Shooting the Phoenix

Readers of this blog know I am a big fan of Motorola.  From a moribund company laying off tens of thousands of employees, in just 3 years Motorola has become a financially stronger, more profitable and much higher growing company.  By using Disruptions and creating multiple White Space efforts, the company’s equity value has more than doubled under new leadership (see chart here.)

But recently, Motorola’s equity value dropped.  The company announced it would miss an earnings forecast due to lower mobile phone margins.  Note, Motorola did not say sales or earnings were declining – because both were up substantially.  Market share had grown in all its key markets and products, and revenue growth was on track.  The company did not stall, but it did miss an earnings forecast.  At the time I blogged that investors should look at other key metrics beyond the earnings miss, since the company’s efforts all portend a great future with much improved revenue and earnings.  But I was in the minority, as the majority of analysts unleashed a series of concerns about Motorola’s ability to keep profitably growing.

And that’s when Motorola’s management blinkedInstead of taking to the airwaves with its story of planned growth in order to reset investor expectations, leadership chose to announce a 3,500 employee lay-off (see article here.)  And that created a target for corporate raider, Carl Icahn.  Today he announced that he owned 1.4% of Motorola shares, and he wants a seat on the Board of Directors (see article here.)  On CNBC’s Faber report (see article here), Mr. Icahn informed investors he wanted to pay out the company’s $10B cash hoard in a special dividend, sell several businesses, take on substantial debt and use cash to buy up outstanding shares.  Innovation be danged!  Mr. Icahn wants to take the money and run.

When public speaking I ask audiences what the fastest way is to create cash value in a business.  I tell them you can immediately create cash value by selling the desks, chairs, copiers, intellectual property, new product designs, customer lists, distributor contracts and vendor agreements.  Then you can layoff the workforce, because in the short term they are purely cost.  "But what about tomorrow, next week, and next year?" is the audience’s standard reply.  And that is the key.  For everyone can see that by selling these assets it kills the ability to create what might be far greater future value.  Somewhere, someone has to invest in White Space, or there is no innovation nor growth.

Phoenix Principle companies create above average value by combining profitability with growth.  By using White Space to develop new products, new markets, new customers, new services and launch innovation of all kinds these companies create valueManagers that optimize the business, run it for immediate cash, destroy value by seeking to get the most possible cash as fast as possible.  And that is Mr. Icahn – shooting at the Phoenix in order to get meat today rather than generate more value from many eggs and chicks both today and tomorrow.

How did this happen to Motorola?  The leadership did not do an effective job of communicating their future opportunities.  Google, Cisco and Microsoft all have a cash hoard, a good credit rating and several businesses they could sell.  They also have an equity value (aka stock price) high enough that it reflects the future expected value.  Motorola’s leadership did not shed the old mantle of the stodgy midwestern company.  Thus when iPhone was announced at MacWorld it eclipsed the fact that a similar product (ROKR) has been on the market from Motorola for several months and already sold more units than iPhone predicted to sell in its first 24 months!  Phoenix companies not only have to follow The Phoenix Principle, they have to get investors on board to the expectations of future growth and profits.

I am a Motorola shareholder, which should surprise no one that has read this blog.  But I am not overjoyed that my investment is worth more today due to Mr. Icahn.  Mr. Icahn will at best put a few extra dimes in my pocket short term.  But as a Phoenix company Motorola can put many dollars in my pocket soon enough.  If Mr. Icahn succeeds with his plans he will kill the bird laying the proverbial golden eggs, and that is in fact bad news for investors, employees, suppliers and customers who will see Motorola lose market share to Nokia, Sony, RIM and others.  And Chicago will watch another great company, like happened at Sears, move from market leadership to the whirlpool of demise. 

Disruptive Success

How can we recognize a Phoenix company?  One that will sustain its success for a prolonged period?  We can start by looking at the one and only company which has been on the Dow Jones Industrial Average ever since it was created.  The one company that has overcome Schumpeter’s dire predictions of individual company failure, and demonstrated it is possible to earn above average rates of return for  extended time and simultaneously grow.  That company is General Electric.

A recent article on GE’s Medical Devices business (see article here) highlights key characteristics of how to overcome Lock-in to an existing Success Formula by internally Disrupting and using White Space.  Mark Morita is the Manager for Disruptive Technologies within this GE business.  Mark is not an engineer, nor is he in product development.  GE recognizes that it must maintain a powerful group always focused on making incremental improvements in their products and markets.  But, they simultaneously must have a Disruptive focus that can produce breakthrough results

And that is where Mark comes in.  Mark Disrupts the engineers by introducing technologies from entirely other fields.  While they attend medical equipment conferences, Mark attends gaming and consumer electronics conferences.  While they try to make sonogram machines that are 10% lighter or 10% cheaper, Mark looks for ways to make them the size of a GameBoy at less than half current cost.  His role is not only tolerated in GE – it is mandatedAll across the many GE businesses they maintain roles which are dedicated to attacking Lock-In and Disrupting the existing Success Formula.  Mark and his counterparts constantly keep the GE businesses operating White Space to create new Success Formulas leading to growth.

Jack Welch, the famed former CEO of GE, had the nickname "Neutron Jack."  This referred to his willingness to Disrupt GE in order to seek above average results and growth.  No business was sacred in GE, and no market was beyond their reach.  Welch constantly Disrupted GE from within, and kept Lock-in from leading to deteriorating performance.  It wasn’t mere goal-setting that kept GE dynamic, it was an institutionalized practice of internal Disruption and extensive use of White Space.  New CEO Jeffrey Immelt is now continuing that practice, with dramaticly large recent acquisitions of about 2/3 of Abbott Labs (medical diagnostic equipment) and Smiths Group (aerospace) while indicating he plans to sell the $10B plastics business (see article here).

Even a huge company, such as GE, can operate according to The Phoenix Principle and sustain success.  The Phoenix Principle does not apply only to small companies, nor those in high-tech markets.  Any company can achieve and sustain success if they are willing to identify their Success Formula and Lock-ins, attack those Lock-ins with programs designed to generate internal Disruptions, then fund White Space in which permission is given to develop new Success Formulas.  These steps may seem mundane, but those who follow them can become the next GE – and that would not be a bad thing.

Addressing Challenges

Walgreen’s is the kind of company that can make an investor very worried.  It’s an "old fashioned" retailer, and the company has certainly seen dramatica changes in its markets.  Over the last decade, we have changed how we purchase licensed pharmaceuticals, as well as how we think about "drug stores" as many competitors have begun offering to fill prescriptions.  The "corner pharmacists" has practically disappeared.  Is Walgreen’s a company on the brink of disaster?

As I’ve written before, look for a growth stall.  Any time a company sees declining revenue or profits for 2 or more consecutive quarters, or two or more quarters of declining year-over-year sales or profits, the company enters a growth stall.  When this happens, there is a less than 7% chance the company will ever again sustain growth of a meager 2% per year.  Interestingly, Walgreen’s has not stalled.  This despite all the changes in insurance rules about drug payments, the advent of on-line and mail-order pharmacies, corporate moves to drastically cut employee drug costs, the entry of new competitors such as discount retailers (WalMart and Target) and just about every grocer, and competitor moves to offer generic drugs at extremely low prices.

At its recent annual meeting (see article here), the new CEO very clearly identified many of these influences as Challenges the company must face.  He followed this up by listing all the actions Walgreens had taken to set up White Space projects to maintain company growth, which include but are not limited to:  digital photo processing, refilling printer ink cartridges, introducing exclusive department store type cosmetics, and now even opening in-store health care clinics for walk-in customers.  As the CEO, Jeffrey Rein said, "We’re testing everything we possibly can to see what happens, to see what does work.  We don’t know until we put it out there."  After a very clear statement that the company faces many market shifting Challenges, similarly clear statements about using White Space to drive new growth.

This new CEO is not an outsider by the way.  He’s a 25 year company veteran.  So it’s clear that companies can internally develop leaders who can recognize Challenges, Disrupt and establish White Space.  Whether Walgreens can maintain its 32 years of ongoing growth is no sure thing.  The fact that the company has not stalled however is a great testament to identifying Challenges and reacting.  As a company that is facing tremendous Challenges, Walgreen’s leadership is a model of how to keep up the growth by using White Space.

Great Things from Small Beginnings

My last blog led to a reader comment "Can there be White Space without Innovation?"  (click here to read full comment) Quite simply, I don’t see how.  Of course, innovation is a term open to wide interpretation.  Some think that innovation requires a huge breakthrough invention, a new product, or a never-before-seen business model.  Maybe a patent or a copyright.  In fact, innovation simply means introducing a new way of operating for yourself or your customers.  Defined this way, we can innovate in all parts of our business model, and innovations can be "small" or "large".  What’s important about White Space is that we use innovation processes to attack old Lock-ins and develop a new Success Formula.

Take for example Foulds, a 121 year old $25million revenue company that makes pasta in Libertyville, IL (see full article here.)  Pasta is far from a "high-tech" business.  And the distribution channels are extremely stable and well known.  Suppliers are HUGE agribusinesss competitors like Cargill, and customers are HUGE supermarket chains like Jewel, Dominick’s, Safeway and Kroger.  Many competitors are extremely well funded such as New World Pasta that spend millions of dollars on ad campaigns for Prince and Creamette brands. In this competitive situation, the world changed in the late 1990s when the Atkins diet craze swept across America and many people stopped eating pasta entirely.  Suddently, Foulds was facing a stagnant market, surrounded by industry forces much, much better resourced than they were. 

The easy answer for Foulds would have been to drop into a price war to drive volume.  Or to have dumped money into advertising – largely to no avail.  Or possibly closing shop, or looking for a buyer to "consolidate" the industry.  Doing "more of the same" to Defend & Extend the 121 year old business model would have led to loss of share to the big players and possibly failure.  So, company CEO Chris Bradley opened White Space in the company he ran.  He allowed his employees to face the Market Challenge, and atack the Lock-ins so prevalent.  In their effort, the team overcame commitment to a century-old recipe for pasta.  They experimented with different ingredients and then different manufacturing processes (literally adjusting the time-proven work of generations).  In the end they developed a pasta with 6 times the normal fiber of regular pasta and a taste and texture that is considered better than what dry pasta was like before.

This new pasta is not a patentable product.  And it doesn’t open some new "food category."  But it does allow people who seek a high-fiber, high-protein and healthy product for their diet to eat pasta – something not allowed on some diets at all and heavily restricted on others.  And this innovation has helped the company to not only deal with the Market Challenge, but actually to thrive.  Foulds recognized a Market Challenge, Disrupted its Lock-in to old recipes and hand-made manufacturing processes, and then gave permission to the team to innovate a new Success Formula which could appeal to a shifting market. The value of White Space is that it gives innovation a place to flourish, a place to succeed, by intentionally acquiring permission to break old Lock-ins and thereby develop a new Success Formula that incorporates innovation – of any type or scale that addresses Market Challenges.

Critical Permission

If you aren’t tuned-in to ad agencies, and if you don’t live in Chicago, you might well have missed a furor that erupted in early December regarding America’s largest retailer.  Wal-Mart made a switch in ad agencies last fall, moving their $500million account to DraftFCB.  But then, shortly after making the switch, Wal-Mart fired the company’s head of marketing and fired the agency.  Wal-Mart then, and now, was unwilling to offer an explanation.  They hid behind a veiled claim of "ethics violations," using besmirching language to imply wrong-doing while offering no facts.

Since then, Susan Chandler at The Chicago Tribune has unearthed a pretty good explanation of what went on (see article here.) [Like lots of news stories, it takes some time and research to start piecing together what really happened.] Seems more than a year ago Wal-Mart hired a new 35 year old marketer to help change the Wal-Mart image and promotion program.  Given how Wal-Mart’s growth prospects, and stock price, had stagnated since 2000 this appeared like a very good idea.

The new marketer started moving Wal-Mart away from selling on Price, Price and Price.  As my old marketing professor said "Price is nothing but a blunt club that has no meaning.  Skilled marketers use other tools to create customer value and over time make a lot more money."  So this new marketer’s actions looked like a good move to actually help Wal-Mart get back on the growth track.

She actually had Wal-Mart underwriting fashion shows.  And launched advertising in Vogue magazine.  And she moved much trendier merchandise into the stores.  She also started Wal-Mart selling higher margin products, such as wine, gourmet coffee and sushi.  She did this in selected stores, testing her ideas.  In effect, she set up her own White Space and began working on a new Success Formula to replace the old, tired one at Wal-Mart.

But, she made a small mistake.  She didn’t really have Permission to use Market Challenges to create a new Success FormulaWal-Mart had not (and still has not) Disrupted itself.  The company has not agreed that it’s Success Formula needs to change, and its leaders have not expressed any need for a new Success Formula.  Operating in denial of the marketplace Challenges which have let Target, Kohl’s and JCPenney take away customers and sales, Wal-Mart really wanted the new marketing head to Defend & Extend the old Success Formula.  She may have thought she had White Space, but she didn’t.  While she had resources, she lacked Permission – Permission to attack old Lock-ins and Permission to develop new solutions.

So the top brass at Wal-Mart fired her.  And they fired the ad agency.  It’s easier to deny Challenges, and fire those who take on Lock-ins, than it is to Disrupt your thinking and commit to White Space.  It’s easier to live in Lock-in than use White Space to find a new and better Success Formula.

Wal-Mart has had many "industry experts" support these actions.  According to the Tribune, once the firings were done the Chairman of a retail consulting company (Howard Davidowitz) said "Wal-Mart’s lifestyle advertising is all wrong.  It shows in the sales."  Uh, with 99% of the company stuck in doing wat it’s always done, you don’t suppose the weak results are dure more to a failing Success Formula than some new White Space efforts?  The consultant is as Locked-in as Wal-Mart’s maangement.  Even this outsider was willing to give the new marketer permission to try new things.  Supporting management may help him get future fees, but it isn’t doing the investors or vendors much good.

Or, take this quote from George Whalin, another "industry expert," – "They [Wal-Mart] don’t attract 25-year-old trendy women.  Their customers are older women.  They’re not skinny-jeans buyers…. They [Wal-Mart] lost their minds."  Maybe the need for new customers is the problem, George.  You think it’s a poor idea to attract younger customers?  It’s bad to expand your customer base?  To upgrade your product lines to higher margin items and to improve your competitiveness against your fastest growing and most successful competitors is "losing your mind"? Not only is Wal-Mart Locked-in, so are the "experts."  If they won’t support White Space, with Permission to develop a new Success Formula, how do they suppose Wal-Mart is to turn-around its sales trends?

As this firing happened, Wal-Mart had its worst November sales in a decade.  How does Wal-Mart talk about this performance?  According to the company spokesperson, "We have found the thing that appeals to everyone is priceWe will continue to emphasize price leadership." 

Reinforcing the old Success Formula isn’t going to solve Wal-Mart’s competitive problems.  If you keep doing what you just did, you’re going to get what you just got. Without Permission to Disrupt Lock-ins and create a new Success Formula, all the size and resources of even a Wal-Mart won’t create success.  Too bad for Wal-Mart’s top marketer, too bad for the agency, too bad for shoppers looking for an improved Wal-Mart, too bad for vendors that want Wal-Mart to do more than beat them up for lower prices, and too bad for investors.

Stick with the Innovator

Boy, Motorola‘s stock had a rough day today.  The company announced lower than expected earnings, and the price dropped 7.8%!  A recent chart (see here) shows this has been the extension of a slide that started back in October, with the latest decline bringing the free fall to over 25%!  Wow.   Meanwhile the DJIA and NASDAQ 100 have all gone up substantially.  This is ugly.  Should you sell the stock if you’re an investor?

If you’ve read this blog a while, you probably know that I’m recommending you don’t sell Motorola.  In fact, consider buying more.  Why would I say that – and what do I see that all these other investors don’t?  Well, just take for example the MarketWatch article on Motorola (see here).  It’s all about mobile phone handsets.  Although volume is up, and Motorola is taking share from competitors, it’s prices have gone down and thus revenue and profit have been hurt.  The companion article on new products at Motorola (see here) also talked only about handsets. Merrill Lynch issued a report on Motorola, cutting its rating to Neutral from Buy, and through several pages of analysis the only discussion was about sales of mobile handsets.  All of these would lead you to believe that all Motorola does is make and sell mobile handsets.  But we know that’s not true.

Why, just before Christmas (12/21/06) Motorola announced its acquisition of Tut (see here), a company that helps Motorola’s Network and Enterprise unit expand its market in IPTV and the "connected home" marketplace.  Tut helps telephone companies get into the TV business, and enriches the communications at the home.  Tut built upon Motorola’s earlier acquisition of Symbol Technologies (9/20/06 see here.) And that, of course, had expanded the acquisition of General Instruments in 2000 that made Motorola a major player in the DVR business (see here).  Don’t forget, Motorola also bought Good Technology (11/11/06 see here) which gave them a boost in the mobile communicatinos business we think of now as "blackberry."  Now Motorola is not only in the network, data and video technology for businesses, but home use as well.  Both growing at double digit rates annually.

Simultaneously, Motorola has been expanding its R&D in new ways.  They have expanded development operations in Brazil (see here) as well as India (see here.)  And don’t forget their 2006 partnerships with Kodak and Google to develop and launch new products (see here.)

And the company has expanded other very large and growing businesses.  Have we forgotten that Motorola makes the infrastructure equipment for mobile phones (and all other mobile devices) and they recently won the deal to rebuild the Sprint network (8/9/06 see here.)  Have we forgotten that Motorola is #1 (by a huge amount) in the radio systems for Police, Fire, Ambulance and other safety services?  And that business got a shot in the arm after 9/11/01 when the government asked to connect these systems – leading to Motorola’s launch of MotoVision as a product which can link these emergency services and is now rolling out across the U.S. (see here.)

Motorola is much more than a handset business.  And even that is growing – and gaining share on all competitors.  Motorola isn’t a story of a company stalling.  It’s a company that has been investing in multiple White Space projects simultaneously as it expands into new businesses and finds new opportunities.  Yes, these need to produce higher revenues and higher profits.  And it is important Motorola learn how to forecast its sales dollars and earnings to help investors know what to expect.  But we must not lose sight of the fact that Motorola is a company that is growing, at double digit rates, and earning above market average rates of return on its sales.  It has put in place a new management team (new CEO and new Marketing head – see articles on Zander as 2006 CEO of the year here and on Keller here ) who are willing to bring Challenges to the fore and use Disruptions to drive new innovation.

Motorola has attacked old Lock-ins head on.  It has established White Space, and is developing new markets to expand its sales.  Now, and in the future, mobile handset sales are only a part of the business.  It’s time Wall Street analysts, news reporters and investors take a broader view of Motorola.  Anyone who does should see "a future so bright they need to wear shades."

Succeeding on Competitor’s Lock-in

Did you buy any CDs this Christmas?  If you did, the odds re you didn’t buy as many as you did in previous years.  A freefall in sales of physical music products (CDs and music DVDs) has been going on since 2000.  (For more data see Chicago Tribune article here.) That year CD sales peaked at 942 million units.  By 2005, the volume was down to 705 million – a full 25% decline!  And sales were off an additional 15.7% in the first six months of 2006.

Meanwhile, according to the Recording Industry Assocition of America, Sales of digital singles increased 71.3% in the first half of 2006.  Since inception in 2003, sales of iTunes have reached a staggering 1.5BILLION songs – making Apple Computer Company the 4th largest music seller in the U.S.  According to ComScore networks (see more data here), sales at iTunes increased a whopping 84% in the first 3 quarters of 2006.  According to the V.P. of communications at RIAA, Jonathan Lamy, "This is a markeptlace that went from nothing 3 years ago to this year surpassing a billion dollars in retail revenue" (quote from Tribune.)

You have to wonder, why is Apple capturing all these sales and all this value?  After all, they didn’t invent MP3 technology – the format that made digital music possible had been around for several years before Apple created its iPod version of the music storage and playback device.  Likewise, Napster had gone on to great infamy demonstrating the huge demand for a digital music site years before iTunes was launched.  Obviously it wasn’t a technology breakthrough that gave Apple this big success.

Furthermore, before Apple launched either iPod or iTunes Sony had already been a long-term leader in consumer electronics.  Sony’s famous Walkman, Discman and other products had pioneered portable music.  Sony had a global distribution for its products in stores of all types, including its own.  And Sony was a brand synonymous with quality in consumer electronic devices and music playback.  Sony even owned its own music label, and a huge archive of popular songs as well as contracts with several popular artists.  Sony had all the pieces to create and dominate the digital music business.  But it didn’t.

Sony was, and is, trapped in its Lock-in.  The company had two separate division for hardware and software (music), and the two didn’t talk to each other.  Worse, both divisions committed to the old music industry Success Formula, and had Locked-in on the physical distribution method for selling music (CDs). [For White Paper on music industry Success Formula and Lock-in visit here.]  Both feared cannibalization more than they sought breakthrough solutions, as Sony joined EMI, RCA and others in suing Napster into oblivion during 2000, hoping it would stop digital music sales and help them regain sales and profits.

Today the traditional music companies are still Locked-in, and Apple is making enormous profits.  Like Southwest in the airline industry, Apple is simply doing what the market wants and is reaping huge benefit because the most likely, and most powerful, competitors are more interested in preserving Lock-in than succeeding.  Just because competitors are large, and well funded, and full of good product development does not mean you can’t effectively compete against them.  When markets shift Lock-in often means that the most logical activity – that of existing competitors reaping the benefitis often NOT what occurs.  And it makes enormous markets available for new competitors to develop new Success Formulas that create above average returns.

Lock-in Limits Thinking

I’m almost 50, and if you’re age is anywhere near mine, and you’ve lived in the U.S.A., you probably have a really bad attitude toward electricity created by nuclear power.  Back in the 1970s electric utilities set about building nuclear power plants which cost up to 10 times (not 10% more, 1,000% more) than they forecast.  As a result, electric rates were shooting up beyond everyone’s expectations in order to pay for these enormous cost overruns.  Additionally, construction timelines were extended out 2x to 5x expectations, causing power shortages which further drove up rates.  And then, on top of all of this, serious concerns about safety developed as we saw various problems in nuclear operations – not the least of which was the core exposure at Three Mile Island which put a scare in everyone across the U.S.A.  as we all genuinely feared a Chernobyl-style meltdown and radiation leak.

The electic utility leaders of the 1970s made a series of mistakes when they went about implementing nuclear power.  Not the least of these was a complete lack of standardization.  As a famous study at the time reported, in the U.S.A. no two nuclear power plants were the same.  Successful nuclear programs in France, Germany and Japan had demonstrated that by utilizing the same engineering, the same plans, and learning from each and every build then improving those plans, they had developed extremely cost effective nuclear powered electricity which was proving to be extremely safe.  As a Harvard Professor (definitely not a hotbed of support for nuclear power) reported, the French program was producing electricity at rates so low that you could completely encase the spent fuel rods in platinum 3 foot thick and blast it into outer space, or bury it into a core hole 15 miles below the earth surface, and the added cost would still make their cost per kilowatt hour a fraction of the cost of fossil fuel generators in the U.S.

But, that was then.  What about now?  As recently reported (see Chicago Tribune article here), nuclear power is starting to make a U.S. comeback.  Fossil fuels are more expensive than ever.  And, this time the industry seems to be intent upon utilizing all the lessons from the past 50 years.  Yes, that’s right, we’ve been making electricity from nuclear fuel for 50 years (the U.S. wasn’t first, but even here nuclear power is over 40 years old).  But will this program move forward? 

That all depends upon our Lock-in.  As a country, we can choose to remain locked-in to our previous assumptions about nuclear power.  Assumptions based upon a single history (the U.S. experience versus the global experience), and based upon a very poor implementation.  Or, we can view recent world events as a Disruption to our thinking.  We can view the 5 year old war in Iraq as at least partially connected to our need for secure fossil fuel reserves.  We can view the breakdowns in domestic offshore supplies from storms in the Gulf of Mexico as indicative of the risks inherent in our fossil fuels based supply system.  We can view the ongoing reports of global warming as having at least the potential of being accurate (and if so, potentially deadly).  We can utilize these market challenges to our energy supply strategy as creating within us a need to disrupt our approach to energy production in the U.S.A.

If we do this, we then can see the validity in using White Space to restart a nuclear energy program domestically.  We should not wholesale change strategy – we need to learn.  We should set aside Permission for a handful of companies to utilize all the accumulated knowledge on nuclear power to begin implementing some new plants.  We should observe these projects closely.  Monitor their progress and results.  Learn from them as much as possible.  And ADAPT in these White Space projects to develop solutions which work.  Then, we can begin to MIGRATE toward a nuclear power as an effective part of our national energy policy.

As a nation, we’ve been Locked-in to an "anti-nuclear" energy strategy.  But, 30 years have passed since Three Mile Island, and a lot has been learned.  Our approach, our strategy, is being Challenged by a range of forces.  What we must do now is see these Challenges as reason to Disrupt ourselves – our approach – and realize we must move beyond our Lock-in.  We can use White Space to give Permission for trying a new solution, and potentially develop a new Success Formula for American energy supply.

Metric motivation

Do you ever wonder how people get so locked in to doing something that they end up doing the wrong thing?  Do you think they are all bad people?  My experience has shown me that rarely do people do things because they have no internal moral compass.  Rather, it’s the systems we use to Lock-In behavior which causes behavior to end up creating negative "unintended consequences."

Take for example compensation for attorneys.  As everyone knows, attorneys charge by the hour.  As do plumbers, electricians, retail store clerks and a raft of other occupations.  On the face of it, this makes complete sense.  But, as the Chicago Tribune recently reported (see article here), when you couple this simple billing process directly to compensation, you can get some pretty bad outcomes.  By "promoting" what is seen by top management as a key success factor, your Lock-in can lead well-meaning people to do things which are less than…… shall we say….. positively correlated with customer success?

As the Tibune reported, by Locking-in on the metric, billable hours, what starts to happen in law firms is people "fudge" their billing.  What appears to be a good thing, tieing compensation to a key firm growth metric,  leads everyone up and down the firm to do unnecessary work, take longer time to do work than is necessary, utilize resources on projects that are hard to justify, and even outright exagerate the time spent on client efforts.  As a result, some clients are finding they need to challenge their attorney’s bills – not an activity you want to spend time doing with someone who is supposedly your advocate, hopefully looking out for your best interest.  And some judges have been considering attorney’s bills too high, and refusing to force the payment of those bills.

I don’t mean just to pick on attorneys here.  More than a dozen years ago I took a leading position with the consulting firm of Coopers & Lybrand (later merged with Price Waterhouse and then later acquired by IBM.)  I had worked at the firm only 6 months when I was in a meeting with the top officers of the firm to discuss "firm direction."  As the meeting droned on, talking about nothing but billable hours per type of project, I finally said "you know, I’m getting the sense that no one here cares what kind of work we do.  I could have armies of MBAs operating jack hammers and no one would care as long as it generated thousands of billable hours at market  hourly rates."  One of the top 5 firm officers turned to me and said "you know Adam, now you’re starting to get it."

What we all have to be careful about is Locking-in on metrics which can lead to behavior that does not serve our customers well.  This Lock-in, often a key sign of good implementation of strategy or quality (locking-in metrics is a cornerstone of Six Sigma), can become deadly when disassociated from market conditions and customer needs.  Yes, billable hours are good – but only when those hours are serving the client’s best interest. 

That’s the problem with Lock-in, at first it seems like a really good idea.  You use a metric to help drive repetition of behavior which has proven to lead to success.  Locking in on the metric improves results.  It clearly is beneficial, and a good thing.  But these same locked-in metrics can prove problematic, even disastrous, if we don’t regularly Challenge them in the face of market requirements.  We need to alter our metrics in order to keep ourselves aligned with customer needs.  Metrics must be seen as guideposts, not ends into themselves.  And all of them need to be viewed as flexible and alterable – before they lock us in to a tour of the Swamp and eventually failure.

Swampy Behavior

I’ve talked a lot about the business lifecycle, but not recently.  For newer BLOG readers, I describe the business lifecycle as being like a river.  Companies start out in the Wellspring, looking for a working Success Formula.  After it hits on a functioning business model, it enters the Rapids where it uses innovation in all parts of its business to fully develop the Success Formula and make maximum returns while growing.  Then the company hits a growth stall, and enters the Flats – where paddling suddenly becomes critical.  Hoping that they can now extend their life by doing more of the same, they hope to stay in the Flats.  But, unfortunately, in today’s economy there is no energy in the Flats and companies find themselves rapidly in the Swamp, where they become so obsessed with killing mosqitos and fighting alligators that they forget entirely what the Rapids were like and their real objective is to find fast moving water again.  Finally, they fall into the Whirlpool when competitors simply pull them into failure.

I’m often asked how to identify transitions in companies across these sectors, and I point to how Lock-in during the Rapids leads to the stall in the Flats.  Look at Lock-ins, and adherence to Lock-in even after the market has shifted and the Success Formula results are deteriorating.  As focus becomes all about Lock-in adherence, even as results have become mired, and you see companies in the Swamp.  Very few recover from the Swamp – the use up their resources as competitors push them toward the Whirlpool.

WalMart has exhibited all the traits of a company deeply in the Swamp.  Despite their poor results, chronicled in this blog, Walmart rigidly sticks to its doctrine and hopes the market will bring them fresh water so the paddling isn’t so tough.  A great example showed up recently, in the form of WalMart’s business cards.  In the midst of it’s worst monthly and quarterly performance in over a decade, WalMart chose to react by reducing the physical size of their business cards (see Forbes article here.)  Yep, amidst a crisis in growth this management team has reacted by cutting costs – it’s core Success Formula Lock-in – in the trivial area of business cards.  WalMart is schrinking the cards in order to lower the paper cost and ink cost in printing employee cards.  Give me a break – this is going to make any difference in the competitive problems with Target, Kohl’s and JCPenneys?

This joins the pantheon of key indicators that investors, employees and suppliers can use to identify a company in deep strategic trouble.  I used to call it "the paper clip memo phenomenon."  Look for the CEO of a troubled company to send out an email telling employees to be sure to save and reuse paper clips before discarding materials.  This memo has come in many forms – such as "please start printing on the back side of paper as well as the front side", or "from here forward printing documents in color is forbidden," to "we are reducing all email archive space by 75% in order to save on server costs in IT."  All real world examples of business leaders who are effectively telling the world they have no idea how to deal with the strategy problems they face, and they hope to survive as long as possible by adhering to Lock-in.   

WalMart is huge and it won’t fail tomorrow.  Heck, if we get a recession next year (predicted by several economists) WalMart might even see an up-tick in business and a jump in it’s stock price as customers go on a cost-saving binge.  But, longer term, WalMart has demonstrated that it is out of touch with its customers and competitors – and it’s low cost no matter the consequences strategy is not the path to growth.  Sometimes, the smallest things can demonstrate the biggest strategy problems.  Just look at their business cards.