by Adam Hartung | Mar 7, 2006 | General, Lock-in
Did you ever wonder why Sony doesn’t dominate the digital music market? After all, they are historically strong in consumer electroncis (i.e. walkman). And they own a recording studio. Yet, Apple dominates and the word "I-Pod" is synonymous with digital music. Sony was locked into different divisions with differing goals, and a desire in those divisions to fight digital music in order to extend the life of CDs. They didn’t see the I-Pod coming. They were blinded by their Lock-in to their old Success Formula, so even though they could observe MP3 technology, and Napster’s first inroads into their market, they waited way too long to effectively react.
This week’s Oscars is a showcase for recognizing Challenges. The event was dominated by movies from small production houses, and best picture was won by "lowly" Lions Gate – best known for low budget slasher movies, urban films and documentaries.
It’s easy to discount this experience. You may not have enjoyed many of the movies which dominated the nominations, and the wins. After all, for best song to to be the urban rap "It’s Hard Out Here for a Pimp" is more than a bit jarring for many people over 40. It’s easy to say "I don’t connect with these movies, and this doesn’t make any sense to me" and then walk away. As a viewer, no problem.
But, if you work for Universal Pictures, you should think again. The early stages of change look just like this. A market shifting Challenge looks exactly like the 78th Academy Awards. A bit odd, easy to discount and explain away. But the fact is, films made differently, and for a fraction of what the big studios spend, just ran away with all the awards.
Lions Gate is a different sort of company from Paramount, et.al. These companies represent the front edge of a shifting marketplace. They demonstrate a new Success Formula for filmmaking. Larger competitors will ignore them at their peril, for they could well do to movie companies what Apple first did to large computers (such as DEC and Wang), and then later what a struggling Apple did to analog music.
by Adam Hartung | Feb 28, 2006 | General, Innovation, Leadership, Lifecycle, Lock-in
I’m a midwestern guy – born in Oklahoma, college in Kansas and now a long-time resident of Illinois. I love Chicago. But, I have to admit, some things have been concerning me lately.
Illinois lost jobs last year. In fact, Illinois has had a net job loss since 2000. That’s a Telltale of problems. The marketplace is shifting, and it’s not clear Chicago is creating an effective new Success Formula.
Across the business landscape, there are lots of signs of problems. Former bellweather Kraft has been locked in a turnaround for 5 years, without much progress. In 2004 the company closed 20 plants and laid off 5,500. Recently it’s announced plans to shut another 20 plants and lay off 8,000 more. Crosstown, Sara Lee has been struggling as it has sold off business after business in search of "focus," yet it has not been able to improve results. Revenues are predicted to halve over the next 5 years in this prolonged turnaround effort – apparently in plans to shrink itself into success.
Sears has shown misstep after misstep since being acquired by K-Mart. It announced in 2005 it would convert 400 KMart stores into Sears Essentials – but as sales fell 20% in the first 40 conversions that decision has now been abandoned. Sears can’t even buy it’s own Canadian operations, having had its offer turned down by the Canadian Board! And McDonald’s is under attack for everything from bad fat in its food, to unannounced ingredients causing asthma attacks and a 30-something hedge fund manager trying to force management to restructure its operations in order to add value to a stuck stock.
For years, I’ve heard people talk about "midwestern paternalistic companies," "mature management in mature industries," and "old fashioned values exemplified by careful management" when talking about Chicago. Unfortunately, these are a pleasant veneering over of unpleasantly Locked-in management teams. Too many companies are blaming a "midwestern culture" for an inability to Disrupt their failing Success Formulas and implement White Space. Too few new products are being created and introduced, and too few new innovations are being introduced into operations.
Do midwesterners lack innovation? Of course not. Go to any of a number of Chicago area angel investing groups, or entrepreneur groups, or venture clubs and you’ll see, literally, dozens of new ideas for businesses of all types. Ask those entrepreneurs where they go for corporate support and you hear "the coasts. None of these big Chicago companies want to get involved with local innovators." And, alas, you don’t see these companies sending representatives to any of these networking events. These venerable laggards keep looking inward for all the answers, instead of looking outward – where White Space creates a flourishing market of innovation.
I would think that the apparent Challenges – the loss of jobs, or the declining stock prices, or the frustration of limited growth – would lead these company executives to do something different. To Disrupt their ineffective operations. But so far, they have remained Locked-in to those old Success Formulas – and the price is being paid (quoting a famous line from It’s a Wonderful Life) "by those people who do most of the working, and eating, and living, and dying in this town."
by Adam Hartung | Feb 22, 2006 | General, In the Swamp, Leadership, Lock-in
Recently GM announced with pride that it had reduced it’s IT expenditures by 25%. The company’s IT spend to sales ration has dropped from 2.4% to 1.6% – a 33% decline. This was held up as a sign of great progress. But, as Baseline recently reported, because GM is looking at the wrong metrics this fact doesn’t matter much.
During this same period, GM’s employment declined by nearly 50%. And the amount of work outsourced (as a percent of revenue) increased from 67.7% to 75%. As a result, the number of transactions undertaken at GM declined markedly. So, while IT costs declined, at the same time the business supported by IT declined even faster. The net? IT costs per transaction actually INCREASED by almost 74%.
Businesses tend to Lock-in on the metrics used, just like they lock-in on behaviors and processes. If they keep looking at the old metrics, they miss the changes necessary to actually improve the business. Often one of the most critical Disruptions is Disrupting the metrics used. In the case of GM, they were caught bragging about peformance on an out-of-date metric. Another demonstration of Defending and Extending a broken Success Formula when what’s needed are entirely different measures to drive new behavior.
by Adam Hartung | Feb 13, 2006 | Disruptions, General, In the Swamp, Leadership, Lifecycle, Lock-in
My three weeks in India were fantastic. I visited twenty-some companies, all developing new business models in their pursuit of new revenues. From company to company, I saw people working in White Space as they sought out Success Formulas that would provide short-term gains and create long-term advantage. Even for companies with tens of thousands of employees, it was clear that operations in India are constantly disrupting themselves as they seek to compete with each other, and continue driving enhanced value.
While there, I thought about all the U.S. companies that are blissfully ignoring this phenomenon. What I saw in India wasn’t just low-cost competitive undercutting, but in fact people doing the work differently – and as a result creating considerable new value for not only themselves but their customers. I kept wondering, "why do so many U.S. and European business leaders remain so unmoved by what is happening here?"
Then I recalled the story of CSC. Entering 2000, CSC had a robust commercial consulting business with revenues reportedly over $1B. According to industry analysts, this consulting division was by far the most profitable part of CSC, contributing nearly 3 times the profit for its revenue base compared to other divisions. Further, it was claimed to be growing at nearly 20%+ year.
Now, just 6 years later that same division is reported to be under $200M revenues (an 80% decline). And insiders say it has operated at losses to break-even since 2001. The division simply ignored the oncoming avalanche of opportunity being created by the internet and offshore IT services vendors – an avalanche they could readily see from their perch creating e-business opportunities and installing new technologies.
Unfortunately, as they missed the first wave of offshoring their revenues slumped and their profits vanished. In reaction, they brought back a President who had left during the dot-com days in order to provide new "focus" to the business. Upon his return, this President declared that from his 20 years of experience he knew that customers wanted their IT services to be done locally. He re-opened a slew of local offices in the U.S. and moved the P&L from a national service line model to a geographic P&L. He expected these local offices to get into clients and "slug it out" for revenues against the competitors. And he repeatedly said that he knew this would work – because it had worked in the 1970s and 1980s.
He was Locked-in to his old Success Formula. Unfortunately, he was perilously ignorant of the oncoming wave of qualified IT consultants in India now available to his clients across the internet. Year after year he, and CSC, watched as business was lost to new competitors, layoffs followed to "stabilize" the business, only to be followed by more pressure on prices, and fewer revenues and more layoffs. A vicious circle that was inevitable.
To this day, CSC has practically no commercial consultants in India. While Tata has 60,000, Infosys 40,000, Cognizant 30,000 and WiPro 30,000 – the vast bulk of which are supporting U.S. clients. Not to mention the dozens of smaller companies doing everything from IT services to business processes. Even Accenture has nearly 20,000 and Office Tiger (both U.S. companies) has 6,000. In reaction, CSC has retrenched to large outsourcing contracts (the profitability of which is highly doubtful) and increased its federal government business – where it can avoiding competing with Indian firms.
Lock-in leads to blinders. Blinders lead to ignorance (as my teacher once said "ignorance can be fixed"). When CSC commercial consulting faced its Challenge (offshore competitors) leading to a big problem (declining margins and revenues) they did not use this Challenge to Disrupt their model and create White Space. Many American companies, such as Accenture and IBM, did just that – creating large and very viable Indian organizations supporting clients competitively. Those companies are using the White Space to develop their own new Success Formulas. But CSC has lost the commercial consulting market. And they are threatened in all their commercial business. They are under attack from hedge fund operators who want to split up the company and capture value before more is lost.
Ignorance is perilous. If we allow Lock-in to determine our behavior we lose the ability to Disrupt and face our Challenges – leading to failure. Instead, we have to use Challenges to Disrupt and open White Space so we can find new Success Formulas. And via that route, we can remain competitive in the new marketplace.
by Adam Hartung | Jan 29, 2006 | Defend & Extend, General, Lock-in
I’ve been delayed posting because I’m traveling around India. What a wonderful country that is regularly creating new Challenges for old businesses.
Auto traffic in India is always difficult, primarily due to very poor quality, and insufficient, roadways. But on a recent journey traffic was particularly snarled. Finally we reached the cause – there was a trio of cows standing in the road looking as placid as imaginable while autos found their way around the cows.
I commented to the driver that this seemed a problem worth solving. India is no longer a slow-moving agrarian state, but rather today it has become a fast-paced technology-led country with new demands. Especially in the cities. While the past need not be forgotten, surely small changes could be made to more effectively move toward the future. Why would they continue to allow cows to wander onto the roadway? Why not put up roadside fencing? Why not have people along the road keep the cows off – or at least lead them off when they wandered on? He looked at me like I was from Mars. "Why would we do those things?" he asked me.
Finally, I understood the often used phrase "Sacred Cows." We say it in business meaning something that is unchallengable. All executives say "around here, we have no sacred cows." But in fact they do. They see them, but they do not recognize them. Just like the driver who was very willing to accept cows on the roadway, business leaders can see the things that impact their business, but they don’t recognize them as something which is changable. Just like the driver looked for ways around the cows, rather address the notion of cows blocking the roadway altogether, business leaders look for ways around the Challenges as they focus on the immediate problem. They accept these things (their sacred cows) as given, and they look for ways to maneuver around them without impacting them. They ignore the Challenges and overlook the Lock-in as they march forward focusing on the problems being created by the Lock-in and the Challenges to it.
Once you are Locked-In you have created your sacred cows. You then institutionalize them with your processes. Activities are based on the notion that these things will never change. And then, we don’t see the Lock-in anymore. We are blind to the notion that these Lock-ins can, in fact, be a cause of our problems in a changing environment. From inside, the sacred cows become invisible as something that can be changed. And to outsiders that is the obvious sign of Lock-in.
Every business has its sacred cows. It is unavoidable as the business defines its market, customers and competencies. But long-term success requires you bring along people who can point out these sacred cows, and identify the Challenges which will lead you to suffer by maintaining the sacred cows and processes which support them. Just as India must fix its roadways, including the impact of wandering sacred cows, if it wishes to maintain its growth rate, businesses must identify their Lock-ins and develop ways to address them to maintain growth.
by Adam Hartung | Jan 15, 2006 | Disruptions, General, In the Rapids, Lifecycle, Lock-in, Openness
I’m a boomer, and for my generation going to the movies was a primary pastime. With only 3 channels of TV, we looked forward to the movies as an alternative. We also enjoyed the big screens, the color, and the immersion experience that the theatre provided. And all of it was available for as little as $.25 for a matinee or just a dollar or two for a weekend feature with your date.
My how times have changed. As demonstrated at the recent Consumer Electronics Show, one of the hottest items is home theatre. We now have huge screens, crystal sharp images, bone jarring audio systems and even the ability to put in place theatre seating to give viewers the "movie experience" right in our homes.
Yet, most movie producers still release movies to the theatres. Maybe that’s why movie viewership, revenues and profits were down in 2005. They are still following an outdated distribution model. For many of us, going to the movies means a trip to our family room. And the movie itself might come from the video store, or from the video showing up in our mail, or via a download from the cable or satellite TV company – or maybe even a download to our PC.
USA Today ran an article about changes in the wind. Small producers are starting to distribute their films straight to video (on-demand or on DVD) the same day they go to theatres. Why fight (and pay big bucks) for distribution to theatres if the majority of viewers are waiting for home release? While the big studios aren’t doing this yet, the appeal to most consumers is clear.
This is the way markets shift. Slowly, but following definitely, in an evolutionary road toward the needs of customers. Who fights this? Those most invested in the old ways and are Locked-in to them. Just like the music industry largely missed the shift from CD to MP3, the theatre operators and the large studios run the risk of missing this shift in movie viewership. The studios’ largest customers are the theatre operators, and they will trumpet their superior environments and the rare viewer that will watch a movie multiple times there. The risk to studios is they listen to these customers, who are ignoring the Challenges, and they too miss the shift until its too late.
The opportunity exists for the small player. The companies that can move quickly to meet customer needs with equipment (hardware and software) to augment the trend, and the new producers who aren’t vested in the old system of distribution.
For investors, the threats are real. Investing in theatres is very risky going forward. And investing in studios that don’t recognize the shift, and take advantage of it, has risks as well. The opportunity, likewise, exists for investing in those who will be leading this shift by offering the products that consumers want when they want them.
Today each of my 3 teenage sons has a home theatre audio systems, with those thumping subwoofers, that make the house shake. Their auto systems rival the ones in their rooms – and we have video in at least one car. They are acquiring better monitors all the time. They still like an occasional movie on a date, but 90%+ of their movie viewership is at home. What do you think movie viewership will be like in 10 years when they are in their own homes and starting their own families? Are you positioned for the shift – or are you planning on an extension of the past?
When markets shift, you can’t Defend and Extend your old Success Formula. And you can’t count on participants in your distribution channel to point out the shifts of end users – because they are busy defending their own business. You have to be very wary of emerging new competitors. And it is critical to create White Space to explore and learn about new ways to compete. The Challenge today is very real for Disney and other large existing players. Look for effective White Space in those companies – or find the new players who offer better opportunities for growth.
by Adam Hartung | Jan 15, 2006 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
The Chicago Tribune ran a great overview of the situation facing McDonald’s leadership today. In a nutshell, an upstart hedge fund manager (William Ackman of Pershing Square Capital LP) is pushing McDonald’s to restructure itself by spinning off restaurant operations, selling real estate and otherwise changing the company. He is supported by a large REIT (Vornado Realty Trust) which would like to participate in the real estate restructuring. McDonald’s management is fighting off these efforts.
The really interesting question is, how did McDonald’s get itself into this mess? Quite simply, Lock-in to the past has kept McDonald’s from seeing its real Challenge. McDonald’s business today is remarkably like it was in the 1960s. The company still franchises and operates a hamburger chain. While there has been an amazing amount of change in the last 40 years, little of it has affected McDonald’s as they have continued Defending and Extending their early success. Now McDonald’s is mired in the Swamp, unable to control its own destiny due to the attacks from outsiders.
McDonald’s has had lots of opportunities. It has bought other restaurant concepts (such as Chipotles), yet it never really supported their growth as it kept focused on hamburgers. It built expertise in franchising as well as food and restaurant supplies distribution strengths. But it never moved into those businesses beyond supporting its core business. And as nutritional habits have changed among its baby boomer customer generation has aged, while an entirely new generations of customers has come along, McDonald’s steadfastly ignored the Challenges and kept trying to grow its old Success Formula.
You can’t blame the hedge fund operators and REITs for taking aim at McDonald’s. Any time a company becomes a slave to its Lock-in it becomes an easy target. Management is too easy to predict, and their unwillingness to address Challenges with their resources makes those resources a juicy desire for outsiders. Sometimes competitors take advantage, and sometimes its unexpected outsiders – like in this case.
We all have a natural tendency to support the incumbent. They’ve worked hard to get their positions, and we want them to succeed. But when the incumbents can’t address Challenges and overcome Lock-in the interests of shareholders, suppliers, employees and customers are best served by those who would force a change in behavior.
by Adam Hartung | Jan 8, 2006 | General
Everyone over 40 thinks about retirement. Nearly everyone looks forward to it. And younger workers look forward to the opportunities which retirement creates.
But will you retire? This week’s announcement by IBM that it can’t afford to continue it’s retirement plan is just another in a string of Telltale warnings. We heard a lot of press last year that Social Security might not be there for many retirees (at least not like they imagined.) And we hear that some big-time business threats, like the problems at GM, are more than a little bit due to high pension costs.
Just a few years ago the stock market was skyrocketing and everyone felt their pension plans were in great shape. After only a few years of anemic market performance now corporations are claiming they can’t promise retirement.
Who’s problem is this? Why, it’s yours (and mine.) No matter what we want to believe, what we Locked-in on when we were younger, and what happened for our parents there is no doubt that retirement is going to be different for the Boomer generation. But have you Disrupted your thinking and made plans? Or are you ignoring these Challenges, so clearly being reported, in favor of Lock-in to old assumptions?
I’ve talked often about how easily businesses ignore their Challenges and avoid Disrupting their Lock-in. But this one is personal. The pension Challenge affects us as individuals. It requires we as individuals find some White Space to rethink our retirement plans. Have you started? Or are you content Defending and Extending your past beliefs? The Challenges are large – and the personal risk is high. Maybe it’s time you think about how you’ll handle this Challenge; before it becomes a problem you may not be able to solve.
by Adam Hartung | Jan 8, 2006 | General, In the Rapids, Innovation, Leadership, Lifecycle, Openness
Motorola has done it again. As reported by every news agency that attended the Consumer Electronics Show, Motorola has joined up with Google, Yahoo and Kodak to improve its products and make new products. This is, of course, after partnering with Apple months ago.
What’s really important about this news is it shows the ongoing effort to create White Space in Motorola. As I blogged a year ago, Motorola’s efforts to create White Space where new innovation can flourish is a key success factor for turning around the struggling behemoth. Now, it’s ventures not only are opening the product development doors for licensing and creation, but in fact the Kodak venture will co-locate people from both companies into a joint development facility.
Many people have pointed out that several new products, including the RAZR, were mostly developed prior to Zander showing up. So why am I such a fan of Zander? Why so eager to talk about these projects? Because Zander Disrupted Motorola and unleashed the creativity which was there. The sparks already existed, but previous leaders did not know how to Disrupt the environment, attack the Lock-ins that held Motorola hostage to its worn out Success Formula, and create White Space to migrate the company into a new Success Formula. What’s happening in Motorola’s turn-around isn’t just a product story. It’s a story about how to overcome Lock-in to the past and launch yourself forward. And for that a lot of credit does go to Mr. Zander.
A lot has happened at Motorola since Ed Zander took over. Most of it, from raising cash by selling automotive businesses to aggressively promoting DVRs to putting real pizzaz into the phone marketing and creating new ventures has all been good. This is a company to watch, and probably a stock to own.
by Adam Hartung | Jan 4, 2006 | General, Leadership, Lifecycle, Lock-in, Openness
2006 has started with the completion of Viacom’s spin-off of CBS. Since these two entities merged, their value has about shrunk in half. What was to be an integrated media company is trying to increase its value by dis-integrating. Even Sumner Redstone, the legendary investor, said on CNBC Tuesday January 2 (when interviewed by Bob Pisani) that "Synergy is dead."
For at least 4 decades business leaders have believed that getting larger, especially by acquisition, was a good thing. If you couldn’t generate growth, fake out investors by buying it. But now we’re seeing companies face the opposite. Carl Icahn is after Time Warner to break up its business. And Knight Ridder is being forced to bust up its newspaper empire. All in order to "unleash the value" hidden in these merged organizations.
Congratulations! This is a great move to help these companies reinvigorate themselves. Not because of "focus", but because they can now quit focusing inward, trying to optimize their business models, and get back to the job of pleasing customers and adjusting to market requirements. The era of conglomeration was built on false assumptions that large companies could control their destiny and through optimization generating ever larger returns. Not! Instead, these companies lost touch with customers, became out of phase with their markets and prey for more nimble competitors while destroying shareholder value (not to mention the economic impact of thousands of lost jobs from downsizing, needless outsourcing and considerable "economic dislocation" for suppliers.)
Now, CBS and Viacom each needs to get about the job of creating a new Success Formula that aligns with customer needs. If they use this split as a Disruption, and put in place some White Space for new ideas to emerge, they have a great opportunity to catch up lost ground on emerging competitors and regain lost customers. They’ve moved the batter to first base – it’s time to see if they can move him around the bases to score.
