to mobile computing. In fact, when the iPhone came out, CEO Steve Ballmer dismissed it, saying, “There’s no chance that the iPhone is going to get any significant market share. No chance.” Other attempts to adapt to Apple’s innovations, such as the Zune music player, didn’t gain traction either.

You would think that by so totally misreading the market that Microsoft would be near bankruptcy, but actually the opposite happened. Over the past 10 years, the company has grown revenues at the impressive annual rate of about 10% and maintains margins of nearly 30%. Those are strong numbers.

Take a look at Microsoft’s cloud business and you’ll understand why. The company recently reported that it’s growing at an annual rate of over 100%. This, however, is not a new initiative, but a direct consequence of Microsoft’s old servers and tools business that it began building for more than a decade ago.

Microsoft is not a nimble company. It doesn’t impress anybody with brilliant market forecasting or slick branding. What it has done has made substantial investments in the research division it set up in 1991. When you are building capacity in your business decades ahead of time, you really don’t need to be that fast.

Google’s Social Ineptness

One company that’s become famous for its agility is Google. So when Facebook emerged as a serious rival, it was no surprise when the search giant jumped nimbly into the space. It launched Google Wave, Google Buzz and then Google+. None met with significant success. Customers don’t flock to you just because you move quickly.

Still, Google is thriving and recently passed Apple to become the world’s most valuable company. To understand how, take a look at the innovation ecosystem that it’s built. It invests heavily into research and allows promising projects to incubate at its Google X division. At the same time, its longstanding policy of 20% time gives its engineers the freedom to turn all that cutting edge technology into products.

The company is also active in the research community, regularly publishing openly in scientific journals as well as on its own blog and invites academics to spend sabbaticals at the company. The scientists gain access to Google’s unparalleled data sets, while they add to the firm’s knowledge and understanding of cutting edge technologies.

Some of this new knowledge goes to create completely new products, like self-driving cars. Yet most of it gets plowed back into the core business. That may be boring, but it’s incredibly profitable.

Slowly Reinventing the Future

There has been probably no company that’s transcended as many technology cycles as IBM. It was a leader in punch card machines, then dominated mainframes and led the charge in the PC era. Later, it built a phenomenal business around consulting services that helped design, build and maintain sophisticated systems for enterprises.

Today, as those installed systems are moving to the cloud, IBM’s business is reeling with revenue dropping for 17 straight quarters. Many would say that the company desperately needs to become more agile and adapt. Yet IBM seems to be doing just the opposite, doubling down on bets it made decades ago.

Take the company’s cognitive computing initiative, also known as Watson, which CEO Ginni Rometty sees as central to the company’s future. IBM has been working on the technology for decades. Other long-term efforts, such as quantum computing and neuromorphic chips, are focused on powering the company long after we reach the limits of silicon chips.

These new computing architectures aren’t likely to have a measurable impact until sometime around 2020, but when it does, most firms will be struggling to adapt. IBM won’t have to.

Shaping The Future

Agility is a very positive thing, but it is often overrated. Apple didn’t create the first digital music player, the first smartphone or the first tablet computer, yet it came to dominate each category. Amazon wasn’t the first to sell books on the internet, either. These companies succeeded not because they were faster, but because they developed products that were demonstrably better than their competitors.

Truly great companies don’t need to adapt to the future, because they create the future. Take a look at any great business and it becomes clear that what made it great wasn’t the ability to adapt, but a dedication to creating, delivering and capturing new value in the marketplace. The truth is that we need to start focusing less on disruption and more on solving fundamental challenges.

Which brings us to something else Theodore Levitt said, “People don’t want to buy a quarter-inch drill, they want a quarter-inch hole.” Clearly, it is not a particular business category that defines a company, but how it solves problems for its customers. And you can’t solve really tough problems by simply moving faster. Great companies prepare the ground long before.

And that’s really the point. Business that focus on solving big problems and are willing to invest in them for years —or even decades — can get a lot of other things wrong.

– Greg

A previous version of this article first appeared on Harvard Business Review