What’s the future for Chrysler? Fiat?

"Reborn Chrysler gets a European makeover" is the headline at the Detroit Free Press.  Now that Fiat is in charge, can we expect Chrysler to turn around?

There is no doubt Chrysler has been severely Challenged.  But that alone did not Disrupt Chrysler – you can be challenged a lot and still not Disrupt Lock-ins.  On the other hand, the new CEO appears to have stepped in and made significant changes in the organization structure, as well as the product line-up at Chrysler.  We also know that bankruptcy changed the union rules as well as employee compensation and retirement programs. These are Disruptions.  That's good news.  Disruptions precede real change.  No matter the outcome, the level of Disruption ensures the future Chrysler will be different from the old Chrysler.  Step one in the right direction.

But, the Fiat leadership under Sergio Marcchione appears to be rapidly installing the Fiat Success Formula at Chrysler.  The organization, product, branding and manufacturing decisions appear to be aligned with what Fiat has been doing in Europe.  So this makes our analysis a lot trickier.  Companies that effectively turn around align with market needs.  They meet customer requirements in new, better ways.  For Chrysler to now succeed requires that the American market needs are closely enough aligned with what Fiat has been doing to make Chrysler a success.

If this gives you doubts, you're well served.  It's not like Fiat has been a household name in America for a long time.  Nor have I perceived Fiat was gaining substantial share over its competitors in Europe.  Nor do I have awareness of Fiat being noticably successful in emerging auto markets like China, India or Eastern Europe.  They aren't doing as badly as Chrysler, but are they winning?

The new management is rolling in like Macarthur's team taking over Japan.  They clearly have already made many decisions, and are now focused on execution.  What worries me is

  • what if the product lineup isn't really what Americans want?
  • what if dealers don't make enough margin on the new lineup?
  • what if the cost/quality tradeoffs don't fit American needs?
  • what if competitors match their product capabilities?
  • what if competitors have lower cost?
  • what if competitors have measurably better quality?
  • what if competitors bring out new innovations, like electric, hybrid or diesel, change the market significantly from what Fiat has to offer?
  • what if customers simply have doubts about Fiat quality?
  • what if customers like the Charger, Challenger and 300 more than they like the new Fiat products?

I don't have to be right or wrong on many of these questions and it portends problems for the new Chrysler/Fiat.  And that's the problem with having such a tight plan when you start a turn-around.  What if you get something wrong?  How will you know?  What will tell you early you need to change your plan fast, and possibly dramatically?  Nowhere in the article, nor elsewhere, have I read about White Space projects being created that would produce an entirely new Success Formula.  Only how Chrysler is being converted to the Fiat Success Formula.

I want the best for the new owners, employees and vendors of Fiat.  I'm really happy to see the level of Disruption.  But until we see White Space, more discussion of market testing and experimentation, as well as greater discussion of competitiors, I'd reserve judgement on the company's future.

If you read about White Space at Chrysler/Fiat please let me know.  This is a story worth watching closely.  Americans have a lot riding on the outcome – good or bad.  So if you read about Disruptions or White Space share them with me or here on the blog for everyone.

PS – Don't forget to download my new ebook "The Fall of GM" for additional insight on managing Success Formulas in the auto industry.

PPS – There have been a lot of great comments related to recent blogs.  I appreciate the personal notes, but don't hesitate to blog directly on the site.  Also, keep up the comments.  I don't feel compelled to re-comment on them all.  Suffice it to say that the quality is excellent, and comments make the blog all that much more powerful.  So please keep up the responses.

You gotta move beyond your “base” – expand beyond your “brand”

What is a brand worth?  Do you spend a lot of time trying to "protect" your brand?  A lot of marketing gurus spent the last 20 years talking about creating brands, and saying there's a lot of value in brands.  Some companies have been valued based upon the expected future cash flow of sales attributed to a brand.  Folks have heard it so often, often they simply assume a recognized name – a brand – must be worth a lot.

But, according to a Strategy + Business magazine article, "The trouble with brands," brand value isn't what it was cracked up to be.  Using a boatload of data, this academic tome says that brand
trustworthiness has fallen 50%, brand quality perceptions are down 24%,
and even brand awareness is down 20%.  It turns out, people don't think very highly of brands, in fact – they don't think about brands all that much after all. 

And according to Fast Company in the article "The new rules of brand competition" the trend has gotten a lot worse.  It seems that over time marketers have kept pumping the same message out about their brands, reinforcing the  message again and again.  But as time evolved, people gained less and less value from the brand.  Pretty soon, the brand didn't mean anything any more.  According to the  Financial Times, in "Brands left to ponder price of loyalty," brand defection is now extremely common.  Where consumer goods marketers came to expect 70% of profits from their most loyal customers, those customers are increasingly buying alternative products.

Hurrumph.  This is not good news for brand marketers.  When a company spends a lot on advertising, it wants to say that spend has a high ROI because it produces more sales at higher prices yielding more margin.  Brand marketers knew how to segment users, then appeal to those users by banging away at some message over and over – with the notion that as long as you reinforced yourself to that segment you'd keep that customer.

But these folks ignore the fact that needs, and markets, shiftWhen markets shift, a brand that once seemed valuable could overnight be worth almost nothing.  For example, I grew up thinking Ovaltine was a great chocolate drink.  Have you ever heard of Ovaltine?  I drank Tang because it went to the moon, and everyone wanted this "high-tech" food with its vitamin C.  When was the last time you heard of Tang?  It was once cache to be a "Marlboro Man" – rugged, virile, strong, successful, sexy.  Now it stands for "cancer boy."  Did the marketers screw up?  No, the markets shifted.  The world changed, products changed, needs changed and these brands which did exactly what they were supposed to do lost their value.

Lots of analysts get this wrongBillions of dollars of value were trumped up when Eddie Lambert bought Sears out of his re-organized KMart.  But neither company fits consumer needs as well as WalMart or Kohl's for the most part, so both are brands of practically no value.  People said Craftsmen tools alone were worth more than Mr. Lampert paid for Sears – but that hasn't worked out as the market for tools has been flooded with different brands having lifetime warranties — and as the do-it-yourselfer market has declined precipitiously from the days when people expected to fix their own stuff.  So a lot of money has been lost on those who thought KMart, Sears, Craftsman, Kenmore, Martha Stewart as a brand collection was worth significantly more than it's turned out to be.  But that's because the market moved, and people found new solutions, not because you don't recognize the brands and what they used to stand for.

Every market shifts.  Longevity requires the ability to adapt.  But brand marketers tend to be "purists" who want the brand to live forever.  No brand can live forever.  Soon you won't even find the GE brand on light bulbs.  That's if we even have light bulbs as we've known them in 15 years – what with the advent of LED lights that are much lower cost to operate and last multiples of the life of traditional bulbs.  GE has to evolve – as it has with jet engines and a myriad of other products – to survive.

Think for a moment about Harley Davidson.  Once, owning a Harley implied you were a true rebel.  Someone outside the rules of society.  That brand position worked well for attracting motorcycle riders 60 years ago.  As people aged, many were re-attracted to the "bad boy" image of Harley, and the brand proliferated.  A $50 jacket with a Harley Davidson winged logo might sell for $150 – implying the branding was worth $100/jacket!!  But now, the average new Harley buyer is over 50 years old!  The market has several loyalists, but unfortuanately they are getting older and dying.  Within 20 years Harley will be struggling to survive as the market is dominated by riders who are tied to different brands associated with entirely different products.

If you see that your sales are increasingly to a group of "hard core" loyalists, it's time to seriously rethink your future.  Your brand has found itself into a "niche" that will continue shrinking.  To succeed long-term, everything has to evolve.  You have to be willing to Disrupt the old notions, in order to replace them with new.  So you either have to be willing to abandon the old brand – or cut its resources to build a new one.  For example, Harley could buy Ducati, stop spending on Harley and put money into Ducati to build it into a brand competitive with Japanese manufacturers.  This would dramatically Disrupt Harley – but it might save the company from following GM into bankruptcy.

The marketing lore is filled with myths about getting focused on core customers with a targeted brand.  It all sounded so appealing.  But it turns out that sort of logic paints you into a corner from which you have almost no hope of survival.  To be successful you have to be willing to go toward new markets.  You have to be willing to Disrupt "what you stand for" in order to become "what the market wants."  Think like Virgin, or Nike.  Be a brand that applies itself to future market needs – not spending all its resources trying to defend its old position.

Don't forget to download the new ebook "The Fall of GM" to learn more about why it's so critical to let Disruptions and White Space guide your planning rather than Lock-in to old notions.

Becoming the elusive “evergreen” company – Apple vs. Walgreens

For years business leaders have sought advice which would allow their organizations to become "evergreen."  Evergreen businesses constantly renew themselves, remaining healthy and growing constantly without even appearing to turn dormant.  Of course, as I often discuss, most companies never achieve this status.  Today investors, employees and vendors of Apple should be very pleased.  Apple is showing the signs of becoming evergreen.

For the last few years Apple has done quite well.  Resurgent from a near collapse as an also-ran producer of niche computers, Apple became much more as it succeeded with the iPod, iTunes and iPhone.  But many analysts, business news pundits and investors wanted all the credit to go to CEO Steve Jobs.  It's popular to use the "CEO as hero" thinking, and say Steve Jobs singlehandedly saved Apple.  But, as talented as Steve Jobs is, we all know that there are a lot of very talented people at Apple and it was Mr. Jobs willingness to Disrupt the old Success Formula and implement White Space which let that talent come out that really turned around Apple.  The question remained, however, whether Disruptions and White Space were embedded, or only happening as long as Mr. Jobs ran the show.  And largely due to this question, the stock price tumbled and people grew anxious when he took medical leave (chart here).

This weekend we learned that yes, Mr. Jobs has been very sick.  The Wall Street Journal today reported "Jobs had liver transplant".   With this confirmation, we know that the company has been run by the COO Tim Cook and not a "shadow" Mr. Jobs.  Simultaneously, first report on the Silicon Valley/San Jose Business Journal is "Apple Claims 1M iPhone Sales" last weekend in the launch of its new 3G S mobile phone and operating system.  This is a huge number by the measure of any company, exceeded analysts expectations by 33-50%, and equals the last weekend launch of a new model – despite the currently horrible economy.  This performance indicates that Apple is building a company that can survive Mr. Jobs.

On the other side of the coin, "Walgreen's profit drops as costs hit income" is the Crain's Chicago Business report.  Walgreen's is struggling because it's old Success Formula, which relied very heavily on opening several new stores a week, no longer produces the old rates of return.  Changes in financing, coupled with saturation, means that Walgreen's has to change its Success Formula to make money a different way, and that has been tough for them to find. The retail market shifted.  Although Walgreen's opened White Space projects the last few years, there have been no Disruptions and thus none of the new ideas "stuck."  Growth has slowed, profits have fallen and Walgreen's has gone into a Growth Stall.  Now all projects are geared at inventory reduction and cost cutting, as described at Marketwatch.com in "Higher Costs Hurt Walgreen's Profits."

Now the company is saying it wants to take out $1B in costs in 2011.  No statement about how to regain growth, just a cost reduction — one of the first, and most critical, signs of Defend & Extend Management doing the wrong things when the company hits the Flats.  And now management is saying that costs will be higher in 2009/2010 in order to allow it to cut costs in 2011.  If you're asking yourself "say what?" you aren't alone.  This is pure financial machination.  Raise costs today, declare a lower profit, in order to try padding the opportunity to declare a ferocious improvement in future year(s).  This has nothing to do with growth, and never helps a company.  To the contrary, it's the second most critical sign of D&E Management doing the wrong thing at the most critical time in the company's history.  When in the Flats, instead of Disrupting and using White Space to regain growth these actions push the company into the Swamp of low growth and horrible profit performance.

We now can predict performance at Walgreen's pretty accurately.  They will do more of the same, trying to do it better, faster and cheaper.  They will have little or no revenue growth.  They may sell stores and use that to justify a flat to down revenue line.  The use of accounting tricks will help management to "engineer" short-term profit reporting.  But the business has slid into a Growth Stall from which it has only a 7% chance of ever again growing consistently at a mere 2%.  This is exactly the kind of behavior that got GM into bankruptcy – see "The Fall of GM." 

The right stuff seems to be happening at Apple.  But keep your eyes open, a new iPhone is primarily Extend behavior – not requiring a Disruption or necessarily even White Space.  We need to see Apple exhibit more Disruptions and White Space to make us true believers.  On the other hand, it's definitely time to throw in the towel on Walgreen's.  Management is resorting to financial machinations to engineer profits, and that's always a bad sign.  When management attention is on accounting rather than Disruptions and White Space to grow the future is sure to be grim.

New ebook – The Fall of GM

Of all the companies that typified America’s rise as an industrial superpower, none was more successful than General Motors.

What happened? Why has it fallen so far? GM at its biggest boasted some 600,000 well-paid employees. It will be left with something like 60,000 after it emerges from bankruptcy. How did that happen? Why did its stock price tumble from $96 per share at its height to 80 cents recently? Why did its market share shrink from one out of every two cars sold to less than one in five last quarter?

And thus begins the new ebook about the fall of GM.  In 1,000 words this ebook covers the source of GM’s success – as well as what led to its failure.  And what GM could have done differently – as well as why it didn’t do these things.  Read it, and share it.  Let folks know about it via Twitter.  Post to your Facebook page and groups, as well as your Linked-in groups.  As markets are shifting the fate of GM threatens all businesses.  Even those that are following the best practices that used to make money.  Let’s use the story of GM — and the costs its bankruptcy have had on employees, investors, vendors and the support organizations around the industry as well as government bodies — as a rallying cry to help turn around this recession and get our businesses growing again!

Fall of GM by Adam Hartung ebook

Download Fall of GM

 

 

Are markets efficient? To Survive forget that myth.

Harvard Publishing recently posted an article from a professor at the London Business School, Freek Vermeulen "Can we please stop saying the market is efficient?"  The good professor's point of view was that he observed a lot of companies that were efficient which didn't survive, and several not all that efficient that did survive.  He even took time to point out where some Harvard professors had identified that companies who implement ISO 9000 often see their innovation decline!

Unfortunately, the good professor is all too correct.  If markets were efficient, we'd see performance move in a straight line.  But any follower of equities, for example, can show you where the stock of a company may have gone up, then declined 20%, then gone back to a new high, maybe to even fall back more than the original 20%, only to then climb to even greater highs.  If the market for that equity were efficient, it would never have these sorts of wild price gyrations.

Likewise, the market for products, things like copiers, aren't all that efficient.  A case I describe pretty deeply in Create Marketplace DisruptionWhen Xerox brought out the 914 copier it changed the world of office copies.  But it didn't take off.  Instead, for years companies maintained their duplicating shop in the basement, using small lithographic offset presses.  This went on for years, and usually the basement shop was closed when (a) the operator retired, (b) the printing press simply gave up the ghost and was ready for the scrap heap, or (c) when the company realized it had so many copiers the basement would be better served to house copiers instead of the printing press.  The fact is that marginal economics – the very low cost of continuing to operate an alread-paid-for-press meant that it was easy to simply keep using presses long after they had any economic advantage.  Not to mention all kinds of kinks in the decision apparatus that funded things like a print shop just because the budget "always had."   But eventually, as the retirees and metal scrappers started accumulating, the market shifted.  What had been a "mixed market" of presses and Xerox copiers suddenly shifted to almost all copiers.  Xerox exploded, and the small offset press makers disappeared. 

That wasn't efficient.  There was a huge lag between when the benefits of copiers were well known and the demise of print shops.  In the end, those who had debts or equity in printing press companies suffered huge losses as the business "fell off a cliff."  There was no "orderly migration" out of the marketplace.  In a very short time, the market shifted from one solution to another.

As recently as 2007 almost every home in America had a newspaper delivered.  By 2009 the market had begun to disappear with subscriptions down over 60% in some markets.  For advertisers, the purchasing of print ads dropped by over 50% in just 24 months.  Yet, the growth of web usage and internet ads had been growing for almost a decade.  In an efficient market there would have been a smooth transition between the two, with say 5% of ads shifting every year.  Again, the economists' "orderly transition" would have applied.  There doesn't seem anything orderly if you're in a market where the newspaper has disappeared, filed for bankruptcy, or cut its pages 40% – and you're wondering how to get the local news or even the TV listings you once found in the newspaper.

Market shifts are sudden, and big.  In the later half of the 1980s the PC market shifted from 60% Macintosh to 80% Wintel in just 5 years – while growth for PCs exploded.  It didn't feel very efficient to people at Apple, the suppliers of apps for Macs or the user base.  Thousands of people in corporations were told "surrender your Mac and get a new PC next week" with no discussion, explanation or concern.

Companies that fall victim to market shifts aren't without strategists, planners or quality programs.  Many have robust TQM or Six Sigma projects.  But these are all about optimizing performance against past performance – not necessarily what the market wants.  When you optimize agains the past you depend on minimal change.  When markets shift, these "efficiency" programs can cause you to be the last to know – and the last to react.

People like to think of evolution as sort of like Continuous Improvement.  Get 5% better every year.  Like a variety of mammal might lose 1/4" of tail each generation until it no longer has one.  We now know that's not how it worksThere are winners.  They keep reproducing, get stronger and more of them every year.  Like mammals with long tails.  Meanwhile, an alternative develops – like a mammal with no tail.  Then suddenly, without expectation, the environment changes.  Tails become a big hindrance, and those with tails die off in a massive exodus.  Those without tails suddenly find they are advantaged by the lack of tails, so they begin breeding fast and getting stronger.  In short order, perhaps a single generation, the tailed mammals are gone and the no-tails become dominant.  Not very efficient, or orderly.  More like reactive to an environmental shift.

If you want to do good tomorrow, I mean one day from today, the odds are that you can accomplish that by being just slightly better at what you did yesterday.  But if you want to be good in 5 years, you may well have to do something very different.  If you wait for the market to tell you – well – you've waited too long.  By the time you know you're out of date, the competitor has taken your position.  You have no hope of survival.

We live with a lot of myths in business.  The value of efficiency, and the belief in efficient markets, are just a couple of big ones.  Kind of like the old myths about blood-letting.  Before the USA, never before in history has anyone ever tried to establish a government of self-rule.  And self-rule led America to a country dominated by businesspeople.  No longer did the king determine winners, losers, prices and behavior.  Now markets would do so.  The people who would make these markets were the emerging business folks.  But nobody knew anything about markets – except some theories about how they "should" work written by an Englishman who had grand thoughts about open-market behaviors.  So most people accepted the earliest theory – with its ideas about "invisible hands" that would guide behavior.

Markets are dramatically inefficient.  Just look at the prices of equities.  Look at the bankruptcies all around us.  GM, your local newspaper, Six Flags and your neighborhood furniture store.  People who were often efficient, but didn't understand that markets shift quickly, and very inefficiently.  They don't move in small increments – they change all at once.  And if you want to survive, you have to
prepare for market shifts.  Simply working harder, faster and cheaper won't save you
when the market shifts.  If you aren't ready to be part of the shift, you get left behind and won't survive.

Markets are shifting today faster than they ever have.  Telecommunications, internet connections, massive amounts of computing power, television, jet airplanes – these things have made the clock speed on changes much faster.  Market shifts that used to be seperated by decades are compressed into a few years.  If you don't plan on market inefficiencies – on market changes – you simply can't survive.

Lots of people misunderstand Darwin.  The prevailing view is that his study on the origination of species says that the strongest survive.  In fact, his conclusion was quite the opposities.  What he said was that it is not the strongest that survive, but the most adaptable.

 

Leaders make a difference – P&G, GM, AT&T

As I've given presentations around the country the last year I'm frequently asked about the role of leadership in Phoenix Principle companies.  All people can bring Phoenix Principle behaviors to their work teams and functional groups.  Yet there is no doubt that organizations do much better when the leaders are also committed to Phoenix Principle behaviors

Unfortunately, all too often, top leaders are more interested in Defend & Extend ManagementBusinessWeek's recent article "How to Succeed at Proctor & Gamble" talks about replacing CEO icons such as Charles Schwab, Michael Dell and Jack Welch.  Unfortunately, only one of these was a real Phoenix Principle leader – and the others ended up coming back to their organizations when the replacements tried too much D&E behavior – leaving their shareholders with far too low returns and only dreams of rising investment value.  Even more unfortunate is the fact that too many management gurus simply love to wax eloquently about leaders of big companies – regardless of their performance.  Such as Warren Bennis's description of A.G. Lafley at P&G as "Rushmorian."  Those at the top are given praise just because they got to the top.  Yet, we've all known leaders who were far from being praise-worthy.  Even the mundane can be loved by business reviewers that rely on them for money, access, ad dollars and influence.

There's a simple rule for identifying good leadershipGrow revenues and profits while achieving above average rates of return and positioning the organizations for ongoing double digit growth upon departure.  It's not the size of the organization that determines the quality of a leader, it's the results.  We too often forget this.

Back to departing P&G CEO, Mr. Lafley.  Preparing to retire, he's taken the high ground of claiming to be "Mr. Innovation" for P&G.  Experts on innovation classify them into Variations, Derivatives, Platforms or Fundamental.  Using this classification scheme (from Praveen Gupta Managing Editor of the International Journal of Innovation Science and author of Business Innovation) we can see that Mr. Lafley was good at driving Variations and Derivatives at P&G.  But under his leadership what did P&G do to launch new platforms or fundamental new technologies?  While variations and derivatives drive new sales – "flavor of the month" marketing as it's sometimes called – they don't produce high profits because they are easily copied by competitors and offer relatively little new market growth.  They don't position a company for long-term growth because all variations and derivatives eventually run their course.  They may help retain customers for a while, but they rarely attract new ones.  Eventually, market shifts leave them weaker and unable to maintain results due to spending too much time and resource Defending & Extending what worked in the past.  Mr. Lafley has done little to Disrupt P&G's decades-old Success Formula or introduce White Space that would make P&G a role model for the new post-Industrial era. 

Too often, bigness stands for goodness among those choosing business leaders.  For example, GM is replacing departed CEO Rick Wagoner with Ed Whitacre according to the Detroit Free Press in "Former AT&T chief to lead GM."  Mr. Whitacre's claim to fame is that as a lifetime AT&T employee, when the company was forced to spin out the regional Bell phone companies he led Southwestern Bell through acquisitions until it recreated AT&T – as a much less innovative company.  Mr. Whitacre is a model of the custodial CEO determined to Defend & Extend the old business – in his case spending 20+ years recreating the AT&T judge Green took apart.  Where a judge unleashed the telecommunications revolution, Mr. Whitacre simply put back together a company that is no longer a leader in any growth markets.  Market leaders today are Apple and Google and those who are delivering value at the confluence of communication regardless of technology.

Today, few under age 30 even want a land-line – and most have no real concept of "long distance".   Can the man who put back together the pieces of AT&T, the leader in land-line telephones and old-fashioned "long distance service" be the kind of leader to push GM into the information economy?  Does he understand how to create new business models?  Or is he the kind of person dedicated to preserving business models created in the 1920s, 30s and 40s?  Can the man who let all the innovation of Ma Bell dissipate into new players while recreating an out-of-date business be expected to remake GM into a company that can compete with Kia and Tata Motors?

Any kind of person can become the leader of a company.  Businesses are not democracies. The people at the top get there through a combination of factors.  There is no litmus test to be a CEO – not even consistent production of good results.  But in far too many many cases the historical road to the top has been by being the champion of D&E Management; by caretaking the old Success Formula, never letting anyone attack it.  They have avoided Disruptions, ignored new competitors, and risen because they were more interested in "protecting the core" than producing above-average results (often protecting a seriously rotting core).  Much to the chagrin of shareholders in many cases.

Now that the world has shifted, we need people leading companies that can modify old Success Formulas to changing market circumstances.  Leaders who are able to develop and promote future scenarios that can guide the company to prosperity, not merely extend past practices.  Leaders who obsess about competitors to identify market shifts and new opportunities for growth.  Leaders who are not afraid to attack old Lock-ins, Disrupting the status quo so the business can evolve.  Leaders who cherish White Space and keep multiple market tests operating so the company can move toward what works for meeting emerging client needs.  Leaders like Lee Iacocca, Jack Welch, Steve Jobs and John Chambers.  They can improve corporate longevity by shifting their organizations with the marketplace, maintaining revenue and profit growth supporting job growth and increased vendor sales.

Investing in, or against, indexes – DJIA, GM and Cisco

Unless you have a lot of time to research stocks, you probably invest in a fund.  Funds can be either an index, or actively managed.  People like index funds because you aren't relying on a manager to have a better idea.  Index funds can only own those stocks on the index.  Like the S&P index fund – it can only own stocks in the S&P 500.  Nothing else.  Interestingly, the Dow Jones Industrial Average is considered an index fund – even though I don't know what it indexes.  And that is important if you are an investor who benchmarks performance against the Dow.  It's even more important if you invest in the Dow (or Diamonds – the EFT for the Dow Industrials).

GM is now off the Dow ("What does GM bankruptcy mean for Index Funds?").  Because it went bankrupt, the editors at Dow Jones removed it.  But it wasn't long ago that the editors removed Sears and Kodak.  But not because these companies filed bankruptcy.  Rather, the Dow Jones editors felt these companies no longer represented American business.  So the Dow is a list of 30 companies. But what companies is up to the whim of these Dow editors.  Sounds like an active management (judgement) group (fund) to me.

Go back to the original DJIA and you get American Cotton Oil, American Sugar, Distilling & Cattle Feed, Leclede Gas Light, Tennesse Coal Iron and Railroad and U.S. Leather.  Household names – right?  As the years went buy a lot of companies came and went off the list.  Bethlehem Steel, Honeywell, International Paper, Johns-Manville, Nash Motor, International Harvester, Owens-Illinois, Union Carbide — get the drift?  These may have been successful at some time, but the didn't exactly withstand "the test of time"  all that well.  Even some of the recent appointments have to be questioned – like Home Depot and Kraft which have had horrible performance since joining the elite 30.  You also have to wonder about the viability of some aging participants, like 3M, Alcoa and DuPont.  So the DJIA may be someone's guess about some basket of companies that they think in some way represents the American economy – but it's definitely subject to a lot of personal bias.

Like any basket of stocks, when the DJIA is lagging market shifts, it is not a good place to investAnd the editors are greatly prone to lagging.  Like their holdings in agriculture and basic commodities years ago, through holding big industrial companies in the 1990s and 2000s.  And the over-weighting of financial companies at the turn of the century when they were merely using financial machinations to hide considerable end-of-value-life  problems.  When the DJIA is holding companies that are part of the previous economy, you don't want to be there. 

The Dow should not be a lagging indicator.  Rather, given its iconic position, it should hold the "best" companies in America.  Not extremely poorly performing mega-bricks – like GM.  GM should have been dropped several years ago.  And you should be concerned about the recent appointment of Kraft.  And even Travelers. 

Those companies that will do well are going to be good at information, and making money on information.  So who's likely to fall off (besides Kraft)?  DuPont, which has downsized for 2 decades is a likely candidateCaterpillar is laying off almost everyone, and cutting its business in China, as it struggles to compete with an outdated industrial Success Formula.  Bank of America has shown it is disconnected from understanding how to compete globally as it has asked for billions in government bail-out money.  And the hodge-podge of industrial businesses, none of which are on the front end of new technologies, at United Technologies makes it a candidate — if people ever recognize that the company would quickly disintegrate without massive U.S. government defense spending.  Even 3M is questionable as it has slowed allowing its old innovation processes to keep the company current in the information age.

Adding Cisco was a good move.  Cisco is representative of the information economy – as are Verizon, AT&T (which was SBC and before renameing, GE, HP,  Intel, IBM, Microsoft, Merck and Pfizer (if they transition to biologics from old-fashioned pharmaceutical manufacturing ways – otherwise replace them with Abbott).  But all those other oldies – like Walt Disney (sorry, but the web has forever changed the marketplace for entertainment and Walt's folks aren't keeping up with the times), Boeing (are big airplanes the wave of the future in a webinar age?), Coke (they've kinda covered the world and run out of new ideas), P&G (anybody excited about Swiffer variation 87?), and Wal-Mart – which couldn't recognize doing anything new under any circumstances.

As an investor, you want companies that can grow and create a profit.  And that's increasingly not the DJIA – even as it slowly adds a Microsoft, Intel and Cisco.  You want to include companies in leadership positions like Google and AppleTheir ability to move forward in new markets by Disrupting their Lock-ins and using White Space to launch new projects in new markets gives them longevity.  As an investor you don't want the "dogs" – so why would you want to own DuPont, et.al.?

Investors may have been stung by overvaluations in technology companies during the 1990s.  But that was the past.  What matters now is future growth ("Technology on the comeback trail").  And that can be found by investing in the future – not what was once great but instead what will be great.  Invest for the future, not from the past.  And that can be found outside the DJIA.  Unless the Dow editors suddenly change the portfolio to match the shift to an information economy.

(For additional ideas about recomposing the DJIA, see my blog of 3/12/09 "Dated Dow")

Shift your Success Formula, or learn Chinese – GM, Hummer

How appropriate.  "GM strikes deal to sell Hummer" headlines a Marketwatch.com article.  A day after declaring bankruptcy, Hummer with all its branding and product drawings is going to China.  It seems everything about GM is iconic – including its movement of an operating auto businesses to China.

Is this bad for America, or good?  I'd rather say it's inevitable.  In a global economy, industrial production will move to the lowest cost location.  And with a low valued currency, a very lowly paid workforce, and access to very inexpensive capital that puts China at the top of the list.  Unless you want to bring back Chairman Mao and wall-in China, the population density and government programs make it inevitable that the country will be a leader in manufacturing.

But that doesn't equate to high value.

America is the world's largest agricultural nation.  But has that made America wealthy?  Not since the 1800s has it been true that land ownership for agricultural uses made Americans – and the nation – wealthy.  As the value of agriculture declined – largely due to dramatic increases in production – America's wealth shifted to industrial production.  It was by being the largest and most productive industrial nation that America prospered during the Industrial economy.

But now, industrial production has razor thin margins.  Much like agriculture.  Over-invest in capacity, and you can end up with under-utilized (or closed) plants and not much margin from other businesses to cover the cost.  Not since the 1990s has America operated anywhere near "full capacity" on its manufacturing base.  The "good" years of the last decade were unable to produce industrial jobs, or wealth for industrial companies (i.e. – GM's bankruptcy.)

In the great battle for economic leadership, the next wave is about informationHow to obtain, use and manipulate information is where value is now created.  Steel traders can make more than steel producers today.  If you want to improve your profitability, and your longevity, you have to change your thinking from "how do I make and sell more stuff" to "what do I know they don't know, and how do I turn that into value?" 

For somebody selling autos, it's becoming a lot more important to understand customer wants and preferences than to be good at making cars.  Toyota and Honda can identify opportunities first, and put products into the market faster than anyone else.  They can maximize their product development and short-run capability to reach targets fast, and gain advantages over competitors.  Don't forget, Honda made money not just on small, high mileage cars but on a full-size pick-up called the Ridgeline (and Toyota on the Tundra).  These companies are better at using scenarios to recognize early market shifts, and clearer about competitor moves so they can position products to fulfill unique customers needs.  Even if it means launching products not traditional to their "core" – like Honda's Ridgeline, it's manufacturing robotics, and its new jet airplanes.

In the industrial era, people sought scale advantages and tried to build entry barriers against competitors.  In the information economy flexibility is equally (or more) important than sizeRecognizing customer needs and competitor actions early is more important than catering to old, devoted customer groups.  Willingness to Disrupt, and do what you must do to change the market by using White Space test projects keeps you ahead of the competition – rather than trying to Defend & Extend your "core."

For the industry, having Hummer production in China could turn out to be a good thing.  It will lower product cost.  If the distribution in the USA can gain control of the market, by recognizing customer needs and directing the production, the distributors can grab all the value away from the Chinese manufacturer.  If, on the other hand, the dealers try to act like old fashioned dealers who merely keep stock and negotiate price — then they won't create value and margins will stink.  There are ways to make money in the information economy, even for traditional players, but it requires changing your Success Formula from industrial-era behaviors to the needs of an information-based economy.  You can follow GM – or you can try to be like Cisco.

From GM to Cisco – changes in the DJIA

June 1, 2009 will be remembered for a really long time.  As I last blogged, I think the iconic impact of GM as one of the most successful and profitable of all industrial companies makes its bankruptcy more important than almost any other company.

As GM loses its market value, it was forced off the Dow Jones Industrial Average.  In "What's behind the Dow changes?" (Marketwatch.com) we can read about how the Wall Street Journal editors selected Cisco to replace GM.  I've long been a detractor of GM for its slavik devotion to its outdated Success Formula.  For an equally long time I've long been a fan of Cisco and how it keeps its Success Formula evergreen.  Cisco reflects the behaviors needed to succeed in an information economy, and its addition to the DJIA is a big improvement in measuring the American economy and its potential for growth. 

What I most admire about Cisco is management's requirement to obsolete the company's own products.  This one element has proven to be critical to Cisco's ongoing growth – and the company's ability to avoid being another Sun Microsystems.  By forcing themselves to obsolete their own products, Cisco doesn't get trapped in "cannibalization" arguments Management doesn't get trapped into listening to big customers who want Cisco to slow its product introduction cycle Leaders end up Disrupting the company internally to do new things that will replace outdated revenues.  It sounds so simple, yet it's been so incredibly powerful.  "Obsolete your own products" is a statement that has helped keep Cisco a long-term winner.

Since even before writing "Create Marketplace Disruption" I've espoused that Cisco is a Phoenix Principle kind of company.  One that uses extensive scenario planning to plan for the future, one that obsesses about competitors in order to never have second-place products, willing to Disrupt its product plans and markets to continue growing, and loaded with White Space developing new solutions for new markets.  It's a great choice to be on the Dow – which will eventually have to replace all the outdated companies (like Kraft) with companies that rely on information – rather than industrial production – to make money.

The big shift – GM, Chrysler, Ford

GM will file bankruptcy next week ("GM reaches swap deal, but bankruptcy still lies ahead" Marketwatch).  It's likely historians will look back on this event as a major turning point in the change away from an industrial world (away from making money on "hard" assets like factories).  GM was considered invincible.  As were all the auto companies.  The reorganizing of Ford, and bankruptcy of Chrysler will be remembered, but not likely with the impact of GM filing bankruptcy.  Pick up any book on America post WWII and you'll find a discussion of General Motors.  The quintessential industrial company.  Destined to live forever due to its massive revenues and assets.  After next week, history books will change.  Altered by the previously unimaginable bankruptcy of GM.  If "What's good for GM is good for America" is no longer true, what does it mean for America when GM declares Bankruptcy?

None of America's car companies will ever again be strong, vibrant auto companies.  They are in the Whirlpook and can't get out.  It's simply impossible.  GM is now worth about $450million (at current prices of about $.80/share).  It already owes the federal government $20billion – which is supposed to be converted to equity, with more equity owned by employees and converted bondholders.  For most of the time since the 1970s, the average value of GM has been only $15billion (split adjusted average price $25).  To again become viable GM wants the government to increase its investment to $60billion ("GM bondholders may recoup $14Billion" Marketwatch.com.  That means for GM to ever be worth just the amount being supplied by the government bailout it would have to be worth $116/share – which is $20/share more than it was worth at its peak in the market blowout of 2000! (Chart here).

That means it is impossible to conceive of any way GM could ever be successful enough to achieve enough value as a car company to repay the government – and thus it has no future ability to provide dividends to private investors.  Even though GM says it will be repositioned to be healthy, that simply is not true.  It's no more healthy or attractive than Quasimodo, the hunchback of Notre Dame, could have ever hoped to be – or the elephant man.  Helping them is charity, not a business proposition.  When a company has no conceivable hope of making enough money to repay its investors it cannot attract management talent, or additional capital as assets wear out, and it eventually fails.  It won't be long before the people running GM realize their future are as bureaucrats in a non-profit – but with far less psychic value than working at, for example, the Red Cross.

Meanwhile, Chrysler is downsizing dramatically as it looks for its way out of bankruptcy.  As it tries to give the company to Italians to run, the company is dropping obligations it has carried for years.  Even the venerable Lee Iacocca, who literally saved the company 20some years ago, will lose his pension and even his company car ("Iacocca losing pension, car in Chrysler bankruptcy" Reuters). 

Ford, which restructured before this latest market shift, has not asked for bailout money.  But its market share is dropping fast.  Its vendors (including Visteon) are going bankrupt and Ford is guaranteeing their debt to keep them in business – with an open-ended cost not yet reflected in Ford's P&L.  Even though it restructured, Ford's balance sheet is shot ("What About Ford?" 24/7 Wall Street).  It has no money to design a new line of competitive vehicles.

None of these 3 companies have the wherewithal as operating businesses to replace assets.  And  they are competing with Japanese, Korean and Indian companies that have lower operating costs, lower fixed asset investments, higher quality and newer product lines, better customer satisfaction rates, higher profits and stronger balance sheets.  Without competition it's hard to expect America's car companies to do well.  When you look at competitors you realize this game can still have several more moves (especially with market intervention by government players with public policy objectives) – but the end is predicatable.  Only for reasons of public policy, rather than business investment, would you continue to fund any of these American competitors.

Even though the switch from an industrial economy to an information economy began in the 1990s, historians will likely link the switch to June, 2009. (I guess that's fair, since the shift from an agrarian economy to an industrial economy began in the 1920s but wasn't recognized until the late 1940s.)   Just as GM was the company that epitomized the success of industial business models, it will be the company that becomes the icon for the end of industrial models.  It failed much faster, and worse, than anyone expected.

If "What's good for GM" (as in the government bailout) isn't good for America any longer – what is?  For many people, this is shift is conceptually easy to understand – but hard to do anything about.  They don't know what to do next; what to do differently.  They fully expect to continue focusing on balance sheets and assets and the tools we used to analyze industrial companies.  And those people will see their money drift away.  Just like you can't make decent returns farming in a post-agrarian economy, you won't be able to make money on assets in a post-industrial economy.  From here on, it's all about the information value and learning how to maximize it.  It's not about old-style execution, its about adaptability to rapidly shifting markets built on information.

Let's consider CDW – a 1990s marvel of growth shipping computers to businsesses around America.  CDW has pushed hardware and software onto its customers for 2 decades in its chase with Dell.  But every year, making money as a push distributor gets harder and harder.  And that's because buyers have so many different sources for products that the value of the salesperson/distributor keeps declining.  Finding the product, the product info, inventory, low shipping and low price is now very easily accomplished with a PC on the web.  Every year you need CDW less and less.  Just like we've seen distributors squeezed out of travel we're seeing them squeezed out of industry after industry – including computer componentry.  If CDW keeps thinking of itself as a &quot
;push" company selling products – a very industrial view of its business – it's future profitability is highly jeapardized.

The market has shifted.  For CDW to have high value it must find value in the value of the information in its business.  Perhaps like the Chicago Mercantile Exchange they could create and trade futures contracts on the value of storage, computing capacity or some other business commodity.  The information about their products – production, inventory and consumption – being more profitable than the products themselves (everyone knows more profit is made by Merc commodity traders than all the farmers in America combined).  Or CDW needs to develop extensive databases on their customers' behaviors so they can supply them with new things (services or products) before they even realize they need them — sort of like how Google has all those searches stored on computers so they can predict the behavior of you, or a group your identified with, before you even type an internet command.  CDW's value as a box pusher is dropping fast. In the future CDW will have to be a lot smarter about the information surrounding products, services and customers if it wants to make money.

A lot of people are very uncomfortable these days.  Since the 1990s, markets keep shifting fast – and hard.  Nothing seems to stay the same very long.  Those trying to follow 1980s business strategy keep trying to find some rock to cling to – some way to build an industrial-era entry barrier to protect themselves from competition.  They try using financial statements, which are geared around assets, to run the business.  Their uncomfortableness will not diminish, because their approach is hopelessly out of date.  GM knew those tools better than anyone – and we can see how that worked out for them.

To regain control of your future you have to recognize that the base of the pyramid has shifted.  How we once made money won't work any more.  Value doesn't grow from just owning, holding and operating assets.  Maximizing utility of assets will not produce high rates of return.  We are now in a new economy.  One where outdated distribution systems (like the auto dealer structure) simply get in the way of success.  One where a focus on the product, rather than its use or customer, won't make high rates of return.  With the bankruptcy of GM reliance on the old business model must now be declared over.  We've entered the Google age (for lack of a better icon) – and it affects every business and manager in the world.

The future requires companies focus on markets, shifts and adaptable organizations.  Successful businesses must have good market sensing systems, rather than rely on powerful six sigma internal quality programs.  They have to know their competitors even better than they know customers to deal with rapid changes in market moves.  They have to be willing to become what the market needs – not what they want to define as a core competency.  They have to accept Disruptions as normal – not something to avoid.  And they have to use White Space to learn how to be what they are not, so they remain vital as markets shift.  So they can quickly evolve to the next source of value creation.