by Adam Hartung | Aug 11, 2008 | General, In the Rapids, Leadership, Lifecycle
Some businesses get in the Rapids by picking a fast growing market and then trying to keep up with exploding demand. Such as PC manufacturers in the 1980s and laptop manufacturers in the 1990s. Or internet companies in the late 1990s. The market explosion means these companies keep selling more and more primarily due to robust demand. And revenue growth covers a world of sins, as they can raise external money to fund growth even if not profitable. But in these instances, when the explosion stops many of these competitors rapidly disappear – unable to maintain growth as the market shifts. The Rapids is a temporary phenomenon which disappears, and these businesses are not able to keep growing.
But Phoenix Principle companies create above-average growth and maintain profits in shifting markets often considered low growth. Take Aldi in grocery retailing. That market grows along with the population – about 1 to 3% per year. The vast majority of "good" competitors grow no faster than that. And those who do sport better growth usually obtain it merely by making acquisitions – so there’s no "real" growth just mashed up bigger numbers under one name. Worse, as Wal-Mart and other discounters have started selling groceries it’s caused many traditional grocers to see declining revenues as customers started buying more groceries at the new alternative. So, you’d think yourself hard pressed to get into, and stay in, the Rapids as a grocer. But Aldi, one of the world’s largest grocers, has done just that.
Aldi may seem small to Americans, with only 900 stores in the USA. But the company is $45B in revenues. And their success, growing at 5-10% per year, can be traced to following The Phoenix Principle:
- Aldi is always looking for places to expand. They don’t just try to sell in one geography, like most U.S. grocers, nor in just one country. They cover most of the developed world, with plans to expand into growing markets as well. They don’t focus on what they’ve done, but rather on where they can go and what they must do to keep growing.
- Aldi doesn’t follow the competition. They do what competitors are too locked in to even consider, much less do. While large grocers carry upwards of 45,000-80,000 items, Aldi stores carry 1,300. While most grocers rely on branded goods, Aldi is almost exclusively private label. While large grocers advertise weekly with specials, Aldi advertises very little and instead provides dramatically lower prices. Major grocers constantly rotate "deals" pitching suppliers to offer money to cover the deal cost, but Aldi just has the same price low price all the time. Where major grocers have lots of staff to help people, the typical Aldi has only 7 or 8 employees thus maintaining revenue/employee almost triple the national average. Aldi doesn’t ask customers what they want. Instead, Aldi competes by attacking competitor Lock-ins and beating them for customer sales.
- Whenever opportunities come along, Aldi remains open to Disruptions. In every country Aldi allows local management teams to build the concept tailored to customer needs. Aldi doesn’t force every country, or even every store, to be similar. Instead, they Disrupt their pattern and open stores where they can be most profitable – not necessarily where they will create "market density" – and each store is built to take advantage of its location.
- They don’t shy away from White Space. Recognizing the upscale shopper is not inclined toward an Aldi because of the merchandise available and sparse layout the company bought Trader Joe’s Market in 1979 which sells considerably more upscale merchandise, and has aggressively expanded. And instead of the typical grocery circular, Trader Joe’s mails out something that looks and reads more like a newspaper with recipes and discussions about featured merchandise, rather than just focusing on price (even when prices are very competitive.) And Aldi even allows Trader Joe’s stores and Aldi stores to exist in the same market – not worrying about cannibalization, but instead trying to maximize revenues.
Aldi is probably the most profitable grocer in the world (it’s hard to say definitively because the company is private.) It certainly is the most successful – opening a new store somewhere almost every week for the last 20+ years! With a growth rate more than double the industry average, and the highest net margin in the industry, Aldi has long been a quiet game changer that simply goes out there and makes money in one of the toughest businesses on earth. Selling groceries. And that’s what staying in the Rapids is all about.
(Read more about Aldi’s business in Chicago area here [Aldi North America is headquartered in suburban Chicago]. Read about the company history here.)
by Adam Hartung | Aug 7, 2008 | General, In the Swamp, Leadership
We all know success. At some time, we’ve been in the winning position – possibly as an individual, but most likely as part of a team. When we taste success, we look hard at what got us that great flavor and we hold that memory closely. We all want to succeed again. And sometimes we can repeat those behaviors, those activities, and repeat success. The more we work hard, repeat our experiences and find success the more it reinforces repeating those behaviors and tactics.
And that leads to Lock-in. Very quickly, success breeds doing more of the same. We work harder and harder at doing what used to work, in the belief that the more we do it the greater our likelihood of success. But what we start to miss is changes in the marketplace. Despite our great strength, things change. And as much as we would like to keep doing what we’ve always done the reality is that our returns are destined to decline. We have to adjust to changing competitors and find new ways to win.
As I’ve listened to the the recent story of Brett Favre’s career as a football player, it’s hard not to feel for the guy. He’s one of the greatest NFL quarterbacks of the last 25 years. There’s no doubt he’ll be in the Hall of Fame. And recently he retired. But, as autumn came around he found himself Locked-in to doing what he’s always done. Even though he’s well past the age most players retire, and he retired in March, he decided he wanted to "unretire" and play more football.
But, his team – the Green Bay Packers – have moved on. The coaches and managers have recognized that they have to deal with intensive competition this fall. Although it would feel good to put Mr. Farvre back into the lineup, the odds of success are very low. Continuing to hope the competition won’t cannibalize Mr. Favre is a low probability proposition. Although his historical success has been great, when looking forward it’s clear the team must move toward a new Success Formula. Mr. Favre did well for a long time, but things have changed.
For his part, Mr. Favre needs to take a look at where his value is greatest. Many former football players have found fortunes beyond their imaginations after leaving football. This week Roger Staubach, a former Dallas Cowboys football quarterback, sold his real estate venture to another company for more than $500 million and remained a director of the company. His value from moving on into real estate development has been multiples of his football salary. Similarly, former Green Bay quarterback Bart Star made a fortune in auto sales, and former Denver quarterback John Elway has seen his football value eclipsed by his ownership of sports franchises and (again) auto dealerships.
Mr. Favre has seen diminishing rates of return as a quarterback for the last few years – and that is unlikely to change. But his celegrity is great. His value in other venues is greater than his value on the football field. He may love to play football – and all of us have our passions. But it becomes nonsensical when we let our passions overtake our ability to add value. It hurts ourselves as individuals, and the organizations we work with.
Many sports superstars find this a hard lesson to understand. Michael Jordon retired twice from Chicago – and played in D.C. before finally quitting. And it is usually to their detriment that they let Lock-in to prior personal Success Formulas stop them from developing more success. Mike Ditka, "da coach" as he’s called in Chicago, has made vastly more money from restaurants and endorsements than he ever did as a coach – even including his 2 years as head coach in New Orleans after coaching the Chicago Bears.
When markets shift, value from old Success Formulas declines. We may wish for the past – but it’s gone. For individuals, and the organizations that employ them, there comes a time to move forward to where greatest value can be achieved. The faster we move toward that future the better for everyone. Including the cheeseheads in Green Bay’s Lambeau Field. And for the very talented Mr. Favre.
by Adam Hartung | Aug 6, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle
If you don’t control your destiny, who does? Most Americans are especially proud of their independence, because it gives them the strong sense that their destiny is up to them. While everyone understands the role of luck and timing, those who also understand their strengths can find ways to maximize them. Anericans have the opportunity to make the most out of our circumstances. And that independence is also true for business. In America, home of capitalism if not the birthplace, any business has the ability to direct itself toward greater returns and success. And the larger you are, the greater your resources, the greater your ability to control your destiny and maximize your results.
So how is it that General Motors, the world’s largest auto company, would say that it’s destiny is not in the hands of its leaders? As the Board of Directors at GM reinforced its support in its CEO, I was shocked to read the following quote in today’s Chicago Tribune (read article here):
- "Most of the problems the company is suffering are not of their own making. There’s been radical changes in North American demand," said David Hel, an analyst at Burnham Securities Inc. in Sierra Vista, Ariz., said. "I don’t think making a change at the top is going to solve that."
Excuse me???? What was that? We’re to believe the largest auto company in the world, with all those assets, all that cash flow, all those employees, was without the ability to influence its own competitiveness and results? We’re to believe that no leader would have managed this absolutely dysmally performing company any better the last 5 years? The CEO, who over the last few years has watched the company lose market share, see it’s share price drop to a 54 year low (chart here), sold off many of the most valuable remaining assets (like GMAC) and overseen write-offs that exceed the entire market value of the firm is not responsible?? I do hope your investment firm receives enormously large fees for helping GM with its pension plan investments, or whatever it is you do for them, to make such a blatantly ridiculous comment. Because you just shot your personal credibility all to heck. l’m sure employees and investors could help identify a raft of better leaders than the ones who drove GM into its current dire straits. Mr. Waggoner may be well educated, well speaking, bright, cordial, tall, and good looking – but he’s done one heck of a terrible job as CEO at GM.
I guess following Mr. Hel’s confused thinking the leaders at Toyota, Honda, Nissan and Kia have no responsibility for the success of their companies. It’s all just a random set of variables that leads to success, or failure for an auto company?
Time for a reality check here. Of course the decisions made by leaders at GM were very different than the decisions made by Honda’s leaders. And the outcomes are radially different. What has befallen General Motors is a failure to recognize that markets keep growing, just in different ways. The demand for transportation has never been greater than it is today. Sure it may have shifted, from horses years ago to trains to automobiles to airplanes. And the kinds of autos people want to buy may have shifted around since the Model T was number 1. And the growth in auto sales may now be greater in China and India than the USA. But the demand for transportation is growing, not declining. So the market is growing – just not GM. Because GM quit trying to grow, and tried to Defend & Extend its practices and traditional markets.
GM leadership was willing to consider itself a "mature" company. Thus GM’s management expectations for growth were allowed to subside. Instead of measuring itself against total growth, managers became happy to talk about GM share and growth in selected segments. Thus GM could justify its below-market growth, and claim that it was an acceptably mature company. The leadership was OK with performing poorly because it abdicated its responsibility to growth – despite the impact on shareholders, employees, suppliers and customers. Management, and apparently the Board of Directors, is more happy to fail as GM than to become a better company – albeit one significantly different than the one sucking tail pipe fumes now.
Once any leadership team accepts that slower growth is acceptable, ultimate failure is a fait accompli – it will happen. Growth absolutely will slow. And eventually that will lead to enormous troubles. For any analyst or investor to claim that growth is out of the hands of management is syccophantic. As we know, despite the move to small cars in the 1970s, then big cars, and to higher quality cars, and then to higher mile-per-gallon cars year after year the offshore manufacturers have been growing share at the expense of the U.S. companies (except for the great success Chrysler had prior to its acquisition and innovation killing management changes by Daimler Benz). These offshore competitors did not relegate themselves to excuses about shifting customer tastes between segments as they came out with new models that covered the board – including pickups and SUVs – to keep their share profitably growing.
If you haven’t thrown in the towel on GM – you should definitely do so now. Clearly, the leadership team has given up on figuring out how to be successful. They are hoping to do no more than survive by doing what they’ve always done. And we know that won’t work. They may survive a while, but without growth the competitors will eventually eat up all their customers, resources and eventually them. By admitting they can’t believe a different leadership team could find a better way to compete, and grow, demise is a fait accompli.
by Adam Hartung | Aug 4, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
We all know we’re going to die. But we don’t usually think about it as we live each day. We pretty much run our lives the same until we are exposed to a new threat, like a particularly dangerous intersection or a tainted food, and then we change our behavior to deal with the threat. We know the average longevity for an American adult is around 75, so we fully expect to live that long and we don’t really think beyond that.
The same is true for most businesses. Yet, for about a decade we’ve known that the odds of a healthy public company surviving a mere decade is, at best 50/50. With such a short expected half-life, it should be surprising that pretty much all businesses do their planning as if they will go on forever. We apply optimism to our businesses the same way we do our lives. No CEO or other top executive will say "I imagine my company is in the half unlikely to make it another decade." Individually this makes sense, but collectively it is a disaster. Business leaders keep being surprised by the fragility of their Success Formulas as their businesses fall into the Whirlpool, wiping out shareholders and bondholders as well employee jobs.
Last week Chicago woke up to the painful, overnight demise of Bennigan’s (read story here). One of the oldest casual dining restaurant chains, Chicago was one of Bennigan’s top markets with 10% of its company stores located here. Also, Bennigan’s largest store was very visibly located on Michigan Avenue in the heart of the city. So Chicagoans were very surprised that at midnight on July 29 the owners called up store managers telling them to shutter the stores – the company is liquidating. Apparently the chain could not compete in a market of recession-softened demand, busted real estate values and higher food prices. So overnight, the business disappeared – leaving franchisees of 140 stores wondering what they heck they’re now supposed to do.
Bennigan’s, owned by Metromedia Restaurant Group, is a startling example of the myth of perpetuity. Despite being one of the very first casual dining concepts, increased competition was not hard to spot. Likewise, the dissolving of real estate values has been happening for months – like a slow pour of honey. And that recessions cause downdrafts in eating out has been known ever since restaurants have existed. And that food costs would increase was being predicted almost 3 years ago as fuel prices went up and showed no sign of a major downward reversal. It takes a lot of fuel to make and transport those quasi-prepared meals to restaurants – as well as a lot of energy to heat and cool the locations to customer expectations. None of these trends were hard to spot. But somehow, Benegan’s management did not plan for them.
As management Locks-in on its Success Formula it becomes blind to changes that could be very threatening – possibly business ending. As problems develop, seen in revenue or profit declines, the tendency is to say "we have to do more of this, do it faster, do it better, do it cheaper." When reality may be there is a need to take much more drastic action. But the desire to Defend & Extend becomes paramount among the optimists, who keep hoping for "things to return to better conditions." When, often, the current situation is more likely "the new reality." Or "the new normal." The past conditions are very unlikely to ever return.
Anyone expecting a return to widely available, extremely low cost credit had better think again about all those banks writing down billions of loans, and the near collapse of the mortgage industry as Freddie Mac and Fannie Mae stand on the brink of failure. And as auto leasing companies shut off all leasing products due to fear of lower residual values. Anyone thinking about a return to rapid U.S. job expansion had better take a look at the videos of hundreds of millions of workers in China, India and South America all desperate for a job at any wage. Anyone expecting lower taxes and a government bail-out had better take a look at the record-breaking deficit built up the last 8 years (when the budget was last balanced) and the expected upcoming costs for war (continued or ending), health care, and the aging/retiring population demand on social security.
What happened in the past was then, all that’s important is planning for the future. Without taking a very sobering look at what might happen, it’s easy to be Pollyanna. And that is how leadership teams fall into the half of businesses that don’t survive. It’s not lack of hard work. It’s an unwillingness to realize things change and we have to prepare for those changes. If we get stuck in D&E management, we keep doing what we always did despite declining returns. And eventually, you just can’t keep going any longer.
Failure rarely is as dramatic as it happened at Bennigan’s. Usually the wind up happens through an acquisition and slower shut down (like JPMorgan is about to complete with Bear Sterns), or through a longer process of management bleeding out the company assets (not unlike SBC’s takeover of AT&T). But the end point for Bear-Sterns and Bennigan’s were the same. They are no more. Any management team unwilling to accept the staggeringly pessimistic statistic that it has a 50% chance of failure in a decade is a likely candidate.
Keep that in mind GM, Ford, United Airlines, Delta and Citibank. We don’t like to think these sorts of iconic companies with long histories and past glory can disappear. Yet, past members of the Dow Jones Industrial Average included Woolworth’s, American Can, Johns-Manville, Esmark, Inco, Internationals Harvester and Nickel, Nash Motors, National Distillers and Swift. None of those DJIA companies thought they would ever leave the DJIA – much less disappear. Yet they did. If we run our business as if it can go on forever by doing more of the same we doom it to demise. Whether it’s fast like Bennigan’s, or more slowly.
by Adam Hartung | Aug 1, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Fear is a good motivator. But when the fear goes beyond that necessary for protection, it can become paranoia. While it’s not a word we like to think applies to us, in Defend & Extend organizations paranoia is fairly common. Defending the Success Formula, and it’s Lock-ins, becomes so paramount that anything which even looks like it might affect the Lock-in can cause extreme over-reaction.
Take the reaction Wal-Mart displayed when it started telling employees they needed to fear a Democratic win next fall (read article hear.) Wal-Mart certainly has its share of problems, but they won’t be fixed, or turned into a disaster, by whoever is elected in the next Presidential campaign. Yet, the leaders at Wal-Mart are so fearful of anything that would upset their Lock-ins that they are now telling their employees they had better vote Republican.
Wal-Mart’s credo is low cost. And somewhere along the way, this included paying its employees no more than it has to. The stories abound of Wal-Mart employees so underpaid they have to use food stamps or other government welfare subsidies to survive. And everyone is familiar with the armies of Wal-Mart employees lacking health care coverage. This Lock-in, to everything being low cost – including employees – caused Wal-Mart to develop a pathological fear of unions. A paranoia. And that has led to a fear of Democratic politicians.
Once unions were powerful in America. But you have to go back to the 1950s and 1960s. Then threats of union boycotts or strikes actually caused management to make decisions that were not balanced, but instead designed to avoid union wrath. But even at its height, non-government worker union participation never reached more than 50%. Now, union participation is only 8% – and that is down 50% since the mid-1980s. Unions are not a threat to any business leader today – including Wal-Mart.
Yet, as the article details, even minor union activity has caused dramatic over-reaction within Wal-Mart. When one store achieved union representation for its butchers Wal-Mart got rid of butchers by going to meat cut at the slaughter house. When a store in Canada had its store personnel unionize Wal-Mart closed the store. And now Wal-Mart is so afraid that unions might regain some strength they are trying to affect the votes – one of the truly independent actions all Americans have – of its employees.
A union would not bankrupt Wal-Mart. It might even make the company better! Yes, its cost might rise – but as we’ve seen low cost is not the only way to compete. The cost of a living wage with health care for all full-time Wal-Mart employees would not even cost retail prices to rise 2%. So it’s not like Wal-Mart loses its ability to be low-cost if employees had a decent wage and benefits. Moreover, if Wal-Mart had to pay better it just might have to rethink some parts of its Success Formula. And that just might help Wal-Mart adjust to changing market circumstances and become a far better competitor.
By trying to "stamp out" unions, and certainly deny their existence inside Wal-Mart, management is being paranoid. So driven to defend its Success Formula that it won’t consider options. Most Americans want their cohorts to have the basics covered. And while liking low prices, they are willing to pay for good products and good service fairly. And instead of seeing Wal-Mart as a company that abuses employees, unions could cause people to say "Wal-Mart is a great place to work. They treat people well. Let’s shop there."
D&E breeds paranoia. Protecting the Lock-ins to an extreme. And that’s the sign of a company in trouble. Because inevitably, all companies have to migrate to changing markets if they want to be profitable longer-term. The sooner management identifies paranoia, and kills it, the faster the company can react effectively to market shifts and improve its profitability. But don’t expect that to happen at Wal-Mart.
by Adam Hartung | Jul 23, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Everyone knows newspaper ad revenues are down dramatically. But this trend didn’t happen overnight. Ad revenues started slumping way back in 2001. At the time most management blamed the recession. Then lack of recovery was blamed on a jobless recession. By 2004 it was clear that advertisers were increasingly looking to targeted advertising like the internet and cable TV, moving away from traditional print. By 2005 movie studios were telling media companies they never intended to use traditional advertising like they previously had, auto companies were shifting large portions of advertising to the web, and real estate companies (not yet into the doldrums they face today) were shifting more and more advertising to the internet instead of full page newspaper ads for which there was no evidence of value.
Simultaneously, by 2000 eBay had become America’s permanent garage sale, making the need to buy an expensive classified ad far less necessary. Not to mention the impact Vehix.com and Cars.com was having on used auto sales. Meanwhile Craigslist.com was demonstrating its ability to find buyers for apartment rentals, autos and all kinds of things. It was clear that classified ads were now facing competition like never before seen – and that competition was going to intensifiy, not lessen.
Newspapers reacted all through the decade by slashing staff and other costs. At Chicago’s Tribune Corporation management could see it had purchases the LA Times at a market top, and by 2004 the company had already made several rounds of cuts at all its properties. Into this declining market Sam Zell decided to buy Tribune Corporation using a little of his money and a lot of debt (OPM – or other people’s money).
Now, after a slew of additional cuts, Zell has told employees "it was unfair to hold him to previous forecasts." (see quote in Chicago Tribune article here). If you can’t hold the Chairman and CEO responsible for over-optimistic decisions leading the company to the brink of disaster – and causing cost slashes which jeapardize the product while leaving no money to invest in the emerging on-line media market – who do you hold responsible?
Every management team has the requirement to do scenario development. All businesses have to be managed to succeed in future markets against future competitors. To meet these challenges, they have to develop scenarios that assess all market forces – both good and bad. It may be OK to hope for the best, but for goodness sake isn’t it up to management to plan for the worst? But Sam Zell allowed himself to listen to outgoing management, the Tribune company sellers, and use historical revenues as the basis of his projections. As he said "his team predicted a 5 percent to 7 percent decline in 2008 revenue." Rather than look at the forces affecting The Chicago Tribune and other newspapers (as noted earlier), he simply took the current results and said "surely things won’t be worse than a 5 – 7 percent decline". WRONG! As they like to say in ads for mutual funds "past results are no indication of future performance." Or, maybe you could at least have the savvy to not believe everything you’re told by the salesman.
Chicago is one of America’s largest and greatest city. Its citizens deserve great news reporting. But the Chicago Sun-Times has been gutted by a previous owner who embezzled billions out of the company leaving it on the brink of failure. And now its largest newspaper, The Chicago Tribune, is getting smaller and containing less news as Mr. Zell shows his "toughness" by laying off thousands of employees and slashing the news and editorial staff. This has led to some of the best editors in the country walking out the revolving door installed in HR due to the declining quality of the product. But, Mr. Zell claims that when he loaded the company up with more debt than it could repay he should not be held responsible.
There was another option available to Tribune Company and Mr. Zell. The internet started to affect how people searched for and acquired information by the mid-1990s. Tribune reacted by doing some things right, such as its investment in Cars.com, CareerBuilder.com and Food Channel which bred FoodNetwork.com. But it never attempted to transition news to the internet. What the company could have done by the time it sold to Mr. Zell was move its investments into building the worlds best on-line environment. Dow Jones, for example, invested in Marketwatch.com which was moving fast to displace The Wall Street Journal. And the foresighted News Corporation moved heavily into not only cable television, but internet acquisitions such as MySpace (and now Marketwatch via its acquistion of Dow Jones).
Mr. Zell should have recognized that Tribune Company was not a big building he could hope to fill with new tenants and milk for cash. Overly optimistic assumptions are the result of rose-colored glasses, which no leader should wear when planning for the future. Tribune Company was largely a group of outdated properties facing far faster growing and more successful new competitors – with a few gems that needed much more investment. He was buying old freestanding Sears stores just when the competition was throwing up shopping malls. He needed to move fast not to leverage this property up and out of cash, but instead to invest into internet opportunities with which he could migrate the news and other information base within Chicago Tribune and LA Times. Mr. Zell and his management team needed to figure out how to deliver reader eyes to web sites, and thereby serve up an enticing audience for the internet ad buyers. Not hope for a planned recovery of print media advertising in the face of the internet tsunami.
Who are the losers because of Mr. Zell’s optimistic forecasts that he now wants to say aren’t his responsibility? Chicagoans to start wtih. We’re wondering in Chicago if Wrigley field will be bought by someone and renamed XYZ park – something Chicagoans dread. We’re now expecting the landmark, and historically important, Tribune Tower to be converted into condos. And we’re getting less and less news every day as the paper gets smaller and smaller – with no good replacement for the information people seek. The same thing is happening in LA, where business leaders are frantic over the value destruction wrought at their local paper under Tribune Company control. And of course there’s all those great researchers, writers and editors who instead of transitioning to new media are simply out of work. And who knows what will happen to the bond holders who trusted Mr. Zell to be far better at utilizing scenario planning to keep Tribune Company a viable and successful company.
by Adam Hartung | Jul 22, 2008 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
Apple Computer company (see chart here) has been rather remarkable. After eschewing the Newton and other products it Locked-in on the Macintosh – and almost failed. After years of declining PC market share and no new products Steve Jobs returned – and with a lot of Disruption and White Space he turned the company around. For the last 4 years Apple has been a model Phoenix Principle company.
Today Apple announced earnings (read article here), and again they were up. But analysts were concerned because the company indicated margins could decline in the next quarter to account for costs of launching new products. This is exactly the kind of feedback that ended up driving Motorola (see chart here) into its bad situation. After Ed Zander Disrupted Motorola, installed White Space and had the company acting like a high-tech power again he fell victim to the lure of margin maintenance. Instead of following up the Razr with a new product every quarter – some hitting well and some maybe not – he let disappointing sales of Rokr and other new products push him toward D&E behavior. He started focusing on Razr sales for market domination – and in the end he pushed the Motorola cellular handset division over the brink when competitors eclipsed him. Short-term margins looked great, longer-term Motorola is fighting to survive in cellular handsets (it’s biggest business).
Apple is showing all indications of continuing to do the right things. After entering new markets, it shows the ability to bring out a series of sustaining product technologies to grow revenues. Each Disruptive product opens the door for these new products which help grow revenues with new customers. Now the CFO is telling investors that new products are planned, and since sales are never assured he has to be conservative about the margin estimate! Good!! No one introducing new products can be sure of their early sales and margin. But to be like a Phoenix, and continually keep rejuvenating, you must continue to launch new products in search of new opportunities. And that is exactly what Apple indicates it is going to keep doing. For investors, employees, customers and suppliers this is good!
The worry is Apple’s reliance on the CEO. Marketwatch quotes an analyst who said investors are worried about Steve Jobs’ health after a recent pulbic appearance "Question’s about Steve’s health will weigh on the stock until he, at some point, looks better in a public forum" (read quote here.)
There’s no doubt Jobs is a good manager. His willingness to Disrupt and instill White Space has allowed him to do well for all the constituencies benefitting from Apple’s turnaround and ongoing success. But for Apple to be a truly great, evergreen, Phoenix company it must build into its architecture the ability to renew itself. Rather than rely on its leader, it needs the systems to seek out the low-return businesses to exit, and to create Disruptions that self-develop White Space which can be monitored and guide growth. Otherwise, the company will stumble when Jobs inevitably leaves. And that would be unfortunate. Businesses can become evergreen, but not if their longevity relies on the leader – the hero CEO.
At Cisco Systems (see chart here) the company mission includes obsoleting its own products. This credo promotes Disruption as it keeps managers from becoming too Locked-in and staying with a product too long in an effort to avoid "cannibalization." As a result, Cisco is not too dependent upon its CEO to keep moving it into new markets, using new technologies and launching all new products. Until Apple develops a system for Disrupting itself its reliance on Jobs will be too high – just as was true at Microsoft – and investors have reason to be wary of the long-term results.
by Adam Hartung | Jul 17, 2008 | General, In the Rapids, Leadership, Lock-in
I regularly beat the stuffing out of organizations for Defending & Extending their Lock-in. Low growth and poor results have demonstrated for these companies that market shifts are pushing their Success Formula toward obsolescence. They need to Disrupt and use White Space if they are to survive and grow again.
There is another side to this. Some companies are in the Rapids, and they have a different set of requirements. Take for example IT services provider Infosys. Their quarter ended 30 June, 2008 saw revenues increase by 24.5% versus a year ago! The company also added over 7,000 employees during the quarter. Tata Consultancy Services (TCS – also an the IT services provider) for the same period saw revenues grow 21% as they added nearly 9,000 new employees. These companies are clearly in the Rapids, seeing revenues grow in double digits and they are profitable. They have a very different Lock-in problem.
When businesses are in the Rapids, their objective is to define the Lock-in which will guide improving results from the Success Formula. Without Lock-in, they cannot keep growing revenues and, even more importantly, improve on the Success Formula to grow profits and maintain above-average returns as new competitors enter. These businesses need to make sure they have a clear hierarchy that can guide the recruiting, hiring and new employee indoctrination process. They need clear processes for adding new large clients – Infosys added 49 clients in the latest quarter and TCS added 35. Without Locked-in processes to rapidly sell, onboard and deliver services to new clients they cannot maintain this rapid growth. Without clear IT structures, they cannot measure employee performance against client goals, and effectively implement billing and cash receipts. They need Locked-in decision-making processes that allow leaders to quickly review business issues and make quick decisions so the company can keep growing. And they need to develop experts inside the company who can oversee operations and be sure each silo maintains its performance.
When a business enters the Rapids Lock-in is GOOD! We forget about that because so often we are talking about problematic businesses. But when GM was growing fast, it needed to create Lock-in that helped it become the #1 auto company offering more styles and features than previous leader Ford. When Microsoft was growing fast it needed Lock-in to help it dominate the desktop market amongst fierce competitors threatening to fragment the PC software market. It was Wal-Mart’s Lock-in to supply chain leadership that allowed it to go from a small group of stores in backwater rural towns to the world’s largest retailer in just 2 decades. (Of course, all of them are now Challenged looking forward because eventually the let Lock-in overcome their need to change due to market shifts – but that’s a different story.)
When businesses don’t create Lock-in they can’t grow. They can’t compete effectively in a way that meets market expectations. They are chronically short capacity. They cannot onboard clients effectively, so potential buyers grow weary of the wait. They lose track of their record keeping and miss customer expectations – as well as struggle with cash management. They make erratic decisions that confuse customers, investors and employees, slowing the ability to maintain growth.
Today, Infosys and TCS are very profitable at the gross margin line – but not so on the bottom line. Their revenue per employee is a mere $51,000. Accenture produces revenue of $240,000 per employee! In the Rapids, these high growth companies that are Disrupting the marketplace need to manage their Lock-ins so they not only grow, but earn above average rates of return as well. Eventually, all Success Formulas hit the wall of diminishing returns. Market shifts allow competitors to strip out value from old Success Formulas. But first, before they stall, successful companies have to implement Lock-in to make their Success Formula valuable! Those that don’t just churn through lots of investor cash, employee turnover, beaten up suppliers and in the end fail.
In the Rapids, Lock-in is good! If you’re evaluating a growing company, you want to see that it has a clear Success Formula and knows how to Lock it in. Only after that has happened, and proof of above average returns are demonstrated, does it become critical to manage Lock-in for evergreen, long-lived results.
by Adam Hartung | Jul 8, 2008 | Defend & Extend, General, Leadership, Quotes
Ed Bronfman, Jr. is a scion of the family that used its ownership of Seagrams, and U.S. liquor prohibition, to build a fortune in Canada. Eventually he made a very large investment in Warner Music and appointed himself CEO. Unfortunately, his investment has not turned out as well as he would have liked due to market shifts in how people buy music. Here’s his quote (source of quote here):
"We expected our business would remain blissfully unaffected even as the world of interactivity, constant connection and file sharing was exploding. And of course we were wrong. How were we wrong? By standing still or moving at a glacial pace we inadvertently went to war wtih consumers by denying them what they wanted and could otherwise find – and as a result, of course, consumers won."
Lock-in caused Warner Music to be complacent – and ignore customers that switched to competitors. When markets shift, standing still (doing the same thing – or Defending & Extending your old Success Formula) can cause you to become competitively less viable.
Here’s an even better quote from Bill Gates, founder of Microsoft (source of quote here):
"Your most unhappy customers are your greatest source of learning."
Listening to your biggest, and your best, customers is important, but you won’t learn much about the market. They like your Success Formula and share your Lock-ins. It’s the customers who complain that are telling you about changes in the marketplace. They are telling you they will shift if they can find an alternative. And those who outright become disloyal, who leave, are really able to tell you about market shifts and changes in competition that threaten your returns. You might want to take your best customer golfing to keep her happy, but you should invest your resources in understanding the customers that complain, threaten to leave, cut their business or completely leave. They can give you the market information you need to plan for a future with higher returns.
by Adam Hartung | Jun 27, 2008 | Defend & Extend, General, Leadership, Lock-in
We all say we compete to win. But really, many of us just compete to compete. Winning is a lot less important than following "the rules." But in much of life, the rules are designed to favor the current winner. To win, you have to find a way to compete differently.
Athletes have set rules to play by. And when they violate those rules, fouls are called. We like to think real world competition is the same. But there are actually a lot less rules in most worldly competitions – it’s not nearly as cut and dried as a sport. As a result there are lots of opportunities to change how you compete, in effect doing different or new things. And savvy competitors, Phoenix competitors, realize that is the easiest, fastest and best way to win. They don’t fixate on doing things the way everyone else does it. Instead they look for a new way to compete that can unseat the entrenched way of behaving.
Over the last 18 months Americans watched this be applied in the Democratic presidential nomination process. Senator Hillary Clinton entered the competition as the clear front-runner. She had access to all the party elders, all the influencers and all the money raisers. She had all the traditional advantages of not only name recognition and awareness, but having the party apparatus primed to support her. Given this advantage, she was clearly going to be hard to unseat. She had the traditional Democratic party machine ready to work for her in big states like California, Massachusetts and New York. And all the traditional competitors that tried to beat her in the nominating process by competing in the traditional way were eliminated.
But Senator Barack Obama followed a typical Phoenix Principle campaign – and beat Senator Clinton. He eschewed trying to work the traditional tools of competition, and instead developed a different approach. He didn’t try to do "more, better, faster, cheaper" of the leader. He instead used typical Phoenix Principle approach that allowed him to win – even though it upset the classical competitor to no end.
- He focused on the future, not the past. Rather than talking about how great things were in some previous era – such as when Democrats last held the Presidency – he focused on a scenario of the future. His scenarios demonstrated a connection with trends in the USA and globally. Constantly focusing on the future, he pushed voters to think about how to achieve future goals – rather than how to return to traditional ways of competing. He didn’t talk about how to get from today to the future, he talked about designing a future then developing a backward plan to reach that future.
- He focused on his competitors rather than his customers. He did what they could not, or would not, given their primary constituency. While conventional wisdom said to focus on older people because they vote in higher percentages, he realized that voting group was Locked-in to traditional candidates and he focused on the overlooked younger voters. He promoted voter registration and being their advocate. He spent little time with old-line union bosses, because unions represent a far less powerful constituency than in the time of Franklin Roosevelt – or even Jimmy Carter. While the traditional competitors focused on traditional financing tools, such as reaching out to lobbyist groups and PACs, he focused his fundraising on the internet where competitors were less willing to depend. They were used to trading influence for money – and unsure that traditional donors would appreciate them raising large sums nontraditionally thus weakening their need to aid the donors. He focused less on his customers – the traditional Democratic voter – and instead focused on competitors to find their weaknesses and exploit them.
- He was Disruptive. He talked about doing things differently. His primary message was "change." This meant different things to different people, but at no time did he stop promoting "change." He talked endlessly about doing things differently – about Disrupting "Washington", lobbyists, corporate America, health care insurers, oil companies. He never showed fear of Disruption, but instead embraced it as a way to develop a new, better future.
- He used White Space. Conventional wisdom said "fight tooth and nail to win primaries in the big states." Instead, he exploited the caucus system used in many states to win. His compaign used unconventional techniques to exploit weaknesses in the "mega-message" approach of traditional candidates. He never tired of finding new, unique places to tell his message – making tremendous use of the internet including YouTube! and other social networking sites. He did not try to identify with traditional campaign methods, but instead used unconventional as often as possible. And he talked about bringing White Space projects to Washington – by creating dialogue with enemies currently ignored, and opening doors to change communication between fractured American constituencies.
Although Senator Obama’s compaign was a long shot, it exploited The Phoenix Principle and created an enormous upset. A very junior candidate – in both age and political experience – he set out to win by doing what had to be done rather than doing what everyone always did. Rather than being cowered by the huge name recognition, political clout and funding available to Senator Clinton, former Senator Edwards and other candidates he used their Lock-in to his advantage. He could predict what they would do, and as was pointed out several times on television coverage his campaign leaders uneerily projected his competitors’ performance in every single primary more than a year in advance! By understanding his competitors so well, by recognizing their Lock-ins, and then using Phoenix Principle practices he came from far behind to win.
And it can work for you too. Focus on the future, not the past. Focus on competitors, not customers to gain insight and advantage. Be Disruptive. Use White Space to develop new approaches to competition. That’s competing to win.
