by Adam Hartung | Sep 22, 2008 | Defend & Extend, Disruptions, Ethics, General, In the Whirlpool, Leadership, Lock-in
By now, everyone knows the story. After all the cost to take over Freddie Mac and Fannie Mae, plus the guarantees given to J.P. Morgan Chase for their acquisition of Bear Sterns, and the cost to keep AIG alive – in the range of $300million to $600million – the Treasury secretary now says the U.S. taxpayers need to spend at least (it could be more – even more than 2x this amount) $700billion to purchase the bad loans sitting on the books of banks, investment firms, insurance companies and hedge funds.
So what does the taxpayer get for this? So far, all the taxpayer is told is "it’ll stave off an even worse crisis." I’m reminded of the words attributed to Illinois Senator Everett Dirkson "a billion here and a billion there and pretty soon it adds up to real money." This is a lollapalooza of a bunch of money – and yet no one seems interested in saying what the taxpayer gets. The proposal is pinned on "things will be worse if you don’t", without much talk about how things will ever get better. There’s no talk about how this will create more jobs, create rising incomes, or improve asset values. Just "it can get a lot worse."
So, put yourself in the role of CEO. If someone came into your office saying "I think we made a whopper of a mistake, and you need to agree to pony up something like $1 to $1.3trillion dollars to bail us out." After you get back up, what would you ask? How about, "what’s this for?" To which you hear "Well, it seems we simply made a bunch of bad investments, and now we have to buy them all back." Nothing about how your business will be better for having done it.
Now, it might occur to ask, "if I do this, how do I know it won’t happen again?" And that’s the question you really should be asking today. Have you heard before about this problem, and told your previous actions would stop the problem? If yes, wouldn’t you say "hey, I’m a bit tired of running around this tree and getting these recurrent bad news meetings. Seems like every Monday is something of a ‘here’s the newest crisis’ environment. What’s your plan to adjust to the market requirement?" And if the plan is to do more of the same, but now with more resources, done harder, and working smarter you’d be pretty smart to say "if the previous actions didn’t work, why should these work?"
In the end, this $700billion to $1.6trillion isn’t changing anything. It’s just putting the proverbial "finger in the dyke." Only what started out as a few hundred million dollars (the finger in the first hole) has exploded into over $1trillion and the dyke hole isn’t the size of a finger – it’s the Holland Tunnel! Clearly, what was tried hasn’t worked. Yet, this is asking more of the same. So, in the legislation the person who’s been watching and saying "things will be fine" and spending the hundreds of millions has now said "just to make sure this works, I want not only all this money but no oversight on what I might need to spend additionally – and no controls over what actions I might need to take – in order to finally stop the flooding problem." Uh, right. Since everything you’ve done before didn’t work the obvious right answer is to give you more money than I ever imagined, and on top of that give you unbridled permission to do anything else you want to keep trying more of the same to stop the problem.
When do you say "no"? Confronted week after week with crisis after crisis, when do you say "I don’t think this is working?" It’s so easy to go along. It’s so easy to say "this has been the way we’ve always done it. Things haven’t worked so far, so clearly all we need to do is do more of it. Possibly more than any of us ever dreamed imaginable – but surely if we do enough, do more, eventually it will work."
Now, more than ever, we need White Space. The financial markets have shifted. Competition has shifted. The balance of competitiveness has shifted to those who have access to lower cost resources of everything from oil to labor. Those who focus on industrial production can now see that it is dominated by those who have more people, who are equally trained and who work for less. Whether that is the production of shirts, or software code. Trying to prop up a global financial system based on the "full faith and credit of the U.S. government" is difficult when that government is significantly in debt, has lost its position as #1 in manufacturing output, and no longer controls the financing of everything from dams to auto purchases. Trying to "fix" this situation with solutions designed to work in another era, under a different set of circumstances, will not produce better results.
At the very least, when confronted with this kind of situation it is the time for leaders to say "where is the White Space to develop a new solution? If I have $1.3trillion to buy the problem – either by giving up the money or by printing more – and I forego all other expenditures (like health care, or defense against competitors) to put the money here – I deserve to see some money spent on developing a new solution. One that is built upon the new market characteristics." This is not the S&L crisis again, nor is it the failure of a single big bank. We are seeing the results of a market shift which the industry was not prepared for. And the only way to come out successful is to have White Space to develop a new solution.
So far, no one has asked for permission to develop a new solution – nor has anyone even proposed it. No one has even asked for resources to develop a new financial system. All the money is going to attempt propping up the old system – and the more we dig, the deeper we get.
At the very least, for $700billion, we need White Space. We don’t need hedge fund managers who are salivating to buy up beaten down assets. We don’t need regulators trying to roll back the clock. Nor do we need "do nothing" recommendations with "have faith this will all work out in a capitalistic system." We are in the information age – not the industrial age. We are in a global economy – not a U.S.-led international economy. We are facing new competitors, with different advantages, doing very different things. And we need new solutions. Without those, each Monday will continue to feel like the movie "Groundhog Day" as we relive over and again the problems we don’t address by simply throwing money at it. We have to find a way to move beyond "more of the same."
Mr. Paulson is willing to bet the U.S. Treasury on doing more of the same. He’s ready to spend money Americans don’t have (since there is a negative U.S. government budget and huge deficit.) This means either higher taxes, or turning on the printing press and creating inflation. That’s a bet he’s willing to take. Are you? Or would you like to see some options? Some new solutions? Or even some teams that are working on new solutions? If he’s your V.P., your CFO, do you approve his recommendation, or do you ask for something more – some White Space to develop a solution that does more than stave off future crisis. Do you look to the future, and how to win, or do you try to preserve the past and put all your money on the bet that old solutions will work?
by Adam Hartung | Sep 16, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Openness
There has been a lot of press recently about the terrible situation for retailers. With house prices plunging, incomes stagnating for 6 years, and credit tight we’ve entered a consumer-led receission in the USA. Analysts are giving plenty of reasons for retail companies to do poorly. About all the big boys are seeing declining revenues – and even the behemoth Wal-Mart is barely growing and it’s doing all the price-chopping it can. Walgreens, the nation’s fastest growing retailer, has slowed its store openings. Jewelers are going bankrupt. A single stumble seems to have led clothier Steve & Barry’s into bankruptcy despite a great reputation with college students. In the middle of this, one company is going into the retail business, opening new stores in hotly contested markets like Chicago. L.L. Bean (read story here).
L.L. Bean has been around a long time, selling product via catalogs. Of course as the internet blossomed and web pages replaced catalogs, their sales on–line grew as well. They’ve long made money as a catalog-based retailer. Their distinctive product line of outdoor-oriented gear, coupled with their catalog distribution, has been the L.L. Bean Success Formula. Yet, now in one of the worst retail markets in recent history the company is moving into traditional brick-and-mortar retail. To traditional analysts, this seems nuts. But L.L. Bean is showing all the strengths of a Phoenix Principle organization. Like Virgin, that launched a profitable airline when everyone said airlines were impossible to make money, L.L. Bean is moving now when the traditional retailer’s Success Formulas are most at risk.
- Traditional retailers are suffering. This shows that the industry Success Formula is producing diminishing returns. The industry is primed for change, because Locked-in existing players are trying to "hunker down" and do "more of the same." This provides a great opportunity for a new player with game-changing ideas to enter the market.
- L.L. Bean’s stores are not targeted at existing retailers. They are targeted at what will make retail stores successful in future years. The plan is all around what people will want in the future to shop at retail, not what has worked in the past.
- L.L. Bean is focused on competitors, and how it can beat them. This move is not about trying to Defend & Extend the old L.L. Bean business, it is about taking advantage of weakened competitors at a time of market shift. L.L. Bean isn’t opening these stores in Chicago (and other places far removed from its traditional market of Maine and the Northeastern U.S.) because customers told them to – they are doing it as a way to be more competitive. For a long time the midwest was a difficult competitive market because of Lands End based in Dodgeville, WI. But since being acquired by Sears Lands End has grown considerably weaker, creating an opportunity for L.L. Bean.
- L.L. Bean is disrupting it’s old Success Formula. These stores have nothing to do with the old centralized catalogue sales and distribution tactics. And the stores are industry Disruptive environments that are as different from a Sears, Wal-Mart, Eddie Bauer or Aeropostale as they can be. L.L. Bean isn’t just trying to sell more stuff in new markets, it is creating an entirely new approach to how it sells.
- L.L. Bean is not trying to extend its old Success Formula. It is using White Space to develop a new Success Formula that will allow the company to be far more successful in 2015 than it was in 2005 or 1995 or 1985. By using White Space since launching its first stores, L.L. Bean is experimenting – trying new things – and learning how to be more successful in a shifting retail marketplace.
When markets shift the existing leaders often stumble. By trying to Defend & Extend their old Lock-ins they hope to regain past results. But shifting markets make old approaches create declining returns. The result is an opening for new competitors, with new Success Formulas, to take advantage of the shift. These new competitors, whether brand new, or a company willing to retool like L.L. Bean, use White Space to figure out what works in the new marketplace. So even when you hear how bad things are in any market, and the existing players are talking about cutting back, there’s always room for a winner. If they are willing to undertake Disruptions, and use White Space to learn what creates the new Success Formula.
by Adam Hartung | Sep 2, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Openness
Today Google (see chart here) announced the launch of its new web browser – called Chrome (see Marketwatch article here). At first blush this may seem quite techie, thus uninteresting to most of us. But it is big news for some very important companies – and well worth watching.
Is Chrome better than Internet Explorer from Microsoft (see chart here)? I don’t know, but I don’t really care right now. There can be a lot of technical debate about what browser is best – but we all know that with IT products being a great product isn’t what’s important. If the market were dominated by great products we sure wouldn’t be using applications from Microsoft – nor databases from Oracle – or software packages from SAP. As Geoffrey Moore has written about extensively in his books (Crossing the Chasm, The Gorilla Game, and Dealing with Darwin to name just 3), success in high tech products – like success in most products – has more to do with your ability to manage the product lifecycle and attract customers than how good the product is.
What we should care about is that Google, a company known for its search engine and its ad placement machine just launched a new product into a very large market against the world’s largest software supplier (based on number of individual users). With a product that’s ostensibly free. This is a clear action by Google demonstrating its ability to follow The Phoenix Principle:
- Google is taking a product to market based upon their scenario of the future – not the market today. They see how a better browser makes getting your work done easier and faster.
- Google is focused on the competition, not currenct customers or their own internal machinations. They see a Locked-in, moribund competitor that is unable to move into new solutions.
- Google is willing to be internally Disruptive by entering entirely new markets, using entirely new metrics and with entirely different requirements for success.
- Google is using White Space to figure out how to grow revenue in the application market that everyone who uses the internet needs – a connection page/application we call a browser.
This is a very big deal. It means Google is not at all willing to rest on its laurels. Yes, it pretty much owns the "search" business and it is hugely in front with on-line ad placement. But it’s not just Locked-in to those markets and focused on Defending & Extending them. It’s ready to go into a very different market with a very different requirement for Success. It’s willing to use White Space to learn how to maintain its extra-ordinary growth rate. This is a very big deal. Google has shown it will give its people permission to do very different things, in very different markets, and authorize the resources to push into those markets aggressively. This is a very, very important step for Google that portends quite good things.
Now to the company with 75% market share – Microsoft. You might laugh and think Microsoft has little to fear. That would be like laughing when Alfred Sloan started selling all those different kinds of cars at General Motors when Ford had 75% share with the Model T. Or laughing at Honda when it first brought the Civic to American and GM + Ford + Chrysler had almost 90% of the U.S. auto market. Microsoft is big, but it’s not invulnerable. Microsoft has sat on its laurels. It’s efforts at "search" were a dismal failure. It completely missed the ad placement market. Microsoft has not offered customers an exciting advance they are willing to buy in desktop applications for years. And its last effort to excite customers with a new operating system was so ignored it had to force distributors to take Vistage by refusing to ship its old product – to howls of complaints. Microsoft is big and has lots of money – but so did Ford, GM, Woolworth’s, Xerox and a long list of other companies that once dominated a market only to fall prey to Disruptive competitors while they practiced Defend & Extend management.
What’s worse is the likely impact on Yahoo! (see chart here). Yahoo! was first to make "search" into a business (not the first search engine, but the first to make it a profitable business). But it’s share has consistently eroded as Yahoo! kept trying to do more of what it always did – while Google went out and used White Space to develop Disruptive solutions. While Yahoo! clung to its ad agency roots, Google developed the world’s largest data center to house servers for those billions of searches we all do. Google developed its own servers, and its own facilities located near rivers to cool them all. And Google kept doing things on the cutting edge of internet use to find out what would create more and better on-line advertising generating new revenue for itself. Yahoo! is trying to find a way to survive – while Google is going into whole new business initiatives with White Space Yahoo! hasn’t even considered.
Today’s announcement wasn’t just a product release by Google. Chrome shows us that Google is a company doing all the right things to stay in the Rapids of fast growth. Unlike Microsoft and Dell that Locked-in early and built a business on Defend & Extend tactics which eventually left them without innovation – Google is using White Space to get into markets that attack the heart of its biggest —- and most Locked-in —- competitor. We can expect Microsoft will do nothing – nothing but try to argue that it is biggest so best. Meanwhile, Google is taking advantage of Microsoft’s Lock-in to take customers into new solutions. This is very good news for Google investors, and very bad news for Microsoft and Yahoo! investors. Not because Chrome is a great product, but because it shows Google is a Phoenix Principle company while Microsoft and Yahoo! are Locked-in to D&E practices that are sending them to declining returns and marginal performance.
by Adam Hartung | Aug 14, 2008 | Disruptions, General, Leadership, Lock-in, Openness
The Phoenix Principle applies not only to companies, but industries and even whole economies. There is no doubt countries Lock-in on a market approach, and then Defend & Extend it. And these Locked-in countries become victims of market shifts and new competitors who are not afraid to Disrupt and use White Space to change.
Just think historically for a moment. There was a time when the Dutch controlled more land than any other country. As leading explorers, their territories were the most vast. But they were unable to evolve a system of government which would allow them to Defend & Extend their territories, and they fell from the top perch. The Spanish became the next big economic engine, developing extensive colonies for their King, Queen and church. But, a Lock-in to how they would govern became rife with corruption and eventually they lost their leadership as their floating armada was destroyed. The British led the industrial revolution, and took over global economic leadership, but unable to evolve quickly enough from a monarchy to a more participative government they lost leadership to competitive countries who built systems of self-rule (such as the Americans.) This is not intended to be a chronology, but rather examples of economic Lock-in and inability to Disrupt and use White Space to maintain economic leadership.
We are now looking at what appears to be another major transition. In 2009 or 2010 China will become the #1 manufacturing country in the world, pushing America to #2. As the world has witnessed this week, watching the Olympics, the Chinese are making great strides in pushing forward – changing the face of business competition as they grow in almost all parts of the global economy. Today, the price of gasoline globally is being increased largely by exploding Chinese demand for fossil fuels to promote their economy – and current prices are something they are able to pay while still achieving their country goals for growth in jobs and economic prosperity. Meanwhile other economies, like the USA, are plunging into recession partly aided by high energy costs.
We can see that the Chinese have been good implementers of The Phoenix Principle. Let us not forget that within our lifetimes this country was a deep economic backwater under the no-growth leadership of Chairman Mao and his Gang of Four. Despite one of the world’s oldest cultures just 50 years ago China was not an important economic force. But:
- The Chinese demonstrated an ability to visualize a very different future. After Chairman Mao died the leaders developed scenarios for China that were built upon ideas for how they could lead. Remember that China had no foreign exchange, nor available assets (such as oil or timber) to sell. Yet, the leaders were able to create scenarios of China as a world power. Thus, when the Soviet Union failed the Chinese were primed and ready to stop spending money for tanks on their western front and invest in manufacturing and infrastructure for growth.
- The Chinese focused on competitors to learn how to succeed. And they looked not just at the Japanese and Americans – who were the leaders – but at all countries for how to build a strong, high growth economy. By looking at emerging nations they learned what worked, and where the problems layed, and they designed an approach that would allow them to unseat the Americans, Japanese and Europeans. They did not try to compete like Americans, but rather built their own competitive engine which was unique – and we now see almost beyond competition with U.S. manufacturers.
- The Chinese were quick to Disrupt. Old practices, some enforced with death sentences, were overturned to allow people to do new things. When necessary, entire cities were flooded to create better waterways and fresh water for industry. Homes were destroyed, and some historical landmarks, to make way for highways. The Chinese were willing to challenge their internal Lock-ins, and use Disruptions to create opportunites for doing new things.
- And they have been very willing to create and use White Space for developing a new Success Formula. It wasn’t long ago China retook possession of Hong Kong from the British. Thousands of Hong Kong Chinese fled to American, Canada, Australia and elsewhere fearing a loss of freedoms. But the Chinese turned Hong Kong into the White Space from which they could learn how to operate a capitalistic system that would work for China. As they learned, they utilized those learnings to open new industries and new cities which allow intense capitalisitic style competition in a country that still values central planning. White Space has allowed the Chinese to hone a new Success Formula which is now growing much, much faster than anything in the "developed" world.
The Chinese have emerged as fierce competitors. The market has shifted. Fiddling with exchange rates may help U.S. manufacturers, but it is just so much short-term financial machination. While America sits in a debt crisis threatening to shatter real estate values and strangle economic growth, the Chinese are rapidly becoming the world’s economic leader through manufacturing. For Americans to think they will ever recapture the manufacturing lead is nothing but fairy tale thinking. That game is over, and they won. Americans can hope for a return to the past, but hope won’t grow the economy.
America, and Europe, must realize the market has shifted. Rather than use tactics trying to Defend & Extend old Lock-ins, leaders must Disrupt. White Space must be used to define a new Success Formula. Here America has strength. One benefit of the American structure is how much White Space is created through entrepreneurship.
Now, more than ever, it is time to funnel resources to those White Space initiatives to develop a new American economy. America went from the #1 agricultural economy to the #1 industrial economy via its ability to look forward rather than backward, to Disrupt and to follow those on the front edge of the economy into new businesses. And that is what must happen today. The focus must be on building upon leadership in advanced electronics and telecommunications, nanotechnology and bio-engineering (3 examples – not exhaustive) to find the next economy – and build a Success Formula capable of regaining economic leadership. Or, it can slip further into the Swamp of slow-to-no-growth like those countries which are the heritage of most American leaders – Britain, France, Germany, Italy and Spain. All wonderful countries with a spectacular past.
by Adam Hartung | Jul 31, 2008 | Disruptions, In the Swamp, Leadership, Lifecycle, Lock-in
I talk a lot about company Success Formulas. They are easy for us to see, and easy to discuss. But did you know that economies have Success Formulas as well? Countries, and the people who run them, have Success Formulas and Lock-in which can have a huge impact on our results.
China and India long have had Success Formulas based on limited trade, and reliance on central planning for everything they do. China focused most of its attention on its enormously long border with the Soviet Union, and it maintained its Lock-in to traditions centuries old as it protected itself from its most critical enemy to the west. After India found independence from England its leaders formed a sort of quasi-socialist government which constantly balanced trade and subsidies from the Soviet Union and the USA. Both countries, desperately poor, were more focused on protecting themselves from war with the nearby Soviets even if it meant widespread poverty – for which it asked the USA to help.
Then the Berlin wall crumbled, as did the Soviet Union. This sudden market shift challenged both countries to rethink what they needed to do. Quickly, both made changes in their policies which allowed them to open up White Space for doing more with the USA. Without a need to balance the US against the Soviets, it became in their best interests to find ways to be more pro-American. As a result, both quickly made advances to use capitalist principles for doing business with US and European companies (more US than Europe, by quite a bit however). Internally things didn’t change much in either country, as these White Space projects were really geared only on selling to America in order to gain badly needed foreign exchange which could be used for development as decided mostly by their central planning committees.
Today, despite the altered world order, the Chinese and Indian internal Success Formulas are largely unchanged. Think of the export zones in which all these offshore people work as "skunk works" projects within the country. In both countries, well over 90% of the population does not share in the wealth created by the offshore work. Poverty is still rampant, potable water scarce, and the population struggles for education and better circumstances. There was no "Disruption" within each country. Only a willingness to experiment in doing something different if it could improve its position by earning foreign exchange and increasing aid from the wealthy Americans. There was no Disruption, and largely no internal change in how either country felt economies should be planned.
Behind the business scene, largely not even known by most Americans, there have been ongoing negotiations about import tariffs and trade quotas between America and Europe – largely versus China and India. Organized under the banner of the World Trade Organization (WTO) these "Doha negotiations" have been going on for years (read about the Doha development negotiations here). These negotiations are where the official governments discuss things like subsidies and tariffs for agricultural products, and basic materials like steel. Its here where Asians yell at Americans for subsidizing farmers, which lowers grain costs, while these countries refuse to import American grain because they fear it will force their peasant farmers into starvation on their small, uneconomic farms. It’s here where the offshore players scream for market access to sell steel at their marginal cost, while Americans point out that their steel was made in grossly polluting plants, using labor barely paid above slave wages in conditions intolerable by any western standard.
This week, after 5 years of ongoing negotiations to allow for more trade growth (largely through more U.S. exports), the talks broke down. (read article here) Some say it’s "fair trade capitalism" versus "communism". But these labels don’t much help us understand the importance of this breakdown. As Tom Friedman pointed out in The World is Flat, we now operate in a global marketplace. Lots of people depend on those containers of goods moving over the ocean – or those terrabytes of digital information passing along the satellite connections and undersea cables. Everything from what we buy at the local store, to the price of rice, to the production of automobiles is affected by these negotiations. There is no doubt that our imports and their lack of imports has made a huge difference in the everything from the number of jobs in America to the value of the greenback. Because no country operates without some subsidies and tariffs, everyone has them. And right now, these agreements are highly valuable to the Chinese and Indians, while not so good for Americans.
The only way to understand how we can move forward is to understand the differences in the Success Formula for the American economy, and theirs. Americans long ago swallowed the bitter pill of agricultural reform. Today less than 5% of our population works in agriculture – compared to over 80% in China and India. Additionally, we have been willing to allow low-value work in things like textiles and metals production to go elsewhere (including Mexico and many other developing nations) while our workers moved into higher-value-added white collar jobs. The American Success Formula is to allow companies to fail, to allow market forces – brutal as they may be – to alter the what people do, and how much they are paid. So Americans see no problem with open borders – and even view trade as a form of detente foreign policy. Laissez Faire economics is largely acceptable.
But this is not true for the Chinese or Indians. If they allow food products to decline even 1%, there will be mass failures and no clear answer to where these near-subsistence farmers will find work. The governments fear mass starvation, because the central planners have no idea how they could parse out work to the remote, rural areas. If they had work. Because there is precious little manufacturing work – despite all the exporting done to the USA – given the size of their populations. And, if these central planners forced better working conditions in its plants they might lose sales to Korea, Thailand, or Bangledesh. It wasn’t long ago that shipowners who wanted to scrap their vessels didn’t bother with a dock, they just ran the ship ashore in Bangledesh where near starving people ran out when the tide left to cut it up with no safetry procedures at all (nor concern for collecting hazardous mateials they merely let go into the sea.) The Chinese and Indian negotiators are fixated on these countries that are even poorer than them! And their Success Formula is all about planning a better future for their country – without the swings of market-based systems.
Given these two very different Success Formulas, how could anyone expect negotiations to make a difference? Years ago the USA could easily give in, because it was rich, its population well fed and well employed, and its currency very strong. But now, the USA has much more at stake. Jobs are not as plentiful, huge government deficits have cut the value of the currency almost in half, and people are concerned about their future. The USA now has quite a bit to gain – and the Chinese and Indians a lot to lose. This change means we can expect other negotiations to find trouble reaching an accord – such as with the environment (read WSJ article here.)
In this environment, the only hope is for a significant Disruption in one or the other groups. Either the Chinese and Indians consider a significant switch away from central planning – toward market forces – and the inevitable pain this will cause, or the USA has to agree to far more central planning of its businesses and the detailed use of tariffs and other tools to protect its people – just as the Chinese and Indians do. Either action would be a major Disruption in what is considered permissible. But it is required. Until one group changes its Success Formula, this is a religious war unlikely to be resolved across a negotiating table.
The U.S. will take the hit for the talks failing – but that is unfair (Read FT article here). The Success Formulas are too far apart for meaningful change to happen. Until one party or the other Disrupts its economic approach, there can be no agreement. Which will change is yet to be seen – but given the mood in America today don’t be surprised if you see a lot more tariffs and other protective measures go into place – and pretty quickly.
by Adam Hartung | Jul 18, 2008 | Disruptions, In the Rapids, Leadership, Lifecycle, Openness
Yesterday IBM (chart here) announced it’s most recent quarterly results (read here). The good news was revenue climbed 13% and income from continuing operations rose 22%. This ability to stay in the Rapids is pretty amazing, given that a 10% growth at IBM means adding more than $10B per year. And despite being in myriad markets, the company produces about $260,000 revenue per employee.
A colleague said to me that he wasn’t surprised IBM had this nice growth. After all, they’re in high-tech. I had to tell him I was surprised at his naivete. IBM’s growth was not automatic, nor in any way assured, because of the general industry in which they compete.
Quite to the contrary, many high-tech companies struggle and fail. Remember Wang? DEC? Silicon Graphics? Compaq? Coopers&Lybrand consulting? "High Tech" is full of cutthroat competitors willing to drive you out of business in a heartbeat with suicide pricing and over-exuberant product claims. Don’t forget that IBM itself was on the brink of failure in 1993.
IBM, which walked away from the PC business after inventing it, became committed to mainframes – and to a lesser extent mini-computers – in the 1980s. This worked great until data centers started downsizing due to new techologies – and the floor fell out of revenues. With a change in it’s leader, and a lot of Disruptions inside IBM, the company lessened its dependence on hardware sales as it grew services sales in the latter 1990s. Since then, IBM has deployed an aggressive innovation program that promotes the development of new products and services across the panoply of high-tech. Now, in the face of terrible economic conditions IBM is demonstrating it can maintain growth, even though it is huge, by reaping the benefits from maintaining Disruptions and White Space in many technology, geographic and product markets.
Keeping your organization in the Rapids is not the result of where you’re located (like India or China), or your size (small versus big) or your age (young versus old) or the markets you sell to, or the technology you use, or how much you spend on R&D, or how much you outsource, or "general market conditions", etc., etc. Staying in the Rapids is the result of ongoing management attention to scenario planning, keeping your eyes on competitors, maintaining a willingness to Disrupt and keeping White Space alive and viable. And any organization can do those things – allowing you to grow even when competitors and customers feel the pinch of recession.
by Adam Hartung | Jun 30, 2008 | Defend & Extend, Disruptions, In the Swamp, Leadership, Lock-in
We have a lot of signs that we are in, or on the edge of, a seriously long and painful recession. According to Merrill Lynch today (read report here) the S&P 500 was down 8.7% in June, down 18.3% from the October, 2007 peak. GM is at a 53 year low, and swap spreads price in (for both it and Ford) a 70% probability of bankruptcy in 5 years – 30% in one year. Home prices nationally are down 20%, and there is no visibility when the decline will stop. All the major banks are at multi-year lows due to the crisis in mortgage-backed securities. For the first time ever, the Conference Board survey showed more people expect their incomes to decline than there are people who expect an income increase in the next 6 months. Oil and gasoline prices are at record highs. The dollar is at multi-year lows compared to other currencies and fears of inflation are keeping bonds from increasing in price.
Otherwise, everything’s great!
So, what are your plans? Do more, better, faster and cheaper? Often, the first thought is to cut resources. Cut back and "wait it out." Hope that you can survive the recession, and live to compete again "when things return to normal." But that approach is very likely to be your end. You may not survive the recession. If it lasts longer than anticipated, or is deeper than anticipated, you could well run out of resources and that’s that! But, even if you do survive, recessions do not end by "things returning to normal." Recessions end when the economy changes creating more growth. After all, recessions are about periods of negative growth – about economic stalls – and they end when something comes onto the landscape allowing growth to return.
It is during recessions that new products have their greatest likelihood of success. Examples:
- in the 1974 recession Japanese auto manufacturers made their great launch in the USA as they positioned their smaller cars as a good replacement for quality-short, high cost American made cars. GM, Chrysler and Ford never fully recovered and have lost market share ever since.
- in the 1991 recession many data center budgets were cut. When budgets returned computer usage switched to PCs – leaving mainframe and mid-range manufacturers in decline. This change eventually wiping out DEC and Wang – and caused IBM to convert into a services company.
- in the 2001 recession companies and individuals stopped magazine and newspaper subscriptions. As we moved into the mid-2000s people turned to the web for news and now many traditional publishers are in deep financial trouble.
Many companies retrench competitively during a recession. They try to Defend & Extend their old positions while waiting for the good old days to return. They blame the recession on external events (like oil prices or government actions) and think that the end of the recession will put them back in the same competitive position they were in before. They try to maintain the business while waiting for better days. But that’s not how the world works. While they are maintaining, other competitors are gaining ground!
The economy does not return to growth magically. It returns based upon new, more productive products entering the marketplace. During recessions is when customers are incented to try new technologies and products to see how they perform. They switch to products that may have less capability, but are less costly, and then realize they perform well enough to keep using them. Simultaneously, the greater use of these new products allows them to develop into better products, eclipsing older products and technologies. What might have been a "worse" product at the recession’s outset, but cheaper, becomes better and displaces the former product by recession end. Think about hybrid or fuel cell cars today. Or web conferencing.
Great companies do not try doing more of the same, but cutting costs, during a recession. Weaknesses which were starting to show up become full-blown breakdowns in a recession. Customers hurt by the recession no longer will pay for the high cost of the product or service and start searching for alternatives. They don’t stick on the same product, but become adopters of alternative platforms. When the recession ends, they are converted and never go back to the old technologies and products, allowing old competitors to fall into the whirlpool.
As you enter this recession, what are you doing to Disrupt your Success Formula? How are you attacking Lock-ins? What White Space do you have to develop new solutions that can pull you out of the sales funk? It may feel uncomfortable at a time of struggling sales to do new things – but now is when it is most critical to move beyond Lock-ins. Those products which looked less capable, but offered 80% of the traditional product at half the cost are the ones most valuable in a recession. Those customers who you could ignore during rapid growth due to their limited loyalty are the ones at the front edge of alternatives who can be most insightful about what it takes to succeed in the future. Competitors that were leaders in old technologies can be undercut with new products or services that provide new solutions while saving money – making them vulnerable while you bring new products to market.
During recessions "Creative Destruction" is high. Becoming a better, stronger company does not mean cutting costs and surviving. Coming out of a recession stronger requires developing a focus on the future – one unencumbered by your old Lock-ins and Defend & Extend practices. Then figuring out how to undercut competitors by using new solutions for which they are unable to react. Disrupt your thinking about what works, attack Lock-ins and become committed to testing new solutions. And set up White Space to figure out the technologies, products and services which will allow you to grow again.
Recessions are not pleasant. But Phoenix Principle companies can use them to better position themselves for future growth. And in the process slingshot past long-standing competitors who are less willing to Disrupt and use White Space.
by Adam Hartung | Jun 16, 2008 | Defend & Extend, Disruptions, General, In the Swamp, Innovation, Leadership, Lock-in
Here we sit with nearly $150/barrel crude oil. In the USA gasoline is over $4/gallon, and diesel fuel is nearly $5.00/gallon. For the first time since the 1970s, adjusted for inflation we have new highs for petroleum fuels. But we can’t seem to break our reliance on petroleum. We all know that petroleum demand gives a lot of power to leaders in unsettling countries – where peace is an uncommon word and decision-making bears no relationship to U.S. or European processes. And we know that long-term the oil will run out. And we know that we all would benefit, maybe even the climate would benefit, if we used other "renewable" energy sources. But we don’t. Why not – are we all collectively "stupid."?
Quite to the contrary, we all are acting very rationally. In the 1970s oil went from $2/barrel to $30/barrel. That caused such havoc it sent the U.S. economy into a tailspin. But the major supplier of oil, OPEC, quickly got the message and began pumping more oil. It wasn’t long into the 1980s before oil restabilized at $15-$20/barrel. The U.S. businesspeople breathed a collective sigh of relief, and went on about business without much change.
How brilliant of the suppliers. When the price became so high that Americans truly started investing in alternative fuel sources they quickly lowered the price. They made petroleum competitive enough that alternative technologies, which were less effective, economically unviable. Now we hear they are looking at the world with exactly the same analysis (go to WGN TV web site here for 30 second clip.) They have kept raising price until we are at the edge of making substantial investments in alternative energy – such as reactivating our nuclear program for electicity production – and now they plan to control supply to maintain price.
We are not foolish people, we are reacting economically correctly given current market conditions. We may hate higher energy cost, but we will pay it until there is a more economic alternative. And today the alternatives, from E85 gasoline to hydryogen cars to electric cars simply aren’t as effective and are costly. These alternatives probably would have far better performance given money and time to work on them – but who wants a "less good" solution at the same or higher price?
This is the way it is for all new technologies. They are less good until they find markets where they can be developed into a more competitive solution. These new solutions are what Clayton Christensen called "Disruptive technologies" in his excellent books The Innovator’s Dilemma and The Innovator’s Solution. OPEC’s leaders are pricing to make sure that oil remains the best economic solution for as long as possible – so they raise price but not too much.
The only way to change our reliance on petroleum is to develop a replacement. But who will pay? Who will pay for the less good solution? It would be an unwise consumer to invest in an electric car when it costs more and lasts a shorter time. Or in a hydrogen car when there are no refueling stations. Or for a building developer to invest in solar panels when it drives up the total cost of rent for his tenants.
Baring intervention, we will keep using petroleum until the supply declines to the point that there is no choice but to develop an alternative. When the petroleum becomes so rare that the cost goes so high that the other solutions become relatively cheaper. That could take many more decades. And could entail more wars and other very costly societal impacts.
The only way out of this connundrum is to use either penalties for the fossil fuel (such as taxes) or to provide subsidies to the less economical solution. And these penalties/subsidies have to be implemented by the government. But in a society, like the U.S., that is Locked-in to concepts of "free markets" and "no taxes" and "no subsidies" these programs are not attractive to politicians who must stand for re-election. What politician wants to be the one who voted to raise the gasoline tax $.50/gallon? Who wants to be accused of "pork barrel politics" for providing a subsidy of $3,000 for buying an electric car (especially if made in Japan or Korea)? Or giving a real estate developer a $200million grant to install solar panels? Or paying a farmer $50million and then giving a company $1billion to build a windmill farm?
As long as we remain Locked-in to our assumptions about the benefits of free markets, low taxes and no subsidies we will continue to march down the road of continued fossil fuel dependence. Economically, it will always be cheaper to sustain petroleum than develop a new solution. The only way we can overcome this will be to Disrupt our approach to energy. Future behavior is highly predictable when we have current industry executives, who want to sustain petroleum as long as possible, setting our energy policy. They will always make the case for drilling more holes, opening new mines and building new refining facilities. That, on the margin, is currently the most economic solution. Only by Disrupting our approach to energy – then creating White Space for new solutions to develop – can we ever change. We have to create the projects to test these new solutions. To learn and make advancements in order for the new technology to become economically more effective. And that can only happen in places which are not being managed by people that benefit by sustaining the status quo.
99% of the world’s population is paying money, today, to less than 1% for petroleum. This is a vast transfer of wealth. From not only the developed markets in Japan, USA and Europe, but China and India as well. This is making those who lead the middle east and selected dictator-controlled countries in Africa and South America incredibly rich. And none of that money is being invested in an alternative to fossil fuels. If we are ever to change, it requires we address our underlying assumptions about trade and lassez faire economics – New solutions require Americans disrupt their beliefs in doing what is always most economical today – and create White Space where we can develop new solutions that will someday surpass the oil on which we are all so dependent – and tired of complaining about.
All new solutions have a cost to develop. There is an early days when they are less economical than existing solutions. They are either subsidized in the early days, or they don’t happen. At least not until the old solution becomes prohibitively expensive. We subsidize commercial ventures all the time – such as the 20 consecutive years of losses which were subsidized by investors in Federal Express. Or the consistent reinvestment made by investors in unprofitable airlines. Or the losses sustained in the early days of Amazon and eBay. But America’s current Lock-in to old-fashioned economic notions about pricing, taxes and government subsidies means that little will be done to address reliance on petroleum. We could maintain the status quo for another 50 years. And that is unfortunate. Because now is a good time to recognize the Challenge, Disrupt our thinking, and implement White Space projects that could change our energy policy dramatically in just a single decade. But only if we are willing to address our old Lock-ins to an outdated economic Success Formula.
by Adam Hartung | Jun 12, 2008 | Disruptions, General, Innovation, Lifecycle, Openness
Yesterday the news services all reported that America’s National Center for Health Statistics now has determined the average person born this year will live to over 78 years old (read article here.) White women will live to 81, and white men to 76, while black women to 77 and black men to 70. Did you haar about this on the television, radio or see in the newspaper? What are you going to do about it?
We’ve known across our liftetimes that people are living longer. Substantially longer. So, hearing this sort of information becomes like the weather – we see it but we don’t really pay any attention. Unless there is a pending calamity (such as a thunderstorm) we pretty much ignore the information. But this really has some big implications. And for businesspeople, failing to plan for those implications could be deadly.
The most obvious implication is retirement. President Franklin Roosevelt declared the retirement age would be 65 when he established Social Security. Where did 65 come from? It was the life expectancy at the time. In other words, the program wouldn’t be too costly because at least half of Americans weren’t expected to survive to ever get a check. That’s no longer true. So can we continue to expect retirement at 65? If not, what does that mean for your business? When was the last time you hired someone knew who was over 55? If she can work until 75, is a 20 year potential loyalty too short? Maybe the company that seeks out people over 55 to hire will have an advantage? Will these older workers be more dedicated, harder working, less distracted by children at home and school, quicker to complete tasks due to more experience, make fewer mistakes due to better judgement, require fewer benefits (like child care or education subsidies), be more punctual and possibly even work for less pay?
Oh yes, but there’s the cost of health care. We all know health care costs are going up. Of course, 20 years ago people with strokes, heart attacks and cancer died. Now we know not only how to save their lives, but keep them alive for a very long time with medication, rehabilitation services and assisted living. Of course there’s a cost to this. How will we pay for this? Will health care jobs become less valuable? Will we import health care workers? Will we export health care work to foreign countries – asking people to go to India on vacation and replace a hip while there (medical tourism is one of India’s fastest growing businesses)? Will we change our lews and care standards so that health care is more automated and cheaper but with an allowable error rate? Who will benefit from changes in health care?
We used to accept health insurance companies saying that once you had one of these illnesses your insurance forever after would be extremely expensive – if you could obtain coverage at all. But should employers accept this? We now know cancer, heart attack and stroke survivors live decades without recurrences – so does it make sense to charge more for insuring these folks. If we keep adding up more and more people who are survivors of illness will we end up with the government the "insurer of last resort"? If we want to employ these people but we don’t because of heath care costs can we expect governmental intervention? Will we begin charging penalties for smoking, drinking, poor exercise habits? Will we lose our civil liberties as we strive to lower health care costs (no one thinks its a bad thing that we force everyone to wear a seat belt today – a clear loss of the civil liberty to choose whether to wear one)? What insurance practices will be necessary to compete? What insurance practices should employers seek out?
How about immigration? As we live longer the average age is going up as well. Where will the younger people come from to do all the manual work the retirees don’t do? Should we expect an impact on immigration reform that might involve allowing more workers into the country to offset the aging? Will that lead to an increase in demand for education and skills training? Will it change our use of English as the only language? Will it change the foods sold in grocery stores? Demand for housing, and the type of housing desired?
What about television programming? Will it remain totally focused on younger people in the "coveted advertiser age groups" below 54? Will it make sense to run movies at 7:00pm rather than 11:30 or midnight? What about retail stores, should they make changes for an older average population? Do huge shopping malls make sense if people are less interested in spending the day roaming this indoor paladium?
Average life expectancy is just a simple projection, made by the government every year. Easy to ignore while we run our business every day. But it has significant implications on many businesses – implications that could have an impact in as little as 5 years. Add onto that other easy projections – like urgan sprawl is causing water use to increase, and growing economies in China and India means exponential growth in demand for fuel, and increasing education in foreign countries means the standard of living is going up faster outside the U.S. than inside – and what do these mean for your business in 5 years? If you’re a homebuilder, should you be in the USA or India? If you run a college should you be opening a new campus in the U.S. or China? If you’re in health care, should your next hospital be in Chicago, or Thailand? If you’re a recruiter, should you be putting your management through foreign language school? If you make TV programs, should you expand your studio in Burbank, or open one in Bollywood? You don’t need a crystal ball. It’s not about having a highly accurate forecast. It’s just, are you really planning for a future that will most likely be different than the past? If you’re not, you’re sure putting a lot of faith in luck.
by Adam Hartung | May 15, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Lifecycle, Openness
General Electric (see chart here) announced today it is looking at ways to sell its appliance business (see article here). Great move! Too many companies hold onto a business for all the wrong reasons, and refuse to take action to keep themselves in the Rapids.
GE needs to Disrupt. The old CEO, Jack Welch, was famous for taking Disruptions. That’s how he got the nickname Neutron Jack. Keeping his eyes on the future, he kept GE focused on new opportunities and he used White Space to develop new Success Formulas. And while he had the top job GE performed admirably, growing multi-fold. If a business didn’t meet goals, Mr. Welch sold the business and invested his management talent and money in better opportunities.
Now GE finds itself nearing the Flats. Last quarter saw a profit decline. Two in a row, and the company falls into Growth Stall from which it has only a 7% chance of returning to consistent growth exceeding 2%. So that blip in a century-old record was a very big deal. And the good news is that the current CEO seems not to be ignoring it. He looked around, and found one of the long-legacy businesses of GE with little innovation and limited growth. While competitors were re-introducing front-loading washers, low energy and low water washers, and scads of various innovations in large appliances his team was #1 in share but far from #1 in market leadership. Management was happy to blame poor performance on the bad U.S. economy, and the stagnation in U.S. new home sales, planning on a recovery some time in the future. So sell it! That’s what Mr. Welch would have done, and that’s what Mr. Immelt is now doing. There are always opportunities for innovators in all markets, and keeping around Locked-in management teams that think they are doing OK because their markets turn south only breeds ongoing poor results.
Yes, GE was in appliances for 100 years. But so what? Today appliances are only 4% of this $178billion revenue behemoth. And GE needs to maintain its growth goal of 10%. The CEO can’t accept excuses. Millions of houses are being built in India and China and South America – and with enough innovation current homeowners will replace old appliances. Insufficient growth is a management issue – not a market issue. Markets are how you define them, and if your defined market isn’t growing go into another one! GE needs to stay in the growth Rapids, and having been around a long time is no reason to coddle a management team that doesn’t know how to maintain growth. GE is in a lot of businesses, and it has gotten out of a lot of businesses, and it can get into a lot of new businesses. Congratulations to the top executives for not letting history put the company at risk of going into the Flats and then the Swamp of low returns.
Too many leaders are unwilling to Disrupt. They let ties to Lock-ins keep them trying to "fix" a business. Doing more of the same, trying to be faster or cheaper, when what’s needed is a new Success Formula. GE is showing us that if you keep your eyes on the future, and hold tight to meeting your growth goals, you can’t afford to let Status Quo Police keep you focused on Lock-ins. You can’t try to succeed by merely Defending & Extending what you always did. You have to be willing to Disrupt and do entirely new things. You have to Take Action before it’s too late. Good job GE.
