Tuesday, February 28, 2006

Irreverant Thoughts on Railroads, Transportation, and Business Strategy

Seems like every business student and manager knows the proverbial story about the demise of the railroads in the early part of the 20th century. Presumably, it’s because “they thought they were in the train business, but they were actually in the transportation business.” This is supposed to be a profound strategic insight, and you’ve probably heard some variation of it.

I myself heard it again a few days ago after a speech I gave at a corporate conference. The meeting was held at a Disney property in Orlando. Those of you who follow my blogs will find it ironic that after my last two critical pieces about the Disney/Pixar deal, I wound up speaking inside the belly of the beast. But actually, after bringing my wife and kids with me and enjoying the Disney attractions for a few days, I wound up concluding, once again, that Disney knows how to do theme parks right. They’re really good at it. Build the theme parks around high-profile proprietary animation characters, which they’ve done, and you’ve got a helluva high-growth value proposition. In my speech, I acknowledged as such, but I also pointed out that perhaps Disney’s uneven-to-dismal track record in terms of profitability, return on assets, and stock value over the past decade is due to its corruption of that value proposition. It’s not just the shameless and excess exploitation of the characters which winds up diminishing their “specialness” and diluting the Disney brand. There’s something much deeper.

What Disney has done over the past 20 years is to deviate from its core value proposition and head off into many other unrelated businesses by virtue of redefining itself as an “entertainment” company. Accordingly, any market it got into was officially classified as entertainment. During its heyday, (or low-day) Disney was into movies, TV, cable, radio, music, newspapers, book publishing, travel, cruise lines, retail stores, consumer products, special effects and engineering, theater productions, sports franchises—and, oh, yes, theme parks and animation.

You can call these markets “entertainment”, I call them unrelated businesses. There’s no way to dominate all of them. Just because you can do Mickey Mouse great doesn’t mean you can do the Mighty Ducks professional hockey team great (which Disney finally unloaded). Disney’s focus and resources got spread way thin, and its financials reflected it—which, I believe, generated the obsessive exploitation of successful cartoon characters to recoup some income.

So after my speech (which, for the record, included many other topics—I’m not obsessed with Disney!), someone in the audience asked me the railroad-transportation question. He wondered why I had criticized Disney for expanding its strategy to “entertainment” when the prevailing mythical wisdom is that railroads should have expanded their strategy to “transportation.”

Great question! Here was my response: It’s one thing to carefully build on your core strengths and markets to expand their scope and appeal. It’s quite another to willy-nilly enter markets you know nothing about. The railroad industry could have asked: How do we improve service to build share and customer loyalty and repeat business—and charge more while reducing our costs to build margins? Next questions: How can we carefully take our skills and assets to move cargo, not just people? How can we build and expand our presence in both these sectors? How can we expand these sectors themselves to insure they remain high-growth? Are their any other closely related transportation sectors where our skills and assets can organically lead to dominance and strong, profitable growth? These questions are reasonable “transportation” questions.

But using Disney’s strategic logic, the railroads would have jumped into completely unrelated areas in the holy name of “transportation”: ships, cars, bicycles, even the burgeoning air travel business. That would have been suicidal.

It’s time to reconsider the railroad vs. transportation legend because it's misleading. Or maybe it's time to just bury it altogether.

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