Theodore Levitt's prophetic writing on the demise of gasoline rise of chemical cells

[morphix]

I'm was just doing some studying for my business studies course on the theme of marketing and read this interesting chapter concerning marketing orientation within business and how many businesses have traditionally been product orientated which has resulted in mass production and massive growth followed by decline.

This extract caught my interest from an article entitled Marketing Myopia by Theodore Levitt written in 1960...

Product provincialism: The tantalizing profit possibilities of low unit production costs may be the most seriously self-deceiving attitude that can afflict a company, particularly a "growth" company, where an apparently assured expansion of demand already tends to undermine a proper concern for the importance of marketing and the consumer.

The usual result of this narrow preoccupation with so-called concrete matters is that instead of growing, the industry declines. It usually means that the product fails to adapt to the constantly changing patterns of consumer needs and tastes, to new and modified marketing institutions and practices, or to product developments in competing or complementary industries.

..what may someday be a still more classic example is, again, the oil industry. Having let others steal marvelous opportunities from it (including natural gas, as already mentioned; missile fuels; and jet engine lubricants), one would expect it to have taken steps never to let that happen again. But this is not the case. We are now seeing extraordinary new developments in fuel systems specifically designed to power automobiles. Not only are these developments concentrated in firms outside the petroleum industry, but petroleum is almost systematically ignoring them, securely content in its wedded bliss to oil. It is the story of the kerosene lamp versus the incandescent lamp all over again. Oil is trying to improve hydrocarbon fuels rather than develop any fuels best suited to the needs of their users, whether or not made in different ways and with different raw materials from oil.

Here are some things that non-petroleum companies are working on:

* More than a dozen such firms now have advanced working models of energy systems which, when perfected, will replace the internal combustion engine and eliminate the demand for gasoline. The superior merit of each of these systems is their elimination of frequent, time-consuming and irritating refueling stops. Most of these systems are fuel cells designed to create electrical energy directly from chemicals without combustion. Most of them use chemicals that are not derived from oil - generally, hydrogen and oxygen.

* Several other companies have advanced models of electric storage batteries designed to power automobiles. One of these is an aircraft producer that is working jointly with several electric utility companies. The latter hope to use off-peak generating capacity to supply over-night plug-in battery regeneration. Another company, also using the battery approach, is a medium-sized electronics firm with extensive small-battery experience that it developed in connection with its work on hearing aids. It is collaborating with an automobile manufacturer. Recent improvements arising from the need for high-powered miniature power storage plants in rockets have put us within reach of a relatively small battery capable of withstanding great overloads or surges of power. Germanium diode applications and batteries using sintered plate and nickel cadmium technologies promise to make a revolution in our energy sources.

* Solar energy conversion systems are also getting increasing attention. One usually cautious Detriot auto executive recently ventured that solar-powered cars might be common by 1980's.

As for the oil companies, they are more or less "watching developments", as one research director put it to me. A few are doing a bit of research on fuel cells, but this research is almost always confined to developing cells powered by hydrocarbon chemicals. None of them is enthusiastically researching fuel cells, batteries or solar power plants. None of them is spending a fraction as much on research in these profoundly important areas as it is on the usual run-of-the-mill things like reducing combustion chamber deposits in gasoline engines. One major integrated petroleum company recently took a tentative look at the fuel cell and concluded that although "the companies actively working on it indicate a belief in ultimate success...the timing and magnitude of its impact are too remote to warrant recognition in our forecasts."

One might, of course, ask, why should the oil companies do anything different? Would not chemical fuel cells, batteries, or solar energy kill the present product lines? The answer is that they would indeed, and that is precisely the reason for the oil firms' having to develop these power units before their competitors do, so they will not be companies without an industry.


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[flecc]

I'm afraid that article is terribly biased to a view rather than facts, and in places very silly indeed, e.g. solar power cars becoming commonplace!

The major oil companies have long been engaged in alternative research but with far more realism than that author. They are well aware of the limitations of the areas mentioned. It's easy for pundits to spout about hydrogen fuel cells without having the faintest idea how we are going to produce hydrogen in the vast quantities needed. Equally they preach electric power without any understanding of the near impossibility of distributing the quantities of charging current needed to replace ic vehicles with electric. These are why the oil companies restrict the research expenditure, content to let others spend money looking for any chinks in the technological barriers which they will then take advantage of if any transpire.

Meanwhile they spend in the areas that are profitable, researching ways to extract more of their core product. Their job is rightly to earn money for shareholders, not waste money on unproductive research.

Certainly there are "blind" companies, a current perfect example being Kodak who have now filed for bankruptcy protection. They did just what Theodore wanted, researched and invented the digital camera which could replace their film business, but then made the mistake of thinking it wouldn't catch on and let others benefit and kill their film business. Polaroid made a similar digitally related mistake.

But the oil companies are a bad example, they are very aware and far from stupid.
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[morphix]

Good post flecc. I'm not sure yet while I'm being asked to read this very long article (of which that is just a small extract!) I think it's to show a dramatic shift in the thinking about the role of marketing in business which took place from 60s onwards..

Levitt argues that businesses like oil companies and car manufacturers are narrow-sighted and setting themselves up to fail with a strong product-orientated marketing bias and neglecting customer-satisfaction orientated marketing. He argues that this is what causes market cycles of rapid growth and rapid decline, of boom and bust and unsustainable long-term growth.

But surely the oil companies are proof he's wrong, as you said. They're still going strong, and we're still a long way off any cheap alternative energy source that can realistically replace oil, even half a century later.

Surely it's logical as you suggest that oil companies or whatever other industry, if it has a hugely profitable product which can be mass produced cheaply will continue to focus and exploit that fully for as long as its profitable to do so. Why divert energies and resources elsewhere? I see nothing illogical or wrong in riding the market cycles, or product life cycles.. as one product life cycle declines so another emerges. But it doesn't mean a company should abandon or end its product life cycle earlier than necessary.

 

[flecc]

Absolutely. And there's always the point that if another company does make a technological breakthrough, one of the very rich oil companies can then just buy them out and exploit the breakthrough.

Blue skies research is best done by universities, government organisations and industry funded research centres like Xerox Corporation's open source PARC (Palo Alto Research Centre). They invented windows and the mouse for computing, first adopted by Apple and later by Microsoft, showing how successful and unrestrictive such research methods are.

 

[morphix]

Let me read (or rather type) this amusing part from the next section of the article for you..where Levitt tries to emphasize his point further by talking about the US railroad industry...

Less than 75 years ago, American railroads enjoyed a fierce loyalty among astute Wallstreeters. European monarchs invested in them heavily. Eternal wealth was thought to be the benediction for anybody who could scrape together a few thousand dollars to put into rail stocks. No other form of transportation could compete with the railroads in speed, flexibility, durability, economy, and growth potentials.
As Jacques Barzun put it, "By the turn of the century it was an institution, an image of man, a tradition, a code of honor, a source of poetry, a nursery of boyhood desires, a sublimest of toys, and the most solemn machine - next to the funeral hearse - that marks the epochs in man's life."
Even after the advent of automobiles, trucks and airplanes, the railroad tycoons remained imperturbably self-confident. If you had told them 60 years ago that in 30 years they would be flat on their backs, broke, and pleading for government subsidies, they would have thought you totally demented. Such a future was simply not considered possible. It was not even a discussable subject, or an askable question, or a matter that any sane person would consider worth speculating about. Yet a lot of "insane" notions now have matter-of-fact acceptance - for example, the idea of 100-ton tubes of metal moving smoothly through the air at 20,000 feet above the earth, loaded with 100 sane and solid citizens casually drinking martinis - and they have dealt cruel blows to the railroads.

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I have a feeling there's going to be a tutorial discussion on this...and I expect everyone will be praising Levitt as a marketing genius and visionary. I can't help be critical of his writing and thinking though.. ok so he may be right to a point that businesses should be more customer-orientated, but the way he makes his point is so dismissive and blunt, he sees things very much in black and white. All of the companies he has slated in his examples, like Ford and his model-T*...have been hugely successful with the mass production product-orientated business model.. ok so their industries may be in decline now, but the wealth and the effects of it has been created and has benefited many people eh. How can you say that approach is wrong! I guess I'm seeing this from 21st century prospective though where takeovers and diversifying in business is common now..look at BP "Beyond Petroleum"..which presents itself as an energy company...or maybe that's more corporate social responsibility marketing trickery than actual substance?

* "Any customer can have a car painted any color that he wants so long as it is black".

 

[flecc]

Probably a bit of hype in "beyond petroleum", but there's no doubt the largest oil companies are closely following all the alternatives, and aren't going to be caught unawares.

I find the railways example a bit funny for more than one reason. Their decline was confined to the USA and Britain for entirely political reasons, stupid politicians rather than stupid businessmen. Elsewhere as in France, Japan and others they've been in growth both technologically and in popularity, and even here in Britain overuse is the problem, despite the lack of investment. The railways have a great future in coping with human travel needs in a way commensurate with the environmental interests.

There's another consideration that makes exploitation of a resource or idea to the full a benefit. Companies that do that often make extremely large profits, large enough to trigger benefaction. Thus we get free research for others at PARC from Xerox, much needed help for the third world from the Bill and Melinda Gates Foundation, social housing from Guinness and Peabody, William Morris sinking his car making fortune into the Nuffield Foundation, and others far too numerous to mention. The world would be a poorer place without those, illustrating there's more to business than a company existing in perpetuity.

 

[morphix]

Flecc in this article Levitt mentioned some electricity utility companies in 1960 were jointly investing/developing large closet-sized power cell batteries and they were intended to be going into homes! And they believed these batteries could be used to generate power for the grid also. I wonder what happened with that and why it never took it off? And if serious research and development into battery technology has been going over half a century, why hasn't it progressed much? What's the reasons? Is it lack of technological know-how, production cost, or rival industry opposition or what?

 

[flecc]

I guess those were fuel cells feeding a very large battery. Fuel cells are viable though rather expensive at present, but it's where the fuel for the fuel cells comes from that is the big problem as mentioned above. Hydrogen is the best contender, but making it in huge quantities is problematic. That home scheme may have been based on the expected North Sea gas being used, but gas is now expensive and running out, so we need to get away from it as soon as we can.

The fundamental problem with batteries is that they are energy converters with all the losses that entails. The conversion of electrical current into chemical potential is inherently very inefficient, meaning energy densities a fraction of those of fossil fuels. That is why there is such a huge contrast between the performance of externally powered and battery powered electric vehicles, 300 mph high speed trains make battery powered road vehicles look pathetic.

There's no commercial conspiracy anywhere in this, or lack of research, it's simply a matter of the physics of the possible in our world, and the limited ultimate potential.

 

[flecc]

To enlarge on that battery problem, it's helpful to look at the NiMh (Nickel Metal Hydride) cell, since it's a closed circuit fuel cell, neatly explaining the principles of both fuel cell and battery functions.

In it's most basic form, the NiMh cell contains water in a mixture of rare metals or rare earths as a hydrate (a material able to absorb water). When charge current is passed into it, the water is hydrolysed by the electrons into it's constituent hydrogen and oxygen. Once the charge current is disconnected, those two gases would like to recombine, but cannot because the surplus electrons, due to the imbalance of electrons over protons now present in the atoms, have nowhere to go.

Connecting a load such as a lamp or a motor gives the electrons somewhere to go, so they emerge in a continuous stream enabling the hydrogen and oxygen to recombine back to water in the hydrate. From this you can see that the NiMh cell is in fact a fuel cell which has the ability to manufacture it's own fuel, hydrogen and oxygen from water.

But you can also see the limitation. The atoms only have a fixed potential for this process since water is just water, we can't play God and make it better*. To double the output means doubling the content. Similar atomic limitations exist for all battery types, the tyranny of the universe's physics.

So the optimism of the 1960s, of Theodore Levitt and of youth, while having it's place in lifting the spirit, has no relevance in physics and it's limitations.

* Though we can make it heavier or lighter.
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