What’s an Industry?

LONDON – Carmakers are afraid of Apple. YouTube, Netflix, and Amazon are upending the television industry. Skype, Facebook, Twitter, Snapchat, and others have changed consumers’ notions of how – and how much it costs – to communicate with one another. Sectors and industry delineations as we know them are breaking down.

Once upon a time, those delineations established a fairly clear-cut world. Car companies made cars, and they were in the automotive industry. Phone companies ensured that we could speak to one another over great distances, and they were in the telecommunications sector. Broadcasting companies made television shows, and they were in the media sector.

Everything was neat and orderly. Analysts could easily categorize companies and tell the markets what they were worth, boards could oversee firms with a view to shareholders’ happiness, and all was right in the world. Until it wasn’t.

That world – in which clearly defined sectors enable easy classification of what a company does – is disappearing before our eyes. Is Apple a technology company or a luxury watchmaker? Is Google a search-engine firm or an up-and-coming car company manufacturing driverless vehicles?

But, for every Apple or Google, there are companies that seemed innovative but became obsolete or fell behind. Kodak and Nokia, for example, provide a cautionary tale for companies that began life as innovators.

Nokia, in particular, was long held up as a case study in corporate reinvention – the very epitome of constant, top-to-bottom change. Here was a company that entered and exited sectors as needed: paper, tires, rubber boots, and telecoms. And yet it has lost its way; with the sale of its mobile-phone business to Microsoft, many doubt that it can recover and reinvent itself yet again. (Of course, even if Nokia has run out of road, its loss may be Finland’s long-term gain, as startups begin to blossom from the minds of the company’s highly skilled ex-workers.)

Many traditional companies, too, have fallen behind because they hewed too closely to their traditional definitions. Like Kodak, other storied brands have not innovated: Polaroid, Radio Shack, Borders, Aquascutum, Blockbuster, and the list goes on. Their managers thought they were doing the right thing: not losing sight of the “core business.” Their board members knew the industry and had all the right credentials to oversee the managers.

But both managers and board members were wearing blinders. They did not make room around the table for those who could see that the company’s destiny did not lie only straight ahead, but also off to the side.

Too many companies are too slow to have tough conversations about strategy and to ask whether the right people are in place to push them hard enough and far enough, showing them vistas that are not visible from where they feel most comfortable. Complacency has never been an option; but in an environment in which startups can overturn an entire sector in the space of a few years, what once seemed like sound strategy can now amount to resting on one’s laurels.

Traditional companies are only now coming to terms with the reality that early-stage companies might challenge them in a serious way. Swiss watchmaker Tag Heuer, for example, has just announced that it will create a partnership with Google to catch up in the high-stakes battle for the world’s wrists.

Many traditional companies, however, continue to believe that being toppled by upstarts can happen only in the “technology” sector. But what sector does not rely on technology? How many companies that could be classified as technology companies could also be classified as something else? As the e-commerce website Etsy prepares for its IPO, should analysts call it a technology company or a retail company? The biotechnology company 23andMe is moving beyond genetic spit tests and into the competitive and pricey world of drug discovery. Pharmaceutical companies ignore that at their peril. Banking and finance, oil and gas, higher education – no sector is immune.

Perhaps inevitably, even those firms that are most responsible for blurring the lines between sectors are not immune to the consequences. In a legal case between Apple and A123, a manufacturer of batteries for electric cars, A123 accuses Apple of violating a non-compete agreement that its engineers signed. One defense strategy that Apple is using is to argue that it is not violating the agreement, because it is in a different industry.

But, in a world in which a computer company that has already revolutionized the music business and the telecommunications sector, and that now makes watches, could soon start manufacturing electric cars, one can only ask, “What is an industry?”

Obviously, Apple has been asking that question for years. Traditional companies must learn to ask it as well. An idea catches on, money piles in, and before anyone can check their analogue wristwatch, the ground has shifted. 

Lucy P. Marcus,

founder and CEO of Marcus Venture Consulting, Ltd., is Professor of Leadership and Governance at IE Business School and a non-executive board director of Atlantia SpA.

MAR 28, 2015