by Adam Hartung | Jun 14, 2010 | Defend & Extend, Disruptions, Leadership, Web/Tech
I was struck by a recent Baseline.com article that described the top 6 reasons IT projects fail in "What Dooms IT Projects." Primarily because the reasons have nothing to do inherently with information technology, and thus are identical to why all projects fail – including new product launches, new market expansions, new manufacturing technology adoption, new financing forms and any other new projects companies start. AND because these are the same reasons I've been reading for 20 years!
- Insufficient user (or customer) involvement. Inevitably someone says that if the team had just spent more time talking to users/customers everything would have worked out OK. As if for some reason the team had no interest in the customers, and were so arrogant as to simply not care! We all know that lots of time is spent capturing user/customer input. The problem is that users/customers don't really know what they want! Therefore, their recommendations are insufficient to describe what it would take to really make them happy with any change.
- Unrealistic Timetable. Why do people say they'll do a project in 3 months that everyone knows will take 9? Simply, the team has no choice. In today's world we have to achieve results quickly. Long projects are never completed, because conditions keep changing (more on this in #4 below). So the team is forced into very rapid deadlines. Only, the deliverables are usually kept the same, making it impossible for the project to complete on time!
- Poor Requirements. As if there was no target? There are plenty of requirements, it's just that (back to #1 above) the customer doesn't really know what they want, so the requirements which look great at the beginning look insufficient (poor) after people are a lot more educated from the completed work! The requirements look great until you get into the effort and start seeing how much more could be done, and how much of the value lies in going the next step (often in multiple places.)
- Scope Creep. During the project users/customers see early examples or interim deliverables. Once that happens they say "Oh, now I have a LOT better idea what I really want. So can't you just make this small change? It will make all the difference imaginable in how I'll use this – or even whether I'll use this." Given this interim input, there's almost no way to NOT add on to the project.
- Lack Executive Support. Of course no executive is going to say "I am four-square behind this project" once user/customer feedback starts coming back less than enthusiastic, timetables start slipping, the deliverable starts looking a lot bigger (and the work a lot more expensive) and finger-pointing has started about "why didn't we figure this all out before we started!" Even when the entire management team yells "go" at the beginning, once a project is deemed problematic support evaporates faster than ethyl alcohol rubbed on hot stainless steel!
- Poor Testing. Sure, blame the testers. Given how many variables have shifted and turned since the project started, who remembers, or knows, what to test any longer? Exactly what performance requirements will be the triggers that determine acceptability? Which variables are most important? And, if the project is now struggling with changed requirements, the timetable is blown, scope has been redefined more than once, users/customers have started griping about delays and the executives are saying "will this nightmare project ever end" exactly what tester is going to stand in front of the train and say "hey, let's stop this thing"?
Bad projects are expensive. According to Baseline.com, just in American IT projects $63B is lost every year to failed IT projects. About 25% of the time – really, 1 in 4 times – projects are considered complete failures. Less than 1/3 of the time are projects considered successful. Yet, there is nothing new in this list. It's been the same list for at least 20 years! Even though "project management" has now become an academic discipline – results are not improving.
The approach to project management since the 1960s has been the same. Write down requirements, use some sort of "scientific management" effort – some kind of time/motion study – to estimate the time to complete, freeze the project, get agreement on project outcomes and funding, then "execute." And project management has been all about how to improve this process by adding more, and more, and more, and more steps. There are now checklists that are book after book of things to do in order to "nail down" each step. And there are hundreds of articles written about the "discipline" of keeping to the plan, not changing things, and keeping "everyone on board to the original project" until it is complete.
But all of this simply adds up to do more of what we've always done, try to do it better, via automation try to do it faster and consider using consultants or offshore resources to do all of this extra work cheaper. There's been no change to how we do project management, no change to the underlying premise. Even though results are no better now – in fact they may well be worse – than 40 years ago!
So why don't we change the approach?
The problem is that shifts happen. Customer needs change every day, based upon what happens not only in their work but in what their customers want and in what competitors do. As the world shifts, requirements change. Customers that don't really know what they want, because they only know what they've done, are asked to do the impossible to define their requirements – and then asked to do the even more impossible task of not wanting more as things shift. As demands on customers change, and as competitors change the environment, shifts demand changes in expectations. And testing is all about "does the hurdler jump the bar" without any consideration, by design, as to whether he finishes the race (much less how fast he finishes.) And the incentives are for judges to lower the bar, so the darn race can just end.
The old approach was designed for a nice, slow-paced, static world. Where everything is known, and that's impossible with market needs. It can work if you're trying to build a bridge maybe, but when trying to design some solution for a complex system (like the modern market, or IT community, or logistics design, etc.) that has infinite moving parts? And where the speed with which parts change can be amazingly fast? Let's get real, traditional project management simply won't work in today's complex IT, marketing, finance, HR, operations, production, logistics, manufacturing, sales world!
So, instead, try a new approach. We've used this for 10 years with all kinds of projects, and it works a whole lot better. Undertake your project realizing that if it aligns with future needs it will add value – and that is what really matters.
- Don't ask users what they want. Don't ask them for requirements. They don't know.
- Develop your scenario of what would be the PERFECT, ideal solution in 2 or 5 years. Really. Not just an improvement over today, what would be perfect! Even if you have no idea how you would ever do it. Write that down. Then, say what those requirements are. Design to those specs – which are probably 10 to 100 times beyond the current state. Don't settle for some fractional design. Don't start if you can't deliver what the market will want in the future when customers aren't bridled by what they don't know today. Build for a future scenario that is way better than today – not just some initial requirements your Locked-in customer thought about.
- If you don't know how to design it, study your competitors – including fringe competitors. Look at everyone imaginable that is solving a similar problem and see how those you may never before considered are doing it. See how people in China, Bangladesh, Hyderabad, San Paulo, Moscow, Taipei or Bangkok are doing it. See how some 20 year old college kid and her buddies are trying to do it. Look at how the upcoming competitor with .1% market share is doing it. Don't just go for the well known solution approach. Don't settle for "best practice" which is a 6 year old innovation that has little competitive value left. Don't be afraid to do what can provide huge value improvement.
- Write a long story, with detail, about how completing this project is going to really screw with your existing competitors. Describe the huge pain they will feel. How they will be in shock and awe of your performance once you are able to blow them away with this new capability. Destroying the traditional competition is a great motivator. Make them into the villain – after all, they are! (By the way, if you don't think the project will have a positive competitive impact – why are you doing it?)
- Focus really, really, really hard on defining important early valuable deliverables. Fast wins. Don't just figure out what the end state will look like, it's critical to know what you can deliver successfully in 90 or 120 days! We can't wait forever for results, so throw out complex ROI analysis. Instead ask the team to simply say how quickly they can start producing, rather than spending, money – and how quickly their project will pay back the investment. Force them to prove that there are measurable wins in the first year, and payback in less than 3 — on something!! Don't worry about "scale." Just the opposite, worry about how to demonstrate value quickly! Keep all timelines under a year, most under 4 months.
- Tell everyone you are going to do something new. You are prepared to be the innovator. You can, and will, Disrupt the things you've done in order to give spectacular results. You don't just want a 5% improvement, you want to win. It's not about how much better you were than before – it's about being competitively better than everyone else. You simply want to win in the marketplace – and you'll do new things to accomplish this. You care about results more than process.
- Give the team permission to do whatever they have to do to succeed. Don't give them a list of "rules" within which the project has to operate. Give them the permission to really focus on success – that they can do what's needed to accomplish their goal. Don't set up barriers. Instead, tell them there are no barriers and you don't want them to talk about there being any barriers.
- Make sure the team does not report to the Status Quo management. Structure the project so that the team reports to someone who can focus on project success first, rather than abiding by old rules, or fears cannibalization, or has a vested interest in the success of the Status Quo.
- Commit enough resources so the project can succeed. Don't give it piecemeal funding that will require the team constantly battle to keep the project moving forward. Don't expect success from part-time resources borrowed from other full-time work, or from a team assembled only to do this project then return to their old jobs. Everyone has to be committed to the project, and its success, and the money should be there if they reach their goals (regardless of the route they took.)
This may not sound like a typical project management approach. But hey, given how well the old approach has worked out don't you think it's time to give something new a chance? Would medicine have ever advanced if we just kept on blood-letting? When will we try something new if not now?
PS – Don't miss my newest column in CIOMagazine. "IT Strategy, Use Scenario Planning to Get Beyond Legacy Systems." As IT has become one of our highest costs, it's more important than ever we change how we do IT planning and project management.
by Adam Hartung | Jun 13, 2010 | Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in
If your boss told you that he enjoyed your hard work, but he wanted to cut your pay 50% I bet you would feel – well – violated. Your hard work is just that; hard work. If you received $100,000 (or $50,000 or $250,000) for that work last year it would be hard to accept receiving some fractionally lower amount for that same work next year. Especially given that every year you are able to work smarter, better and faster at what you do. Because your execution constantly improves you'd expect to receive more every year.
But in reality, it doesn't matter how hard we work. What matters is the value of that work. It's why nearly incoherent ball players and actors make millions while skillful engineers barely make 6 figures. In other words, pay inevitably ends up being the result of not only the output – it's volume and quality – but what it is worth. And that the compensation is a marketplace result – and not something we actually control – is hard for us to understand.
Every years many pundits decry "excessive" executive pay. There is ample discussion about how an executive received a boat load of money, meanwhile the company sales or profits or customer performance was less than average, or possibly even declined. Of course the executives don't think they are overpaid. They say "I worked hard, did my job, did what I thought was best and was agreed to by my Board of Directors. I did what most investors and my peers would have expected me to do. Therefore, I deserve this money – regardless of the results. I can't control markets or their many variables (like industry prices, costs of feedstock, international currency values, or the loss of a patent or other lawsuit, an industrial accident, or the development of a competitive breakthrough technology) so I can't control the results (like total revenues, or total profits or the stock prices). Therefore I deserve to be compensated for my hard work, even if things didn't work out quite like investors, customers, employees or suppliers might have liked."
This answer is hard for the detractors to accept. To them, if top management isn't responsible for results, who is? Yet, shockingly, each time this happens investment fund managers that own large stock positions will be interviewed, and they will agree the executives are doing their jobs so they should get paid based up on their title and industry – regardless the results.
An example of this behavior was reported by Crain's Chicago Business in "Tribune's $43M Bonus Plan Lambasted by Trustee." Even though Tribune Corporation's leadership, under Sam Zell, took the company from profitable to bankruptcy, and even though they've been unable to "fix" Tribune sufficiently to appease bondholders and develop a plan to remain a going concern thus exiting bankruptcy, the management team thinks it should be paid a bonus. Why? Because they are working diligently, and hard. So, even though there really are no acceptable results, they want to get paid a bonus.
We all have to realize that our company sales and profits are a result of the marketplace in which we compete, and the Success Formula we apply. The combination can produce very good results sometimes; even for a prolonged period. Newspapers had a good, long profitable run. But markets shift. When markets shift, we see that the old Success Formula must change because RESULTS deteriorate. Slow (or no, or negative) growth in revenues and/or profits and/or cash flow is a clear sign of a market shift creating a problem with the Success Formula. When this happens, rewarding EXECUTION (or hard work) is EXACTLY the WRONG thing to do! Doing more of the same will only exacerbate bad results – not fix them
What's bad for the business, in revenues/profits/cash flow, must (of necessity) be bad for the employees. Not because they are bad people. Or lazy, or incompetent, or arrogant, or any of many other bad connotations. But because the results are clearly saying that the value has eroded from the Success Formula . Usually because of a market shift (like readers and advertisers going from newspapers/print to the internet). What we MUST reward are the efforts to change the Success Formula, to get back to growing. Not hard work. As much as we'd like to say that hard work deserves money – we all know that money flows to the things we value regardless of how hard we work.
I've long been a detractor of many executives – Brenda Barnes at Sara Lee has been a frequent victim of this blog. Whitacre of GM another. Steve Ballmer at Microsoft. That the Boards of these companies compensate these leaders, and the teams they lead, is horrific. It reinforces the notion that what matters is hard work, willingness to toe the line of the old Success Formula, willingness to remain Locked-in to industry or company traditions – rather than results. Results which give independent feedback from the marketplace of the true value of the Success Formula.
Let's congratulate the Tribune Trustee. For once, more attention is being paid to results than to "hard work" or "execution." Tribune – like General Motors – needs a wholesale makeover. An entirely new team of leaders willing to Disrupt old Lock-ins and use White Space to define a new Success Formula. Willing to move the resources in these companies, including the employees, back into growth markets. If more Boards acted like the Tribune Trustee we'd be a lot better off because more companies would grow and maybe we'd move forward out of this recession.
by Adam Hartung | Jun 9, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
I so enjoyed the feedback from my article on Chicago and Illinois politicians I decided to take on another sacred cow – so let's talk about education.
According to Inside Higher Education's article "In Search of Innovators" there is a distinct lack of innovation in higher education. They cite a number of studies that show colleges are much better at enrolling students than graduating them. Especially private schools and junior colleges. And, imagine this, professors and administrators are more interested in continuing their positions and jobs than what students learn ("learning outcomes" in the industry vernacular.) Seems that keeping things from changing is the highest interest for educators, rather than actually teaching anything students need to learn to compete today.
But, we all know this. We've all seen colleges that have courses taught by only one or two professors, who only teach at odd hours, only allow a few students, refuse to keep office hours, or refuse to post previous exams. We're all familiar with schools that limit the hours administration offices are open, and are intractable about the requirements for graduation – even if they were set 20 years ago.
Quite simply, Lock-in drives most schools. Programs like tenure which make it impossible to fire anyone help maintain Lock-in. And professors would rather argue about what they don't want to do than try anything new and different. For all of us who went to college, and especially for those of us with students in college, it's clear that students are a route to their money (or their parent's money) – sort of little money pumps – intended to allow the college to not change. Many colleges even brag about how little they've changed over the last 20, 50 or even 100 years! In a world where change is every present, and dealing with change is now one of the most important skills a young person needs!
According to The Chronicle of Higher Education "For Innovation to Occur, Colleges Need a Big Push, Scholars Say." This journal cites program after program where a college tried to start up something new, only to have the program fail. But of course, because there is no White Space in colleges. White Space is where you give Permission to break all Lock-ins and do whatever it takes to be successful – and then provide the resources for success to occur. This does NOT exist in a college, where none of the Lock-ins can be violated. A professor can't even decide to change from teaching in class to using video instruction or on-line training because it's not allowed. So how can something new really be tried?
Where we have seen growth in higher education has been in for-profit schools like Devry and Phoenix that have rapidly challenged tradition and moved into new education models. Traditional schools decry these institutions, claiming the quality isn't acceptable. Of course, the "quality" argument is what printers used to claim Xerox machines would never succeed. It's what DEC said about AutoCad – before DEC went out of business. It's what Kodak executives said would make digital photography a tiny market compared to film. It's what executives at Sony said would keep music customers from buying MP3 devices/music before Apple launched the iPod. Quality is the #1 excuse used by Locked-in organizations to justify why they shouldn't change.
Forty years ago it was pretty clear that if you could afford college and grad school, it was worth it. But as costs/prices have skyrocketed, and the relevancy of education in many institutions has declined, that argument has lost a lot of credibility. Increasingly students are saying they want their education to be meaningful, practical and applicable. The market has shifted. They want to study on their schedules, without giving up their incomes or struggling with horrible commutes. And increasingly, these customers are moving to the suppliers that meet their needs – rather than trying to Defend & Extend old practices.
It's ironic that in the one place where we should most be open to new models we have almost no innovation. But it's impossible without a change in the structures and processes – and that requires a willingness to create a lot of White Space. For most colleges, I'm not optimistic.
by Adam Hartung | Jun 7, 2010 | Defend & Extend, In the Swamp, Innovation, Leadership, Music
I was born in 1957. That year, a 3 bedroom track home in Wichita, KS sold for the same price as that very same track home in Palo Alto, CA – about $10,000. Of course, things have changed hugely since then. Agriculture value had declined markedly, and automation has allowed for dramatic productivity improvements, robbing the heartland states of hundreds of thousands of agricultural jobs. Without people on the farms, the need for agricultural cities supporting the farms declined. No growth, and values decline. Today that home in Wichita is worth something like $50,000.
The land where the track home once sat in Palo Alto is worth $500,000. Because the explosion of technology jobs in Silicon Valley made demand for housing much greater, and as the value of technology soared those employed in the industry saw their incomes rise, allowing for higher home values.
It all comes down to growth. Geographic areas are like businesses in that growth leads to all kinds of good things – including higher home values. People go where the jobs are. Especially good paying jobs. And that comes from investing in innovation, and the companies that develop new solutions aligned with market needs.
According to Forbes magazine in "Houston: Model City" Illinois has lost 260,000 jobs in the last decade. No wonder home values in Chicago never soared like San Jose. But it's also no mystery why the 15-20% decline in Chicago real estate seems never to be improving. When a city stops growing – well – look at Detroit.
Today Crain's Chicago Business reported "Chicago Economy Sees Signs of Life, But Rocky Recovery is Forecast." Why? Little has been done to improve job growth. Once an agricultural center (the famous stockyards of The Jungle fame) Chicago became a powerhouse manufacturing center. But over the last 15 years the city and state have done almost nothing to drive more jobs related to information or the coming biological growth wave.
Few realize that the University of Illinois is ranked as the 4th best engineering school in the world. Yet, most graduates end up "going coastal" in order to find high paying jobs. Worse, innovators who want seed money or venture capital find none from the state, as it continues struggling to support the costs of jobs and pensions related to the now-gone manufacturing economy! Spending money trying to Defend & Extend the old manufacturing base. And there is almost no angel or venture private financing, which has grown considerably on both coasts, because that is targeted largely in non-manufacturing industries. And the large companies in Chicago – from Kraft to Sara Lee to Motorola to Lucent – to even Boeing – invest nearly nothing in spin-off companies and innovators in their own back yard. Many start-ups report they have to move either west or east in order to obtain financing for their ideas and rapid growth.
For cities and states, growth is the key. It is OK that once all the cowboys ended their cattle drives in Wichita. And that the world's largest grain elevator is just southeast of town. When agriculture was the center of the universe that was a good thing. But because the leaders did not transition toward new job growth as the economy shifted, Wichita is now a backwater. It is so hard to recruit talent to Wichita that Pepsi moved the headquarters of Pizza Hut to Dallas, and most of the decisions for Beech aircraft are made at Raytheon Headquarters in suburban Boston. Face it, do you want to live in Wichita?
How quickly will people say the same thing about Chicago? Already, nobody wants to live in Detroit. If Chicago city leaders, and Illinois state leaders, can't get out of old Lock-ins to manufacturing mind sets we all may be surprised how quickly Chicago follows its sister cities into unattractive outcomes. For politicians, and corporate leaders, a focus on growth is extremely important if they want to keep their city vibrant.
For residents of Chicago, there is ample reason to be worried about the future of their infrastructure and home values.
by Adam Hartung | Jun 6, 2010 | Current Affairs, Defend & Extend, Innovation, Leadership, Lock-in, Openness, Web/Tech
According to Crain's Chicago Business, "Walgreen's Same Store Sales Nearly Flat." Walgreen's has been Locked-in for 3 decades. Build more stores. Simple. Just like WalMart did for many years. Demand seemed insatiable, until there was a store on almost every corner. Build stores, turn the product fast and keep people coming in for prescriptions or something on sale. Their Success Formula worked, and it helped them grow and grow.
But then about 3 years ago growth slowed. A lot. Raising capital got a lot harder to build these stores, and the apparent need for more stores was a lot less obvious. But Walgreen's didn't attack it's Lock-ins to the old Success Formula. Management kept defending it, and trying to extend by acquiring other chains they could convert into Walgreen's. But as we've seen in same-store results, Walgreen's has stalled. And we know that less than 7% of stalled companies ever consistently grow more than 2% ever again. Walgreen's just refuses to realize that health care programs are forcing more people to drugs over the web, and that retailing is fast moving to on-line sales for both convenience and price. So the Success Formula keeps struggling a bit more every year, with hope that things will somehow return to the "good old days."
A much better management team is in place at Netflix. Netflix has clobbered Blockbuster with their on-line model for movie rentals. You'd expect them to keep pushing hard for on-line rentals, in order to Defend & Extend the Success Formula – just like Walgreen's management has done. In spite of the fact that everyone knows DVD rental growth is threatened by more people simply downloading movies. Thus, I was delighted to see Netflix publish this chart:
Source: BusinessInsider.com
Netflix has admitted that its "core" business will peak in 2013! How great. And what's even better is that they are rapidly changing their model by investing heavily into streaming downloads. Where most management would say "we have to stop that transition, it will cannibalize our very profitable existing revenues" Netflix is planning for the change – and preparing to help the market move in that direction!
Only by allowing a streaming download White Space team to be formed 3 years ago is Netflix able to make this transition. It attacked its Lock-in to the traditional – and wildly successful model – in order to allow a team to have the permission and resources to figure out how to move into the new business profitably. That means Netflix has a really decent chance of keeping the company growing as the market shifts! Great news for investors, suppliers, employees and customers!
You don't want to be like Walgreen's management. They may have a chart showing the maximum number of stores needed in the USA – but they won't publish it. Because they have no idea how they'll migrate away from the old Success Formula. They have no Disruptions or White Space. They are fighting market transitions, and slowly seeing results falter. But the growth stall is a big sign that Walgreen's has a lot of heavy problems ahead.
You do want to be like Netflix. Be honest about where markets are headed. Quit trying to protect an old Success Formula with arguments like cannibalization. Instead, attack the old Success Formula with Disruptions and launch White Space teams designed to figure out how you can grow with the market shift – even if price points are destined to deteriorate. Long-term its the only way to survive – and thrive.
Don't forget, I will be the keynote speaker for the breakfast CIO Perspectives meeting hosted by CIO Magazine this Wednesday, June 10. You can hear more about how to be a market leader using The Phoenix Principle at the Intercontinental Hotel Chicago – please register and I hope to see you there!
by Adam Hartung | Jun 3, 2010 | Current Affairs, In the Rapids, Leadership, Openness
How should you select a new CEO? Loyalty? Historical management of an existing business? Understanding of company or industry heritage? Most of those criteria are rear view focused, even if dominant. Wouldn't the most important criteria for a new CEO be understanding growth markets and ability to drive growth?
Are you familiar with the acronym BRIC? It stands for Brazil, Russia, India & China. Four rapidly growing markets. If you aren't familiar, you really need to be. Because your future may well be determined by your ability to compete there – rather than your ability to compete in the USA. Those markets are growing, and they are rapidly becoming dominant in not only production capability, but in their demand requirements for products as well. Soon they won't only be places you consider for low cost resources – but places you need to sell if you want to succeed. The emerging middle class, with money to spend, is rapidly shifting to BRIC countries from the USA and Europe.
According to Crain's Chicago Business, in "Baker & McKenzie Elects New Leader" this $2.1B law firm just selected as its new CEO the head of its Brazilian operations. Uncharacteristic for most American businesses, yet such an obviously smart move. Already only 675 of 3,850 company lawyers – less than 20% – are in the USA! It's a global economy, and Baker & McKenzie are moving where the growth is!
Compare this with McDonald's, which could have put the leader of Chipotle's in charge – but instead sold Chipotles, with its very high growth, and kept putting long-term McDonald's employees in the top job. Or imagine the difference if GM's Board of Directors had put the head of EDS or Hughes Aircraft, subsidiaries of GM in the 1980s, in the top GM job 25 years ago. By continuously putting an "auto" executive in the top job GM ended up selling off the high growth subsidiaries, gutted the value out of Saturn, and ended up in bankruptcy court!
There is no more important job for an organization's leader than growth. Growth can cover a multitude of sins. Missed sales, lost customers, pricing issues, faulty products — all can be forgotten if you keep driving growth. Just look at Google's Schmidt and Apple's Jobs. Hats off to the Management Board at Baker & McKenzie for moving forward and putting the growth market leader into the top job. More companies should be so unconventional.
Maybe this will be another Disruption that will help Baker & McKenzie grow even faster than its competitors! Disrupting the Status Quo is an important part of growth. Recently Tom Parrish created a podcast interview, published on his EnterpriseLeadershipo.org blog, of us discussing the need to Disrupt in order to grow. Give it a listen for ideas on using Disruptions to grow in your organization!
by Adam Hartung | Jun 2, 2010 | Current Affairs, Defend & Extend, Disruptions, Food and Drink, Leadership
Rumors are flying around Chicago about the health of Sara Lee CEO Brenda Barnes. Will she stay or leave? Some investors are wondering as well. While I join the chorus of voices that wish Ms. Barnes good health, her departure would not be a bad thing for Sara Lee investors, employees, suppliers and customers! Whether for health or other reasons, a change in the top at Sara Lee is long overdue.
As Crain's Chicago Business reported in "Sara Lee's Secrecy on CEO Barnes' Health Leaves Investors Wondering" in the 5 years Ms. Barnes has been CEO Sara Lee's value has dropped 25%, even as the S&P consumer goods index has risen by 18%! During her tenure, revenues at Sara Lee have declined 50% – largely due to asset sales from which the cash proceeds have done nothing to improve results. Currently, Ms. Barnes has a large deal on the table to sell another multi-billion dollar business in her ongoing effort to make Sara Lee a smaller and less competitive company.
There's nothing wrong with selling a business. But leaders have a responsibility to either pay the proceeds out to investors or re-invest the proceeds into new, growing businesses with high rates of return that will add more value. In Ms. Barnes case the money has been spent buying up shares of stock (the plan for any future proceeds, by the way). That has done nothing more than make the pool of shares, like the company assets, smaller. As already mentioned, these asset sales have not added anything to revenue or profit growth and thus the company value has steadily declined.
Of course, as I vilify Ms. Barnes reality is that it takes the agreement of Sara Lee's Board of Directors for this strategy to be implemented. And it takes a leadership team which agrees to go along – without offering strong dissent and driving discussion of results and long-term impact. While I make out Ms. Barnes to be a "goat" there is a lot more wrong at Sara Lee these days than simply the CEO.
Sara Lee has long been without any White Space. The company has tried to "milk" its aged brands, hoping to get more profits out of products that were much more exciting to customers in 1970 than 2010. While Jimmy Dean Sausage, Sara Lee frozen desserts and similar products were the stuff of my youth the current generation of young adults have chosen much different fare – in not only food but household and health/beauty products. Sara Lee's leadership before Ms. Barnes started the route of focusing on past sales and simply trying to give existing customers more. As a result, there has been 2 decades of insufficient scenario planning, limited competitor analysis – and no Disruptions. There has been no White Space to do anything new.
Similarly, we can easily make heroes out of CEOs in companies doing well. Steve Jobs at Apple is a case in point. During his 10 year leadership, Apple has gone from near bankruptcy to value greater than Microsoft. But this was not all Mr. Jobs. He has pushed his Board of Directors and leadership team to do more scenario planning, obsess about competitors, implement Disruptions and open White Space for doing new things. As a result, the Apple organization is now entering new markets and launching new products.
Mr. Jobs has not been without his own health concerns the last few years. Hopefully, he is doing well and will live many, many more healthy and happy years. Yet, if he chose to depart Apple for health or other reasons Apple is well positioned to continue doing well. Because as an organization it is planning correctly and implementing Disruptions and White Space – critical capabilities of Phoenix organizations.
CEOs matter. They set the tone for their organizations. Good ones understand the need to build organizations that can enter new markets – like Mr. Jobs. Bad ones spend their energy trying to Defend & Extend past results, often getting trapped in financial machinations as the organization shrinks and value disintegrates – like Ms. Barnes. But it's not all about the CEO and we shouldn't get too caught up in that single job. Good organizations have the skills to produce long-term growth and high rates of returns, and that can be built anywhere. Let's hope Sara Lee's Board wakes up to this and starts making changes in that organization soon.
by Adam Hartung | May 26, 2010 | Defend & Extend, In the Swamp, Leadership, Lock-in, Web/Tech
In theory, Sustaining Innovations that help a company Defend & Extend its products are supposed to be cheap. The breakthrough is done, and the investments on variations, derivatives and enhancements are "engineering" as opposed to "science" so the development is supposedly more easily planned, the costs better understood and the returns more predictable. That's the theory, anyway, and as a result most managers constantly defend their decision to keep investing more in Defending & Extending past products rather than investing in new things which would develop new markets and new revenue streams.
But, like a lot of business myths, there's really no proof for this theory. It just sounds good. It seems "to make sense", and the big issue is that "it simply has to be less risky to spend on what you know rather than what you don't know." And "after all, this is investing in our own market and what could have a higher rate of return than defending our mother ship?" I'm sure everyone has heard these kind of comments when it comes time to allocate resources. Management supports doing more of what's been done, reinforcing Defend & Extend behavior. It just HAS to make sense to do more of what we know rather than invest in something new that we don't know as well – right?
But look at this chart from Business Insider:
Microsoft has spent billions of dollars in R&D Defending its desktop PC near-monopoly with enhancements to Office (Office 2007 and now Office 2010) and the operating System (Vista and System 7). It has spent heavily on other things as well, but in the end its entertainment division and mobile O/S products as well as others have not successfully grown revenues. As a result, Microsoft's value has not risen and Apple is about to eclipse Microsoft's value despite being a smaller company (see yesterday's blog for a more thorough review of valuation issues).
Now we can see that all this spending on R&D to Defend & Extend is in no way cheap. In dollars, Microsoft spent 3.5 times as much as Google and 8 times as much as Apple in 2009 – companies which as a result of their spending generated considerably more growth than Microsoft. Microsoft even spent more dollars, and more money as a percent of revenue, than IBM and Cisco (companies that rely heavily on hardware as well as software sales)! By any measure, Microsoft's efforts to Defend & Extend its "base," or its "core" has come at a very, very high price – in dollars or as a percent of revenue.
Consider that a good measure of R&D should be its ability to generate incremental revenue. Using that yardstick, Microsoft is a disaster, while Apple is a star.
Far too many companies Lock-in R&D and New Product Development to the existing business. The decision-making systems are geared to invest more in what is known. New investments are tagged with "risk adjustments" and "cannibalization charges" and a host of other costs to make them look less positive than doing more of what has historically been done. Lock-in to the Success Formula means that the financial review system, along with the technology assessments, are designed to give a major benefit to doing more of the same, while dramatically penalizing anything new!
In almost all companiess decision-making systems are designed to reinforce the Success Formula, not give an "independent" answer based upon markets. The processes are designed to do more, not do something new. And in the case of Microsoft, we can see how that has led to huge investments in simply defending the PC business while the technology marketplace is now rapidly shifting to new platforms – like mobile devices (smartphones and tablets), cloud-based applications and data access, and even gaming consoles. Competitors are developing a huge advantage by investing R&D and New Product Development dollars in new markets which provide greater growth opportunities – and higher rates of return over any time period other than the very short term.
Even if you're not in the computer/tech business, you don't want to end up like Microsoft. You don't want to over-invest in yesterday's solution trying to Defend it in the face of market shifts. That did not work out well for Polaroid, Kodak or Xerox which lost their luster as customers switched to new solutions and new competitors. Be sure to look not just at how much you spend, but that your spending is linked to markets and their growth, not simply doing more of what you already know!
by Adam Hartung | May 25, 2010 | Current Affairs, Defend & Extend, In the Swamp, Innovation, Leadership, Lock-in, Web/Tech
The leadership of Microsoft's entertainment division are leaving, as reported at TechFlash.com "Bach, Allard leaving Microsoft in Big Shift for Consumer Businesses." Whether by their own choice or by request, the issue is simply that Microsoft has not driven the XBox to a dominant position versus the Sony Playstation or the Ninendo Wii. It is competitive, but not a big winner. The entertainment division has only recently moved beyond break-even, after years of losing billions of dollars. In the high-growth gaming business, Microsoft has simply not performed, despite its vast resources. And mobile devices developed in this division have lost over half their market share in under 2 years to Apple and Google.
Some of the weakness may have been that the leaders were long-term Microsoft veterans, comfortable to Mr. Ballmer and other leaders, rather than executives committed to their markets. Messrs. Bach and Allard were not they type of leaders to challenge the Microsoft Success Formula, instead willing to accept mediocre results rather than violate Microsoft Lock-ins that would have jeopardized their careers. Microsoft was willing to lose money, and not be a big winner, as long as the division leadership didn't challenge Lock-ins or the company focus on desktop computing products.
I'm not optimistic now that the division is reporting directly to CEO Steve Ballmer. He had an enormous role in the company decision to commit vast resources to Defending the old Success Formula by massing hundreds of billions of dollars behind development and rollout of Office 2007, now office 2010, Vista and now System 7. Yet, these projects have done nothing to grow Microsoft; instead only helping the company hold onto old customers. Worse, Mr. Ballmer himself recently informed the world in his CEO Summit (as reported in Computerworld "Microsoft's Ballmer admits 'Window's Vista was just not executed well") that he's not a good leader of product development – costing the company thousands of man-years in wasted development when admittedly mismanaging Vista!
Chart source Business Insider
Now, largely due to the ongoing Defend & Extend management practices of Mr. Ballmer, Microsoft and Apple's valuations are in a dead heat. Growth at Microsoft is poor, while Apple with its multiple new products is growing much faster – causing Apple's value to catch up to what has historically been the world's largest software company.
As I commented on the recent interview for bnet.com (available as a podcast) Microsoft's Defend & Extend management practices are deeply rooted in the industrial economy. But they are insufficient for success in today's rapidly shifting marketplace. I discussed this in more depth for my keynote address at the Western Michigan Innovation & Energy Summit last week, and a second article was published in the local newspaper on Saturday "Customer is Always Right? Columnist says not for Innovative Businesses." Specifically, Microsoft's total commitment to maintaining old operating system and Office customers has created an inability to re-focus resources on high growth markets like gaming and mobile devices.
Although Microsoft has solutions – including tablet technology – it's management is Locked-in to Defending what it always did and not committing to new growth markets. Anyone who thinks Microsoft will be the major player in cloud computing, just because it has demonstrated some new products, must look closely at how poorly the company has developed these other growth markets. Technology and products are not enough when management is Locked in to protecting past markets. Microsoft is far behind Google, and has practically no catch of being a major player with so much resource dedicated to Office 2010 and System 7.
Thus investors as well as customers and employees are not doing so well at Microsoft. In the rapidly shifting technology and gaming markets, this inability to commit to new markets is deadly. For Microsoft, replacing the heads of the entertainment division is most likely analogous to rearranging the deck chairs on ocean liner Titanic. The pending outcome is rapidly becoming inevitable. Time to look for lifeboats!
by Adam Hartung | May 19, 2010 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Web/Tech, Weblogs
Do you lament "the way things used to be?" I remember my parents using that phrase. Now I often hear my peers. And it really worries me. Success requires constant growth, and when I hear business leaders talking about "the way things used to be" I fear they are unwilling to advance with market shifts.
For 5 years newspaper publishers have been lamenting the good old days, when advertisers had little choice but to pay high rates for display or classified ads. Newspaper publishers complain that on-line ads are too inexpensive, and thus unable to cover the costs of "legitimate" journalism. While they've watched revenues decline, almost none have done anything to effectively develop robust on-line businesses that can offer quality journalism for the future. Instead, most are cutting costs, reducing output and using bankruptcy protection to stay alive (such as Tribune Corporation.) Even as more and more readers shift toward the digital environment.
Source: Business Insider 5/18/10
While most of the "major" newspapers (including Tribune owned LA Times) have been trying to preserve their print business (Defend & Extend it) HuffingtonPost.com has gone out and built a following. There's little doubt that with the last 3 years trajectory, HuffingtonPost will soon be the largest site. And reports are that HuffingtonPost.com is profitable.
In 2006 the CFO at LATimes told me he couldn't divert more resources to his web department. He felt it would be jeopardize to the print business. "After all," he said "you don't think that the future of news will be bloggers do you?" Clearly, he was unprepared for the kind of model Arianna Huffington was building – and the kind of readership HuffingtonPost.com could create.
On Tuesday I presented the keynote address at the Innovation and Energy Summit in Grand Rapids, MI – and as reported in West Michigan Business "Energy & Innovation Summit Speakers Urge Business Leaders to Seek New Businesses, Not Protect Old Ones." Defend & Extend management always "feels" right. It seems like the smart thing to try and preserve the old Success Formula, usually by cutting costs and increasing focus on primary revenue sources. But in reality, this further blinds the organization to market shifts and makes it more vulnerable to disaster. While NewsCorp and others are busy trying to think like newspapers, emerging news market competitors are developing entirely different models that attract customers – and make a profit.
That's why it is so important to use future scenarios to drive planning (not old products and customers) while passionately studying competitors. Talking to advertisers gave these publishers no insight as to how to compete, however had they spent more time watching HuffingtonPost.com, and other on-line sites, they might well have used Disruptions to change their investment models – pushing more resources to the web business. And had they set up dedicated White Space teams not constrained by old Lock-ins to traditional revenue models and goals of "avoiding advertiser cannibalization" they might very well have evolved to a more effective Success Formula necessary for competing on the internet into 2020.
