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(originally published by Booz & Company)


Purpose and Innovation

Masaru Ibuka set up Sony in the aftermath of World War II, and he set out the “purposes of incorporation,” which included feeling “the joy of technological innovation.” In the fifties he decided to work on a transistor radio. “People are saying that transistors won’t be commercially viable,” he said. “This will make the business all the more interesting.”8

Bill Allen, chief executive of Boeing from 1945 to 1968, said that the company he led was “always reaching out to tomorrow” and that it employed people who “eat, breathe and sleep the world of aeronautics.” A stream of radical decisions led to the development of new airliners—the 707 in the 1950s (the first commercial jet), the 727 in the early 1960s and then in 1965 the 747 (the first wide-bodied jet). Discounted cash flow just did not come into it. “We will build it even if it takes the resources of the entire company,” Allen told a doubtful non-executive in 1965. It nearly did require all of those resources—but of course Boeing retained its enormous lead over its rivals, such as McDonnell-Douglas. Allen was driven by Purpose to take a risk; he innovated and Boeing changed—and continued to dominate the industry.9

And then there is Bill Gates. His Purpose—to get Windows onto every desktop in the world—was a modern version of Henry Ford’s plan to democratize the automobile, and Gates’ company grew at the same heady speed, making him, like Ford, the richest man in the world. But like Ford, now that Gates has come close to achieving his Purpose, there is a dilemma. He continues to win his battles, but he has not established a peace. His software near-monopoly is eroded daily by new developments on the Internet, in open-source software, and in the nature of computer-based devices, to say nothing of challenges from regulators. Should Microsoft keep its old Purpose, honed across three decades? Or should it adapt and change the industry rules again? Perhaps consideration of this question prompted Bill Gates’ announcement, in June 2006, that he would retire as chief executive of Microsoft.

These examples do not mean to imply that changing the rules is only for big businesses. It is worth remembering that Walton’s approach brought him success as a small businessman before he became a big businessman. He changed retailing in Bentonville before he changed it in the Midwest or in the United States as a whole.

The key to changing the rules and winning dominance is to make decisions. This applies as much in a village market as in a global market. Henry Ford’s competitors reckoned they could make a surer stream of profits from the mid-size and luxury markets. Walton’s competitors allowed him to grow to critical mass in the semirural Midwest while they were milking more lucrative urban markets. Buffett’s fund management rivals all preferred to estimate how other fund managers would respond to new information rather than to judge purely on fundamentals.

If you doubt Purpose can generate enduring advantage through innovation, I invite you to compare the performance of the companies in the following table with those of their rivals.

Seven companies that have enjoyed enduring advantage

Company Purpose Type of Purpose How Company Rewrote the Rules Financial Results
Ford Use machines to improve the world Heroism Made money from cheap cars and mass production c. 100 percent p.a. real return 1903 to 1919
IBM Seek out the new “beyond our present conception” Discovery Aimed to solve customers’ problems 9 percent p.a. real earnings growth 1915 to 1956
S. G. Warburg Maximize the achievements of the elite Heroism Encouraged hostile takeovers and Eurobonds 23 percent p.a. real earnings growth 1948-1969
Wal-Mart Give the customers a good deal Altruism Introduced very low prices to small towns 27 percent p.a. real earnings growth 1971 to 1992
Berkshire Hathaway Invest excellently and encourage excellent managers Excellence Invested large stakes on fundamentals 22 percent p.a. real returns 1965 to 2003
Disney Make people happy Altruism Created new product types 18 percent p.a. real returns 1923 to 1998
Sony Innovate in a useful way Discovery Invented portable, convenient products 10 percent p.a. real earnings growth 1967 to 1999
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PURPOSE: The Starting Point of Great Companies
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