by Adam Hartung | Jul 20, 2009 | Current Affairs, Defend & Extend, eBooks, General, In the Whirlpool, Leadership, Lock-in
Years ago there was a TV ad featuring the actor Pauly Shore. Sitting in front of a haystack there was a sign over his frowning head reading "Find the needle." The voice over said "hard." Then another shot of Mr. Shore sitting in front of the same haystack grinning quite broadly, and the sign said "Find the hay." the voice over said "easy." Have you ever noticed that in business we too often try to do what's hard, rather than what's easy?
Take for example The New York Times Company, profiled today on Marketwatch.com in "The Gray Lady's Dilemma." The dilemma is apparently what the company will do next. Only, it really doesn't seem like much of a dilemma. The company is rapidly on its way to bankruptcy, with cash flow insufficient to cover operations. The leaders are negotiating with unions to lower costs, but it's unclear these cuts will be sufficient. And they definitely won't be within a year or two. Meanwhile the company is trying to sell The Boston Globe, which is highly unprofitable, and will most likely sell the Red Sox and the landmark Times Building in Manhattan, raising cash to keep the paper alive.
Only there isn't much of a dilemma here. Newspapers as they have historically been a business are no longer feasible. The costs outweigh the advertising and subscription dollars. The market is telling newspaper owners (Tribune Corporation, Gannett, McClatchey, News Corp. and all the others as well as The Times) that it has shifted. Cash flow and profits are a RESULT of the business model. People now are saying that they simply won't pay for newspapers – nor even read them. Thus advertisers have no reason to advertise. The results are terrible because the market has shifted. The easy thing to do is listen to the market. It's saying "stop." This should be easy. Quit, before you run out of money.
Of course, company leadership is Locked-in to doing what it always has done. So it doesn't want to stop. And many employees are Locked-in to their old job descriptions and pay – so they don't want to stop. They want to do what's hard – which is trying to Defend & Extend a money-losing enterprise after its useful life has been exhausted. But if customers have moved on, isn't this featherbedding? How is it different than trying to maintain coal shovelers on electric locomotives? This approach is hard. Very hard. And it won't succeed.
For a full half-decade, maybe longer, it has been crystal clear that print news, radio news and TV news (especially local) is worth a lot less than it used to be. They all suffer from one-way communication limits, poor reach and frequently poor latency. All problems that didn't exist before the internet. This technology and market shift has driven down revenues. People won't pay for what they can get globally, faster and in an interactive environment. As these customers shift, advertisers want to go where they are. After all, advertising is only valuable when it actually reaches someone.
Meanwhile, reporting and commentary increasingly is supplied by bloggers that work for free – or nearly so. Not unlike the "stringers" used by news services back in the "wire" days of Reuters, UPI and AP. Only now the stringers can take their news directly to the public without needing the wire service or publishers. They can blog their information and use Google to sell ads on their sites, thus directly making a market for their product. They even can push the product to consolidators like HuffingtonPost.com in order to maximize reach and revenue. Thus, the costs of acquiring and accumulating news has dropped dramatically. Increasingly, this pits the expensive journalist against the low cost journalist. And the market is shifting to the lower cost resource — regardless of how much people argue about the lack of quality (of course, some [such as politicians] would question the quality in today's "legitimate" media.)
Trying to keep The New York Times and Boston Globe alive as they have historically been is hard. I would contend a suicide effort. Continuing is explained only by recognizing the leaders are more interested in extending Lock-in than results. Because if they want results they would be full-bore putting all their energy into creating mixed-format content with maximum distribution that leads with the internet (including e-distribution like Kindle), and connects to TV, radio and print. Pricing for newspapers and magazines would jump dramatically in order to cover the much higher cost of printing. And the salespeople would be trained to sell cross-format ads which run in all formats. Audience numbers would cross all formats, and revenue would be tied to maximum reach, not the marginal value of each format. That is what advertisers want. Creating that sale, building that company, would be relatively much easier than trying to defend the Lock-in. And it would produce much better results.
The only dilemma at The New York Times Company is between dying as a newspaper company, or surviving as something else. The path it's on now says the management would rather die a newspaper company than do the smart thing and change to meet the market shift. For investors, this poses no dilemma. Investors would be foolhardy to be long the equity or bonds of The New York Times. There will be no GM-style bailout, and the current direction is into the Whirlpool. Employees had better be socking away cash for the inevitable pay cuts and layoffs. Suppliers better tighten up terms and watch the receivables. Because the company is in for a hard ending. And faster than anyone wants to admit.
Don't miss my recent ebook, "The Fall of GM" for a
quick read on how easily any company (even the nation's largest employer) can be
easily upset by market shifts. And learn what GM could have done to avoid
bankruptcy – lessons that can help your business grow!
http://tinyurl.com/mp5lrm
by Adam Hartung | Jul 17, 2009 | Current Affairs, Disruptions, General, Innovation, Leadership
Business leaders too often react to a recession by cutting costs, stopping spending, discontinuing new product launches — and waiting. The theory is that the market is bad, so it's an uphill slog to try doing anything new. Supposedly, a smart leader waits until things improve before spending again.
An example of this thinking is at GM. The retired executive brought back to head marketing, Bob Lutz, supports killing off the Pontiac brand to make GM smaller and leaner. But he realized this week that there was a car in the Pontiac lineup called the G8 which was selling pretty good. Designed in Autralia, this 2 passenger sports car had sales up 56% from last year – something no other GM car could boast. So Lutz said he'd find a way to keep making and selling the car. But now, Lutz has reversed position and in "GM's Lutz Makes another U-Turn" from the Wall Street Journal he says "upon further review and careful study, we simply cannot make a business
case for such a program. Not in today's market, in this economy, and
with fuel regulations what they are and will be." In other words, we can interpret these comments as "we at GM want to save money and try selling the cars we've got – whether you like them or not – rather than move forward with a car you may really want." This kind of thinking is not the way to grow out of a recession.
On the other hand, we have Tesla Motors. The company Mr. Lutz laughed at a few months ago claiming it wasn't a serious car company. Tesla has one car for sale today, a superfast 2 seater sports car that is 100% electric. Today in Marketing Daily we read "Tesla Plugs Dealership into Manhanttan's Chelsea". Tesla is selling 100% of its production, and it is supporting that by opening a new, stylish dealership in Manhattan. While GM is eliminating a hot seller, Tesla continues to promote theirs. While GM closes dealerships, Tesla opens a new one. Tesla is making a car, albeit a low production model, that people want. It is going where the market is shifting. That's how you get out of a recession, you give customers what they want.
I met another great example last week at Morgan Aircraft. You've never heard of this company unless you've been to an air show. While the makers of private aircraft like Cessna and Gulfstream are shutting down production, Morgan has raised millions of dollars while developing a new aircraft slated for market introduction in about 4 years (flying in tests today, still needing FAA approval). But the Morgan isn't a typical plane as you know it – what's called a "fixed wing" aircraft. The Morgan is able to take off vertically, like a helicopter, then fly horizontally like a plane. This dramatically improves the use of a plane by eliminating airport runways, and thus the commuting requirements to/from airports for business flyers. Morgan has identified the early users of their aircraft, which will allow successful introduction as it expands the market for its technology. Morgan brings to market something new, something different, something that gives buyers a reason to buy – better economics and improved ease of use. That's how you raise money and build a business in a recession – by offering something new that creates demand for your product.
Perhaps even Starbucks' new leadership is getting the idea. After months of doing "the wrong stuff" (as reported in this blog), The Seattle Times reports "Starbucks Tests New Name for Stores." Only this is way beyond a name test. The new stores have a different menu, including liquor, a different ambiance, and even different coffee making equipment. This is something new. Will it matter? We don't yet know, because (a) we haven't heard of any Disruptions in Starbucks to make us think this is a really serious initiative that could displace the earlier commitment to "coffee", (b) we don't know how much permission the developers of the new idea have to really do something new – like maybe not sell coffee at all, and (c) we don't know if there are any significant resources committed to the project. So it's too early to know if this is really White Space. But at least it's not another flavor of coffee or repackaging of coffee or more of the same – which was killing Starbucks. If the leadership really starts creating some White Space projects to develop new stores then even the beleagured Starbucks has the opportunity to grow itself out of this recession.
Recessions dramatically bring home market shifts. Those clinging to old Success Formulas are exposed as very weak (like GM) and are targets for failure. Those who reach out to provide solutions to new market demands can not only grow during the recession, but upstage older competitors. They can change market competitiveness to favor themselves, and grow dramatically by overtaking the Locked-in competition. Recessions end when businesses launch new products and services that meet the needs of a shifted market. So if you're waiting on the recession to end – just keep on waiting. When it ends you just might find you are so out of the market you aren't competitive any longer. Instead, get with moving toward the new market needs today so you strengthen your business and become a leader in the near future.
by Adam Hartung | Jul 15, 2009 | Disruptions, In the Rapids, Leadership, Openness
I've had the good fortune recently to meet some companies that are doing an extremely good job of practicing The Phoenix Principle. Although no company story can be told well within the shortness of a blog, some of these stories are so powerful I want share some of the good things I'm seeing. Especially now, when it seems bad news is dominating. That's not true everywhere – and it's worth profiling a few winners (and hoping they'll excuse the brevity of these descriptions.)
Recently I met with Tasty Catering in suburban Chicago. Tasty is by far not the largest caterer in the U.S. (or even Chicago), nor the smallest. Nor is it the oldest, nor youngest. You could easily miss it as "just another company." One of those nearly faceless businesses crowded into the business parks around America. But this company is by no means normal, and as a result
- It's been named "Caterer of the Year" by top food magazines
- It's been The Best Company to Work For in Chicago 3 times
- It's been honored by Winning Workplaces and The Wall Street Journal as a top American business.
- There were a lot of awards, these are just the ones that come to top of mind.
When Tasty Catering created its vision – it's BHAG (in Jim Collins venacular) – nowhere does it say "caterer". Their ambition is to be the best. At whatever the company does. The 50-ish founder told me that his employees were insistent about this, because they did not think Tasty would just be a caterer. There are too many possibilities, according to the internal teams. The people at Tasty want to go wherever the market leads them. Their ambition is to GROW.
Everyone in Tasty is challenged to scan the horizons for new business opportunities. . And create business plans. The CEO encourages his people to work with college professors and get school credit – but if the plans are good Tasty funds them. And the business ideas don't have to be in catering, or even food. Whatever has the opportunity for growth. So Tasty now has a finance company, a "green" gift business, a supplier to large-scale retailers of packaged food, and a trucking company. Again, those are just the ones I remember. And at least one of these was created by employees who are first-generation immigrants with little formal education – employees another company might deride as "kitchen workers" – but with a massive desire to grow the business. At Tasty, everyone is considered capable of seeing a market opportunity that can create profitable revenue, and everyone is encouraged to bring those market-based ideas to the table.
Tasty obsesses about competition. Everyone in the company has internet access. And manager after manager told me stories about using the web to track competitors. Press releases, articles, anything that's on the web – they keep track of what competitors are doing. When they see competitors do something, they want to know why – and if it works. Tasty uses competitors as much as test beds for ideas – what works and doesn't – while simultaneously tracking their activities in traditional areas. They track customer reactions to competitive ideas, and use that to bring out their own ideas. As a result, Tasty finds new customers, finds new products to sell and finds new markets to develop.
The CEO told me that when he started he had a bunch of hot
dog/hamburger joints. But it was an intern who told him he'd be
better off to sell those assets and change into catering. This was an
incredible distruption, to change from a fast food operator to a
caterer, but with the growth of franchise fast food staring him in the face he made the
switch. Now the CEO relishes the Disruptions his staff bring. Wouldn't trucks make great rolling billboards – if painted for that purpose? Time to change the trucks. Wouldn't having a menu that's all healthy, and disposable products that are entirely eco-friendly, snare some accounts? Why not try it? If the kitchen isn't busy 24×7, couldn't we make packaged food for sale as retailer brands? If we need financing for a new business line, can't we fund that from internal cash flow? Why not start an internal finance company? If restaurant and store operators want prepared food, why not start pursuing RFPs and see if we can win some retail business (even though it means we'd have to double our equipment overnight)? Disruptions are so common at Tasty they don't even think aboout them as disruptions – they are the norm.
And as the last paragraph indicated, White Space is everywhere. When an employee has an idea they can turn it into a business plan. The people inside Tasty even help work on it. Then the plan is vetted and reviewed. If it looks good, Tasty will set up a separate company to implement the plan, and make the employee the CEO. Now this person has the permission to go make it happen, and the money to do it. There are goals, and report-backs. And discussions about how to make the business grow. And every project is visible for everyone in the company to see. No "skunk works." Everyone knows what's happening, and looking to see what works. Everyone wants to learn and migrate toward a growing future so the business will succeed and they can succeed with it.
2009 started off with a sledge hammer for catering. The recession caused companies to cancel events, big and small, and quit catering in food. It would have been easy for Tasty to falter – because revenues went down for the very first time. But instead, everyone met and put their heads into finding ways to get back on the growth track. Resources were cut in the tradtiional business. Belt tightening went around the board. But resources were expended in new marketing – viral on-line campaigns for example – to find the customers who still have needs. People put more energy into differentiation programs – like the non-plastic clear wrap and non-plastic disposable utensils – to make the business more appealing to those who still have events. And new business opportunities – like the private label manufacturing – took on new urgency and more resources. As a result, while many caterers have failed and others are in dire straits Tasty has returned to growth – and not just in catering.
Meanwhile, the employees at Tasty are some of the most gratified I've seen. Here in this recession, they still are highly motivated and love their work. Even though they could do other jobs, they stay. They don't expect the CEO to find them work, or promise them a job, or guarantee their income. But they do understand that if they keep growing, working at Tasty is great. They tie their success to the success of the business – which they tie to identifying market opportunities and fulfilling them better than competitors. They work at Tasty because they are connected to the market – and it is empowering. It's not paternalism that keeps them satisfied (far from it, peer reviews assure paternalism is not allowed), it is seeing market results from the innovations they develop and implement.
If you have an event of any kind, go to the Tasty Catering web site and/or give them a call. If you have a need for someone to supply you with muffins, cookies, baked goods or other foodstuffs private label – again, to the web site and/or give them a call. This is one great company. Given a little time, they just might give Sysco Foods (the country's largest supplier of food to restaurants) or another mega-company a run for their money. This company is out to WIN – and all eyes are focused on the market, everyone pays attention to competition, Disruptions are the norm and new White Space is created every few months (regardless of the economy.)
by Adam Hartung | Jul 13, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
"Is Bob Lutz the right guy to run GM Marketing?" is the question headlined on Advertising Age. I'm sure you know I think the answer is a resounding "NO."
I'll never forget a few months when Mr. Lutz, being interviewed for a national magazine, said the Tesla sports car and the company that developed it was a joke. He said it wasn't a real car, nor was Tesla a real car company. He said the leadership at Tesla didn't know what it meant to be a professional auto company, and to be professional auto executives. He was condescending and rude as to the future of Tesla.
Let's see, Tesla has made a 100% electric car, sold 100% of its output, has investors that aren't the federal government, has never been bankrupt and has never asked for a bailout to stay in business. Meanwhile, the former vice-chairman of GM was a stanch critic of the electric car, saying it would never meet the driving needs of the American public, and fully supported GM killing its electric car program. While he was a leader at GM, the company couldn't even keep 100% of its capacity in operation, much less sell 100% of the output, the company begged the federal government for money to keep it in operation when private investors would no longer invest, and then wiped out the equity holders entirely – and over 80% of the value of bondholders, by leading the company into bankruptcy.
Mr. Lutz was an executive at GM. But that doesn't make him a good executive. In fact, given the performance of GM since 1975 (nearly 35 years) it might be more of a disqualifier than a qualifier. Why would anyone want to hire an executive who stayed in one industry for over 40 years, during which the companies he worked for lost share, saw their margins decline, led in no new technology categories, was perennially late introducing new products, saw their costs spiral out of control, had the lowest job satisfaction in the industry by its employees, had some of the lower quality scores among consumers in the industry and and eventually had to declare bankruptcy?
America loves to glorify, make heroes even, of business executives. Usually of large companies. But few of these executives actually made a significant positive impact on their companies, employees, investors or suppliers. Executives rise because they are very good at supporting the Success Formula, not because they produce significantly better results. As long as the manager turned director turned V.P. keeps reinforcing the Success Formula, in fact many mistakes can be overlooked. Especially if the executive's style is similar to the top brass at the company (same school, same degrees, same geographic origin, same religion, same politics, same views.) What gets an executive promoted at GM (and most large companies) is simply not results. It is consistent reinforcement of a Success Formula, burnishing and amplifying it, even in the face of deterioriating results. Like Mr. Lutz.
There is no popular election of executives. In this case, perhaps there should be. Given how disgusted most people are with GM, I doubt many people would vote to keep the original management in place. And I doubt fewer still would vote to place a 77 year old executive who was part of the long term industry decline and recent failure in a top position. And even fewer would say that a 77 year old is prepared to take on marketing leadership in a world where traditional advertising has declining value, and the best companies are creatively using all kinds of internet marketing programs. Not just because of his age – but because he's never developed the remotest skill to do the work. Many 30 year olds could explain in deep detail how to get viral campaigns working – while all Mr. Lutz could say is he's seen a YouTube! video and read a blog or two. And he gets to manage the 4th largest ad budget in the USA? Isn't that how GM got into this mess – having people in top jobs who were out of step with current market realities?
Businesses exist to put resources to effective use. We measure that effectiveness with cash flow and profits. We ask that the leaders who borrow money from investors (equity and debt) return that principle with a positive rate of return. And we ask that the executives honor their commitments to the employees and vendors. In the case of GM, the executives eliminated the investments made by investors, reneged on the employee commitments and left vendors holding the bag on long-term contracts the company will no longer honor. Even old customers can no longer hold the company accountable for its defective products. By all measures, these leaders failed. And yet someone thinks it's a good idea to keep the same people running this company?
GM needs new leadership. Leadership willing to Disrupt old Lock-ins and use White Space to develop a new Success Formula. Asking Mr. Lutz to be the head of marketing is not a Disruption. It is an action specifically intended to remain Locked-in to the old Success Formula and maintain the re-invention gap between GM and the marketplace. With this kind of decision making, GM will find itself back in bankruptcy court a lot faster than any of the experts even think.
Don't miss the new ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes."
by Adam Hartung | Jul 9, 2009 | Current Affairs, Defend & Extend, In the Rapids, In the Whirlpool, Leadership, Lock-in, Openness
Google is growing, and GM is trying to get out of bankruptcy. On the surface there are lots of obvious differences. Different markets, different customers, different products, different size of company, different age. But none of these get to the heart of what's different about the two companies. None of these really describe why one is doing well while the other is doing poorly.
GM followed, one could even say helped create, the "best practices" of the industrial era. GM focused on one industry, and sought to dominate that market. GM eschewed other businesses, selling off profitable businesses in IT services and aircraft electronics. Even selling off the parts business for its own automobiles. GM focused on what it knew how to do, and didn't do anything else.
GM also figured out its own magic formula to succeed, and then embedded that formula into its operating processes so the same decisions were replicated again and again. GM Locked-in on that Success Formula, doing everything possible to Defend & Extend it. GM built tight processes for everything from procurement to manufacturing operations to new product development to pricing and distribution. GM didn't focus on doing new things, it focused on trying to make its early money making processes better. As time went by GM remained committed to reinforcing its processes, believing every year that the tide would turn and instead of losing share to competitors it would again gain share. GM believed in doing what it had always done, only better, faster and cheaper. Even into bankruptcy, GM believed that if it followed its early Success Formula it would recapture earlier rates of return.
Google is an information era company, defining the new "best practices". It's early success was in search engine development, which the company turned into a massive on-line advertising placement business that superceded the first major player (Yahoo!). But after making huge progress in that area, Google did not remain focused alone on doing "search" better year after year. Since that success Google has also launched an operating system for mobile phones (Android), which got it into another high-growth market. It has entered the paid search marketplace. And now, "Google takes on Windows with Chrome OS" is the CNN headline.
"Google to unveil operating system to rival Microsoft" is the Marketwatch headline. This is not dissimilar from GM buying into the airline business. For people outside the industry, it seems somewhat related. But to those inside the industry this seems like a dramatic move. For participants, these are entirely different technologies and entirely different markets. Not only that, but Microsoft's Windows has dominated (over 90% market share) the desktop and laptop computer markets for years. To an industrial era strategist the Windows entry barriers would be considered insurmountable, making it not worthwhile to pursue any products in this market.
Google is unlike GM in that
- it has looked into the future and recognizes that Windows has many obstacles to operating effictively in a widely connected world. Future scenarios show that alternative products can make a significant difference in the user experience, and even though a company currently dominates the opportunity exists to Disrupt the marketplace;
- Google remains focused on competitors, not just customers. Instead of talking to customers, who would ask for better search and ad placement improvements, Google has observed alternative, competitive operating system products, like Unix and Linux, making headway in both servers and the new netbooks. While still small share, these products are proving adept at helping people do what they want with small computers and these customers are not switching to Windows;
- Google is not afraid to Disrupt its operations to consider doing something new. It is not focused on doing one thing, and doing it right. Instead open to bringing to market new technologies rapidly when they can Disrupt a market; and
- Google uses extensive White Space to test new solutions and learn what is needed in the product, distribution, pricing and promotion. Google gives new teams the permission and resources to investigate how to succeed – rather than following a predetermined path toward an internally set goal (like GM did with its failed electric car project).
Nobody today wants to be like GM. Struggling to turn around after falling into bankruptcy. To be like Google you need to quit following old ideas about focusing on your core and entry barriers – instead develop scenarios about the future, study competitors for early market insights, Disrupt your practices so you can do new things and test lots of ideas in White Space to find out what the market really wants so you can continue growing.
Don't forget to download the new, free ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes"
by Adam Hartung | Jul 7, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
"Tribune Company Profitability Continues to Deteriorate" is the Crain's headline. Even though Tribune filed for bankruptcy several months ago, its sales, profits and cash flow have continued deteriorating. The company is selling assets, like the Chicago Cubs, in order to raise cash. But its media businesses, anchored by The Chicago Tribune, are a sinking ship which management has no idea how to plug. While the judge can wipe out debt, he cannot get rid of the internet and competitors that are reshaping the business in which Tribune participates. Bankruptcy doesn't "protect" the business, it merely delays what increasingly appears to be inevitable failure.
"GM Clears Key Hurdles to Bankruptcy Exit" is the BusinessWeek headline. In record time a judge has decided to let GM shift all its assets and employees into a "new" GM, leaving all the bondholders, employee contracts and lawsuits in the "old" GM. This will wipe out all the debt, obligations and lawsuits GM has complained about so vociferously. But it won't wipe out lower cost competitors like Kia, Hyuandai or Tata Motors. And it won't wipe out competitors with newer technology and faster product development cycles like Toyota or Honda. GM will still have to compete – but it has no real plan for overcoming competitive weaknesses in almost all aspects of the business.
It was 30 years ago when I first head the term "strategic bankruptcy." The idea was that a business could hide behind bankruptcy protection to fix some minor problem, and a clever management could thereby "save" a distressed business. But this is a wholly misapplied way to think about bankruptcy. In reality, bankruptcy is just another financial machination intended to allow Locked-in existing management to Defend & Extend a poorly performing Success Formula. Bankruptcy addresses a symptom of the weak business – debts and obligations – but does not address what's really wrong - a business model out of step with a shifted marketplace.
The people running GM are the same people that got it into so much trouble. The decision-making processes, product development processes, marketing approaches are all still Locked-in and the same. GM hasn't been Disrupted any more than Tribune company has. Quite to the contrary, instead of being Disrupted bankruptcy preserves most of the Locked-in status quo and breathes new life into it by eliminating the symptoms of a very diseased Success Formula. Meanwhile, White Space is obliterated as the reorganized company kills everything that smacks of doing anything new in a cost-cutting mania intended to further preserve the old Success Formula.
Everyone in the bankruptcy process talks about "lowering cost" as the way to save the business. When in fact the bankrupt business is so out of step with the market that lowering costs has only a minor impact on competititveness. Just look at the perennial bankruptcy filers – United Airlines, American Airlines and their brethren. Bankruptcy has never allowed them to be more competitive with much more profitable competitors like Southwest. Even after 2 or 3 trips through the overhaul process.
Bankruptcy does not bode well for any organization. It's a step on the road to either having your assets acquired by someone who's better market aligned, or failure. Those who think Tribune will emerge a strong media competitor are ignoring the lack of investment in internet development now happening – while Huffington Post et.al. are growing every week. Those who think the "new" GM will be a strong auto company are ignoring the market shifts that threw GM to the brink of failure over the last year. Both companies are still Defending & Extending the past in a greatly shifted world – and nobody can succeed following that formula.
Don't forget to download the ebook "The Fall of GM: What Went Wrong and How To Avoid Its Mistakes" for a primer on how to keep your business out of bankruptcy court during these market shifts.
by Adam Hartung | Jul 1, 2009 | Defend & Extend, In the Rapids, In the Swamp, Leadership, Lifecycle
Two sides of a page, two sides of strategy. Two different approaches, two very different sets of results.
That's what struck me when I was waiting for a meeting recently. I picked up a print edition of Businessweek laying in the reception area. On page 13 was "Public Flac Grounds Private Jets." A soft economy has teamed up with bad impressions of executive perks to create a huge drop in orders for private jets. French manufacturer Dassault had 27 more cancellations than orders in the first quarter. U.S. based Cessna had 92 cancellations, and was bracing for 150 more by today (7/1/09). In the meantime, the company has laid off 42% of its workforce and discountinued development of its newest jet aircraft. And the market for used aircraft is flooded, boding poorly for future sales as the used inventory seeks buyers.
Here are two companies that definitely have their "hedgehog concept" as recommended by Jim Collins. They set out to be leaders in private aircraft manufacturing, focusing on two different continents. And they are leaders. They know how to do be product leaders, and they do it well. But look what happened when the market shifted. In dramatic fashion, they go from record profits in 2007 to barely viable. Being really good at making planes doesn't matter when nobody wants them.
Turn the page (literally), and on page 14 was "Now, the Nano Home." In this short article we hear about how Tata Group, which has launched the Nano automobile for under $2,000, is entering the housing development market. While builders in the USA are failing due to the real estate crash, Tata is creating entire apartment developments. But not U.S. style. These apartments sell for as little as $7,800 and come as small as 218 square feet! (There are larger and more expensive units – up to $40,000). While this may seem crazy to Americans, it fits the market where you're trying to convince someone to leave a squatters tenement and buy something legal to live in. It's a market I've never heard of a single American company trying to develop, yet the opportunity is huge!
So here's Tata Group, the company that started as a trading company in the 1860s, that went on to become an industrial powerhouse making chemicals, steel and industrial products. One of, if not the, largest IT services companies on the planet. An auto manufacturer for India that expands into the global market with an entirely new product. Now the company enters homebuildling, but not like other companies. Instead uniquely doing what will fit market needs. There is no hedgehog concept to Tata Group. Just a company that keeps looking for market needs, then develops unique products to fulfill those needs. And builds a 150 year history of growth in the process.
Anytime you have a narrow business, focused on a single market or product line, you are at risk of market shifts that can kill you. These shifts can come from new technologies, or different production processes, or different attributes offered by competitors. But the fact is, markets shift. The better you are at focusing on your hedgehog concept, the more likely it is you will eventually fail. Just look at the companies Mr. Collins claimed were the big winners in Good to Great – Circuit City and Fannie make are good examples. You can be really, really good at something and you end up reaching the pinnacle of expertise only to be clobbered by a market shift that sends you toppling into failure.
Think like Tata Group. Keep your eyes open for market needs. Then figure out new ways to fulfill them. Especially ways that competitors won't attack. Forget about "focus." No American car company is even trying to make a $2,000 car – despite the fact that the only big growth markets today are China, India and other emerging markets where a cheap auto makes the most sense. And all those big U.S. real estate developers that are declaring bankruptcy, after building billion dollar malls, U.S. condominium projects, and office parks aren't even considering building and selling $8,000 apartments to the fastest growing middle class on the globe. They know their hedgehog concept. But they don't know how to grow. You'll do better to focus on growth and leave that hedgehog in his hole.
For more on how following its hedgehog concept led to the bankruptcy of GM download the free ebook "The Fall of GM". Learn how to avoid the hedgehog mistake and keep your business growing.
by Adam Hartung | Jun 30, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Lock-in, Web/Tech
With all due respect to the great guitar playing songwriter Jerry Reed, today Starbucks and Dell continue to look like copies that were once hot – but now couldn't warm a nose in a blizzard.
"Starbucks continues food push with overhauled menu items" is the Advertising Age headline. Starbucks closed hundreds of stores last year, saw sales in stores open a year fall 8%, and profits dropped 77%. But they aren't bringing anything new to their business. They are revamping the food to make it more healthy. There's nothing wrong with introducing healthier food, but how does Chairman Schultze think this will turn around Starbucks? The company's "return to basics" program has made it overly sensitive to retail coffee prices, while robbing the company of its highly desired cache. An enhanced instant coffee did nothing for revenues. And now this overhauled menu doesn't really offer anything new to excite customers. It's still a ton of calories – even if they are healthy calories – offered at a high price.
Starbucks has given rejuvenated life to McDonald's. Nobody expected the McCafe to be a huge success. But Starbucks has played right into McDonald's sites by shutting down most of its "non coffee" operations and repositioning itself not as a destination but as a fast food outlet. McDonald's reminds me of the hunter who spends all day tramping the forest in search of a deer, only to get back to his pick-up and have a big buck walk within 20 yards of his vehicle. When he least expected to get his kill, it walked up on him. And that's what Starbucks has done. It's made McCafe much more viable than it appeared likely, simply because Starbucks chose to move into direct competition with McDonald's rather than continue on the new business programs it created earlier in the decade.
Starbucks has gifted McDonald's by choosing to fight them head-on right at McDonald's strengths – operational consistency and low price. And now Starbucks is showing complete foolishness by entering into traditional advertising – an area where McDonald's is a powerhouse (the inventor of Ronald McDonald is an expert at ad content and spending). Even worse, Starbucks, which eschewed advertising for years, has decided to promote its new food menu by placing ads in (drumroll please) newspapers! At a time when readership is dropping like a stone, and during summer months when seasonal readership is lowest, Starbucks is choosing to promote with the least effective ad medium available today. Even billboards would be a better choice! We have to ask, wouldn't the previous, much savvier, leadership have launched a wickedly intensive web marketing program to lure customers back into the stores? Some viral videos, lots of social media chat – that sort of thing which appeals to their target buyer? Why would anyone choose to fight a giant – like McD's – on their court, using their rules, against their resource strength? That's not savvy competition, it's suicide.
Simultaneously the once high-flying Dell has been in the doldrums for several years. Decades ago Dell built a Success Formula that ignored product developed, placing its energy into supply chain advantages. Competitors have matched those operational advances, and now Dell gives consumers little reason to make you prefer their product. Not to mention forays into service cost reductions like offshore customer support that absolutely turned off customers and sent them back into retail stores.
Now "Dell is working on a pocket web gadget" according to the Wall Street Journal headline. Not a phone, not a netbook, not a laptop the new device is an assemblage of acquired technology into a handheld internet device. How it will be used, and why, is completely unclear. That it will give you internet access seems to be the big selling point – but when you can accomplish that with your iPhone or Pre, or netbook should you choose a larger format, why would anyone want this device?
Dell seems to forget that it has to compete if it wants to succeed. It's products have to offer customers something new, something better. That's what made the iPHone so successful – it gave users a lot more than a traditional phone. And the same is true for Pre. And these devices now have dozens and dozens of applications available – everything from playing video games to ordering pizza at the closest delivery joint to reading MRI screens (if you happen to be a neurologist). Yet, this new Dell device has no new apps, and it's unclear it is in any way superior to your phone or netbook. Dell keeps trying to think it has distribution superiority, and thus can sell anything by forcing it upon customers. Even products that have no clear application. Dell is Locked-in to its old Success Formula, all about operational excellence, but that model has no advantage now that people with new technology – superior technology – can match their operational excellence.
When companies remain Locked-in too long they become obsolete. And it can happen surprisingly fast. Every reader of this blog can remember when Starbucks seemed invincible. And when Dell was the information technology darling. But both companies remain stuck trying to Defend & Extend their Success Formulas after the market has shifted – and their results are most likely going to end up similar to GM.
Don't forget to download my new ebook "The Fall of GM" and send it (or the link) along to your friends and social network pals. http://tinyurl.com/nap8w8
by Adam Hartung | Jun 29, 2009 | Defend & Extend, In the Whirlpool, Leadership, Lock-in
In May "The Largest U.S. Bankruptcies" was published in BusinessWeek – and since then we've added General Motors to the list. From biggest down:
- General Motors
- Lehman Brothers
- Washington Mutual
- Worldcom
- Enron
- Conseco
- Chrysler
- Thornburg Mortgage
- Pacific Gas & Electric
- Texaco
Did you notice that only 1 of these happened prior to 2001 (Texaco)? As I pointed out in Create Marketplace Disruption, the number of bankruptcies has been skyrocketing from historical norms. And the number of bankruptcies of truly huge companies has been growing at an unprecedented rate.
Ever since the modern corporation was born, the theory has been that being large gave a company lower risk. Since the 1940s people have believed that their jobs, and careers, are safer in big corporations. But today big corporations are failing at a truly alarming rate. What's changed?
Very large companies usually have a Success Formula, locked into place with hierarchy, decision-making processes, narrow strategy programs, consistent hiring processes, tight employee review processes, rigid IT infrastructure and very large investments designed to provide economies of scale. Their approach to success was driven by the notion that with size they would create entry barriers which would protect them from competitors, allowing for years of ongoing profitability. These practices were designed to focus the business on its core technology, products, customers and markets. Management theorists believed that with focus came ongoing success. They did expected businesses to be stable. With limited change.
But today we're seeing dramatic market shifts. And locked-in Success Formulas are literally failing because the company, and leadership, is unable to adapt to these shifts. During the 1950s, '60s, '70s and '80s competition was relatively stable. But that is no longer true. Success no longer comes from Defending & Extending what you used to do.
Dramatic improvements in telecommunications connectivity, computer assisted data accumulation and analysis, and global access to resources has changed the basis of competition. Now businesses must adjust to an extremely dynamic marketplace. Scale is meaningless when a new competitor can access your customers with a web page, achieve global distribution with a logistics partner, access a low-cost outsourced manufacturing plant via telephone, and provide 24×7 service with an Indian-based service contractor. When a new technology can go from invention to market in weeks, adaptability becomes far more important than size.
The marketplace has been shifting dramatically since 2001. In everything from manufacturing to financial services to commodities. Yet, far too few companies are adjusting to the new competitive requirements. Too many analysts and business leaders still seek market segments, market share and developing entry barriers. To succeed today businesses have to overcome Lock-in to Success Formulas in order to Disrupt their old approaches and remain vital to customers through the use of White Space to develop, test and implement new solutions. During periods of dramatic shift, those who follow these practices are far more successful. Regardless of size.
Don't forget to download the new ebook "The Fall of GM" for more on how the world's largest auto company failed to adjust to market shifts – and how you can avoid the GM fate by taking actions to make your business more adaptable.
by Adam Hartung | Jun 26, 2009 | Current Affairs, Defend & Extend, Disruptions, In the Swamp, Innovation, Leadership
"Retailers cut back on variety, once the spice of marketing" is the Wall Street Journal.com headline. It seems one of the unintended consequences of this recession will be forced consumer goods innovation!
For years consumer goods companies, and the retailers which push their products, have played a consistent, largely boring, and not too profitable Defend & Extend game. When I was young there was one jar of Kraft Miracle whip on the store shelf. It was one quart. This container was so ubiquitous that it coined the term "mayonnaise jar" – everybody knew what you meant with that term. Now you can find multiple varieties of Miracle Whip (fat free, low fat, etc.), in multiple sizes. This product proliferation passed for innovation for many people. Unfortunately, it has not grown the sales of Miracle Whip faster than growth in the general population.
Do you remember when you'd go to Pizza Hut and they offered "Hawaiian Pizza?" Pizza Hut would concoct some pretty unusual toppings, mixed up in various arrangements, then give them catchy labels. Unfortunately, what passed internally as an exciting new product introduction was recognized by customers as much ado about nothing, and those varieties quietly and quickly left the menu. Like the Miracle Whip example, it expanded the number of choices, but it did not increase the demand for pizza, nor revenues, nor profits.
Expanding varieties is too often seen by marketers as innovation. I remember when Oreos came out with 100 calorie packs, and the CEO said that was an innovation. But did it drive additional Oreo sales? Unfortunately for Nabisco, no. It was plenty easy to count out the number of cookies you want and put in a baggie. Or buy fewer cookies altogether in these new, smaller packages.
These sorts of tricks are the stock-in-trade of Defend & Extend management. Clog up the distribution system with dozens (sometimes hundreds) of varieties of your product. Try to take over lots of shelf space by paying "stocking fees" to the retailer to put all those varieties (package sizes, flavor options, etc.) on his shelf – in effect bribing him to stock the product. But then when a truly new product comes along, something really innovative by a smaller, newer company, the D&E manager uses the stocking fees as a way to make it hard for the new product to even reach the market because the small company can't afford to pay millions of dollars to bump the big guy defending his retail turf. The large number of offerings defends the product's position in retail, while simultaneously extending the product's life to keep sales from declining. But, year after year the cost of creating, launching and placing these new varieties of largely the "same old thing" keeps driving down the net margin. The D&E manager is trying to keep up revenues, but at the expense of profits.
Simultaneously, this kind of behavior keeps the business from launching really new products. The previous CEO at Kraft said in 2006 that the best investment his company could make was advertising Velveeta. His point of view was that protecting Velveeta sales was worth more than launching new products – and at that time the last new product launched by Kraft was 6 years old! Internally, the decision-support system was so geared toward defending the existing business that it made all marginal investments supporting existing brands look highly profitable – while killing the rate of return on new products by discounting potential sales and inflating costs!
This D&E behavior isn't good for any business. Consumer goods or otherwise. And it's interesting to read that now retailers are starting to push back. They are cutting the number of product variations to cut the inventory carrying costs. As I mentioned, if you now have 6 different stock keeping units (SKUs) for Miracle Whip in various sizes, flavors and shapes but no additional sales you more than likely have doubled, tripled or even more the inventory – and simultaneously reduced "turns" – thus making the margin per foot of shelf space, and the inventory ROI, poorer. Even with those "shelf fee" bribes the consumer goods manufacturer paid.
For consumers this is a great thing! Because it frees up shelf space for new products. It frees up buyers to look harder at truly new products, and new suppliers. The retailer has the chance of revitalizing his stores by putting more excitement on the shelves, and giving the consumer something new. This action is a Disruption for the individual retailer – pushing them to compete on products and services, not just having the same old products (in too many varieties) exactly the same as competitors.
This action, happening at WalMart, Walgreens, RiteAid, Kroger and Target according to the article, is an industry Disruption. It impacts the manufacturers like Kraft and P&G by forcing them to bring more truly new products to the market if they want to maintain shelf facings and revenues. It alters the selling proposition for all suppliers, making the "distribution fees" less of an issue and turning those retail buyers back into true merchandisers – rather than just people who review manufacturer supplied planograms before feeding numbers into the automated ordering system. And it changes what the manufacturer's salespeople have to do.
The companies that will do well are those that now implement White Space to take advantage of this Disruption. As you can imagine, it's a huge boon for the smaller, more entrepreneurial companies that may well have long been blocked from the big retailer's stores. It allows them to get creative about pitching their products in an effort to help the retailer compete on product – not just price. And for any existing supplier, they will have to use White Space to get more new products out faster. And get their salesforce to change behavior toward selling new products rather than just defending the old products and facings.
Markets work in amazing ways. Almost never do things happen as one would predict. It's these unintended consequences of markets that makes them so powerful. Not that they are "efficient" so much as they allow for Disruptions and big behavior changes. And that gives the entrepreneurial folks, and the innovators, their opportunities to succeed. For those in consumer goods, right now is a great time to talk to Target, Kohl's, Safeway, et.al. about how they can really change the competition by refocusing on your innovative new products again!
