Google Growth

When I was young the word Google meant a very large number in math class.  Today, Google means "to search" – or even more importantly Google represents the latest meteoric growth company.  The interesting question, is Google just lucky (right company in the right market at the right time), or is there something more systematic going on?

It shouldn’t surprise you to hear that I think it is systematic.  Let’s just take a look at Google’s IT department, and you can compare it to the typical department.  Or possibly your own.  (For specifics, go to Information Week article here.)  Look for the White Space to innovate growth, and compare to most IT departments.

Firstly, despite spending 50% of revenues on IT, the company has no CIO or CTO.  Instead, IT responsibility is distributed amongst several Vice Presidents.  The closest thing to a CIO they have is a 36 year old with an undergraduate degree in social and political organizations, then a Ph.D. in Psychology.  So much for the "tech bent" requirement in the role – or in Google.  The fact is, that having distributed responsibility is a Disruptive design element which keeps projects, and people, from getting Locked in

When it comes to managing technology he says "What we put on each desktop is not as important as how we think about what to put on each desktop…choice is always better than controlcontrol gets in the way of innovation….sees a distinction between tools that tell you something and tools that stop you from doing something….I try to control as little as possible."

Google manages engineers with a matrix system.  Employees have mutliple managers, and projects typically last as little as 3 months.  Rather than a "good old boy referral" system for placing people, the project assignment system is automated with AI.  Every person and every project is reviewed, and input is put in a database, and the information is completely available to EVERYONE to see.  That’s right, performance reviews are public knowledge.  Another design element that creates Disruptions and avoids Lock-in.

To encourage collaboration, people stay on projects for only a short time.  And, to keep people talking lunch is free in the cafeteria.  Most people would say that free lunch is simply wasted money.  But then again, most people have never come close to Google’s growth rate.

The fact is, Google is loaded with White Space.  Its organizational structure is designed to constantly Disrupt the way people work and think, by moving them frequently and rapidly across projects.  Feedback is public, so that everyone knows what is working and what isn’t.  AI creates job assignments, rather than people, forcing new collaboration and new insights.  And R&D is not budgeted separately from IT, engineering or product development, in order to keep work and people moving freely and focused upon results rather than myopic projects or budgets.

There is very little "Focus" at Google.  Just dramatic growth, fantastic new product development and introduction, and superb rates of return. 

Dell Disaster

I need to thank one of my readers for bringing to my attention a recent BusinessWeek article on Dell (see article here.)  As he pointed out, this article comes almost exactly 3 months after I talked about how Dell’s Lock-in was disastrous.  There are some great quotes worthy of sharing:

Regarding Lock-in:

  • "Dell remained slavishly loyal to its core idea of ultra-efficient supply-chain management and direct sales to consumers, even as rivals have stepped up their game and markets have shifted to take away some of Dell’s key advantages. Instead of adapting, critics say, Dell cut costs in ways that compromised customer service and, possibly, product quality."

Some readers may recall on April 16, 2006 when I pointed out Wal-Mart’s problems and discussed the risk of being a 1-Trick Pony:

  • "They’re a one-trick pony. It was a great trick for over 10 years, but the rest of us have figured it out and Dell hasn’t plowed any of its profits into creating a new trick."

Regarding identifying Telltales of big problems that indicate a company is moving into the Swamp – or Whirlpool:

  • "Dell’s culture is not inspirational or aspirational," says Geoffrey Moore, a tech consultant and author of Dealing with Darwin: How Great Companies Innovate at Every Phase of Their Evolution. "This is when they need to be imaginative, but [Dell’s] culture only wants to talk about execution."

Of course, in an execution focused company there is no room for White Space, and you don’t get innovation:

  • "They don’t feel they’re part of something at Dell, and they generally leave because they feel frustrated," says Snyder. "Dell is not a fun place to work, and it’s less fun now than it used to be."
  • "Even the CEO admitted so in 2003 – "There are some organizations where people think they’re a hero if they invent a new thing," he said. "Being a hero at Dell means saving money."
  • "Inside Dell, ideas that break from the model are discouraged, say former Dell managers. Notes one: "You had to be very confident and thick-skinned to stay on an issue that wasn’t popular. A lot of red flags got waved—but only once."

Lock-in makes you an easy target for competitors:

  • "But it was clear some time ago that Dell’s model was not keeping pace and was not going to be such a big advantage in the future… And while experts believe Dell got the best prices on components when it was outgrowing all of its rivals, these days newly ascendant HP and Asian rivals Lenovo Group (LNVYG) and Acer are offering plenty of growth themselves."

Once a company commits to a Defend & Extend strategy, it becomes so structurally Locked-in it becomes almost powerless to change: 

  • "So why hasn’t Michael Dell—clearly a brilliant guy—changed tactics? For starters, say rivals and Dell alums, shifting gears would upset investors who expect hyper-profitability from Dell’s hyper-efficiency. And having stuck to his guns in the past, he can’t risk letting customers think that "Direct from Dell" is no longer the cheapest, smartest way to go."

By following the Siren’s song of "operational excellence" Dell adopted a Defend & Extend strategy that has placed it at great risk.  Now it lacks the tools for innovation that could help the company to have a longer, more successful future.  Without a serious Disruption, and new leadership that can implement and manage White Space Dell’s future is easy to predict.

Consistency vs Success

Almost two years ago I published a case study comparing McDonald’s and Motorola (download paper here).  As a reader of this blog you know the former I don’t care for, while the latter is doing all the right things.

This week, the #2 fellow at McDonald’s abruptly left.  Why?  Because he was considered to radical, and too quick to try and change things.  As you know, McDonald’s dramatically cut back its number of stores 4 years ago.  Since then, the company has sold off all it’s growth businesses, and has made minor changes to the existing stores which has helped them to improve sales and profits – although the company still does not support the number of stores it once did.  And McDonald’s still is not winning the battle for growth against Starbucks and other less Locked-in competitors. 

The thing McDonald’s most needs is someone willing to Disrupt the organization, install White Space and get the company on a growth path for the future.  Unfortunately, the current CEO, Chairman and Board members are more interested in historical consistency.  Content to Defend & Extend a Success Formula that is no longer leading the marketplace, they have pushed out their best hope for rejuvenating the organization.

Meanwhile Motorola last week again announced it is taking market share from competitors.  Its phones simply keep attracting new customes, as unit volumes are up 46% versus a year ago.  As you know, Motorola’s Board took the opposite set of actions that McDonald’s took, putting in place a CEO who has Disrupted the company and installed White Space in multiple locations.

While McDonald’s has shown signs of reviving the last couple of years, it is important to remember that it still is smaller than at its peak, it has sold off its growth businesses (such as Chipotles) and it is not the dominant market leader it once was.  This most recent action simply demonstrates that the Board is more interested in Consistency than Success.  Too bad for all those employees and shareholders.

You win or You lose

Here in Chicago we have a convenience chain called White Hen.  The stores have been a fixture in Chicago for 4 decades.  But they are about to all disappear.  That is, the remaining ones.  Although the chain is being bought by the much larger 7-11 chain, there is no premium being paid for the company.  On the contrary, investors are losing money on the saleSold in 2000 to Clark (a gas station operator) for $80million, the company went bankrupt and was acquired by management in 2002 for $45million.  Now, 7-11 is paying $35million.  So what happened?

During those 6 years, White Hen shrunk from 245 stores to 206 in Chicago.  This may not sound like a huge problem, but for a debt-laden acquired company losing 16% of capacity is enough to drown it.  In short, the management of White Hen spent too much focus on trying to generate fast profits, and not enough recognizing the need to grow.  They kept trying to cut size and cost to create more profits, and in the end they simply cut cash flow and killed the company.

White Hen is a microcosm of what we see in far too many companies today.  They forget that either you win, or you lose.  You can’t simply "mark time" and try to tweak the profit model.  Competitors today won’t let you do that, they are too smart and too capable.  Today, you have to keep innovating, meeting Marketing Challenges, creating new Success Formulas — or you lose.  There is no tie.  You win, or you lose.  And the leadership of those companies trying to follow the example of White Hen (such as Sara Lee and Sears) should take note of this example.

Did you see it coming?

Today WalMart announced that for the first time in a decade it’s quarterly earnings actually declined.  The stock is down again, remaining a very poorly performing equity investment since the company peaked back around 2000.  Since then, investors have not been rewarded for staying with the Locked-In strategy of the world’s largest retailer.

Did you see it coming?  You should have.  For over a year this blog has been pointing out that Wal-Mart is horribly Locked-in to its old ways, and unwilling to use White Space to create a new Success Formula.  Although it’s impossible to predict the day when things will demonstrably go south, it isn’t hard to predict the trend if you pay attention to White Space – or lack thereof.

When announcing these poor results, Wal-Mart blamed high gasoline prices.  Let’s see, for 3 years now we’ve had high gas prices, and Wal-Mart has blamed petroleum costs for its problems.  You’d think by now, if management was as good as it claims, the company would have adjusted to the reality that gasoline is most likely to remain expensive.  At the very least, they should have executed contingency plans to react to such a market Challenge.  Instead, they plod forward with the same Success Formula, fail to meet expectations, then blame circumstances that they long ago should have planned for and dealt with.

Worse, Wal-Mart leadership blamed this specific quarterly failure on selling off WHITE SPACE projects in Germany and Korea.  Wal-Mart is a company that desperately needs to find a new future.  To overcome its Lock-in.  Yet, once again, we see they have decided to exit markets where they should be learning and growingIf they can’t succeed the Wal-Mart way, then they leave.  If there was ever a big, bright red flag that says this company is in trouble, missing earnings forecast while exiting White Space and blaming the cost of White Space for their earnings problems – while ignoring market challenges like high oil prices – has got to be it. 

This should be a clarion call to avoid this company as an investment, as an employer, and as your primary customer – unless you want to suffer prolonged poor performance.  If they miss forecasts again next quarter they will officially enter a growth stall, and that will put them in the category of having less than a 10% chance of ever maintaining growth of a meager 2%.  The chances of a turnaround are nil, simply due to demonstrated Lock-in, and the odds of a growth stall just jumped dramatically.

Follow the White Space

Once again we have the opportunity to view the tale of two companies. Both troubled, yet capable of success if they do the right things.

Motorola was struggling a few years ago.  Then, a new leader came on board and started Disrupting the old Success Formula.  Simultaneously, he opened up White Space all around the company.  Sales went up, and so did innovation.  While everyone knows about the success of RAZR, Motorola also built its business in digital video recorders and networks.  Now, today, we learn that Motorola has further grown its success, winning a $3billion deal to build out a wireless data network for Sprint/Nextel.  (See full article here.)

Sara Lee found itself also struggling a few years ago.  They also hired a new leader.  But this leader chose to disturb the organization without really changing the Success Formula – focusing on cost cutting and selling businesses without creating any new White SpaceNow, today, we find out that the leader is conceding she won’t meet her margin goals (even as the business shrinks more than 50%), and isn’t really sure when the company will be growing again.  (See full article here.)

Motorola is up over 30% in market valueSara Lee is down more than 30% in market value.  Those who read this blog know that I was a very early fan of Motorola’s turnaround, and recommended it as an investment.  They also know I’ve been a longstanding pessimist of Sara Lee.  Why?  It’s as simple as White Space.  At Motorola you could observe a leader attacking the Lock-in and implementing White Space.  At Sara Lee there was no attack on company, or industry, Lock-in to old formulas and there was absolutely no White Space.

A successful turnaround absolutely requires fast action to Disrupt and implement White Space.  It is the single best predictor of whether a company will overcome its growth stall, or not.  Any time you need to decide whether to invest in, join, or supply a troubled company follow one simple rule – Follow the White Space.

They’re doing what?

When I was young (40 years ago) GM and Ford made cars and trucks.  Harley Davidson made big, loud motorcycles.  Boeing and Cessna made airplanes. Briggs and Straton made the engines for lawn mowers and other yard equipment.  Today, you pretty much can make those same statements.

In the 1960s a company named Honda came to America with a little 50cc motorcycle.  No one knew much about this company or what it did.  But today, Honda does a lot.  Motorcycles, all terrain vehicles, personal watercraft (jet skis), automobiles, full size pick-up trucks, electric generators, lawn mowers and garden tractors, outboard boat motors, water pumps, scooters, snowblowers, robots and airplanes.  So, what market are they in

Honda eschewed the commonly held notions of "core market" and "core customer".  They don’t try to be #1 or #2 in their markets (they are the #3 Japanese auto company, for example).  You can’t define them in any easy way.  Just that they keep growing well above the market average, they keep making money, and they keep providing a doubling our tripling of value for their investors every 7 years or so (quite better than the market average.)

So what drives this success?  A focus on innovation as a tool to avoid Lock-in.  Let’s look at their recent move into jet airplanes (could you imagine GM, Ford, Harley Davidson or Briggs & Stratton announcing they intend to make and sell airplanes?)  The project is led by the V.P. of North American R&D – not the Marketing or Strategy head.  His approach has been to apply innovation.  Honda is using unique engine mounting (top of wing instead of on the fuselage), building with composite material instead of aluminum and implementing a unique wing shape which achieves a larger interior cabin, higher cruising speed and greater fuel efficiency. 

Of course, the competition is belittling this new Honda entry with statements like "It’s a brand new territory for Honda… It’s very different than the consumer market."  OK.  Sounds a lot like what the original players said when Honda entered the motorcycle market, the auto market, the lawn/garden market, the full-size pickup market and then the outboard motor market.  Yet, in each, the innovations Honda brought to market allowed them to attract customers for their products at a good price and a great margin.

Honda does not fixate upon its "core markets", it’s "core capabilities" or even its "core customers".  Instead, it constantly looks for new opportunities to innovate and add value.  It does not fear new markets, but rather sees each new market as an opportunity to Disrupt itself and create White Space for a new solution.  Then, they are merciless in their efforts to do what no previous competitor has done to create value for customers.  And now, they are far more successful than #1 or #2 in almost every market they compete

Creating the Evergreen Company

Everyone wants an evergreen company – one that is constantly growing and self-renewing, generating more revenues and profits year over year.  One such company is Illinois Tool Works.  Have you heard of it?  Do you know what they do?

One of the most important things ITW does is avoid Lock-in.  ITW has no fixation with core markets, core customers, core products nor core competencies.  In fact, the company is a collection of over 600 small businesses around the world, in a wide range of businesses.  They don’t seek imagined synergy and push for consolidations and mergers, instead allowing each business to each maximally develop their customer opportunities and markets.  Headquarters does not dictate the strategy or markets for these businesses.  ITW doesn’t even try to limit its businesses to being in similar markets, functions, technologies or product lines. 

What ITW does is consistently grow, and consistently make more money.  For 90 years.  Revenues grow at about 10%/year, earnings at about 15%/year and earnings per share about 14%/year.

How?  Like I said, the company first and foremost avoids Lock-in.  Leadership isn’t trying to follow fad definitions of new markets, or catch the latest wave of analyst hot buttons.  They disrupt themselves by constantly looking into new markets, new technologies and new product opportunities.  They don’t focus their acquisitions on cutting products or quickly generating more money with cost reduction, instead relying upon customers to help define how they can improve market performance leading to financial performance.  By not seeking "optimization" of their acquisitions (like Tyco), they remain constantly in a disruptive state of enquiry.  And each and every business is allowed to operate in its own White Space – free of dictates from a hierarchy or home office about how to succeed.  Results are what matter at ITW – not slavish response to structural or behavioral Lock-ins.

And the company lauds innovation.  Innovators are sought out, and rewarded.  ITW is one of American’s largest patent filers, and patent holders, and it works hard to maintain that position – even if you’ve never heard of them.  They want White Space projects in their businesses, and they reward the efforts as well as the results.

ITW defies all the rules of best management practice.  They don’t optimize.  They don’t "focus on the core."  Instead they live without Lock-in, constantly innovate and Disrupt, and allow White Space to flourish all over the company.  And for that they achieve innovation on the scale of an IBM, and returns like an old-fashioned (Jack Welch era) GE.  And the result is an Evergreen Company that grows beyond average and makes above average rates of return.

When they do what you can’t

On July 12, McDonald’s announced it was cancelling its Hot ‘n Spicy McChicken sandwich.  "It’s not that it didn’t do well.  It just didn’t do well enough," according to McDonald’s spokesperson Bill Whitman (see Chicago Tribune article).  After 18 months of development, the product was pulled after just 6 months on the market.

On July 13, Wendy’s announced it was going to test market a new fiery, red-hot chicken sandwich even hotter than its Spicy Chicken sandwich – which it has been selling for decade.  "We have defended our Spicy Chicken successfully against competitive intrusion…now we see an opportunity to build on this effort…giving our customers additional options," said Wendy’s Chief Marketing Officer Ian Rowden (see article here).

Could it be that McDonald’s customers just don’t like spicy sandwiches?  Unlikely in the notoriously fickle fast food marektplace.  Practically every competitor (except McDonald’s) has a spicy product line today as the sales of chili peppers has doubled in just the last 4 years.  What’s at play here is good old Lock-in, once again.  We’d like to think that as the #1 fast food company McDonald’s would listen to customers and bring the very best talent to rolling out a product widely desired.  But, more likely, all new products in McDonald’s are vetted over and over until the challenge becomes distinguishing it from what is already on the menu

The more adaptable Wendy’s has demonstrated its ability to one-up McDonald’s for years.  Wendy’s brought us fast food chili, the baked potato with fixins’ bar, the fast-food salad bar, and Frosty’s.  By using disruptions to find new products, Wendy’s keeps the edge over McDonald’s in practically all categories but absolute size.

Wendy’s keeps growing its stores and customers, while McDonald’s remains almost flat on both counts.  By overcoming Lock-in, Wendy’s keeps doing what McDonald’s can’t – and that’s where Wendy’s creates competitive value.

Is GM ready to Change?

General Motors has seen its stock value grow almost 40% in the last 3 months.  Why?  Many analysts and investors believe that GM management has been Disrupted, and is moving into White Space for new solutions to its problems.

Is it for real?  Well, first the Disruption.  Kirk Kerkorian bought almost 10% of GM and then put his representative on the Board.  As outsiders, they have been screaming for change in how management leads the company.  And it has started making a difference, as GM has started doing several things differently.

GM has changed some of its approaches to workers.  Its recent employee buyout was 30,000 oversubscribed indicating a successful tactic for both the company and labor.  And, GM is working with Delphi (its largest parts supplier) and the union to create a unique solution to the bankrupt company’s problems.  Lastly, GM leadership is now entering talks with Renault and Nissan to possibly create a new merged company.

Successful White Space requires (1) permission to discover new solutions outside the historical Lock-in.  This seems to be happening in some of these fledgling projects.  Successful White Space also requires (2) committed resources in advance to develop the new Success Formula.  That we have not yet seen.  While there is progress being made to sell GMAC and raise additional cash, we haven’t yet seen the commitment to actually invest in White Space and create a more competitive future.  Until we see management internally Disrupt itself, following Mr. Kerkorian’s lead, we won’t likely see real investment or commitment to creating a new Success Formula. 

If the outcome of negotiations with unions, and other companies, is just more cost reduction in support of the old Success Formula then Mr. Kerkorian’s Disruptions will be for nought.  Combining GM, Renault and Nissan just to achieve additional "scale" will do no more to create value than combining KMart and Sears.  What’s required is the creation of a new company that is more attuned to customers, designs cars better, gets them to market faster and creates more profit on smaller unit volume.  And that will require lots of White Space projects with wide permission to change and extensive resources.