by Adam Hartung | Jun 21, 2006 | General, In the Rapids, Leadership, Openness
I recently attended a great event. A marketing company offered $3,000 to the start-up with the best idea – an idea they had only 3 minutes to explain. This was a competition for companies looking for angel or venture funding.
As the dozen companies put out their ideas, which ones do you think the 100+ event attendees most backed? Quite simply, they were the ideas that allowed the audience to imagine doing something currently well known better, faster and cheaper. The audience members had a fast, positive, visceral favorable reaction to the ideas that Defended & Extended existing behavior. When it came to thinking about giving away money, they were most ready to support an idea that took the least effort to develop.
The fact is that upon further discussion, the Defend & Extend ideas looked to have a fairly short half-life. Many of the other ideas showed greater long-term value, but they would require finding early angel customers, and white space to actually test the idea and develop a valid implementation. Many audience members could not see past the development problems, and were unwilling to fund White Space for these ideas to possibly flourish.
We all are susceptible to More, Better, Faster. We all have our Lock-ins, and we quickly recognize and accept things which Defend & Extend existing behavior. If we don’t Disrupt ourselves, we’ll never really think about new solutions – and never grow the way we all can. And we’re very susceptible to favoring ideas we see as easy – rather than the ones with greatest potential value.
by Adam Hartung | May 31, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Last week a phase ended when the top execs at Enron were found guilty of crimes related to the downfall of Enron. The are likely to spend the rest of their lives in prison for "white collar crimes." Unfortunately, those crimes cost investors, employees and suppliers billions of dollars. No longer is "white collar crime" considered something easily forgotten.
It was a year ago that I blogged about the fall of Bernie Ebbers at Worldcom (see Dieing for Results). At that time I mentioned that executives can easily find themselves committed to Defending & Extending old Success Formulas – leading them to be sure they’ve done nothing wrong despite the havoc they’ve visited upon so many. The downfall of executives Lay and Skilling give an exclamation point to that blog. They maintain their innocence because they continue to believe that their Success Formulas cannot be wrong.
More troubling than Enron last week was the $400million fining of Fannie Mae. An organization created by congress in the 1930s to help supply mortgages for all Americans was found guilty of acting "arrogantly and unethically" by creating an environment "where the ends justified the means." Top management "manipulated financial reports to win ill-gotten bonuses in the hundreds of millions of dollars." (see report and full text in the Chicago Tribune.)
Have business leaders all turned unethical? Since 1990, the number of classes on business ethics has skyrocketed, and the number of articles on the same topic has grown geometrically. It’s doubtful that any of these leaders think of themselves as unethical – especially as they spend millions defending themselves. And they go on television proclaiming their innocence.
Rather, its an issue of personal Lock-In to old ideas of executive Success Formulas. Executives see themselves as working hard to do what will increase the value of their companies, and themselves. They all protest "I’ve broken no laws" as investigators, prosecutors and reporters tell of how their poor decisions cost billions while sometimes personally enriching themselves. It is their Lock-in to the old notions of what an executive can do that makes them convinced they are not responsible for the damage they’ve wrought.
We all have personal Success Formulas and personal Lock-ins. As leaders, these personal views often spill out into the organizations we manage. If we are unable to see Challenges to our personal views, we are unable to Disrupt ourselves and use White Space to develop new Success Formulas. For leaders, especially in large organizations, this can be very expensive Lock-in to the thousands of investors, employees and suppliers who depend on the company’s future ability to succeed.
by Adam Hartung | May 12, 2006 | Disruptions, General, In the Rapids, Leadership, Openness
Last week Starbucks beat analyst estimates as profit rose 27%. Same store sales were up 10%, the 57th consecutive quarter of sales increases in stores open a year or more. Starbucks now has over 11,000 stores. It has opened 900 so far this year, and will open 900 more before year ends. This is definitely one heck of a growth story, and the company stock has soared 7-fold in the last 5 years.
No company can achieve that kind of growth without significant Disruptions, and lots of White Space. Starbucks has no end to the many flavor varieties of coffee it offers. But, it also offers tea and has seen tremendous growth from Green Tea of late. And to keep promoting itself, the company did an advertising first as it gave away (as in free) 500,000 beverages on March 14 just to remind people it’s spring and time to get out and enjoy the Starbucks stores. And in Chicago, they are starting to sell hot sandwiches – a new test for growth.
Starbucks is not just a coffee shop, of course. Their coffee (as beans and ground) is available in grocery stores, and they are the #1 market player in prepared coffee with their Frappucino, Iced Coffee and DoubleShot drinks, bottled and distributed by Pepsi. You also can get Starbucks Ice Cream and Frappucino bars in most markets. And for the late night adult crowd there’s now Starbucks Coffee Liqueur at the liquor store.
But, the Starbucks White Space goes far beyond the beverages for which they are famous. Starbucks has emerged as a major player in the music business. In 2005, they demonstrated their growth skills as they launched and were the #1 distributor for Ray Charles final release Genius Loves Company. Unbeknownst to many, Starbucks has a music division. Of course it creates all its own in-store music – and offers that on CD. But it also is a major force behind bringing new acts to market and distributing major artists such as Alanis Morissette, ColdPlay and the Dave Mathews Band. Starbucks has even inked an agreement with the famed William Morris Agency to find new talent for them to release.
And Starbucks just co-produced the LionsGate movie Akeelah and the Bee. Although it has gotten off to a sluggish start, the mere fact that Starbucks is into movie production demonstrates the lattitude with which the company will use White Space to drive new business opportunities. Look for tie-ins and promotions in your local store.
Could you imagine CD’s or movies made and distributed by McDonald’s? Or purchasing a frozen Pizza Hut pizza at your grocer? Why not? Any company can keep itself constantly Disrupted and filled with White Space. And for that, you will be rewarded with growth, and a high P/E multiple for investors. And you can provide ALL of your employees with benefits, even health benefits for part-timers (hear that Wal-Mart?). Everyone wins when you avoid the tendency to Lock-in on your first Success Formula and instead focus on White Space.
by Adam Hartung | Apr 25, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
Would you get into the wireless phone business today? Can you think of a more cutthroat competitive marketplace than cell phones? Can you think of a market that has more disappointed investors than mobile communications – voice or data? If I told you a company was getting into mobile communications, you’d probably say "good luck." And then you’d make sure you don’t have that stock in your portfolio.
Unless the company is Apple. Last week the reporters started talking about Apple’s potential jump into cellular phone service (see article). For most companies you’d laugh. But, for Apple, you probably believe it. And you likely think they just might pull it off. After all, why not a cell phone iPod?
Why change your opinion when you hear the company name? White Space. Apple has demonstrated it is willing to Disrupt its Success Formula to open up White Space and develop new markets. By demonstrating that skill, Apple is now able to keep competitors off balance. Even competitors in industries where Apple formerly did not participate. Apple creates possibilities for investors and employees, and concern (if not fear) in competitors just because it has shown that by using White Space it can tackle and win in new markets.
Virgin is like Apple in this regard as well. From a recording company Virgin is now an airline, a retailer, and a cell phone company. What is Virgin’s great skill? It is willing to Disrupt itself and create White Space for launching new businesses and entering new markets. By doing this Virgin, like Apple, has demonstrated an ability to remain evergreen. And create concern and doubt amongst its competition.
The Power of White Space. It keeps your company fresh, and long lived. And in the short term, it keeps you competitors off balance. You don’t have to do everything you announce, nor even succeed at all you try. Merely by demonstrating you will do it you create competitive fear – and an advantage for yourself.
by Adam Hartung | Apr 21, 2006 | General, In the Rapids, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
Wow, have you seen the share price of Google? Google’s value has more than doubled the last 12 months, and risen about 5-fold since going public some 21 months ago. Why is this happening? Simply because revenues are more than doubling annually, and profits keep exceeding everyone’s expectations; including management! Google is into the Rapids. After fighting to create a viable business model, it is now exploiting its advantages in traditional, and new markets, every month. It is winning share versus competitors (such as Yahoo! and Microsoft), while it is entering new markets and launching new products. Google is living in White Space, and exploiting its advantages.
Yahoo‘s valuation has remained flat over this period. And Microsoft has also failed to gain value. Why? Aren’t these great high-tech companies? Yes they are. But unfortunately, for the last two years they have been trying to Defend & Extend their old Success Formulas. Their management has fallen into the "me-too" category with its products, and has failed to find new markets. These companies have been great companies, but they are Locked-in to what first gave them market dominance, and they are missing the opportunities Google is finding.
Lock-in can affect any company, causing it to lose sight of the prime objective – growth leading to enhanced results. Poor Kraft has been stuck for 5 years, and despite owning some of the greatest names in consumer products managed by some of the industry’s most talented people, it can’t find a way to overcome focus on its past. Thus, its sales don’t grow and its value remains – stuck.
As we can see, this phenomenon is not limited to older companies, like Kraft. Even worse than Yahoo! and Microsoft has been Sun Microsystems. An early pioneer in developing servers for corporate and internet use, Sun got so locked into its formula of selling boxes loaded with their own software that the company almost went bust. Sun’s value is only about 7.5% of what it was a mere 6 years ago. Despite being the dominant hardware supplier at the time, and one of the most important companies for launching the internet.
Creating success has the same requirements, no matter what industry you’re in. Disrupt your Lock-in, maintain White Space to explore new opportunities, and above all – fight the urge to focus upon Defend & Extend.
PS – Eric Schmidt is the CEO at Google. Did you know that when Sun Microsystem peaked, he was the company Chief Technology Officer? When all looked good at Sun he went to Novell where he led a turnaround of what many thought was a dead networking company. Oh, and before Sun Eric had been an academic – not in business but in computer science. And an R&D geek at Xerox PARC, Bell Labs and Zilog. Eric is a great example of a person who avoids Lock-in, Disrupts himself and keeps looking for White Space where he can grow. The Phoenix Principle is as important for individuals as it is for work teams and businesses.
by Adam Hartung | Apr 14, 2006 | General, In the Whirlpool, Leadership, Lock-in
Sears held its annual meeting this week, and demonstrated that nothing insures failure like Lock-in to a failed Success Formula. (See coverage in New York Times and Chicago Tribune.) Sales are down, store concepts are failing and the Chairman said he has "no grand solution" as he hopes a "back-to-basics" program can revitalize sales. After all, the Chairman said he was "comfortable with ambiguity."
Chairman Lampert asked "A plane goes from 40,000 feet to 10,000 feet. Is that a good thing or a bad thing?" Well, the CEO said "No one likes double-digit sales declines.." Double-digit sales declines for consecutive years – hey – that’s what we would call a "free fall," and that’s a bad thing Mr. Lampert. You don’t have to be a billionaire hedge fund manager to figure out that one. Growth is your jet fuel – and you ain’t got any!
Sears stands in the middle of the ring, while in one corner is WalMart and the other is Target. Here’s a question for you Mr. Lampert, can you spell "punching bag?"
Not even Sears’ own subsidiary, Sears Canada, will agree to be bought out by the parent. And the convicted Martha Stewart has refused to let her goods be sold in Sears stores. If that isn’t repudiation…..
While the execs follow their old Success Formulas, the losers are employees and vendors. While taking their pay packages, and paying out multi-million dollar severances to former Chairman Lacy and other departing execs, they have gutted the corporate staff. They’ve laid off thousands in stores as they shut them down. And turnover of Sears managers was 35% last year (25% at Kmart) as Mr. Lampert blamed the troubles on his front-line managers and began kicking them out the door.
Sears is in the Whirlpool. "Pride goes before the fall" according to Proverbs, and there’s nothing but pride in Sears’ executive suite. Too bad they were unwilling to use White Space to find a new competitive opportunity for Sears. But that would have meant Disrupting their Lock-in, and that’s the one thing they’ve promised they won’t do.
by Adam Hartung | Apr 10, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
Do you remember 1-800-Flowers.com? You probably think that was one of those dot-coms that dot.bombed since 2000. After going public in 1999 the stock shot to $22, only to fall to about $2 the next year. The company is still around, but it gets very little attention – why even a search on Forbes.com search shows that the last time someone featured this company in a newsleter was way back in September, 2004.
If ever a name would Lock-in a company, this one should have done it. Yet, 1-800-Flowers.com, which was certainly Challenged by the bust, has done a lot to open up White Space and find a new future. Only about half today’s revenues come from flowers and plants. It sells home and garden merchandise under Plow & Hearth, popcorn from The Popcorn Factory, cookies from Cheryl & Co., gourmet foods form Greatfood.com, children’s gifts from HearthSong and Magic Cabin and wine gifts through the Winetasting Network. And last week they announced the acquisition of Fannie Mae candies – a brand that had fallen into bankruptcy under old management.
There’s a reason we use the term "dot.bomb." Lots of companies were Locked-in to their initial business plan (remember pets.com?) and they failed. But 1-800-Flowers.com is still growing. By avoiding Lock-in they are finding new White Space opportunities for growth and value creation.
The stock still sells for under $8/share, so it is warranted to to say that there is ample risk in this as an investment. Yet, with so much White Space, 1-800-Flowers.com is a company to keep watching. They are avoiding the traps that have killed so many other companies, and show considerable opportunity to become a break-out success story.
by Adam Hartung | Mar 20, 2006 | General, Innovation, Leadership, Lifecycle
Chipotle’s Mexican Grill went public last week. The stock shot up in price, and ended the week posting a whopping Price/Earnings multiple of 36! As you probably know, Chipotle’s has been a subsidiary of McDonald’s. Now, it is it’s own company – albeit with most of the stock still owned by McDonald’s.
McDonald’s, meanwhile, has about an average market multiple of 17. Why is Chipotle’s P/E roughly double McDonald’s? Analyst views are mixed as to the exact future of the stock, but what all agree upon is that Chipotle’s has a great growth path in front of it. While McDonald’s is struggling to find opportunities to grow stores, Chipotle’s is expected to expand at double digit rates for several years. And profit growth is expected to match.
Now that it’s outside of McDonald’s, Chipotle’s has the opportunity to explore new opportunities for growth. It can expand in new ways, and develop new solutions. It has the opportunity to create, and sustain, White Space to prolong it’s growth. And the result is a 2x market multiple.
Some would say this is a win/win. Chipotle wins, and McDonald’s wins – because MCD shareholders keep ownership in Chipotle’s. I would say that is a back-handed compliment. Why couldn’t McDonald’s use Chipotle’s to attract new talent? Why couldn’t McDonald’s let Chipotle’s manage White Space to create growth avenues while inside McDonald’s? Why couldn’t Chipotle’s be a growth vehicle to help McDonald’s provide new opportunities for not only employees, but suppliers and investors?
It’s too bad that McDonald’s is so Locked-in to its Success Formula that it had to resort to letting Chipotle’s go outside. Yes, this is better than holding Chipotle’s back. But, it would have been best if McDonald’s would learn to Disrupt itself, create and manage White Space. That would insure McDonald’s of a long and viable future. Now, the future growth at McDonald’s remains clouded, while Chipotle’s appears loaded with upside opportunity.
by Adam Hartung | Mar 15, 2006 | General, In the Swamp, In the Whirlpool, Leadership, Lifecycle, Lock-in
If you’ve read this BLOG for a while you know I am no fan of Sears. Since the merger of KMart and Sears the combined company has done nothing to change its competitiveness versus better managed companies like Target, Kohls and WalMart.
Today Sears stock jumped almost 13%. Oh my, should I reverse my position? After all, the company said (Marketwatch reported) it doubled fourth quarter profitability since a year ago when the companies merged. And revenues are up to $16Billion, from last year’s $5.95billion – wow! And Kmart stores eeked out a .9% same store sales increase during the holidays – the first such increase since 2001! Yeah!
Let’s see… Let’s read a bit more.. what else did they say? "Competitor’s are opening more stores and spending on promotions and marketing – which Sears Holdings isn’t" … Oh, let’s see, these results don’t compare today with combined results from a year ago… Revenues of the combined companies actually declined by 4.5%… well, well… For the year, same store sales at Sears fell 8.4%, while KMart same store sales dropped 1.2%…. oh, the solution — the management is "adjusting its apparel strategy to better meet customer demand" and therefore "expects declines will moderate"…
Those positive headlines, as they said in Oklahoma when I was young, is putting lipstick on a pig.
Sears is still Defending and Extending two completely broken Success Formulas. And the financial heads that put this deal together still haven’t internally Disrupted the operating practices, nor have they created effective White Space to develop a new, more competitive, solution (see previous BLOG on the failure of Sears Essentials). Without those two actions, these results are just financial reporting shenanigans – and those who invest in them deserve the risk they take.
by Adam Hartung | Mar 15, 2006 | General, In the Swamp, Leadership, Lifecycle, Lock-in
Today I got a call from a friend, asking me my opinion of DuPont. I worked for DuPont from 1987 to 1990, and of course DuPont is one of those large and historically great American companies. An early manufacturer of gunpowder for our war efforts, the company went on to innovate such great products as Nylon, Teflon and Kevlar. In The Graduate the famous recommendation to Dustin Hoffman to think "Plastics" is often credited as a plug for DuPont.
But, innovation has been slack at DuPont for quite a few years. They haven’t brought forward one of those great products for a long time. And, their returns have suffered as the company shrunk – through a combination of selling businesses (they owned, and then sold in the 1990s, Conoco for example, and spun off their pharmaceutical business in a joint venture to Merck) and declines in some "core" markets – like printing and other films. Their stock price has suffered.
Today, however, Dupont’s stock broke out to a short-term high after announcing expectations for better earnings. Several technicians said that with only a small additional move upward the stock could jump another 20%. Is this a juicy investment opportunity?
When I read the Marketwatch release, I was disheartened. DuPont didn’t jump up on an announcement of new products. Nor a breakthrough innovation. Nor was there any sign of any major Disruptions happening to their Lock-in, or new White Space projects being created. Instead, I learned that earnings are predicted to rise from closing several labs, shuttering plants and laying off more people. That, plus they think a horrible European market will finally take a turn for the better – no thanks to any new products from Dupont but rather just because enough time has passed while the marketplace stunk to expect an upturn.
It’s hard for me to get excited about DuPont. Even though their history is undeniably great. They keep cutting capacity, cutting jobs, taking restructuring charges and waiting for an economic turnaround. Their improved profits are short-term financial machinations. What would excite me would be to hear about some Disruptions in their internally focused Lock-in. Or to hear about new joint ventures, or other White Space projects intended to spark innovation and create new markets. Without those signs, I’d worry that the short-term stock improvement will just be short-term.
