by Adam Hartung | Sep 15, 2005 | Defend & Extend, General, Leadership, Lifecycle, Lock-in, Quotes
"The slide into bankruptcy protection of two of the USA’s largest airlines is more a result of the carriers’ bad assumptions and slowness to act than the recent rise in fuel prices or the devastating terror attacks four years ago." USAToday 9/15/05 page B1.
Woe are many of the airline companies. They’ve been challenged to find a new, profitable business model. And instead they’ve blamed their employees (too expensive), their customers (disloyal and cheap) and commodity traders (rising fuel prices) for their failures. The leadership of these companies has done everything it can to continue Defending and Extending their broken Success Formula. But not even post 9/11 federal government bailouts were enough.
When companies don’t step up to their market challenges by disrupting their operations and finding new solutions then their future is easy to predict. Too bad for America that nearly half of the industry capacity is now in bankruptcy (and thousands of jobs at risk, not to mention the strain on the federal government’s Pension Benefit Guarantee system) simply because management would not stop trying to do more of what it had been doing (more, better, faster, cheaper) – an impossible plan for saving these companies.
by Adam Hartung | Sep 6, 2005 | Books, Defend & Extend, General, Lifecycle, Lock-in
There’s a new book out that’s well worth reading. Bait and Switch by Barbara Ehrenreich. There’s a great review (in case you don’t have time to read the whole book right now) In the Chicago Tribune by a University of Chicago Professor of history – Eric Arnesen.
Barbara’s thesis is pretty simple – there are a lot of white collar people unemployed and underemployed. So, as a quasi-anthropologist/journalist she faked up a resume, joined some networking groups and went job hunting. What she found is all too familiar to those struggling with white collar unemployment, and simultaneously insightful.
Barbara learned that unemployed and underemployed people tend to blame themselves for their difficulties. As if they simply didn’t work hard enough, try hard enough and diligently pursue all possibilities. Likewise, the herds of advisors in network groups, outplacement firms, job counselors and authors all put the blame for the unemployed squarely on those without good jobs and looking. Lots of advice is "more, better, faster – and consider making yourself cheaper." The same sort of lousy advice that gets businesses with broken Success Formulas into deeper trouble (and failure).
What Barbara also points out is that this answer is….. well…… insufficient. The economy has changed. The work world isn’t like we were promised in school. Globalization of skills, rapid "boom to bust" lifecycles of companies and wicked swings in market shares have made employment opportunities shorter and underemployment a fact of life. Much of what people are suffering through isn’t caused by them – but rather by a change in the working environment in which we all participate.
I regularly speak to networking groups. I find the same phenomenon Barbara describes. People searching for their "last job", rather than the "next job." Individuals become locked-in to a personal Success Formula developed early in their careers, and they keep trying to find a way to make that Success Formula work. But it won’t. The world has changed. What’s needed isn’t "the old jobs" but rather for those who are looking to realize they really have to change what they are looking for, how they are looking for it and often their own primary strengths. They have to compete in this new, transparent "information economy." And that requires a personal implementation of The Phoenix Principle.
Those who will continue to succeed will be able to understand that the employment market has changed. They must recognize their lock-in to old notions, and they must attack that lock-in so they can open doors to new approaches for developing their careers. They need to disrupt themselves, internally, and create personal White Space in order to find new search processes and improve those strengths which are valuable in today’s job marketplace. The Phoenix Principle doesn’t just apply to industries and companies that lock-in to old competitive structures – but to individuals as well.
Give Barbara’s book a read. And then think about what it will take for you to stop trying to Defend & Extend your career, and instead grow into a whole new set of opportunities. We all have to face the fact that retirement age is being pushed higher and higher, and thus we’ll all have to work longer. We might as well enjoy it – and that means modifying our Success Formulas to fit the working world of the future.
by Adam Hartung | Sep 2, 2005 | Defend & Extend, General, In the Rapids, In the Swamp, Leadership, Lifecycle
How do you read the trends in a business from the outside? Look at the articles on page 3. We all read the headlines. But headlines are dictated by what’s relatively interesting TODAY. This short-term phenomenon is not a good way to interpret what’s happening over time.
On Wednesday of this week (8/31/05) the Chicago Tribune business section led with articles about the business impact of Katrina. As they should. But when you turned the page, there were two very interesting, and short, adjacent articles on Motorola and McDonalds (courtesy of Bloomberg News).
The 4 inch by 4 inch text box on Motorola calmly reported that the company was retiring another $1B in bonds. This is on top of $2B in bond repurchases over the last year. Debt is down over 40% since January, 2004 and the company’s credit rating by Moody’s has been raised. By the way, sales and profits have risen over 10% for 6 straight quarters. The lower debt will allow Motorola to consider new investments in R&D and possibly acquisitions.
Meanwhile, the 2 inch by 8 inch text box on McDonald’s said the company was borrowing $3B to repatriate foreign earnings in order to take advantage of a short-term government tax break. By the way, this caused a recent 10% drop in reported earnings on top of the smallest sales gain in 2 years. The repatriated cash will be used to extend the company’s business model by opening new stores (anyone recall the store shuttering program in 2000-2001?), remodelings and paying salaries (no joke – paying salaries!).
I’ve written in this BLOG before about the great difference between Motorola and McDonald’s. One has disrupted itself and opened White Space to innovate – clearly moving rapidly from the Swamp back into the Rapids. The other is practicing Defend & Extend management as it continues struggling in the Swamp. To track performance, keep your eyes on page 3.
by Adam Hartung | Aug 30, 2005 | General, In the Swamp, Leadership, Lifecycle, Openness
Last Christmas we were horrified by videos of people who went out to pick up shells on the beach in Thailand only to be overwhelmed by the tsunami which rushed in and created total devastation. Some people (most) thought the situation was a mere outgoing tide (larger than usual, to be sure). A few, however, recognized this was no mere tide, but a tsunami about to unleash. Instead of going to the beach, they ran as fast as possible the other way. These few saved themselves.
How do business leaders know when a problem in their business is merely the tide going out, and when it will be a tsunami challenging (possibly wrecking) their business model? This question is critical for leaders and investors. When the business is in the Rapids, and short-term problems can be fixed, then staying the course is the right thing to do. But, if the problems are actually signals of much deeper challenges then a lot more is needed before the business is dumped into the swamp and returns become elusive.
Wal-Mart stock has been dumped lately. Due to concerns about hurricane Katrina’s impact driving gas prices higher, investor’s have driven Wal-Mart’s value down to levels similar to the market collapse after terror on 9/11/01. Is the tide going out on Wal-Mart, sure to come back in and raise Wal-Mart to greater value, or should we be more worried about the future?
The key is to move beyond short-term concerns and look at longer-term trends. Wal-Mart has been struggling to maintain its value since peaking in the dot.com boom. Since 2000, the stock has gone sideways. Why? There have been a series of problems for Wal-Mart: Union problems/threats, store failures in Europe, lost customers to more trendy Target and Kohl’s, rising costs from energy prices, employee lawsuits over discrimination, government investigation for hiring illegal immigrants, and top executives fired for misappropriation of expense monies to wage illegal union-busting activities. Problems with customers losing discretionary spending dollars to high gas prices is merely the most recent in a series of concerns about Wal-Mart’s ability to re-invigorate growth and its profits.
One reason we review quarter-to-quarter results is it helps us determine if a company is in the Rapids, or not. When in the Rapids businesses can tweak their operations to recover from problems. But, when in they move into the Swamp we see recurring problems that aren’t easily overcome. Results are always promised to improve – and historical glory regained. Improvement is always just around the corner from China expansion, investments in lower-cost distribution, and store extensions. And internal problems are diminished by explaining away lawsuits and executive misdeeds as "one off" occurences. In the Swamp, there are so many alligators and mosquitos nipping at the operations we wonder if management has time to focus on how to get back into the Rapids!
Everyone wants large and successful institutions to regain their glory. But that is rare. Smart leaders have to know how to recognize when the market is changing, and they are looking at a tsunami – not just the outgoing tide. Long-term success requires honestly seeing the recurring problems as the symptoms of something much worse – and not always doing what was done (picking up the fish on the beach) but instead taking much more drastic action to address fundamental challenges.
by Adam Hartung | Aug 30, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
Warren Buffet is often called the Oracle of Omaha. His track record at making money for investors in his company – Berkshire Hathaway – was remarkable for several years. Many have heard the story about how a mere $1,000 invested inthe late 1970’s is worth over $80,000 today. But, if you look closer, you’ll see that the company stock is about the same today as it was in 1998. Buffet really hasn’t made a lot of money for investors the last several years.
It’s foolish to attack an investing legend, yet it is worthwhile to look at whether what worked for Buffet for years is still working. As we know, the future is not the past and any company is subject to lock-in and deteriorating returns.
Last year Buffet’s Berkshire made a big investment in Pier 1 Imports. This helped prop up Pier 1’s stock price for a few months, but since then the company’s value has declined about 50%. This year the company suffered it’s first quarterly loss in history. According to Business Week, the company’s CEO has admitted he’s ashamed of company performance. Oops! Buffet hasn’t commented.
About 8 years ago Buffet’s Berkshire made a big investment in Coca-Cola. Such a large investment they put him on the Board. After that investment Coke’s market value doubled by 1998 – but then it started a slide that has Coke’s value back again to about what Buffet paid. Other than dividends, Berkshire hasn’t made any money. Oops! (And if you invested after Buffet you would have lost money.)
Buffet made a huge fortune with a strategy that worked incredibly well. But will it work going forward? He enjoyed buying companies that had a large asset which he perceived as undervalued and then hanging on while that asset rose in value. But increasingly these kinds of assets aren’t able to regain their old value. Companies like Pier 1 and Coke have hit growth stalls that have been deadly. Attempts to implement short-term fixes to their business models have been ineffective in the face of larger challenges to those models.
No one bats 1.00 (to use a baseball analogy) on their investments. But it’s increasingly obvious that Berkshire Hathaway’s strategy hasn’t been hitting so well. Their insurance and re-insurance investments aren’t producing like before, and even Mr. Buffet has been required to give testimony on intercompany relationships with scandals such as AIG. Oops! (This is not to impune Mr. Buffet – there have been no accusations of wrong doing by him or Berkshire Hathaway.)
Has Berkshire Hathaway hit a growth stall itself? Is the Oracle of Omaha locked-in, and possibly missing opportunities to improve shareholder return? Time will tell, but short term (looking at the last 10 years) Buffet shows all the signs of lock-in, and a stall – and that would trouble me if I owned Berkshire Hathaway stock. Mr. Buffet well deserves his opportunities on the public stage, yet it’s worth some hard thinking the next time you’re tempted to follow his lead on investments.
by Adam Hartung | Aug 20, 2005 | Defend & Extend, General, In the Swamp, Leadership, Lock-in
Some of you may remember the old war movies in which the soldiers say "it’s the bullet you don’t hear that gets you." There have been a lot of movies in which the people who are killed make the point that it’s not what you see that gets you, it’s what you don’t see. There is no "Cry of the Banshee" prior to receiving the deadly blow. In business, it’s the same thing. It’s not the factors you plan on that kills your profitability, it’s what you don’t see. It’s not the threat from the direct competition that makes you business model unviable – it’s something that you never expected.
During 2005 there are two remarkable businesses that never saw it coming – and now they are facing great pain. They are household names with tremendous legacy and unbelievably profitable histories. But I can’t find any analysts who think they have growth in their future – and even the companies themselves admit they are facing a lower growth future. And their market values, employees, vendors and customers are all facing difficulty
Wal-Mart and Merck.
Wal-Mart has done about everything a discount retailer can do right. They’ve cut costs, appealed directly to their customers with lower prices. Created tremendous careers for their employees. But what they didn’t predict was a tripling of gasoline prices taking a relatively huge bite out of the discretionary incomes of their target customers. Now, with energy costs eating up the money they’d spend at the Wal-Mart stores the company is struggling to find a way to keep up its growth history.
Merck was the darling of Wal-Street in 1987. It was the highest P/E in the DJIA. It’s growth was spectacular. Not one analyst thought you could go wrong by buying Merck stock (and in all fairness if you bought it then you would have made a lot of money). But no one ever figured that one questionable drug (Vioxx) could destroy billions of dollars in shareholder wealth. The Merck business model made them rich while improving the lives of millions of people. But that same business model pushed Merck to aggressively market drugs directly to patients (rather than to doctors only), and to possibly push drugs into market use a bit quicker. And now the very health of Merck itself is in question.
Both these companies have been undeniably successful. World leaders. And they honed and pruned their business models to perfection for the competitive marketplace they were in. They locked-in that business model, and worked to defend and extend it as fast as possible. And that lock-in to the successful past practices meant they never saw it coming – they didn’t see what would cause them to stall. They didn’t see what could eventually knock them off their top spots.
by Adam Hartung | Jul 21, 2005 | General, In the Rapids, Leadership
Since you’re reading this on-line, odds are very high you’re reading it via Internet Explorer from Microsoft – your web browser. Do you remember who invented the first web browser and took it to market? Spyglass – a Chicago company. They were rapidly followed by Netscape and only months later by Microsoft. Netscape was bought by AOL and disappeared from view. What happened to Spyglass? You probably think it went belly-up.
Wrong. When Microsoft launched IE they simultaneously brought everyone into the world of the web. They made surfing common. And they crushed their competition. But the leadership of Spyglass didn’t simply die. While most high-tech entrepreneurs get so wedded to their Success Formula that they let such market changes doom their enterprise, Spyglass didn’t (See article in Chicago Tribune).
Spyglass used the lost market share and financial losses to spur a Disruption, and then they redirected their energies into new markets. They moved from PCs to specializing in internet access for TVs, cell phones and other devices. The company was sold to OpenTV in 2000 for $2.4billion – right, billion. After their market position was destroyed by Microsoft.
All businesses have to be ready to disrupt and adapt. Not just big, mature companies. Even small companies have to watch their markets and remain flexible to develop new success formulas. And smart leaders that can sustain success across years are like the leaders at Spyglass – flexible, adaptable and ready to use White Space.
by Adam Hartung | Jul 21, 2005 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Lifecycle
Motorola announced a great profit leap this week. Sales keep going up in all markets, and most notably sales of Motorola handsets have been gaining share. It was just 2 years ago that most analysts had given up on Motorola. They tagged the company as unresponsive to customers and a bad investment. But now, analysts all over are trumpeting the success at this aged, but recovering, company and recommending investors buy the stock (as well as the products).
Unfortunately, the same can’t be said for Kodak. Since dropping off the DJIA Kodak has been struggling to re-orient the company toward markets and renewed growth. Kodak announced a loss last quarter, and longer delays before returning to profitability. Although Kodak has been working on its "turnaround" for over 5 years (from film to digital photography) they still are saying that reaching their goals is at least 18 months away. Eighteen months ….. that’s longer in the future than Motorola has been executing its turnaround. And analysts are far from optimistic about the Kodak’s future.
Motorola is opening two new R&D centers, while Kodak is planning to lay-off 20,000+ employees.
Last January (2004) Motorola undertook a pattern interrupt and launched a host of new white space initiatives. The new leader (Ed Zander) escshewed massive layoffs in favor of reigniting his employees and seeking new growth markets. In fairly short order, Motorola has unleashed creative energy trapped in the organization and taken new products to market which are growing the company again. Motorola, in about a year, moved from the Swamp back into the Rapids by effectively disrupting itself then creating and managing White Space projects.
On the other hand, Kodak keeps trying to Defend and Extend its old business while "transitioning" to a new future. The leaders at Kodak won’t let go of the past and unleash their own organization to seek the future. Kodak has plenty of talented people, a great brand, and good distribution. But it keeps trying to defend its past instead of taking the actions to reignite growth in new markets. Its a shame, since Kodak was one of the early pioneers in digital imaging (they held many of the first patents) and its employees have had a clear view of "the future" for 20 years. But management has let lock-in to an old success formula keep them from unleashing their own resources.
Two big and "mature" companies found themselves stuck in the Swamp. Growth had stopped and financial results tanked. One followed the Phoenix Principle, and the other followed traditional management practices. One is now regaining share and growing again, the other remains seriously troubled.
by Adam Hartung | May 12, 2005 | Disruptions, General, In the Swamp, Innovation, Leadership, Lifecycle
Poor GM. When you’re a big target, lots of people find it easy to take their shots at you. No doubt GM is in trouble. But there are few pundits offering solutions for GM’s woes. And no one knows what Mr. Kerkorian is likely to do.
The most prevalent thinking across the press is that GM needs to retrench. Kill products, and whole brands. Never mind that killing Oldsmobile cost GM more than keeping it alive, and that killing Oldsmobile simply made GM smaller as those customers switched to competitors rather than other GM cars. The overwhelming view is GM needs to cut, cut, cut. Remember, GM is not short of cash. It has enough cash to last years and years. So why does it need to do all this cutting and/or selling? Is GM supposed to save its way to prosperity?
GM needs to grow if it wants to remain a vital company. In the short term, this probably means selling more cars. Longer term, it probably means doing lots more than cars (look at GE, no longer just an electric production company.)
Amidst all these calls for belt tightening, busines jettisoning and head lopping we need to remember that GM needs to grow. Last Sunday’s Chicago Tribune interviewed the head of marketing for GM, and for the first time I heard a glimmer of what might turn around GM. He’s out to sell more cars. To compete with those stealing GM’s share. He hears this crisis as a call for GM to change the way it does business and become more customer focused.
That’s a plan that might work. It’s not without risk. But the plans to simply shrink GM have no future. GM needs to turn loose the folks in the divisions to find better ways to compete for customers. Less corporate purchasing and corporate consolidations and more white space for those divisions to do something new. You never know, there might be another John Z. DeLorean somewhere in the giant GM with the next GTO on her mind just waiting for someone to give her the permission and resources to make something new happen.
by Adam Hartung | Apr 18, 2005 | Books, Disruptions, General, In the Rapids, Innovation, Leadership, Lifecycle
I wrote recently that IBM looked like an elephant that could continue to dance (taking off on the title of Lou Gerstner’s book about his days at IBM.) Shortly after that, IBM announced quarterly earnings and its stock accelerated a 2005 decline. A fair question might be "would I like to retract my earlier BLOG?"
Definitely not! Yes, IBM missed its earnings projection by $05/share. Right; a nickel. That was about 6% lower than expected but a nickel higher than last year. The stock sold off like you’d think they’d announced a quarterly loss – falling about 10%. From its peak at the beginning of 2005, the stock is down about 25%.
Over the long term, the markets are efficient. But in the short-tem — well it’s anyone’s guess. Not even the famed Peter Lynch could make money timing a market. What makes money long-term is finding companies that can sustain success (read the latest great book on long-term investing by Jeremy Siegel for more info.)
IBM is taking actions to continue sustaining its success. The stock might be volatile, both up and down, along the way. But few make money trading stocks. The way to riches in a creatively destructive world is finding companies that can sustain success. Since its turnaround in the 1990s IBM has regained its ability to disrupt itself and demonstrate the characteistics of a long-tem sustained growth company.
If you want a portfolio of long-term winners I would say that IBM is a company worth considering. Even moreso today.
