by Adam Hartung | Dec 28, 2008 | Current Affairs, General, Leadership, Lock-in, Openness
It's that time of year when people take to making forecasts. From Marketwatch.com (see how you can enter as a forecaster at Barron's here) to networking groups, organizations are asking for forecasts. Many executives will turn to their favorite journalist, economist, internal strategy leader, or perhaps marketing leader and ask for a forecast for 2009.
But seriously, why bother? Did you read any forecasts in December of 2007 that came close to predicting the events and outcomes of 2008? From current events (such as the U.S. election), to the markets (such as the DJIA or S&P 500) to business conditions (such as GDP performance, manufacturing indeces, unemployment), to commodities (such as the price of oil, corn and gold) no one guessed hardly any of these correctly.
Actually, it's surprising anyone tries to forecast. All forecasts are based upon taking some historical time series and predicting it into the future. The forecasting process itself is flawed because it tries to project some sort of similarity to the past – with variations explained by some predicted event. Things really aren't much different than they were when Benjamin Franklin made his forecasts in Poor Richard's Almanac. The odds of things going along the same are not very good, and the odds of predicting the unusual events is almost impossible. So forecasting doesn't help managers much at all – unless we can expect things in the future to be mostly like the past. And after 2008 – who would think that's very likely?
Instead of forecasting, we should spend some time now developing scenarios. These vary considerably from forecasts because they don't project the past. Instead, scenario planning starts by looking into the future, and describing a scenario. Then, working backward to see how we should prepare in case that scenario happens. Rather than planning from the past, the process begins with a view of the future. Because we all can recognize major trends, like uncertain energy supplies, ongoing religious conflicts, increased globalization of trade, declining value of labor, etc. it's actually a lot easier to imagine what the future will look like. Building an impression of how people are likely to live, based upon how we see major trends emerging, is more accurate than trying to forecast based upon history. After all, we all knew the U.S. was in a recession months ago – but it took the experts almost a year to identify a recession had begun! The closer people are to the "data", especially historical data, the harder it is to identify shifts.
No one should plan their future based upon a single scenario. Because none of us know which trends will dominate, or be offset by another trend. So it's best to develop several scenarios. By working through multiple views it is possible to best understand the strategy most likely to succeed given multiple possible outcomes. Most importantly, this helps us understand how we're likely to perform, given our current Success Formula and the various scenarios.
Scenarios can help us understand likely market shifts. Maybe not today, but likely. And then to evaluate our Success Formula not on how we've done in the past, but how we're likely to do in the future. When gaps emerge, we can then assess how to Disrupt outselves – and determine what White Space projects to pursue in order to evolve our Success Formula to remain competitive.
Forecasting can be fun sport. But as a business exercise – it's not worth the bother. No one trusts the forecast, so no one uses it. And worse, it will most likely further Lock-in the old Success Formula by projecting a future not dissimilar to the recent past. What will help us succeed in 2009, 2010, 2011 and onward is to have scenarios which help us plan for the future and pull us toward better competitive position as things change.
by Adam Hartung | Dec 10, 2008 | Current Affairs, Defend & Extend, General, In the Whirlpool
Illinois' Governor Rod Blagojevich has burst onto the national scene. Not in a good way, obviously. What's surprising, though, is how people are reacting to the fact that today he returned to work and has shown no inclination to resign. They seemed surprised. They seem perplexed that he did not immediately resign. One newsperson on superstation WGN television said he thought this case was in greater need of a psychologist to explain the governor's behavior than a lawyer. I could not help but chuckle when I heard an NBC political analyst on "Countdown" say the "logical" thing for the Governor to do was resign. None of these people are taking the time to think about the Governor's Success Formula.
Rod Blagojevich is the product of some pretty rough-and-tumble politics, still carried out in the wards around Chicago. This is not to imply any wrongdoing on the part of Chicago's Mayor or his administration, nor any of the state employees of Illinois. But reality is that for many years politics in Chicago meant, "you wash my hands and I'll wash yours." While things have changed at the top, for many people in the bowels of government work, this Success Formula was ingrained. For many, if you want your street plowed of snow early, you make sure you contribute to the Alderman's re-election fund – and that was considered absolutely normal. In the old Secretary of State's office you could buy a truck driver's license without even taking the test. Even though several leaders have changed, there's been no real Disruption in local politics and so for many participants, many work teams and some functional groups, this Success Formula has endured. (Although the Secretary of State's office is a model example of change – and nothing at all like it was for many years under previous Secretaries.)
Governor Blagojevich got his "jump start" into politics by marrying the daughter of a powerful Chicago Alderman – Richard Mell. Mell has been powerful for a long time, and as a result he's learned how to play big time, hard ball politics. You don't back down easily, and you play each and every situation to win – not tie – and certainly not to withdraw. You never quite know what might happen, and those who attack may be attacked before they can make something stick. Play to win, all the time, every time. Horse trading is part of the game.
I would not be surprised to learn that similar hard-ball poiticing is common in many city halls and state offices across America – and between most of our representatives in the Congress and Senate. Even Presidents learn how to make compromises – albeit a lot more subtly and ethically than how we're hearing the Governor did it. To some extent, he seems less the "political criminal" (as characterized by the U.S. Attorney) than the politically naive who got too high without the proper training in "how to get things done" politically.
A result of his training was that the Governor learned to play to win. Never give up. Thus, he's utterly predictable. From his point of view, so far he's been convicted of nothing. He may be disliked right now – but there are many examples of politicians who see themselves publicly rehabilitated. In the 1980s a highly discounted politician, who had not even bothered to pay taxes for more than a decade, was elected Chicago's mayor and was quite popular (Harold Washington). Why would the Governor give up? Why resign? He still has the power of the governorship, and any effort to impeach him will take months – if it should succeed. Until the day comes when he absolutely, positively has to stop – why stop?
That's the way of Success Formulas. They don't work by other people's rules. They don't work by consensus, or public opinion, or even common sense. George Wallace extolled the virtues of segregation and even launched a campaign for the Presidency long after segregation was widely deplored in America. Richard Nixon felt humiliated as Vice-President by the lack of respect he was given from Eisenhower – including a complete lack of endorsement when he ran for President. And of course he lost his first run for President, and he was not well liked in his own party. Yet, he successfully positioned himself to win 2 terms as President before resigning in disgrace due to his involvement in ordering the Watergate break-in. None of these people did what would seem "normal" to most people. But they were entirely consistent with their Success Formulas.
We can expect that Governor Blagojevich will work very hard to protect himself, his family and his future. After all, if you listen to the counts against him you can see that was exactly what he was doing as Governor. There is no reason to think he will change that behavior now. While he is now severely challenged, and he has a big stack of problems, he has not been Disrupted – and he has not taken on any White Space where he would try anything new. To the contrary, he is in the same job, with the same people, doing the same work. What he will do is very predictable – it will be the action most likely to help himself and his family. You don't need to be a psychiatrist to understand the Governor – you just need to look at his past and understand his Success Formula. And notice that nothing has happened which is likely to make the Governor think he should change that Success Formula now.
After all, his predecessor (a Republican) didn't change his Success Formula and now the #2 Democrat in the U.S. Senate (Dick Durbin) is asking the President to pardon him for past wrongdoings so he can get out of prison. Why wouldn't Blagojevich ask the incoming President to pardon him in exchange for stepping down from the Governorship (for the good of the state)? To this day, many people think that was "the deal" Nixon made with Congressman Ford when he gave him the Vice-Presidency - which led to him becoming the first President to never be voted on by the American population when Nixon resigned. It was rather quickly that the new President Ford pardoned ex-President Nixon "for the good of the country."
Never underestimate the power of Success Formulas. People will follow them long, long after their results have proven unsatisfactory. Lock-in, established years (often decades) before keeps the person going in the same direction despite the lack of recent success. As small wins come in, they reinforce that the Success Formula will work again, if just adhered to closely enough. And many leaders – in government or in industry (don't forget Bernie Ebbers at Worldcom or Mr. Skilling at Enron) will deny wrongdoing and remain committed to their course even in the face of considerable evidence that to change would be more beneficial.
Of course, if you allow yourself to be Disrupted – and you keep White Space alive in your life – you can avoid this problem. You can learn to adapt your Success Formula to produce better results as environments around you shift. But that has not been the way of Governor Blagojevich. Do you allow Disruptions and White Space in your life? Or are you risking a drift into weaker results while remaining tied to old Lock-ins?
by Adam Hartung | Dec 9, 2008 | General, In the Rapids, Innovation, Leadership, Openness
We keep hearing about all the bad news in this recession (Tribune Company, GM, Circuit City for example). You could easily believe there is no good news. But if we look a little harder we can see that there are businesses which are looking forward and taking actions to build market share – winning against competitors that are reacting by retrenching and hiding in a foxhole. There is a better way to manage when times are tough than cutting costs and "waiting for times to get better."
Ever heard of Tractor Supply Company (see chart here)? If you live in a big city, probably not. As the name implies, this retailer has largely supplied products to farmers and competitors in the agrarian economy. Of course, the number of individual farms has been declining for decades as the economy shifted from agrarian to industrial – and now to information. So you would expect Tractor Supply to be disappearing from the retail landscape, especially during times so difficult that much better known retailers are disappearing and filing for bankruptcy.
But that is not the case. Tractor Supply realized that while "production" farms are fewer and becoming a less attractive market, on the periphery of more and more cities there were people with unsupplied needs. And as cities expanded, and corporations moved headquarters to the suburbs, these ex-urban and suburban families were increasing the number of pets – and in some cases picking up pets like horses and other animals traditionally considered livestock. "Gentleman farms" of only 5 or 10 acres were increasing, where families escaped urban lifestyles to enjoy a connection with gardens, small crops and a few animals. They also needed tools, and hardware for fences and buildings – in short a panoply of products not readily available at Home Depot. And with that insight to the changing market, Tractor Supply has been expanding. The chain has 834 stores (and you never heard of them?). The company opened 20 new stores last quarter, compared to 21 a year ago and 70 this year compared to 63 last year. They are now opening 2 stores in outlying Chicago. The company is growing more today than last year, and moving into new markets where even Wal-Mart has chosen to leave. (Read article about Tractor Supply growth moves here.)
Another great example is Papa John's pizza restaurant chain (see chart here). We keep hearing about how people are eating out less now than before. The marketplace is struggling, as chains such as Bennigan's have shut their doors, unable to draw enough customers. So analysts keep talking about more failures in restaurants. Yet, Papa John's ignored the analysts and figured out a way to grow.
Instead of restricting itself to the "tried and true" revenue growth approaches used by most chains – such as television advertising and newspaper coupons – Papa John's studied how people were using the internet, and created White Space to develop new marketing approaches. They created a one-day campaign, flooding websites such as MySpace.com, NHL.com and others with display ads, via Google ad placement. The result was a 20% revenue jump. By driving people to order on-line, rather than old-fashioned telephone orders, they saw average ticket sizes increase 10-15% due to increased ordering. And they have connected many more customers to Papa John's email marketing. For example, on Facebook the number of Papa John's fans increased from 10,300 to almost 187,000 – an 18X increase in just 3 weeks! Now Papa John's is adding more on-line opportunities for customers, such as advance ordering (up to 21 days – say for a party) and "repeat last order" capability to make transactions fast and easy. As the world moves to the web, Papa John's is learning to use the web to connect with customers and grow! (Read about Papa John's on-line marketing programs here.)
It's easy to bemoan a recession, say there's little you can do, and start whacking at costs. It's easy to get down in the dumps, and lose interest in trying to do better. Tough market news can breed discontent and worry and inaction. In the cost-cutting process you well might lose some of your most valuable employees – and leave yourself quite unprepared for future competition (read here at Harvard Business Press about how traditional recessionary cost cutting reduces competitiveness). Even worse, while you tread water, you greatly increase your vulnerability to competitors who focus on market shifts, analyze competitors to upend them, Disrupt their old behaviors to create future focus, and use White Space to try new things which can create a much better returning Success Formula in the changed marketplace. These Phoenix Principle companies are the ones that will lead future growth in revenue and profits by not running for foxholes today, instead concentrating on how they can Disrupt and use White Space to become a far more successful competitor.
by Adam Hartung | Dec 8, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
So we now hear that Congress will loan $15billion to GM, Ford and Chrysler intended to keep them going concerns until at least March. We've been told that there are requirements on the loans that will better the industry. But honestly, there's nothing new being proposed that makes any difference, nor the proper teeth in Congress's proposed bill. (Read about the bill here.)
The bill limits executive bonuses and severance packages. But why does it let management (and the Boards of Directors) keep their jobs? It is clear that these leaders, and their management teams, led these companies into desperate circumstances. They put their bondholders, equity investors and employees all at risk. They passed the "brink" and got to the point of requiring government assistance to stop a cataclysmic disaster. So why are these people left in their jobs? How can anyone expect a really changed industry if the people who sold off assets for 2 decades trying to Defend & Extend a thoroughly out of date and broken Success Formula are given the money to invest?
Oh, we can expect a "car czar" who is supposed to oversee these loans and assure a the industry invests appropriately for change. Who's the right guy for this job (don't forget – I applied!)? We now read that the lawyer who oversaw the handout of money to survivors of 9/11/01 victims. This is, of course, the right qualifications to evaluate business plans, investment rates and innnovation programs for an industry. He's shown he can hand out money – but where has he shown he knows anything about re-engineering a very broken, large company? Where does he have credentials for un-knotting the Lock-in that keeps these companies dysfunctional? And how is he supposed to stand up to management teams that claim to have superior knowledge about auto company management – despite driving these companies into the proverbial financial ground.
The union leadership apparently wants Board seats in exchange for concessions. What difference will that make? Do union leaders know how to turn around companies where they encouraged Lock-in that cost them thousands of jobs? Are they trying to reach back to the kind of union practices that kept coal stokers on trains long after electric automotives were introduced? Defending & Extending out of date union practices won't fix these companies either. What these union leaders need to be asking for is government promises to secure the unfunded pension obligations, and creating a government program to preserve heath care costs that are likely to be stripped in an effort to lower variable costs. There is no bailout that can cover these costs indefinitely – and that is where labor restructuring needs to focus.
As investors, Americans deserve better than leftover thinking for their investment. More of the old management won't fix the problems. What's required is White Space to make significant changes:
- Auto design has to change from backward integration and standardization for manufacturing to forward-thinking which brings customers
- Distribution has to allow customers more opportunites to buy than the old-fashioned, and tedious, dealer structure which puts off almost all customers (and makes buying an unpleasant event). Customers deserve the right to buy direct if they like, and from dealers if they enjoy what dealers offer.
- Manufacturing has to change from "scale" to "build to order". Flexibility has to overtake 80 year old industrial design practices which have made the products inflexible and too expensive.
- Pension reform is essential. The overhead costs of pensions makes these companies unviable. This will require government intervention.
- Health care reform is essential. Perhaps Michigan should follow the Oregon example (and Massachusetts), and be a leader in developing programs to have state-assisted insurance coverage for everyone. Perhaps this should be an experiment in changing from employer paid health coverage, which offshore competitors do not have to shoulder, to self-paid coverage with guaranteed protection.
These are complex problems. They defy simple solutions. They require White Space. Cut Saturn free (again, like when it was founded) to experiment with new solutions. Give other nameplates the indepence to experiment with other possibilities. Monitor performance, see what works, and migrate toward what succeeds.
Now is the time to implement Disruptions and try something new. When the airline industry was grounded in 2001 there was a tremendous opportunity to restructure from unprofitable hub-and-spoke systems with outdated practices to new approaches using White Space. But neither government, nor the industry, took advantage of the stoppage to really try something new. Everyone was in a rush to start operating again, with practically no change. A huge opportunity was lost. And that sounds like the direction we're headed with the desperately uncompetitive auto industry.
We should not make that mistake again. Now is the time to Disrupt these companies. Fire the executive teams and the Boards. They've never been shy about firing employees or vendors. Put new management in place that understands how to manage innovation – rather than Lock-in. Get people in the jobs who don't want to Defend & Extend what's broken – but instead want to make changes and learn what will make these companies world class once again. And put in place competent oversight that can make sure change happens.
by Adam Hartung | Dec 7, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
A year ago Sam Zell was telling Chicago that he knew how to make money in newspapers. He was certain, absolutely certain, that Tribune Company newspapers – including The Chicago Tribune and The Los Angeles Times – would soon be returned to higher readership, higher ad rates and greater profits. Now, Tribune Company is preparing for bankruptcy (read article here.)
Sam Zell did a horrible job of scenario planning. He didn't look into the future and develop scenarios about what was likely to happen in news. Instead, he simply assumed that readers would return if he made a few format and editorial changes, the economy would strengthen and he could depend on advertisers returning as well. He expected a fast, big payback for his investment. Just like he'd done in real estate all those years.
Sam Zell had a very Locked-in Success Formula. He had spent a lifetime buying property, usually properties already in locations demanded. All he had to do was fix up the property and let growing demand for the scarce resource – his building in a demanded location – drive up the value. He didn't stick around to make money off rent. He didn't run a business that made a product and sold it. He bought properties, dressed them up and sold them at a profit. To him, Tribune Company was a property that was being ignored. All he had to do was fix it up a bit, wait a bit, and sell it to someone for more than he paid.
Oops. That Success Formula doesn't work when customers are walking away from the property to pursue a better one. News seekers in droves are going to the internet for their news. They no longer want to browse a newspaper – understanding that takes time, and it gives only a single source. The internet gives them fast answers to their queries from multiple sources. And advertisers are going where the readers are going – to the internet as well. The cost for a printed medium is high, and the results are hard to prove. Whereas internet ads can be tracked for number of page views, number of click-throughs and even sales. The readers are more, and the follow-up is superior. Advertisers have found it easy to forget about newspaper ads, especially in a soft marketplace.
Meanwhile, the Tribune Company Success Formula was firmly stuck in the 1990s. From sales people to editors, denial about shifting reader needs was everywhere. Even though each news company – from newspaper to radio and TV – had great access to reporters and first touch at many news stories, they did not realize that readers were looking for that news on the web first. Each newspaper and station was Locked-in to pushing the news through its format, ignoring the enormous audience opportunity they had in their local markets by using cross-media approaches, including the web. There was no one approaching customers with multi-format advertising opportunities. Nor was the company investing heavily into web sites or portals that could attract large numbers of on-line readers. The on-line environments were under-invested, and selling ads was completely fractured. There was limited, at best, sales efforts to get advertisers onto the weak websites running news from each individual business unit.
What Tribune Company needed was not only scenario planning that identified the range of opportunities for ad sales – but a sincerely intense analysis of on-line competitors. Instead of bragging that the company had leading newspapers in major cities, the leadership should have recognized its fast declining share of total news coverage – due to shifts in how people acquire their news. By focusing internally, cutting costs and trying techniques like new formats, Sam Zell missed the opportunity to really study competitors and figure out how to transform Tribune into a competitive news company – like, say, News Corp.
And while he was busy firing people and making changes on the periphery, Sam Zell was unwilling to really Disrupt Tribune Corporation. He didn't change the business model – the Success Formula. He whacked the chicken coop, scaring employees, readers and advertisers alike as he talked about firing people until he made money. But he never caused his leadership team to really stop and talk about the future of news. They were too busy looking for people to lay off or protecting their own jobs — while Sam was trying to find buyers for the Cubs, Wrigley Field and the Tribune Tower as a potential condo project.
And Sam's Success Formula had no space for White Space. Sam didn't see any reason to try new things – like having salespeople sell internet ads as well as print ads. Or trying to drive traffic to the Tribune or L.A. Times web sites. As a property "flipper" extra-ordinary, Mr. Zell was not interested in developing a new business model. So none was developed – nor any energy spent trying to create one.
Now, America's second and third largest cities are at risk of losing their primary local newspapers. The suppliers are seeing their customer shrink, and possibly their accounts receivable jeopardized. Advertisers are wondering how they reach their local customers. And employees are looking for new jobs. Meanwhile, citizens are wondering who will be out interviewing the mayors, governors and congresspeople of their fine states. Who will be supplying the news?
The cost to Sam Zell Defending & Extending both his Success Formula and that at Tribune Company is enormous. The bond holders – most certainly pension funds and bond mutual funds - will take a horrible hit. The employees and employees of suppliers pay as well. And the citizens, dependent upon a robust news community will also suffer. It's too bad Mr. Zell didn't talk less, and listen more – implementing White Space to make a leading news company that would impress his customers across the U.S.A. I guess he'll have a lot of time to read Mr. Murdoch's newspapers (like the Wall Street Journal), watch Mr. Murdoch's Fox television stations and look at Fox's web site (have a MySpace page yet Sam?) after Mr. Zell's equity value gets wiped out in bankruptcy. Surely the creditors will ask for a new leader – who faces a much more difficult challenge now that the resources have been gutted by Mr. Zell.
by Adam Hartung | Dec 4, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, In the Whirlpool, Innovation, Leadership
Well the heads of GM, Ford and Chrysler are back in Washington asking Congress for cash. According to Senator Dodd it's a sure thing they'll get it (read article here). And accordinto the the Government Accountability Office even if Congress doesn't approve bailout money, Treasury or the Federal Reserve can provide assistance from the TARP fund (read article here). So, it looks like something will happen.
This time the auto companies are saying they intend to "reinvent" themselves with the money. Uh-huh. And exactly who's going to lead this re-invention? Why the same leaders that got into this problem. Now, do we believe that? A lot of people in Congress have their doubts – seeing as how the bankers didn't seem to change much after being told they would get bailed out. So these Congressional folks are saying they want the auto leaders to report back on their plans to change – and of course GM's head said he'd be happy for the oversight. "It would be very helpful for us, whether it's a board or an individual, to have someone to work with on this, to submit our proposals and then for that person to say,'OK, don't agree with that. You've got to change this," said GM CEO Richard Wagoner. (Read quote and more here.)
So Senator Dodd and Speaker Pelosi – for the good of America – I volunteer for the job. I'll review GM, Ford and Chrysler's plans for innovation and report back on the likelihood of them revitalizing the industry. Now that I've put that on the table – I'll just wait for your phone call or email – you can reach me right here through this blog if you like (see the "contact me" area).
Oh, you don't think I'm the guy Mr. Wagoner had in mind? Why not? Do you suppose he was looking for some "industry guru" who is already sympathetic to his claims that the problems are not of management's making – but rather due to economic circumstantces? Do you think Mr. Wagoner prefers someone who is more traditional, on corporate boards that have been agreeable to CEOs for years – accepting of their tough jobs and approving their extreme paychecks? Do you suppose he doesn't want somebody who has expertise in innovation at all, but rather someone who wants to slowly seek change via one small, incremental step at a time, because that's the way big companies do things? Perhaps someone with government experience, used to the pace of change in government agencies? Or perhaps a lawyer who will be sure all actions are within current legal boundaries – whether they actually create benefit or not?
I do think GM and Ford can be saved. But I don't think current management will do it. They are so Locked-in, so used to the "boundaries" of convention, that there is no way they can create companies competitive with Honda, Toyota and Kia. The first thing any oversight agency should do is change the leadership teams, attack the industry Lock-ins and establish White Space to build a new company. Maybe look at Tessla – the electric car company auto execs love to laugh at — but that hasn't asked for any money from Congress as it's built its sold-out sports car using laptop batteries – for some new management. Or ask John DeLorean to quit dealing drugs long enough give up a few ideas (Ok, that is going to far). But surely, with all those talented graduates at the University of Michigan and Northwestern there has to be some people ready to actually do things differently.
GM needs more than oversight. It needs change. Big change. Let's hope Congress takes Mr. Wagoner's words to heart and finds somebody who knows something about innovation to watch over the billions they give these companies.
by Adam Hartung | Dec 2, 2008 | Current Affairs, General, Leadership, Openness
For years business books have preached "focus". Getting the business to understand its "core", and then focusing on that "core" has been the theme of books from "Competing for the Future" to "Good to Great." It's almost become a foregone conclusion that the best business practice is to focus.
But when markets shift, it's the focused competitor that hurts the most. Just look at the auto companies. Things have turned badly for auto manufacturers. In November, sales were down some 30% + to levels not seen since October 1982 (26 years ago) (read article here).
But a closer look is revealing. GM sales down over 41%, with revenues at its most recent acquisition - Hummer - purchased to increase revenues in the auto business down over 62%. Ford was down 31%, helped by a less decline in its pick-ups. Chrysler down a whopping 47%. Toyota down almost 34%, Nissan over 42% and Honda more than 31%. With numbers like that, you have to be concerned for all auto companies.
And that is where you can smile and be glad that one of these companies chose not to "focus." Unlike all those other companies, Honda doesn't just make and sell cars. It sells manufactures and sells motorcycles, boat motors, snowmobiles, lawn mowers, electric generators, snowblowers, leaf blowers, robots and jet airplanes. It sells directly to customers, sells through traditional retailers, has distributors and dealers. This distribution of business provides Honda multiple opportunities to grow, rather than constantly trying to Defend & Extend its car business. Can you imagine any of the U.S. car manufacturers saying it has that many different products, or multiple sales channels?
In the early 1980s GM started down this future-oriented road. It once owned EDS, and was the largest supplier of IT services globally. GM once owned Hughes Aircraft, making it the largest manufacturer of aircraft avionics. These businesses offered GM the opportunity to grow beyond autos and the struggles the company had with unions and dealers. But, in order to "focus" GM sold both EDS and Hughes – and used the money to Defend & Extend its focus on cars. Just look how that turned out for investors and employees.
"Focus" is highly overrated. Early in a business's life cycle focus is necessary in order to create a Success Formula that helps the company grow. But, as time passes the Success Formula becomes increasingly at risk of market shifts which jeapardizes returns. The best way to avoid getting trapped in low returns is to keep your eyes on the future, and make sure you keep White Space alive building new opportunities to exploit future market opportunities. It would have been easy for critics to attack Honda for being in so many businesses – but in times like these having multiple businesses pushing into future growing markets reduces the problems from severe market shifts.
by Adam Hartung | Dec 1, 2008 | Disruptions, General, In the Rapids, Innovation, Leadership
You don't have to agree with Rupert Murdoch's politics to recognize his business savvy (in fact, ignore them if you want to understand his business acumen). A new book is coming out today on his life, and according to reviews and interviews with the author, it continues to reinforce how Mr. Murdoch followed The Phoenix Principle for building News Corp. into a major, industry leading, corporation. (read about the book here)
Don't forget that News Corp. began as a small Australian newspaper company. As large as Australia is physically, it is sparsely populated. While you may recognize an Australian accent, I bet you struggle to name an Australian corporation. It's relatively small population, abundant natural resources and remote geography (don't forget, it's an island continent) means it is easy for Australia to be missed on the global business landscape. But it is from these humble roots that Rupert Murdoch saw great opportunities for growth if he first moved into newspapers around the globe - eventually becoming what is now America's largest media empire.
Not only does Mr. Murdoch plan for the future, rather than fixating ont he past, but that Mr. Murdoch obsesses about competitors is made clear in his biography. His fixation on CNN helped move Fox News from a fledgling idea to the #1 rated news channel. He fixated on CNBC when deciding to recently launch Fox Business Network. Obsessing about competitors, especially when in a different field, is a trademark of Phoenix Princicple companies that make long-term higher rates of return. They let competitors lead them into new businesses – where they learn and grow.
Mr. Murdoch is certainly Disruptive, and his biographer describes him as "the least corporate person I've ever met in corporate life." And this sort of willingness to Disrupt is what made it possible for News Corp. to win the bidding for MySpace.com. News Corp. is not just a newspaper company – it has vast interests in fim, broadcast television, cable television, direct broadcast satellite, magazines, inserts, books and the internet. Such widespread White Space keeps News Corp. out front of its competitors. (See News Corp holdings and business interests here.)
Contrast this with Ted Turner's empire, for example. Like Rupert Murdoch, Mr. Turner started with a company that was almost exclusively a billboard enterprise – and almost exclusively in the south. Yet, he was able to see that the future of broadcast media was much stronger than billboards, leading him to move forward with projects in radio, broadcast TV and eventually cable television. Launching CNN as the world's first global news network put his company in the forefront of the media industry.
But, eventually Mr. Turner sold his company to another television, film and magazine company – Time/Warner. Rather than continuing to branch out with White Space onto the internet, Mr. Turner agreed to a "grand play" by merging with AOL. Instead of White Space where Turner could learn to expand and grow, with multiple investments in the new media environment, Turner/Time/Warner became trapped in a very costly, and over-committed, situation with AOL. Too early in the lifecycle, and with insufficient learning opportunities, this became a grand disaster leaving Time/Warner a far weakened competitor – and making it possible for Google to emerge as the leading American on-line media company.
I don't ask that you like Rupert Murdoch. Nor that you like News Corporation. Nor that you agree with the heavy political overtones of Mr. Murdoch and those on his executive team. In fact, feel free to disagree with their politics vehemently. But if you look at their business results you see an organization that followed The Phoenix Principle to great success. And, as the media business keeps changing, we will see many competitors disappear – especially those too closely aligned with print and broadcast news. But I would not expect News Corporation to be one of those struggling to survive. Its practices have positioned the company well to continue growing, despite dramatic industry dynamism. And that's what being a Phoenix Principle company is all about.
by Adam Hartung | Nov 25, 2008 | Current Affairs, Defend & Extend, General, In the Swamp, Leadership
Are you encouraged by the Federal Reserve's actions to purchase $100B debt from Freddie Mac, Fannie Mae and Ginnie Mae? Government leaders say this is necessary to "get the markets moving again" (read article here).
Unfortunately, this action is really no different than if the government purchased $100B of SUVs from GM, Ford and Chrysler to "get the auto market moving again." Or, if they purchased $100B of coffee from struggling Starbucks, whose per store sales are predicted to fall all through 2009 (read article here) to "get the coffee shop market moving again." Or if they purchased $100B of homes, now that prices have fallen over 17% in the last year and sales are down at least that much (read article here) in order to "get the real estate market moving again". None of these actions will help the banks, or the auto companies, or Starbucks or homebuilders be more competitive. At best, any of these (including the Fed's planned action) is a stop-gap effort attempting to protect the status quo – in the middle of dramatic market change.
When markets shift, the impact is often delayed by ongoing efforts to Defend & Extend the status quo. Eventually, however, the market shift is unavoidable – and in what seems a very sudden shift change is very dramatic. The market moves from one equilibrium to another. And it is at this shift point (what's called a punctuated equilibrium) that the weaknesses in old competitors become highly visible. Like Citigroup, GM, etc. At the same time, the opportunities for new solutions become visible as well.
When violent market shifts happen, efforts to return to the old status quo never work. Look no further than Japan's economy in the 1990s – which suffered a recession for more than a decade as the country's leaders refused to adjust to the changed competitiveness of Japan in the global economy. Today, 15 years after Japan's recession began, that economy has still not recovered on a consistent growth plan because the leaders keep spending resources trying to protect old business practices which do not work in today's global economy. Consequently, Japan keeps falling further behind China, India and other more competitive economies - and the companies in those economies. Is this the direction we should lead America today?
Future success depends upon changing to meet dynamic market requirements. So far, none of the TARP activities, or the spending by the Treasury or Federal Reserve, are meeting this need. While Congress denies aid to everyone else, a situation likely to change, the spending on financial assets is not creating any new jobs, nor helping the advancement of any innovations in technology, or business practices. Increasingly, however, people are beginning to realize that attempts to shore up these old industry practices are not preparing the American economy, and its companies, for global competition.
What's needed is leadership that will use funding to improve competitiveness – not attempt to preserve the past. Spending funds on unnecessary business trips, unnecessary perquisites, bonuses and dividends does not increase the likelihood of having a vibrant competitive set of industry players in 2010. What does work is installing leaders willing to develop new Success Formulas which are more competitive – by intensely focusing on competitors, Disrupting current practices and using White Space to innovate. If Congress is going to make citizens stakeholders in these businesses, it is within their purview to demand Disruptions – or create them – so the recipients move forward rather than waste money in a vainglorious effort to find the past.
by Adam Hartung | Nov 24, 2008 | General, In the Rapids, Openness, Television
As consumers, it's easy to forget that news is a business. After all, we don't directly pay for news. It comes free to us via television, radio, print or the web. Thus, it's easy to forget that the providers rely on advertisers to foot the bill. Of course, they attract advertisers by competing to get us consumers to watch, read or listen to their news programming. So, you may not have noticed the change in competitors recently in national news – and the big difference this is having on some valuations.
Focusing on television, CNN was the first at making news into a stand-alone business. For many years, CNN was practically uncontested. But in the late 1980s Rupert Murdoch woke up to realize that any business with one player deserved some competition, and he launched Fox. Using tools right out of The Phoenix Principle, he managed to unseat CNN and become #1:
- Fox looked into the future and predicted the market for news was likely to grow, even if the market for newspapers was not. Thus, even though News Corporation had been a newspaper company up until that time, Murdoch invested the vast bulk of all money he could raise into creating a brand new, from scratch, television news company that would be on broadcast television as well as cable. Many people thought he was nuts – but he quickly proved them wrong creating enormous profits.
- Fox obsessed about competition. The new leaders studied what the competitors in broadcasting (NBC, CBS, ABC) did, and studied CNN. They looked for what they could copy – and the weaknesses.
- Fox Disrupted. Where everyone thought news had to be neutral, Fox chose to be non-neutral. Recognizing that many advertisers were corporations that perceived news media were biased liberally politically, Fox news proposed to counter that bias by being biased conservatively politically. Not only was this opportunity available, but Fox recognized there was no way to counter this position by the existing competitors. What could they say they would do differently once Fox said they were going to be conservatively biased? That they would be more neutral? Fox found a way to change how viewers thought about news coverage and what they would watch.
- Fox used White Space to develop new programming. News was not just reporting, but stealing an idea from Nightline people were hired to interpret the news. Bill O'Reilly, Sean Hannity and many others were hired to interpret the news for viewers, not merely report it. While not all of these efforts succeeded, some were wildly successful drawing so many viewers Fox surpassed CNN as #1 in cable news.
Fox developed a Success Formula that grew revenues quickly. The Lock-ins helped Fox attract viewers, and grow revenues and produce prodigous profits. But, that's not the end of the story.
In the 1990s Microsoft joined with NBC investing in a new company to launch a cable channel and internet presence. That company had wide berth, but was intended to provide news. MSNBC faced the competitive marketplace that now had both powerhouses Fox News and CNN. So, what did they do?
- Looking into the future, the leaders recognized that if there was a market for neutrality, and for political conservatism, there was probably a market for political liberalism. So they identified a counterpoint to Fox and CNN.
- They studied what worked at CNN, Fox and cable news. They identified weaknesses in them all. They recognized that many of the programs on both stations had audiences that weren't growing, leaving time slots available for alternative programming.
- And they Disrupted. MSNBC mixed general news coverage with "special investigation" programs into prisons and other locations with news interpretation programs that took a distinctly politically liberal bent. Additionally, program hosts directly compared their programs to Fox and CNN, and even blatantly compared their competitive audience size ratings.
-
And there was plenty of White Space. Programs were tried, added and dropped as fast as they could get them to market. Some were produced fewer than 2 months. Others were tried in multiple time slots. And as programs were shown to have audiences, they were moved around to compete directly with similar programs on the other channels. Newscasters from other NBC programming, such as CNBC or NBC news, were shared with MSNBC creating a different operating model than existed at either CNN or Fox News. Links to MSNBC web programming were added to augment the television programs, offering multi-media capability for viewers.
As a result, MSNBC is now closely tied with Fox News and has a lead in many age groups and time slots (read Marketwatch article here.) The valuation at News Corp. has fallen 67% in the last year (see chart here) – a staggering $10.5billion.
In any market, no matter how strong the competition, the opportunity exists to attack competitor Lock-ins and introduce a new Success Formula which can grow. Even if earlier competitors used The Phoenix Priniciple, if they change to Defending & Extending Lock-in on their Success Formula and do not keep applying the principles to remain evergreen new competitors can re-apply the principles to grow and take share.
Now, in this soft economy, the tendency is to focus on what you always did. But it is during this kind of economy that weaknesses in competitors become more apparent. Opportunities to change competition can become clearer. Customers are more willing to try alternative solutions, giving new competitors a better chance of success. Suppliers are willing to take greater risks to develop new business, making new business launch easier. If you programmatically apply The Phoenix Principle, it is possible to tackle the new economic/customer requirements more quickly, and improve your competitive position.
