by Adam Hartung | Apr 16, 2008 | Disruptions, In the Swamp, Innovation, Leadership, Lifecycle, Openness
It’s hard to turn around a Locked-In company. But it sure is exciting to see a CEO try. And that’s what is happening at Allstate (see chart here.) I blogged previously about this historically staid company that has begun Disrupting and using White Space to chart a new course.
Taking a page from Neutron Jack Welch’s book about how to be a Disruptive leader, the CEO recently decided to implement the "80/20 Management Principle" which he picked up from Illinois Tool Works (read full article here). ITW, by the way, happens to be one of the most long-term successful companies in the U.S., with decades of experience Disrupting and implementing White Space to grow. So the Allstate CEO said "let’s implement this policy, and see if we can be a better company." It doesn’t matter if 80/20 is a great idea or not – the point is that it is Disrupting the old approaches and making people change they way they work. Mr. Welch used rules like "Be #1 or #2 in your business or get out" and created DestroyYourBusiness.com teams to Disrupt people at GE – and open White Space for new growth. For us as investors, suppliers and employees what’s critical is that the CEO is Disrupting people, and causing them to look for new ways to manage the business.
The Allstate CEO is also on a path to use White Space to "reinvent" Allstate (read article here.) Yes, he’s implementing product extensions intended to defend the historical business. But he’s being clear to call these "horizontal" products and he says they really aren’t "new." Meanwhile, he is simultaneously setting up teams to develop entirely new "vertical" products that he intends to use for changing what Allstate develops and sells. These White Space teams range from new insurance products, to new investment vehicles (like mutual funds) to hybrid products that offer both insurance and investment – but different from the old-fashioned "whole life" policies sold our parents and grandparents.
Kudo’s to CEO Wilson, the management team, Chairman and Board of Directors at Allstate. After reeling from the hurricanes, they could have attempted to persevere with business as usual. But even Warren Buffet has said that the old insurance business will see costs rise faster than revenues. At Allstate leadership is using Disruptions and White Space to create a new future that will reposition the company for customer needs in 2015 and beyond. Good for them. They are on the way to becoming a Phoenix Principle company with long-term above average returns!
by Adam Hartung | Mar 29, 2008 | Defend & Extend, Disruptions, General, In the Whirlpool, Leadership, Lifecycle
Boy oh boy did the Chicago press decide to beat up on Motorola (chart here) this week. With the company’s announcement that Motorola does intend to split into two seperate entities – by spinning off the mobile handset business – the press decided it was time to unload. Headlines: "Pulling wings apart a risk for Motorola" (link here) – "Expert’s advice: Cut red tape and deliver" (link here) – "Motorola breakup ends comeback effort" (link here) – "Motorola must think beyond its batwings" (link here). Reading these articles, you would think the people running Motorola were dullards and miscreants with limited skills and poor business sense. But do you really believe that?
The management at Motorola is filled with very bright, hard working people. Most of them have been quite successful inside Motorola or from outside and recruited in. So the question becomes, if they aren’t stupid, how can this happen? As I’ve blogged before – leadership did a decent job of Disrupting initially, and all of Motorola opened White Space that launched new projects and products. Growth followed. But in mobile handsets leadership allowed the early success of Razr to succumb to old-fashioned notions of maximizing product revenue and profit. Management wasn’t stupid, it just listened to the siren’s song of "maximize profits by seeking market share and using volume to seek lower costs in manufacturing, sales and distribution." Who would argue with that? It made a lot of money really fast. It just left the company vulnerable to competitors – who acted fast and leapfrogged Motorola. And it allowed Defend & Extend practices, well entrenched in Motorola, to re-instill themselves.
So if management wasn’t stupid, what’s next?
First, Motorola does need to split. One business needs to keep doing the right things in DVRs, WiMax, headsets and 2-way radios. It needs to keep the funds from its success to re-invest in more White Space projects and not divert money as well as management attention into cellular handsets. The first business is Motorola – always has been – and justifies its brand image. This business is in the Rapids. This business has found ways to Disrupt its old Lock-ins, sell off busineses (like auto products) that don’t perform, bring in new acquisitions and set up White Space to find new growth markets.
The handset business needs to get out on its own – and either fail or turn around. Literally. Whereas the other part of Motorola got itself from the Swamp back into the Rapids, handsets isn’t just in the Swamp, it’s in the Whirlpool. The business would have gone into bankruptcy already if not supported by the rest of Motorola. These two businesses are in very different parts of the lifecycle, and require very different management solutions. So push it out the door and give it a chance, albeit a small one, to turn around.
The handset business needs to start over. New name, and a new leadership team willing to Disrupt abruptly. The key requirement is to so Disrupt the business that old practices are quickly abandoned – since they are what is causing the company to falter. The people, who know they are in trouble, have to see that old Lock-ins to practices like product reviews and technology stability – practices that are seen as good management – are what has gotten them into trouble and they have to be ignored. Those who have administered the best management practices – the Status Quo Police – have to be removed. Those who reinforced abiding by old practices have to go so that new best practices can be created around faster product launches and more market participation.
New handset leadership needs to very quickly give Permission for these bright people to unleash their skills. Permission has to be granted to rethink the technology, the products, the distributors — all aspects of the business. Handsets can’t win by doing what it did before, better. The business has to transform and that requires Permission to break all the rules – and White Space in which to try new things and see what works. Fast.
Great companies learn to let go early and fast. Quite simply, not all ideas pan out. Some products are huge successes, and some aren’t. Great companies keep Disruptions and White Space alive – launching new products and services. But if expectations aren’t met they cut quickly. They review why things didn’t work out as planned, and move on. Maybe too early, or too late, or wrong technology. But move on. Get over it, quit spending where its not making money. Love your launches, but don’t marry them. Keep nimble. Look at the businesses GE has entered, and exited, over the last 20 years. But Motorola, filled with truly innovative employees, spent too much energy on the "selection" process, launching too few products for the market to evaluate, and tried forcing them into success far too long. Does anyone remember Iridium (the failed effort at a satellite-based mobile phone network)? The faster the current distraction (handsets) is thrown over the wall the faster the rest of Motorola can get back to Disrupting and growing new Success Formulas in new markets.
And those in handsets have to learn to launch new products while existing products are still growing – and to let the customers decide what technologies and products are good rather than internal vetting and management. Whatever you call your company – you can’t move too fast finding a new Success Formula. With the size of ongoing losses, you’re in the Whirlpool fast on the way to extinction. It will take serious outside-the-box launches (like Apple launching itself into the music business with iPod and iTunes) to turn around your business. Only by Disrupting – recognizing the depth of your horrible situation publicly and as a team- then giving yourself Permission to overcome all the old Lock-ins and using White Space to redefine a new company can you hope to turn around.
It’s not about whether management is stupid. That is almost never the case. The issue is about managing, and overcoming, Lock-in. Those who learn to manage Lock-in by using Disruption and White Space keep themselves in the Rapids. It’s really, really easy, however, to follow the siren’s call of maximizing profits by letting Lock-in promote reduced innovation, reduced new product launches, reduced distribution experiments while maximizing sales and profits of existing products and services. Only by ignoring those calls can leadership turn around businesses by refocusing on Disruptions, giving Permission for truly different behavior and using White Space to develop new Success Formulas.
by Adam Hartung | Mar 25, 2008 | Disruptions, Leadership, Lock-in, Openness
Whenever we want change too often we can’t. Everyone will agree to change, but we are so Locked-in that we we can’t seem to behave differently, even though we realize poor performance requires change and we agree we have to do things differently. That’s why Disruptions are so critical. Disruptions cause us to stop – and realize other options are possible.
As we ended the 1970s the U.S. was struggling with a host of problems, and some pretty poor performance. The 1970s had seen a huge jump in petroleum prices, runaway inflation with interest rates nearly 20% on everything including corporate debt and mortgages, job stagnation with high unemployment, and tense international relations as American diplomats were trapped in a multi-month hostage situation in Iran. The decade’s last President (Jimmy Carter) referred to America as being in a "malaise". American GDP was going nowhere as Japanese producers looked like they were quickly taking over global manufacturing as well as demonstrating superior quality in a wide range of products.
So what happened in the 1980s to turn this around? President Ronald Reagan implemented a Disruption that changed the way almost everyone thought about many issues. Unlike any other President, early in his presidency Mr. Reagan fired all the striking air traffic controllers. This was unprecedented. He risked the recently deregulated airline industry, the image of government paid jobs (air traffic controllers were FAA employees) as "untouchable", his reputation and decades of labor/management relations by simply refusing to negotiate with the striking controllers and setting up a program to replace them all. In days, everyone in America knew something very different was happening. Whether they agreed with Mr. Reagan or not, everyone knew that this was not going to be "business as usual." Right in the core of American employment, the federal government, a leader had said he was going to do things very differently. And everyone saw he meant business.
This was an enormous Disruption. Not just to airlines and the flying public. This Disrupted how the federal government worked, and how employees and legislators thought about how government would lead. The Disruption was so dramatic that it caused people to say "what else could be different? If we don’t have to negotiate with unions, what else could be changed?" Within months Mr. Reagan took to Congress, and the American public, a radical idea popularized by a fairly obscure economist named Arthur Laffer saying that lowering taxes would actually increase government revenue. To all traditionalists, and most people, this seemed absurd. But in the Disrupted environment post strike-firings Mr. Reagan said "why don’t we give this a try. What we’ve been doing hasn’t worked. Maybe this will. We need to give this a try." And Congress passed the most extensive income-tax rate reduction in American history – literally halving the rates on top taxpayers and cutting rates for everyone else.
The Disruption opened the door to White Space. And once he had White Space, Mr. Reagan used it. He offered as experiments new programs to cut taxes, new user fees to fund parks and other government facilities, and the increased use of outsourcers to cut the cost of government operations. All of these had an impact on rapidly changing what was happening in America – and all were made possible by first Disrupting and then creating White Space to try new approaches. Helped by a release of the hostages on his first day in office, dramatically falling oil prices, and a much more effective federal reserve run by monetarists that had finally gotten control of the money supply leading to much lower interest rates and inflation, Mr. Reagan was able to try a lot of new things which changed the direction of America. But without Disrupting, none of his ideas would have been tried and who knows what the outcome would have been.
America’s Labor movement has never recovered from the Disruption Mr. Reagan implemented. As the attached chart shows, strikes have almost disappeared. And average incomes in America have not kept up with basic inflation, much less core costs like health care, for 25 years. But no one can doubt that Mr. Reagan changed things. And it all started by firing the air traffic controllers – a Disruption that caused people to stop, altered how everyone thought, and created the opportunity for White Space.
by Adam Hartung | Mar 22, 2008 | Defend & Extend, Disruptions, In the Swamp, In the Whirlpool, Innovation, Leadership, Lifecycle
A couple of weeks ago I blogged that the Chief Innovation Officer for Tribune Company – Lee Abrams – was unlikely to make much difference because he wasn’t given any White Space. He didn’t have permission nor resources to develop a new Success Formula – and as a result he would be allowed only to make minor adjustments around the existing Success Formula edges – a program which is way too little, too late for nosediving Tribune.
Recently Mr. Abrams was interviewed (read interview here), and the reported discussion leads me to be no more optimistic than I was before. While I grant Mr. Abrams with a lot of experience, good ideas and desire, he’s still without White Space and that means organizational Lock-in, and the Status Quo Police, will keep his efforts from yielding much improved results.
I was pleased to read that Mr. Abrams recognizes the difference in requirements between his success in radio and his challenges with Tribune. As he indicated, when he applied innovation to radio "what radio needed was discipline. It was all over the place and we disciplined it." That made a lot of sense for 1970s radio. Top 40 had ignited a huge growth wave, and the radio industry was in the Rapids. In the Rapids, businesses need to develop a Success Formula and become good at executing it so they can keep growing fast. Good business practices in the Rapids are all about Locking-In on the Success Formula and replicating faster than anyone else so you can grow the most and build the greatest resource base.
But after growth stalls it’s a whole different game. Once tipped into the Flats or Swamp successful innovation is about finding your way back into the Rapids. And Mr. Abrams seems to know that. When he took his new job at XM Radio a few years ago he had employees bring in memorabilia from traditional radio stations and he burned them! Similar to how he had a Chicago DJ bring disco records to the ball park and blow them up with explosives to mark the shift away from Disco programming! These actions were symbolic Disruptions – making people see that the past needed to be forgotten in search of a more successful future. Disruption is the first step to opening the mind, and organization, for a better future. Then it takes White Space, given Permission to truly develop a new Success Formula and resources to see the efforts through.
But Mr. Abrams isn’t blowing up any artifacts at Tribune. He sounds much more subdued as he looks to use the six smaller Tribune newspapers as "labs" to test things. He even says he "can’t do anything too radical right away." He’s not talking about necessary Disruptions. He’s talking about attempting some sort of evolutionary change within a horribly Locked-in and resource-starved company more focused on making debt payments than anything else.
Those 6 newspapers aren’t labs. The management in them is intent on making budget this year so they don’t have to cut more heads from the traditional business. Those managers are focused on saving their traditional business traditional ways. Mr. Abrams has no White Space there to develop a new Success Formula. Those papers have no spare resources, manpower or money, to spend on White Space projects. They want immediate cost savings or immediate revenue enhancements with no additional investment – and that means working around the edges for minor improvements that don’t run afoul of existing Success Formula Lock-in! If they see Mr. Zell offer resources to Mr. Abrams those newspaper leaders will be screaming bloody murder to Mr. Zell to give them the resources and they can be much more productive with them than any ideas being offered by Mr. Abrams. They won’t reject Mr. Abrams, but they will contend that they can do more short-term with the resources than he can! It will be tough for Mr. Zell to ignore those newspaper heads – after he’s cut their budgets for practically every line item!
Tribune desperately needs Disruption and White Space. I hope Mr. Zell finds it possible to really support his new Chief Innovation Officer by implementing some Disruptions. Things need to change in the newspapers, TV stations and radio stations FAST. The new leaders need to quickly Disrupt, so people realize change is expected. And White Space, with permission to do new things – radical things – as well as resources committed to their success is required. Give Mr. Abrams the tools to develop a new Success Formula and he might. But right now – he’s trying to hook a hose to the kitchen sink while rearranging the furniture in a house on fire.
by Adam Hartung | Mar 13, 2008 | Disruptions, In the Swamp, Innovation, Leadership
Sometimes the headline can sound so good. But then the article gives no reason to believe the headline.
Take the recent case of Tribune Company deciding to hire a new Chief Innovation Officer (read article here). The headline says Tribune is hitching onto a star from the radio industry to help innovate out of its huge media mess. Of course its primary business, newspapers, is declining in readers and revenues. And its television properties have declining viewership as customers shift to more targeted programming. And its radio stations with their all-talk format have been duplicated and specialized to the point that the early Chicago innovator is barely noticable and easily forgetable in the competitive fog. So innovation is badly needed at Tribune, and we all should be glad that the cost-chopping Mr. Zell is finally seeing the light!
Mr. Lee Abrams is very talented person with a lot of historical success. I’ll grant him that he may well be perfect for this job. But he’s going to fail. Why can I say that?
- Firstly, because there have been no internal Disruptions at Tribune since the budget slashing began 6 years ago and accelerated under the change of ownership. The talk is all about finding some way to Defend & Extend the old businesses. Even the article indicates the company is hoping Mr. Abrams will find some golden D&E practice that will keep the newspaper competitive in the face of mounting internet competition.
- Secondly because Mr. Abrams was not given White Space. He has not been given Permission to do whatever he wants to find a new future – even if that means getting out of newspaper production faster, or dropping out of cable TV for more internet plays. And equally important he has not been given the Resources to create anything substantially new. Face it, Tribune is a multi-billion dollar business. For innovation to matter Mr. Abrams will need billions to invest. If the way to make a fortune in the future Media industry is to create or buy the next YouTube or Facebook or Yahoo! where’s he supposed to get the money for that? Tribune is using all its free cash to pay for those hugely expensive junk bonds that financed going public. Unless Tribune sells not only the Cubs but also WGN and some other properties, then stops trying to shore up great, but dated, Chicago Tribune and L.A. Times newspapers, there simply isn’t anywhere near the money needed for innovation to make any marked difference on this company.
- This comes way, way too late as a marginal effort. Almost all the Tribune assets are in no-growth businesses. And Tribune is huge. To make a difference, it will require an enormously big shift. A very dramatic change. Not just a big cost cutting. Not just a change in advertiser strategy. Tribune can’t wait on a bunch of small projects to bear out over the next 4 or 5 years. We’re talking about needing a wholesale restructuring of the business to get out of things that are quickly losing value and making giant bets in new things. And that is very risky. This project comes very, very late in the lifecycle at Tribune. The company can see the Whirlpool on the horizon. By letting the Re-invention Gap get so large between what Tribune does and what the future markets want it has created a very risky transition requirement – and under the best of circumstances we simply have to remain skeptical.
I’d like nothing more than to read about a big internal Disruption at the Tribune. Like replacing the CEO with an executive from Google. Or a program to convert 30% of its newspaper advertising customers to the internet over 24 months – thus starting a big transition from paper to digital news media. Compare the Tribune portfolio to News Corp. and you can get a sense of the kind of Disruption needed to get Tribune into a growth mode. Sell off substantial assets NOW. There are many buyers that want to get their hands on the L.A. Times and Chicago Tribune and Cubs. Do it NOW while the greater fools are out there ready to buy. Before readership drops another 15% and ad revenues fall another 25% and the Cubs potentially end up in the cellar (who knows, we’d all love them to win the World Series – but do you build a corporate transition plan on that?). Then give Mr. Abrams that money, and announce he has permission to do whatever it takes to create a new Success Formula. I’d love to read that headline and article. But so far, really….
by Adam Hartung | Mar 4, 2008 | Defend & Extend, Disruptions, General, Innovation, Leadership, Openness
When markets shift it’s better to "get it fast" and make changes than "fight to the death" to protect the past.
The Chicago Tribune recently reported results of music compact disc sales (read article here.) It may not surprise readers to learn that nearly half of all teenagers bought no (not one) CDs last year. I’m 50, and I remember when teenagers were the mass consumers of 45’s and then LPs (remember small records with big center holes and "long playing albums") then later 8-tracks, cassettes and eventually CDs (how’s that for a walk down memory lane folks!). So to learn that the percentage of CD sales to teenages fell to 10% from 15% in 2007 was a bit surprising. When my sisters and I were young, teenagers were the vast majority of the market!
What does this tell us about the future? CD’s have a pretty lousy future. In 10 years I’ll be 60 – and who knows if I’ll be buying any CDs. But we know that these teenagers aren’t going to start. They’ll never buy a CD. If you’re a music company that depends on CD sales (like EMI, Sony, Vivendi/Universal or AOL Time Warner) you had better be pretty worried. Whether these companies will ever Disrupt their Lock-in and get a new approach is far from clear. They have ignored the trend for a long time, and Locked-in businesses are well known to remain Locked-in until they, quite literally, fail (at least in that market).
Do you remember how people bought all those albums or tapes? Does anyone remember Musicland – the retailer that in the 1970’s had 20%+ of music sales? Or that Virgin was begun as a direct mail company selling music through the mail? In 2007 the number of sold CDs fell by 19%! While sales of digital songs grew 45%! Today Apple, the company once known for a niche computer called the Macintosh, is the number 2 retailer of music in the country – without a single music store! Apple displaced Best Buy to take the #2 position (of course, #1 is Wal-Mart, but how long do you think that will remain as trends continue?) Clearly, the company that "gets it" has made a fortune, while the ones locked-in to traditional physical product sales and bricks-and-mortar have fared far more poorly.
Do you remember Wayne Huizenga? He was the megalomaniac who built up a car dealership into a network of dealerships making a fortune. He also bought the Florida Marlins, and they became World Series winners. And he bought Blockbuster Video, converted it to Blockbuster Music. So now you think, "what a dope." Guess again. This guy gets it fast. He sold his car dealerships when folks were willing to pay a lot. And he sold his ball players, capitalizing on the world series to make a big profit before overspending to try a repeat – as most owners have done. And he was fast to shut those Blockbuster music stores and sell the real estate before he got stuck with a bunch of unsellable inventory. He got it fast — which is more than we can say for the traditional companies mentioned above. Markets are constantly shifting. Those businesses (and their leaders) that Get it fast can avoid costly Defend & Extend – and build on early wins (like Apple) to huge success.
by Adam Hartung | Apr 26, 2007 | Disruptions, In the Rapids, Leadership, Openness
Lately I’ve been pretty hard on companies in this blog, so today I’m taking time to highlight two examples of companies following The Phoenix Principle on the road to long-term evergreen success.
Firstly is Motorola (see chart here). As previously blogged, Motorola is under attack by corporate raider Carl Icahn who would like to borrow a lot of money and pay it, as well as existing cash, out in a special dividend to investors. In other words, do to Motorola what Sam Zell is doing to Tribune Company. In the face of this effort, Motorola announced Tuesday it is buying Terayon Communications Systems to gain more capability (specifically software for delivering video) to it’s television set-top box business (see article here). Keep in mind, in 2009 the television system switches from analog to digital and the demand for set-top boxes to go with all the existing analog TVs is sure to grow – possibly exponentially. This acquisition is a great example of continuing to fund the White Space in a market that is in the early stages of the Rapids. Now that’s a great use of corporate cash – and will provide a real return to Motorola investors. If Motorola leadership and investors can keep the shark away.
Secondly is J.P. Morgan Chase (see chart here.) J.P. Morgan Chase is run by Jamie Dimon. Mr. Dimon is a very colorful character well known for short patience. When Jack Welch institutionalized White Space he was nicknamed Neutron Jack. Mr. Dimon may someday get a similar monicker for his willingness to Disrupt his own people and organization. And this week J.P. Morgan announced the acquisition of technology company Xign (see article here). Xign has been a pioneering company in developing the e-payments system for automated commercial (or busineess-to-business) transactions. This is projected to become a $1.7 billion market by 2010, even though you may never have heard of Dynamic Discount Management (DDM for short). Here we see a Disruptive leader investing in a new business opportunity at the front end of very high growth – exactly the kind of White Space that should excite investors. Compare this with the actions taken by J.P. Morgan’s primary competitor – Citigroup – last week when they laid off 5% of their work force and starting shutting offices and centralizing decision-making in order to protect their faltering old Success Formula.
Far too many leaders use Defend & Extend Management and kill the growth of their company. They manage for protection of the old Success Formula and wipe out all capabilities to Disrupt. They refuse to invest in White Space in favor of trying to prop up the old Success Formula. But there are reasons to be optimistic. There are companies using The Phoenix Principle and positioning themselves to migrate their Success Formulas forward to meet new Market Challenges. You just have to keep your eyes open and look.
by Adam Hartung | Apr 4, 2007 | Disruptions, General, In the Swamp, Leadership, Lock-in
The Chicago Tribune on-line published an interview with new owner Sam Zell. You can see full article here, but parts are worth repeating:
Q: How do you get your information? Do you read newspapers? Do you read online?
Zell: I’ve never read online. I don’t have a Blackberry. I read five newspapers a day, Chicago Tribune, Wall Street Journal, New York Times, LA Times, Financial Times. And I read everything. I read Forbes, Fortune, Business Week.
The new leader of a business who’s very viability is threatened by a new technology does not use it. And we’re to expect he’s prepared for the Market Challenge facing Tribune?
Q: Is it OK for a (top) manager to say, ‘I don’t want to do what you want me to do?’
Zell: No. He has the opportunity. He has the job. Whatever the terms of the job are, he has to live by them. All I can tell you is that, I am your boss and I tell you to do something that is not unethical, but is in line with some big corporate program or directive or philosophy, you’ve got a choice. You can play or you can go work for somebody else…Everybody’s entitled to an opinion. But once you’ve chosen to work with somebody and the lines of the story are clear, I don’t know how you could operate a business if you lay out a strategic plan and then have 20,000 people opt out.
Does this sound like a leader prepared to use White Space in order to find a solution to the thorny market Challenges which have led the Tribune into a 5 year slide?
Q: In the newspaper business, raising revenue means either raising advertising rates or raising circulation or a combination of both. At first blush, which of those makes more sense. How do you do that?
Zell: This is for sure an amateur guess at this point. But I would think the biggest single issue is circulation and circulation penetration. And I think the issue is what if, how do we do this, what’s our cpm? And how can we lower that cpm to make us more competitive with other forms of media. Those are the kinds of questions that I think are relevant. I think the answer is probably we have to find ways to increase circulation and to increase penetration.
Let’s see, the biggest issue is circulation, and that is down because more people, especially young people, are getting news from places other than newspapes (especially the web). And the new leader doesn’t use the web, or even a Blackberry. So how’s he planning to increase circulation? Does he think Tribune has been ignoring this problem the last 5 years? Is he aware of some "silver bullet" for newspaper circulation problems that isn’t known to people at Chicago Tribune, Los Angeles Times, New York Times, Washington Post, et.al.?
Q: But the ESOP isn’t going to have a seat on the board. Why not?
Zell: The idea was that two of the independents would be run by the ESOP. But in the end, it was all about alignment of interests, and nothing else matters. I’m putting $315 million into this deal, cash.
Sounds pretty clear who’s in charge here. The 65 year old guy that reads 5 newspapers a day (how many people do that? how many under 40?) and doesn’t use the web. And he’s not exactly open to ideas from the employees, who ostensibly own the company but have no representation.
Sam Zell has hooked his wagon to the Tribune management team that has not addressed the market Challenges for the last several years. He is comfortably blind to these Challenges. He’s going to use $7.2billion of other people’s money (bond holders) to try and get a return on his $315million. As a real estate magnate, such use of leverage fits his personal Success Formula. But the Tribune is not just a building on Michigan Avenue. Customers and revenues are falling, and there’s not a limited amount of news availability – like there is land.
Defend & Extend Management is planned at Tribune Company. And that means more cost cuts and further erosion in the business. Where’s Steve Case (former CEO of AOL) when you most need him? At least he knows how to use the internet.
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by Adam Hartung | Apr 2, 2007 | Disruptions, In the Swamp, In the Whirlpool, Leadership, Lifecycle
Imagine this: you’re in an industry that hasn’t changed much in 100 years. For the last 5 years the number of customers has been declining, as have revenues. Your long-time users are aging and younger potential users say they have little interest in your product. User interviews regularly say your business is out of date. And new technology exists which completely obsoletes your product. Would you find the answer to your dilemma in loading your company up with a HUGE amount of debt while selling off your most profitable assets?
That is of course the situation at the Tribune Company (see chart here), owner of The Chicago Tribune, The Los Angeles Times, the Chicago Cubs and 25 television stations. If you ever wanted to know when a company moves from the Swamp into the Whirlpool, this is the time for the Tribune. The Tribune Company has been horribly Locked-in to a failing Success Formula with declining results for years. Now it is going to make any alternatives impossible by cranking up the debt load while selling the Cubs and other assets that are profitable and have potential for future growth. Instead of using White Space to find a new Success Formula, which would require more understanding and success on the web, the Tribune is moving to Defend & Extend it’s dying newspaper business! (See article on company sale here.)
The Tribune’s newspaper business is in decline as readers abandon traditional print news for the web, and advertisers are following the subscribers. So not only is the company selling off the Cubs and its investments in growing targeted television, but it is adding $7Billion of new debt (and yes, it’s keeping all the old debt) in order to buy back all the outstanding equity. Yes, they are ADDING debt almost equal to the entire oustanding market value of the company ($8billion). Shades of Michael Milkin and the Junk Bond craze! What paper equity remains will be in an ESOP. But for $320million (that 4% of the new debt added) billionaire Sam Zell gets a warrant to own 40% of the equity should this ever work out. That $320M is less than 1% of the $39billion Sam just recently got for selling his REIT business – so you could say for him this represents a relatively small portfolio investment in a long shot. If Tribune survives, his $.32B becomes worth $3.2B – or 10x return (see MarketWatch article here).
And of course all of this is for a valuation that is only half what the business was worth in 2000, and only 60% of its value as recently as 2004. But that of course reflects the market Challenges which face the Tribune going forward. Challenges completely ignored in this crazy financing scheme.
Meanwhile, the employees of the Tribune now get to spend all their energy looking for yet MORE cost cuts – after 5 years of cost cutting – in order to service this staggering debt load. Just what you need in a situation where you missed the new technology boat. They now have no resources for creating and managing any White Space to find a new Success Formula. Amidst these financial machinations, the newspapers have turned over the publisher at the LATimes and several leading editors in just the last year (see latest article on editor resigning in protest here) demonstrating the disarray inside the business.
The forecast here is not hard to make. I live in Chicago and read the Chicago Tribune. It, as well as The LA Times and other Tribune-owned newspapers have a great history and many Pulitzer Prizes to their credit. But that was the past. If you are an investor, or an employee, or thinking about being a bondholder in this new enterprise I would be looking for a far better future than is promised at Tribune Company.
by Adam Hartung | Feb 17, 2007 | Disruptions, General, In the Swamp, Leadership, Lifecycle, Lock-in
Dell Computer has had a rough go the last couple of years. They’ve had some batteries catch fire – not good for marketing. And they’ve had some SEC investigators looking through their books – not good for investors. But neither of these problems are really that unusual or monumental for a company the size of Dell. The big problem has been that the company isn’t making the money it once did, and it’s sure not growing like it once did. That has stripped the company of 40-50% of its value, or about $43 billion in market loss for investors (see chart here.)
So what’s the response? At the beginning of this month the Chairman and namesake, Michael Dell, announced he was removing the CEO and taking back the reigns (see full article here.) Should we now expect a turnaround?
Michael Dell pioneered the Success Formula that made Dell Computer famous. Simply put, Dell sold directly to customers, outsourced everything they could, used other people’s technology (no R&D), focused on the supply chain to shorten manufacturing and distribution cycles and kept prices low. And anything that wasn’t part of that Success Formula does not exist at Dell. This Success Formula produced great results, and Michael Dell locked it in with every conceivable software product, metric and decision process he could. There was/is no variation at Dell, just execution.
Unfortunately, this Success Formula was not impossible to copy. Competitors not only matched the supply chain expertise of Dell, but added onto it with product innovations, credit terms for corporate buyers, and enhanced peripheral products that expanded the total customer purchase. They matched Dell, and did the company one better. So customers migrated to these competitors. Dell didn’t suddenly lose its Midas touch. Execution hasn’t faltered. Competitors just kept getting better in this dynamic market, and execution wasn’t enough to maintain sales growth and margins.
Now the king of execution is returning. What can we expect? More of the same, of course. The implication, and stated objective, of Michael Dell’s return is to get Dell "back on track." That’s back on track to what they did a decade ago. Is that likely to turn around their fortunes, in a more competitive marketplace with yet more competitive variables?
Dell doesn’t need more Dell. They need more innovation. There are no Disruptions at Dell. And this change of leaders will not create an internal Disruption demanding change. There is no White Space at Dell. I blogged on this previously, and a PR employee responded (you can read the comment by going to that blog) that Dell is a great company. But even he could not identify any White Space in Dell. Despite my emails to him asking for any examples of White Space he could provide — any at all. Without White Space, how is Dell to develop a new Success Formula to produce results in 2009 like they had in 1999?
Michael Dell and his company was a fantastically successful pioneer. His vision helped create a Success Formula that greatly assisted putting a PC on nearly every working desk and in nearly every home, not to mention in the hands of most students, salespeople, and other mobile worker in America. But that Success Formula has already passed the point of diminishing returns. Unless Dell learns to Disrupt and implement White Space, look for the future to be more of the recent past. Results included.
