by Adam Hartung | Nov 20, 2008 | Current Affairs, Defend & Extend, Disruptions, General, In the Swamp, Leadership, Lock-in
The auto execs have not made their case in Washington D.C. Speaker Nancy Pelosi is saying Congress has not yet seen a plan in which they can invest taxpayer money. Almost half of Americans don't think a bailout should be undertaken (read article here).
For those of us who've been around a while, reflections on the last time an auto company asked for help are inevitable. It was 29 years ago, from September into December of 1979, that Lee Iacocca (former Ford executive) and the UAW asked Congress to provide $1.5billion in loan guarantees (not a loan – not cash – just a government guarantee) in order to save Chrysler from bankruptcy. The economy was bad, but nothing like the banking crisis we're in now, and a recalcitrant Congress was not happy. Nonetheless, they prevailed and Democrat Jimmy Carter signed guarantee approval in January, 1978. (Read about the Chrysler loan guarantee here.)
By all accounts then, and certainly later, Lee Iacocca was nothing like Rick Waggoner (GM CEO) or Alan Mulally (Ford CEO). Iacocca had been fired from Ford because he told management they were going the wrong direction. He was a person willing to dissent, to Disrupt, and he'd shown it at Ford before ever coming to Chrysler. Additionally, as a new leader at Chrysler, he was willing to demonstrate changes were afoot by proposing from the beginning to place the head of the UAW on the Chrysler Board of Directors. After decades of labor wrangling, this was a significantly Disruptive act never before considered – and showed a leader willing to do things very differently. Mr. Iacocca even promised to take no salary his first year – he'd only get paid if his plan worked allowing him to earn a bonus according to predefined metrics. (Imagine that – an executive with real skin in the game.)
Iacocca was never a fellow to do what was "easy" or "natural". A feisty fellow with Italian roots, he spoke his mind. When Ford was making boring cars, and considered the Edsel "every man's car" (the Edsel was an enormous failure), Mr. Iacocca conceived of the Mustang — a car that was small, sporty and affordable. Something otherwise not on the American market scene. That car, more than anything else, saved Ford in the 1960s. Even today, Ford is hanging its future and much of its brand image on the 45 year old Mustang.
When he got to Chrysler, Iacocca kept that focus on the future. At a time when automakers were struggling to figure out a profitable way to develop cars that fit American needs he brought out the mini-van – a practical vehicle never before seen. As the economy improved he felt a convertible would be a good idea. He asked his head of engineering how long it would take to make a convertible for him to test – and the exec told Mr. Iacocca 3 years. CEO Iacocca told his engineer he didn't understand – Iacocca wanted him to pull a car off the line, take a saw and cut the top off. That should take about 4 hours. The action was taken, and Mr. Iacocca took the topless sedan for a ride around the block. In less than an hour he was convinced bringing back convertibles would be a huge boost to Chrysler profits.
Mr. Iacocca didn't look to his customers for ideas, he looked at future needs and competitors. Mr. Iacocca studied the cars, and manufacturing processes, from Europe and Japan. By obsessing on everything they did he found ways to make better cars that were more desirable and less costly. At a time when the Japanese Yen was a screaming buy compared to the dollar he changed processes to permenantly lower car costs – not relying on layoffs or more traditional cost cutting – making his company much more competitive than Ford or GM.
Mr. Iacocca never was slow to Disrupt those around him, or the market. As discussed, he was ready to launch new car concepts quickly, and go to the union with changes in work rules and compensation schemes. He created White Space everywhere from car design to manufacturing process groups to union discussions in order to find ways to make his company competitive with offshore players – and the most preferred of the American auto companies.
Ledership makes a difference. Congress has asked Messrs. Waggoner and Mulally to sell off the private jets, cut executive pay and produce a plan that shows the future will not be like the past. And that's fair. But it's not at all clear these leaders are of the Iacocca (or Jobs) way of thinking. If they keep trying to preserve what used to be normal, things aren't likely break their way from those in charge of giving a bailout. Mr. Iacocca is now retired, and far removed from the demands and dilemmas of the current auto manufacturers. But there are other managers out there – other leaders with the ability to focus on the future, obsess about competitors, Disrupt and implement White Space to turn around these troubled companies. I sure hope someone puts them in the right place to persuade Congress fast – before a couple million people lose their jobs and this recession turns into a Depression!
by Adam Hartung | Nov 17, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
It was only about 6 months ago that Microsoft was offering over $30/share for Yahoo! That deal didn't happen. And Yahoo! (see chart here) fell to under $ 11/share . Now Microsoft is saying "no thanks" despite the lower value – and Yahoo is changing it's CEO (read article here). Should Microsoft have purchased Yahoo!? Should Yang be fired?
No, and Yes. Yahoo created what is probably the fastest growing business on the planet today – internet advertising. And Search + ad sales has not only grown fast, it has been highly profitable. Look no further than Google. That one company so dominates a high growth sector is – well – incredible. Why aren't there more competitors being more effective? Yahoo! should be growing like a weed in a hot and wet garden.
And that's why it shouldn't be purchased by Microsoft. Microsoft is thoroughly Locked-in to its old Success Formula all about the PC. Money alone doesn't make a good company. Cash reserves do not assure future growth. And when you watch Microsoft you can see a company that doesn't really have a plan to grow. Microsoft is far from close to the fastest changes and growth happening in technology today – such as wireless application devices – and search. Just buying a company in either sector won't help if it is smothered by the Lock-ins surrounding Microsoft. Microsoft has been without Disruption since Bill Gates shook up things and launched Internet Explorer. And there's been no White Space as Microsoft drolled along creating updates to Windows and Microsoft Office.
At the same time, Mr. Yang has been unable to create the Disruptions and White Space that would allow Yahoo! to compete with Google. Recently, he's even been trying to license Google technology to affirm a lifelong competitive position as no better than #2. But there is no "iYahoo" phone in development – nor any other new business coming out of Yahoo! For a high tech company, with rapidly changing competitors in a dynamic marketplace, to have so few White Space projects is the kiss of death – and has been the death of Yahoo!'s stock price. So Yahoo! desperately needs a new CEO. Someone willing to apply John Chambers or Steve Jobs style business practices to get Yahoo! competing more effectively and growing again – not trying to Defend & Extend the original Success Formula which the market has moved beyond.
I just wish the Board members at GM, Ford and Chrysler would follow the Yahoo! lead. They need to change the leaders in those companies faster than Yahoo! did. If we could get different leaders guiding these auto companies, and different managers carrying out Disruptions and White Space, we could dramatically hasten the return to ecnomic growth for America.
by Adam Hartung | Nov 15, 2008 | Defend & Extend, Disruptions, General, In the Whirlpool, Innovation, Leadership, Lock-in, Openness
On Tuesday, New York Times columnist Thomas Friedman (author of The World is Flat) chided the auto companies for their lack of innovation and desire for government assistance (read article here). Setting off a firestorm of comments across the web, he not only recommended replacing the Board of Directors and executives at GM (as I have blogged), but went so far as to recommend asking Steve Jobs to take over GM leadership as an act of national service.
The other side of this argument was made by columnist John Dvorak on Marketwatch (read article here). Mr. Dvorak says this is a foolish idea, because the auto industry is so integrated and unique that only someone within the auto industry could hope to run an auto company. He recommends searching within the bowels of the auto companies for some overlooked wonderkind who is able to turn around the organization while maintaining the existing business model. He goes on to say that the only reason Steve Jobs has been successful is due to the unique features of the tech industry, implying no tech manager could hope to run a company as complex as GM.
Mr. Dvorak suffers from the sort of traditional management thinking that has gotten GM (Ford, Chrysler, Citibank, Washington Mutual, Sears, General Growth Properties, Sun Microsystems, etc.) into big trouble. As he lists off the "unique features" of the industry, and discusses "the manufacturing, inventory, subassemblies, delivery and other systems that are in place…too delicately balanced and complicated for a newbie to deal with" he describes Lock-in. Mr. Dvorak views what's been done in the name of Defend & Extend Management as good – and therefore necessary to keep. Thus, any turnaround would require doing more of what's been done – hoping somehow doing it better, faster and cheaper can make the company successful again. But he completely ignores the fact, which he actually makes in his article, that there are a lot of other auto companies competing with GM, Ford and Chrysler — and they are better at running these complexities than GM, because they are able to make autos that customers purchase at a higher profit. Mr. Dvorak ignores the obvious fact that it is very likely the structural and behavioral Lock-ins which he thinks impossible for a new leader to manage that are causing the horrible results in the U.S. auto companies. He ignores the notion that it is the very heart of the GM Success Formula that is competitively outdated, and thus causing these horrible results.
Successful turnarounds are rarely accomplished by people who are part of the industry. Because those in the companies are Locked-in to the Success Formula which is producing the poor results. Existing leders and mangers accept those Lock-ins, and that old Success Formula, thus trying marginal changes – or more of the same but with less resource. What really works is when a new leader implements significant Disruptions that cause people to approach the work with a very different frame of mind, and then implement White Space projects (usually several, and with lots of resources and visibility) which allow the company to develop a very different Success Formula to which the company can migrate. Example – consumer products leader Lou Gerstner's turnaround of tech giant IBM.
While Steve Jobs likely could make a significant difference in GM, I don't think it has to be Steve Jobs. We so love our heros we start thinking only they can make a difference. What GM needs is new leadership that works like Steve Jobs. Leadership that (a) focuses on future needs rather than current problems (b) obsesses about competition rather than thinking all solutions lie within the company (c) is not only willing to be Disruptive – but enjoys creating Disruptions to the Lock-ins which overwhelm the Status Quo Police and (d) set up White Space projects where leaders are given permission to do things very differently, and the resources to achieve significant goals.
It can happen in the auto industry. About 25 years ago much maligned Chairman Roger Smith took cost savings from closing outdated plants in places like Flint, Michigan (the reason for Michael Moore's first docu-story Roger and Me) and invested them in a start-up company called Saturn. Saturn was White Space where the leaders were not forced to follow old G.M. Success Formula tactics – like keeping the same union contracts, or using the same components, or using the same dealers, or using the same customer pricing mechanisms. Saturn came on the scene with great fanfare. With only 3 vehicles in their initial line-up, the company's brand became "Apple-like" with its near-cult status. People loved the smaller cars, the focus on safety and consistency, the no-negotiating price method and the low-pressure dealerships. This was a great example of White Space that produced a very significant change in customer opinions about American cars - and car companies – and in just a few years.
Unfortunately, Roger Smith retired and over the years GM's management has dismantled what made Saturn great. Rather than migrate GM in the direction of what made Saturn a winner, they slowly pulled Saturn into the old Success Formula of GM, killing its advantages. Away went all the uniqueness of Saturn as it was turned into just another division GM. Similarly, the acquisition of Hummer from American General offered an opportunity for GM to move in unique directions – but quickly Hummer became just another division which focused on a narrow product range and eliminated much of its uniqueness homogenizing the brand into something far less desirable. GM spent billions on developing an electric car, more than a decade before the hybrids were launched by Toyota and Honda. But management's Lock-in to preset ideas about what that car needed to do caused them to kill the project — and go so far as to sue test customers to retrieve the electric autos they LOVED.
GM desperately needs leaders willing to Disrupt. And willing to implement White Space to develop a new Success Formula. Leaders willing to let the company migrate toward new ways of operating – who believe it is essential. People like Steve Jobs. People the auto companies weeded out long ago when forcing those who move up to slavishly accept the failing Success Formula and focus on Defending & Extending it – despite the declining results. It will take people from outside GM, Ford and Chrysler to turn them around. It can be done.
by Adam Hartung | Nov 13, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
For years we've heard how important it is to listen to you customers. Many books have been written on the importance of listening to customers and giving them what they want. Unfortunately, and this ay sound like heresy, listening to customers can be more problematic than helpful. It's better to use scenario planning, compiling info from a range of resources, than let customers lead your planning.
Look no further than the current problems at GM, Ford and Chrysler. While they may have done many things poorly, one thing they did slavishly was listen to customers. Throughout this decade American customers have told them"we want bigger cars, with bigger engines, with more power." The #1 selling vehicle in the USA for several years was the Ford F Series pick-up, a gas user. For all 3 manufacturers their large SUVs were not only big sellers, but huge profit producers. Customers were willing to pay big dollars for the steel, V-8 engines and luxuries that went with 12 miles per gallon in the city. When asked what they wanted, buyers cried for "more." So Chrysler relaunched the hemi engine – a high horsepower and gas sucking beast. When launched, they sold out hemis – even in station wagons! But this close listening to customers meant the companies were NOT thinking about potential market shifts that could cause customers to shift quickly away from what the Big 3 were making. $150/barrel oil caught them flat-footed, unprepared, with loads of inventory and weak balance sheets. A sitting duck for the recession and debt crisis.
We see this phenomenon in many markets. IBM invented the personal computer, then exited the business 4 years later because their customers – data center managers – had no use for PCs and didn't buy any. Apple launched the Newton – the first PDA – but dropped it like a hot potato when customers told them they were more interested in enhanced Macintosh computers. Harley Davidson's 50 year old customer base keeps saying they only want big V-Twin roaring motorcycles – so Harley has ignored the faster growing and more profitable crotch rocket and scooter cycle markets (not to mention quadrunners, waverunners and snowmobiles.) Harley sales are down over 30% this year.
And we can see emerging trends that point to problem companies who listened too long to customers. Sony, EMI and other traditional music companies missed the digital/MP3 music wave because their retailers wanted to keep making CDs. They kept listening to Blockbuster Music until it disappeared. Major movie studios have missed the move to digital/MP4 film distribution as they keep listening to customers (like Wal-Mart, Target and Best Buy) that want DVDs to sell. Sam Zell spent hundreds of millions of dollars buying the newspaper-dominated Tribune Company, famously saying how he reads 4 newspapers a day, only to find out that people younger than 30 never read newspapers – and never will. When projecting future subscriber numbers, and ad sales, he talked to older folks who read newspapers and didn't recognize a major, permanent market shift in the market. Circuit City catered to their in-store customer, but now is finally waking up to the reality that on-line retailers can kill its profit with lower overhead, less inventory, faster turns and lower cost. Where once on-line shopping was only for the young, everybody is now going to the lower prices. And we now have evidence that for people under 35, they see no value in a traditional stock brokerage (read article here) – meaning bad things portend for companies like Merrill Lynch that keep thinking their over-40 customer base with $2million in liquid assets is the group to listen to. In all these instances, their "core" customers were not telling them where the market was heading, thus letting them drive right off a profit cliff. Heads up to travel agents (yes, a few still exist) and insurance agents out there!
Your customers Lock-in to your Lock-ins. They like what you offer. When you ask them what they want, you'll hear "more, better, faster, cheaper." Nothing insightful there. The customers you need to listen to are those who left you – those who never signed on to you – and those using competitors you've conveniently organized out of your "core segment." They can help you see where markets are headed, and where your Lock-in to old products, services and practices leaves you vulnerable. Otherwise, like GM, Ford, Lehman Brothers, Bear Sterns, Sears, Circuit City and Best Buy you'll be planning from the past – and when market shifts happen – KA-POW!
To be successful you have to use scenario planning that keeps you prepared for future markets. You have to understand not only current competitors, but future competitors. And you have to anticipate what customers will want in the future, not just what they can tell you about their needs today. So be careful about listening to your customers, they are very likely to lead you right into the abyss. Just ask Mr. Waggoner at GM and Mr. Ford, Jr.
by Adam Hartung | Nov 12, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
What to do with GM and Ford? It sort of sounds like "what do we do about our miscreant son ______?" The reality is that both companies are on the brink of failure – and no one believes they can survive without some sort of government bailout. The national news is now active in the debate about whether to bailout or not – and how to bailout – from Nancy Pelosi in the U.S. House of Representatives to MSNBC pundits Keith Oberman and Chris Mathews to CNBC stock maven Jim Cramer. But plenty of people are angry. They were first angered by the bank bailout – and now this potential auto industry bailout makes them angrier. Cries of "socialism" are not hard to find.
Not many Americans want GM and Ford to disappear. The loss of millions of jobs, havoc on the unemployment, insurance and pension systems and the disappearance of thousands of dealerships along with the subsequent short-term shortage of product would be a tornado of problems making the banking crisis look like a west Texas dust devil. But simultaneously, almost everyone is angry about bailing out the companies. So where should this anger be directed, and can it be used constructively?
We must hold management accountable for the terrible state of these companies. Even if you want to blame the union leaders, no labor contracts could have been created without acceptance by company management. Under every bad decision rock will be the fingerprints of someone in management at the company. It is management's responsibility to look out for the fiduciary well being of debtors and investors – as well as the long-term interests of customers who want service and replacement product, and employees who want to keep working, and suppliers who want to support the business. All of these groups have suffered badly due to bad management decisions.
So, are these managers all a bunch of dopes? That would be a radically over-simplified conclusion. These managers are well educated, many from the top schools. They are experienced. They have more vested in the success of their companies than almost anyone. Most have sacrificed pay, bonuses and benefits over the last several years, just like their employees (or even moreso) as part of helping their companies make it year to year.
What we have to realize is that these managers are Locked-in to the Success Formulas their companies created in the 1940s-1960s. During those heydays, investing in auto manufacturing was a great way to grow wealth. Working in an auto company made you amongst the highest paid workers on the globe. Times were good, GM and Ford were on top, and the companies created behavioral norms and structural decision-making systems that helped them do more of what was making money. The companies Locked-in on those behaviors and processes, and they are still trying to run these companies according to those outdated Lock-ins. Even though the marketplace has shifted dramatically over the last 50 years, amazingly little has changed within the Lock-ins at these companies. They have steadfastly Defended & Extended their Success Formulas – even ignoring the learning opportunities from acquisitions in aerospace and computers.
There are auto companies not on the brink of extinction. Toyota, Honda and Kia may not be raking in the money this year, but no one thinks they are going broke. They disrupted the auto market, and have never looked back. As the market Disruptors, they have taken advantage of their Locked-in competitors in everything from labor agreements to manufacturing processes to design methods and even sales/marketing approaches. GM and Ford have been sitting targets, easy to prey upon, because they were so unwilling to Disrupt and use White Space to evolve. Quite to the contrary, the Locked-in leaders at GM and Ford have sold asset after asset – from Hughes Aircraft to EDS to GMAC at GM, for example – in their effort to protect the auto industry Lock-in within their companies yielding poorer and poorer return on assets year after year after year.
Now that the leaders of these companies (and this goes for the financial industry players looking for TARP bailouts) are asking for bailout, someone must step up to forcing change in the management. Not because they are bad people, or ignorant, but because they are Locked-in to approaches assured of not improving results. It makes no sense to put money into Locked-in management teams that have proven they can't make an adequate rate of return. While some are saying "the smartest people about the auto industry are in the auto industry" (or banking), what they really mean is "the people who are Locked-in to how this industry has historically operated, and ignored market shifts to the point they took their companies to the edge of bankruptcy, are asking now for government support to maintain their Lock-in." And that would be a foolish way to invest anyone's money – private or taxpayher. Benjamin Franklin is credited with once saying "lunacy is doing what you always did but expecting a different result." It would be lunacy to bail out these companies and leave the existing management in place – to do more of what was done that led them to failure.
If managing was easy managers would be paid less than workers. To earn more – like the remarkable pay of CEOs – managers are supposed to keep their companies making high rates of return. If they don't, why are these managers there? Once they fail, why should management teams be given money to do more of what they've already done, but to unsuccessful results? Recent examples of AIG managers who are going on lavish business trips so shortly after their company was saved from bankruptcy by the governement is a clear indicator of how ready these managers are to return to the same behaviors and decision-making processes that almost destroyed their companies. They are planning on more of the same, with possibly a little trimming around the edges. Not the kind of change needed for these companies to regain competitiveness. Have you heard any of these management teams take responsibility for their company failures, or recommend they be replaced? Or are they asking for money to keep themselves employed?
There's a lot of competition for managerial positions. There are a lot of leaders and managers who have been pushed out of organizations due to downsizings, or even age. There are thousands of managers receiving new management degrees every year. If these bailouts are to be effective, then we should assuage the anger of those supplying the bailout funds with a change in the management of these companies. If we don't want government employees running them, according to stagnant rules incapable of keeping up with rapid market shifts, then we need a new batch of leaders and managers who are willing to Disrupt how these companies operate – internally – and start up a batch of White Space projects to create new Success Formulas that are competitive and able to produce positive returns in today's marketplace. If we don't change the leadership, we shouldn't expect much payback for the investment.
by Adam Hartung | Nov 11, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Starbucks (see chart here)announced earnings – well sort of (read article here). Accounting rules are the only thing determining whether Starbucks had earnings or losses. Let's say the company broke even – because we don't know for sure given the financial machinations. Starbucks was on a growth tear for a decade, and became a brand synonymous with upward mobility. Company value is now down 75% in just 2 years. Revenues are down, and projected to continue declining into 2010. Earnings have evaporated and company leaders say the only way to create them in the future is continued draconian cost cutting. Company management would like to lay blame for these horrid results on the crappy economy. But is that why Starbucks has taken this fall?
Management has to take responsibility for these results – and it's the leadership in place now. Starbucks was a model of growth. While the company was expanding its shops the previous CEO looked into the future and developed a series of new businesses to augment the original business:
- He started adding food – both cold and hot – to increase sales within the stores
- He pushed Starbucks into food service (United Airlines, among others)
- He pushed Starbucks into grocery stores with prepacked beans
- He pushed Starbucks into liquor stores
- He began promoting CD sales and exploring MP3 distribution
- He produced music – including the #1 CD in 2005 (Ray Charles Greatest Hits)
- He began producing movies (Akeelah and the Bee)
- He opened an agency for artists (signing Paul McCartney of Beetle's fame)
These actions all opened White Space for expanding Starbucks when, inevitably, either stores reached saturation or the growing lust for coffee and tea declined. But he was replaced by Howard Schulz, considered the founding CEO by most. Schulz demonstrated true "hedgehog" behavior (to coin a term used by Jim Collins in "Good to Great") by rapidly exiting of most of these businesses. Mr. Schulz felt Starbucks should concentrate on its "roots" – on coffee. His approach to improving Starbucks was to "focus" on what used to work. And to cut costs until profits met his goal.
But now we can see the disastrous results of his strategy. Stores are closing, and revenues in open stores are going down causing total revenues to decline. And revenues are falling faster than costs, evaporating profits. Where Starbucks was once a model employer, he is cutting benefits to employees and shows little (if any) interest in the famous barrista experimentation that led to innovations like "Frappucino" which helped add billions to total revenue. In just a very few months Starbucks has gone from a company willing to Disrupt its Success Formula and use White Space to grow – into a company exclusively trying to Defend & Extend a strategy from 15 years ago.
But in the last 15 years, the marketplace has shifted dramatically. Quality coffee, including specialties like espresso and latte not formerly common in America, have become commonplace as competitors from Caribou Coffee to Panera Bread, Dunkin Donuts and McDonalds have entered the business. Prices for good coffee have declined, and customers now have other places they can mingle, network or sit and read besides Starbucks. And increasingly you can obtain a good coffee right where you eat breakfast, lunch or dinner. The need to pay a "Starbucks premium" has evaporated – like Starbucks' profits. The new CEO, by following the Jim Collins approach, has ignored the dramatic market shifts which make Starbucks coffee shops a far less profitable business than they were just 5 years ago. He's more likely to end up like Circuit City than the growth company Starbucks used to be.
As mentioned before in this blog, research for "Create Marketplace Disruption" disclosed that only 7% of the time do companies that hit a growth stall ever grow again at 2% or higher. Why such dismal performance? Because the growth stall shows management has missed important market shifts! Focusing internally on profit improvement – especially with cost cutting or "back to basics" actions – only allows competitors to keep improving their position while the former leader retrenches. While the competitors are charging forward, the hedgehog company is burrowing into the dirt, allowing himself to get run over.
Markets never run in reverse. Once someone develops a winning Success Formula competitors emerge. They copy the leader down to the detail, and even come up with their own advantages (including lower price.) Some develop a better solution. And when market shift happens, the leader finds profits decline. To maintain revenue and profit growth requires leaders use White Space to explore new businesses that can evolve and enhance the Success Formula. That was the road Starbucks was on. Until Mr. Schultz took over the reigns. And now, his "Collins-esque" approach to business is driving Starbucks right into the ground(s).
by Adam Hartung | Nov 4, 2008 | Defend & Extend, General, In the Whirlpool, Leadership
In 2004 Motorola (see chart here) was about to take off. It's radio business was continuing to grow as it launched into digital products. And its handheld cellular business was about to go nuts with the launch of a new product called Razr. A new CEO was focusing the company on the future, obsessing about competitors that were launching new products, Disrupting everything from the new product launch process to free corporate lunches and opening White Space all over to get growth going. And it worked.
But then, almost as fast as it grew, Motorola went south. Instead of continuing the new approach, Ed Zander, the CEO, became overwhelmed by a 2-pronged set of concerns. Carl Icahn started buying shares and asking to oust the CEO so he could (somehow) start cutting costs. Instead of taking on Mr. Icahn by demonstrating how his results were headed the right direction while Mr. Icahn was clueless when it comes to high-tech, Mr. Zander began cost cutting to appease Mr. Icahn. Secondly, Mr. Zander stopped pushing the scenario building, competitor obsession, Disruptions and White Space. Instead, he reacted to employee uneasiness by turning immediately to a Defend & Extend strategy, Locked-in on the Razr. New products dried up as the company just pushed harder and harder on Razr sales. The company quickly began operating as it had 8 years earlier when it slid into disarray, lousy returns and massive layoffs as the future grew murky.
Now Motorola is trying to define a new future. The plan is to split the company into 2 parts. Radio and cellular. But the problem is that the biggest, cellular, is in deeply difficult territory. Sales are down, new product launches are few and profits are gone. So the Board hired a new CEO for that business – the former Chief Operating Officer at Qualcomm. And now Crain's Chicago Business reports he's issued an internal memo with his plan (read article here). So can we expect a turnaround?
His plan involves changing his top reports. And he's cutting a line of new products being launched to save cash and "better position products for the future." He's narrowing the technology line-up toward those he believes are the most likely winners. And he's reorganizing along geographic lines. So do you think this will "fix" Moto?
There are reasons to be concerned:
- Products are being stopped from market review. In the end, White Space has demonstrated that the marketplace is much better at selecting winners than executives are. It was "getting Razr out the door" that got Moto going again – an historical problem at Motorola that loves to over-engineer everything and has been slow to new products letting competitors chew them up.
- The company is narrowing its technology use. History has shown that technology shifts can happen fast in high tech, and those companies that avoid the bets by playing the widest technology tend to make the most money the longest. Making technology bets is a quick way to turn a large fortune into a small one – and Moto doesn't have much fortune left.
- There is no Disruption in what he's doing. Changes in employees at the top, and reorganizing along traditional lines, does not attack the behavioral or structural Lock-ins. Without an attack on existing Lock-ins the organization will not do anything new. Organizations like to Defend & Extend what they've always done. Given that there's no Disruption planned, why would we believe the organization will be more productive?
- No White Space. The opposite could be implied, with the decision to stop a new product launch and to narrow the technology use. It's up to the leadership to be right, to guess the future of technologies and customer needs as well as the design of new products. Instead of White Space to develop a new Success Formula to which the company can migrate, this is an effort to have the CEO be brilliant and lead the organization into better results. Unfortunately, this approach almost always fails as Lock-in inhibits transition and the difficulties of being prescient become obvious.
I'd love to see Moto come back. But with the approach as relayed by the Chicago journalists, it appears unlikely. Perhaps a few big investors with private equity will think that a "streamlined" and "focused" Moto will be a better bet. But the fact is that only the market will decide if Moto is a good operation. And that will require having new products and services that meet changed market needs. Moto operates in a hotly competitive marketplace. It doesn't have the luxury of dictating what will work and what won't. Competitors will have more to say about its success than management will. And this approach is weak on scenario development – and absent on talking about competitors. Without Disruption and White Space, how can we expect the company to be effectively market reactive? Doesn't look good for shareholders, employees, suppliers or customers.
by Adam Hartung | Nov 3, 2008 | Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
Circuit City (see chart here) has announced it will close another 155 stores (see article here). Here, right before the big holiday buying season, Circuit City is contracting drastically. The company is almost out of cash, and is running into problems obtaining inventory. And with the likely demise of the company soon, it's unclear how many customers will buy from Circuit City when they can't take back items that break after the retailer is gone.
What makes this story somewhat remarkable is that Circuit City was one of the 11 companies Jim Collins profiled in "Good to Great." Not only was it one of what were considered the best 11 corporate performers in the world – it's turnaround to greatness score was the absolute highest of all the companies profiled, more than twice as high as the next best performer, and more than 3 times higher than the average "Good to Great" company. Jim is considered a management guru, who receives around $100,000 every time he gives a speech to corporate clients. "Good to Great" has been considered a corporate bible by many CEOs and other executives who have taken the stories from Mr. Collins to heart and decided his approach is the best way to great success. So to have Circuit City severely falter, and most likely fail, after only a handful of years since Mr. Collins published his book is an event worth spending some time discussing.
Despite Mr. Collins' great wealth accumulation and speaking success, he is not without detractors. Many academics have questioned the validity of his research. And in "The Halo Effect" professor Rosenzweig of Switzerland's top business school casts Mr. Collins as a fraud. Unfortunately for Mr. Collins, a review of the performance of his 11 "Great" companies demonstrates their performance since publishing the book is – at best – average. When one fails, perhaps it's worth spending some time reconsidering Mr. Collins' recommendations.
What appears true is that companies Mr. Collins likes end up in growth markets. Then, they pursue very targeted strategies which Mr. Collins recommends you not alter much nor even challenge. Mr. Collins ascribes business success in these companies, as he does in his first book about start-ups that get big ("Built to Last"), largely to dogged determination and sacrifice. He proselityzes that success is the result of hard work, dedication, and focus. And, from all appearances, once a company is into the Rapids of Growth, such actions to reinforce the Success Formula are helpful for the early leader to grow. For those who turnaround, much of their success can be ascribed to getting into a growth market and then simply doing what got them there.
But the problem with Mr. Collins' "Great" companies occurs when they lose their growth. In most cases, exactly as it happened with Circuit City, competitors figure out the Success Formula and they copy it. Additionally, lacking the significant Success Formula Lock-ins (behavioral and structural) which Mr. Collins loves and become part of the "Great" companies, new competitors more quickly implement new ways of competing which the "Great"companies ignore. In Circuit City's case, this was obvious in spades as Circuit City ignored on-line competitors which have lower cost, faster inventory turns, wider selection and lower price than traditional brick-and-mortar stores.
As a result, even Collins's "Great" companies end up falling out of the Rapids. Quickly they move into the back half of the life cycle, mired in the Swamp. Without the current of growth, which pushed them in the Rapids toward profitability, they are consumed fighting competitors. But, doing "more, better, faster, cheaper" of what they've always done simply does not make them more profitable. Competitors create market shifts which require changes in the Success Formula to continue thriving. But, with "everyone on the bus" (a favorite phrase of Mr. Collins) no one knows how to do anything new, and there's no place to try anything new. Quickly, results continue faltering and the company is sucked into the Whirlpool of failure – a prediction being made by Marketwatch.com when labeling today's Circuit City article "Circuit City Circling the Drain." Of course, it's hard to argue with Marketwatch's editors when the company value has declined from over 30 dallars per share to 30 cents per share in about 2 years!
Phoenix companies avoid this sort of fall by overcoming their Lock-ins. Something Mr. Collins never discusses. Yes, these Lock-ins help them grow during the Rapids. But all markets eventually shift. The Rapids disappear due to competitive changes. To succeed long-term companies have to Disrupt their Success Formulas by attacking Lock-in BEFORE they find themselves in the Whirlpool. And they implement White Space where they can test and develop a new Success Formula toward which the company can migrate for long-term success. Winning long-term requires more than a single turnaround into a growth market and then slavish willingness to do only one thing. Instead, it requires figuring out likely market changes with extensive scenario planning, being obsessive about competitors in order to identify new competitive changes. And then Disrupting and using White Space to constantly be reborn.
by Adam Hartung | Oct 31, 2008 | Disruptions, General, Leadership
Even in the midst of the recent financial crisis, you probably also noticed that the price of oil has dropped. In fact, it's had a record-setting drop (read article here). It was just in July that oil peaked at $147/barrel. Now it's trading around $60-70/barrel. I'm sure you've noticed the benefit if you're a U.S. driver, as the gasoline pump price has dropped from over $4/gallon to under $3/gallon.
A lot of people simply breathed a sigh of relief. "Well, that's one problem I can now forget about" an executive recently said to me. I was disappointed to hear him say that. Because how does he know oil won't go back up to $150? Or drop to $25? Regardless, doesn't it have implications on how competitors in your business behave? On who wins and who loses? Things certainly haven't "returned to normal." The signs are all around us that there have been substantial changes in how companies manufacture, procure IT services and finance their business. Just because the price of oil went from $25 to $150 to $65 dollars doesn't mean things are "back to normal."
Scenario planning is really important to developing competitive strategy. Most people spend a lot of energy to achieve high precision understanding their historical sales, customers, technology comparisons, price comparisons and share. But they put very little energy on creating potential scenarios about the future. When they do look forward, the tendency is to seek the same sort of precision. As a result, too few scenarios are developed and they end up being based on data people feel are "highly predictable." The scenarios that are important are the ones where unlikely events and outcomes occur. They create opportunities for changes in competitive position.
Scenario planning should start with "big themes." Once you explore that theme, however, the objective is not to develop your "best guess." Instead, the objective is to cast a wide net and explore, in detail, what the world will look like given that scenario. How would thing change given the expectation? How will that help, or hurt your ocmpetitiveness. Who will be the big winner? The big loser? Create a robust description of that scenario – what are the implications – not the likelihood of it happening.
Over the last year the price of energy was one such big theme which interested a lot of people. But most people only explored one scenario – what if oil prices went to $200 or $250? Interesting, but not sufficient. Yes, that scenario is well worth investigating in great detail. But, it's also important to investigate other options – like oil at $150, or $100 or $65 or $35. All of those have different implications. What's important in scenario planning is to investigate them all. To understand how each would impact competition and individual competitors. So your SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis can be done for the future – not just for today.
The other value from scenarios is identifying and understanding the triggers. By exploring the scenarios you start to understand what would make each of the outcomes more likely. Not so you can develop a probability distribution – which will lead you to the "average" or "most likely" outcome – and thus the least likely to make any difference and therefore the least interesting. You don't want to use scenarios to become a forecaster – because odds are you won't be very good at it. You want to recognize the implications of these scenarios, and then figure out how you can use that scenario to improve your competitive position. To upend competitors who did not do the scenario planning and thus aren't prepared. Then you can start tracking key variables, key metrics, in order to recognize when you need to prepare for one of the various outcomes. And if you've done a good job with your scenarios, be the competitor best prepared to take advantage of the changed circumstance to improve your position.
The only way you can be prepared is to have considered the scenarios, and developed some plans should that scenario happen. To be a long-term winner it's not enough just to be good in the current environment, you have to be prepared to succeed no matter what the environment. By developing scenarios, you can be prepared to take advantage of market shifts – and if your competitor isn't, you can gain market share and improve your returns.
We all are subject to letting current events drive our views of the future. Then we try to "stand back" and look at a long term trend and develop some sort of "average" point of view. But neither of these really help when markets shift. What's needed is a set of scenarios – such as oil at $25 or 50 or $100 or $150 or $250 or $300. Understanding how you can grow sales and profits in each makes you prepared, and greatly improves your long-term chances of growth. It's the only way to prepare for market shifts, and worth a lot more during turbulent changes, like we're seeing now, than the deepest analysis of what you've done the last year, 3 years or 5 years.
by Adam Hartung | Oct 30, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
The business press, whether print or on-line, is full of stories about lay-offs. Motorola (chart here) to cut another 3,000 jobs in its flailing handset business (article here). American Express (chart here) to cut 7,000 jobs (article here). Over the last few weeks, other announcements included 3,200 job cuts at Goldman Sachs (chart here), 5,000 at Whirlpool (chart here) and 1,000 at Yahoo! (chart here).
Given the regularity with which leaders have implemented layoffs since the 1980s, investors have come to expect these actions. Many see it as the necessary action of tough managers making sure their costs don't unnecessarily balloon. And political officials, as well as investors and employees, have started thinking that layoffs don't necessarily have much negative long-term meaning. People assume these are just short-term actions to save a quarterly P&L by a highly bonused CEO. The jobs will eventually come back.
Guess again.
Most layoffs indicate a serious problem with the company. Long gone are the days when layoffs meant people went home for a major plant retooling. Now, layoffs are a permanent end of the job. For the employer and the employee. Layoffs indicate the company is facing a market problem for which it has no fix. Without a fix, management is laying off people because the revenues are not intended to come back. Thus, the company is sliding into the Swamp – or possibly the Whirlpool – from which it is unlikely to ever again be a good place to work, a good place to supply as a vendor or a good place to invest for higher future cash flow. Layoffs are one of the clearest indicators of a company implementing Defend & Extend Management attempting to protect an outdated Success Formula. Future actions are likely to be asset sales, outsourcing functions, reduced marketing, advertising & R&D, changes in accounting to accelerate write-offs in hopes of boosting future profits — and overall weak performance.
Layoffs are closely connected with growth stalls. Growth stalls happen when year over year there are 2 successive quarters of lower revenues and/or profits, or 2 consecutive declines in revenues and/or profits. And, as I detail in my book, when this happens, 55% of companies will have future growth of -2% or worse. 38% will have no growth, bouncing between -2% and +2%. Only 7% will ever again consistently grow at 2% or more. That's right, only 7%.
When you hear about these layoffs, don't be fooled. These aren't clever managers with a keen eye for how to keep companies growing. Layoffs are the clearest indicator of a company in trouble. It's growth is stalled, and management has no plan to regain that growth. So it is retrenching. And when retrenching, it will consume its cash in poorly designed programs to Defend & Extend its outdated Success Formula leaving nothing for investors, employees or suppliers. The world becomes an ugly place for people working in companies unable to sustain growth. People try to find foxholes, and stay near them, to avoid being the next laid off as conditions continue deteriorating. Just look at what's happened to employment and cash flow at GM, Ford and Chrysler the last 40 years. Ever since Japanese competitors stalled their growth, "there's been no joy in Mudville."
Given how many companies are now pushing layoffs, and how many more are projecting them, this has to be very, very concerning for Americans. Clearly, many financial institutions, manufacturers, IT services and technology companies appear unlikely to survive. Meanwhile, we see wave after wave of new employees being brought on in companies located in China, India, South America and Eastern Europe. For every job lost in Detroit, Tata Motors is adding 2 in India. For every technologist out of work in silicon valley, Lenovo adds 2 in China. For every IT services person laid off at HP's EDS subsidiary, Infosys adds 2 in Bangalore. It's no wonder these companies don't regain growth, they are losing to competitors who are more effective at meeting customer needs. There really is no evidence these companies will start growing again – as long as they use layoffs and other D&E (Defend & Extend) actions to try propping up an old Success Formula.
Sure, times are tough. But why die a long, lingering death? Instead of layoffs, why not put these people to work in White Space projects designed to turn around the organization? Instead of trying to save their way to prosperity – an oxymoron – why not take action? In most of these companies, lack of scenario planning and competitor focus leaves them unprepared to rapidly adjust to these market changes. But worse, Lock-in and an unwillingness to Disrupt means management simply finds it easier to lay off people than even try doing new things. And that is unfortunate, because the historical record tells us that these companies will inevitably find themselves minimized in the market – and eventually gone. Just think about Polaroid, Montgomery Wards, Brach's Candy company, DEC, Wang, Lanier, Allegheny Coal, Bear Sterns and Lehman Brothers.
