by Adam Hartung | May 27, 2009 | Current Affairs, Defend & Extend, Disruptions, General, Leadership, Lock-in, Openness, Quotes
"The Need for Failure" is a recent Forbes article on why it is bad – really bad – to prop up failing institutions. The author is an esteemed economics professor at NYU. He says "too big to fail is dangerous. It suggests there is an insurance policy that says, no matter how risky your behavior, we will make sure you stay in business." Rightly said, only it creates a conundrum. Large organizations are not known for taking risky actions. Large organizations are known primarily for lethargic decision-making which weeds out all forms of risk – right down to how people dress and what they can say in the office. When you think of a big bank, like Bank of America or Citibank, you don't think of risk. You think just the opposite. Of risk aversion so great they cannot do anything new or different.
What I'd add to the good professor's article is recognition that large organizations stumble into risk they don't recognize, by trying to do more of the same when that behavior becomes risky due to market changes. My dad said that 100 years ago when my grandfather was first given pills by a doctor he decided to take the whole bottle at once. His logic was "if one pill will help me, I might as well take the whole lot and get better fast." Clearly, an example where doing more of the same was not a good idea. Then there was the boy who loved jumping off the railroad bridge into the river. He did it all the time, year after year. Then one month there was a draught, the river level fell while he was busy at school, and when he next jumped off the bridge he broke his leg. He did what he always did, but the environmental change suddenly made his previous behavior very risky.
Big corporations behave this way. They build Lock-ins around everything they do. They use hierarchy, cultural norm enforcement, sacred cows, rigid decision-making systems, narrow strategy processes, consistency in hiring practices, inflexible IT systems, knowledge silos and dependence on large investments to make sure the organization cannot flex. The intent of these Lock-ins is to make sure that historical decisions are replicated, to make sure past behaviors are repeated again and again with the expectation that those behaviors will consistently produce the same returns.
But when the market shifts these Lock-ins create risk that is unseen. Bankers had built systems for generating their own loans, and acquiring loans from others, that were designed to keep growing. They designed various derivative products as their own form of insurance on their assets. But what they did not recognize was that pushing forward in highly unregulated product markets, as the quality of debtors declined, created unexpected risk. In other words, doing more of the same did not reduce risk – it increased the risk! Because the company is designed to undertake these behaviors, there is no one who can recognize that the risk is growing. There is no one who challenges whether doing more of the same is risky – only those who would challenge making a change by saying change is risky!
Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers and AIG all created a much higher risk than they ever anticipated. And they never saw it. Because they were doing what they always did – and expecting the results would take care of themselves. They were measuring their own behaviors, not the behavior of the market. And thus they missed recognizing that the market had moved – and thus doing more of the same was inherently risky.
(The same is true of GM, for example. GM kept doing what it always did, refusing to see the risk it incurred by ignoring market shifts brought on by changing customer behaviors, rising energy costs and offshore competitors.)
That's why big company CEOs feel OK about asking for a bail-out. To them, they did not fail. They did not take risk. They did what they had always done – and something went wrong "out there". Something went wrong "in the market". Not in their company. They need protection from the marketplace.
Of course, this is just the opposite of what free markets are all about. Free markets are intended to allow changes to develop, forcing competitors to adapt to market shifts or fail. But those who run (or ran) our big banks, and many of our big industrial companies, haven't see it that way. They believe their size means they are the market – so they want regulators to change the market back. Back to where they can make money again.
So how is this to to be avoided? It starts by having leaders who can recognize market shifts, and recognize the need for change. In an companion Forbes article "Jamie Dimon's Straight Talk Has A Good Ring" the author takes time to review J.P. Morgan Chase's Chairman's letter to shareholders regarding 2008. In the letter, surprisingly for a big organization, the JPMC Chairman points out market shifts, and then points out that his organization made mistakes by not reacting fast enough – for example by changing practices on acquiring mortgages from independent brokers. He goes no to point out that several changes have happened, and will continue happening, at JPMC to deal with market shifts. And he even comments on future scenarios which he hopes will help protect investors from the hidden risk of companies that take actions based on history.
Mr. Dimon's actions demonstrate a willingness to implement The Phoenix Principle. For those who don't know him, Mr. Dimon has long been one of the more controversial figures in banking. He is well known for exhibiting highly Disruptive behavior, yet he has found his way up the corporate ranks of the traditional banking industry. Now he is not being shy about Disrupting his own bank – JPMC.
- His discussion of future scenarios clearly points to expected changes in the market, from competitor shifts, economic shifts and regulatory shifts which his bank must address.
- He sees competitors changing, and the need for JPMC to compete differently with different sorts of institutions under different regulations. Mr. Dimon clearly has his eyes on competitors, and he intends for JPMC to grow as a result of the market shift, not merely "hang on."
- He is espousing Disruptions for his company, the industry and the regulatory environment. By going public with his views, excoriating insurance regulators as well as unregulated hedge funds, he intends for his employees and investors to think hard about what caused past problems and how important it is to change.
- He keeps trying new and different things to improve growth and performance at the company. It's not merely "more of the same, but hopefully cheaper." He is proposing new approaches for lending as well as investing – and for significant changes in regulations now that banking is global.
Very few leaders recognize the risk from doing more of the same. Leaders often feel it is conservative to not change course. But, when markets shift, not changing course introduces dramatic risk. People just don't perceive it. Because they are looking at the past, not at the future. They are measuring risk based upon what they know – what they've failed to take into account. And the only way to overcome this problem is to spend a lot more time on market scenarios, competitor analysis and using Disruptions to keep the organization vital and connected with the market using White Space projects.
by Adam Hartung | May 21, 2009 | Current Affairs, General, In the Swamp, Leadership, Lifecycle, Lock-in, Openness
"Target heads toward the Crossroads" is the Marketwatch headline today. Like almost all large retailers, Target has had a tough year. Profits dropped, and Target hit a growth stall. If not careful, the company could fall away into noncompetitiveness, like KMart did. At the same time, some think Target is the only strong competitor to WalMart. Just to rough up the problem, outside investors led by raider Bill Ackman are trying to pressure Target to "restructure" and spin off its real estate into a publicly traded trust. Management isn't helped by a Wall Street Journal report "Proxy firm backs critics in Target vote" recommending shareholders vote to put Mr. Ackman on the Board. At this time, in the Flats, is when management teams are most vulnerable – and more often than not make decisions that doom the company.
It's at this time, when growth has stalled and vultures are swirling around, that management is most likely to turn to Defend & Extend Management. They look backward, and try to implement old practices hoping it will ward off attacks. They stop Disrupting, instead forcing high levels of conformance among employees. They jump into short-term cost cutting actions, which kill off new growth ideas, and shut down White Space projects to conserve cash. Instead of heading toward new markets, they emulate traditional competitors and focus on short-term actions. Unfortunately, these actions throw the company into the Swamp, hurting their ability to compete long term and making them victims of competitors. Look at Motorola, which swung from an intense high into the throws of near-failure when the executive team turned toward D&E management after Carl Icahn attacked the company. Instead of going after market growth, the D&E practices plunged the company into a cash drain leading to cataclysmic drop in sales and market share.
The worst thing Target could do is try to be Wal-Mart. Nobody can beat WalMart at being WalMart. And WalMart has its own troubles, including saturation of its stores as well as declining customer interest in its low-cost format. Recent resurgence, linked to the worst economy in 70 years, does not reflect a change in what customers want from retailers long-term. Rather, it's a short-term blip for a Locked-in Success Formula that has seen declining returns on investment for over a decade. If Target were to try emulating WalMart, in format or approach, it would be disastrous.
Nor is doing what Target always did the right thing to do. The market has shifted. What worked in 2005 cannot be assured of working in 2010. Trying to refind its "core" and do more of the same practices would again be a Defend & Extend approach which will hurt results. Amplifying those D&E practices by taking radical actions, such as spinning out its real estate in a short-term financial machination, would only reduce the variables Target can use to regain growth. Following the recommendations of raider Ackman and his Pershing Square firm will attempt to short-term spike profitability, but at the grave risk of killing the company long-term.
What Target needs to do now, more than ever, is study the market. The retail industry is under a major shift as on-line participants increase capability and share, per-store numbers struggle to maintain, and as underlying real estate values tumble. Customer expectations, from baby boomers to GenY are different than they were in 2001, and all retailers need to adapt to these changes. The retailers that do, with new approaches – perhaps mixed approaches that combine on-line with traditional, and/or combine mega-stores with specialty, etc. – will be the ones that capture share as pent-up consumer demand re-emerges in the future. What scenario of the future looks most likely to attract and retain customers in 2015?
Simultaneously, Target needs to study competitors, to define its positioning that produces best results. The good news is that the biggest competitor (WalMart) is so locked in that it's easy to predict. Target can study WalMart, Kohl's, Gordman's, J.C.Penney and others to identify what actions it can take that will avoid head-to-head battering and instead provide rapid growth. Especially by focusing on on-line competitors, including Netshops.com, much can be learned about how the market is shifting and where Target should go to maximize growth.
Above all, Target needs to take this opportunity to Disrupt old behaviors and convince employees, and shareholders, that Target will pull out all stops to become the leading retailer by 2020. WalMart is so Locked-in that it can easily decline (and if you doubt that, just look at other market leaders and how they did coming out of downturns – like GM and Sears). The right retailer, making the right decisions, can become the next leader. But not by just doing more of the same. It will take a concerted effort to open the doors for trying and doing new things.
And right now Target needs to be throwing up test stores and new concepts – White Space projects – where it can learn what will work for the next great retailing Success Formula. No amount of planning is worth as much as experimentation. The newest ideas in retailing need to be reviewed and tested to see what can work now. Maybe the time has finally arrived for home grocery shopping, for example. Who knows? What we do know is that the company that uses this market transition period to build a new Success Formula aligned with changing customer expectations will be positioned to be the new market leader.
Conventional wisdom would say that Target should cut costs, emulate WalMart, get really cheap with prices, tighten its supply chain, spin out all "non core" assets and focus on returning to practices that made a profit in 2004, 05, 06 and 07. But our studies for The Phoenix Principle showed that those practices almost always doom the competitor. Instead, at this critical lifecycle point, it's more important than ever to focus on GROWTH and return to the Rapids – otherwise you end up in the Swamp, moving along toward the Whirlpool, like Woolworths, S.S. Kresge, TG&Y, Sears, KMart and Sharper Image.
by Adam Hartung | May 19, 2009 | Current Affairs, Defend & Extend, General, Leadership, Lock-in
Have you ever heard of a company paying an employee to die? Hard to figure out how that's "pay for performance." Yet, many companies have executive compensation agreements with "golden coffin" provisions which agree to pay the executive's estate substantial sums in the event that executive dies. I first heard about this with the company AM International, which I profiled in my book Create Marketplace Disruption. AM International's Chairman/CEO Merle Banta had a provision in his contract which continued his pay, and guaranteed his bonus, even if he died! This was somewhat remarkable, because during the years he led AM it went bankrupt twice (the last time ending the company), and he laid off thousands of employees. It was hard for the people at AM to understand why this provision existed, since they not only lost their jobs but also their pension fund when Mr. Banta put it all into a company ESOP that went under with the company,
This still goes on today. Probably a lot more than many of us guess. Today's headline "Golden Coffin proposal narrowly defeated at XTO" covers how some shareholders tried to kill the "pay to die" provision for company executives. The Chairman received $1.63M in salary, and $30M in bonus last year – and the Golden Coffin provisions for him are worth more than $90M!!! But I ask you, do you think XTO Energy did well because of the decisions made by Chairman Bob Simpson – or because oil prices spiked to record levels having nothing to do with the management team at all?
When you get paid to hammer nails, or insert rivets, or spot weld, or wash dishes piece pay can make sense. The harder and smarter you work, the more you get done and you can make more money. This is pure pay for performance.
But does this make sense for executives, or even most managers, in a modern corporation? According to its bio, XTO energy owns oil and gas reserves (some proven, some not) under the ground. No matter what management does, the value of those reserves goes up or down with the value of oil and gas. Why should an executive be rewarded if oil jumps to $150/barrel? Sure, his company can be very profitable, but did he have anything to do with it? A 5 year chart of XTO demonstrates that the value of the company is mostly tied to the value of its commodity asset (oil), and not much else.
And the same can be said for most companies. The current value is tied to many factors, including decisions made years before, as well as shifting markets. Companies are quick to point this out when "other factors" conspire to do the value poorly, and they pay executive bonuses anyway. But when the value goes up, there's a willingness to pass along a big chunk of that value to the executives as if they caused it. In reality, about the only thing an executive can do to affect value in the short term (meaning less than 2 or 3 years) is cut R&D, cut product development, cut marketing, cut sales expenditures, outsource functionality to low cost centers, sell assets and lay off employees. Most actions which pad the short-term bottom line but each of which can fatally doom the organization's future. Compensation that's tied to short-term results reinforces doing more of the same, Defending & Extending the company's past, and ignoring needs to invest in shifting the company along with dynamic markets.
Good management keeps its eyes on markets so the company keep can keep positioning itself for growth as markets change. Good management obsesses about competitors so it isn't caught off guard by current or emerging players that drive down returns. Good management disrupts the organization so it is able to shift with markets, rather than getting stuck in behaviors and decision making processes that become outdated and unable to create value. And good management maintains White Space where new products, services, operating practices, metrics and behaviors are tested in order to keep the company evergreen. But how do you tie compensation to these behaviors?
I recently had coffee with someone who worked at AM International when it was declining. He still remembers, painfully, how executive compensation was not linked to what the company needed to do to survive. He told me how later, after AM, he was working for a large manufacturer in central Michigan and he could not believe how every Director, V.P. and other management personnel tied every decision to maximizing their bonus. Eventually, he grew tired of the self-centered behavior and he's now an entrepreneur.
If we are to believe in pay for performance, management bonuses should lag by 1 to 5 years. Bonuses should be based on results – and the results of management decisions actually come to fruition over time. They aren't like pounding nails. This sounds absurd, but we all know that the real impact of executive decisions are seen years after the decision. If CEO incentive compensation for 2009 were tied to performance in 2012 or 2013 do you think the behavior and decisions of executives would change? Would they be more likely to focus on making decision that are for the business's long term health than trying to maximize short-term pay?
Those who've won the CEO lottery have done much better than those who have not. It's very hard to say we "pay for performance" when huge bonuses are paid to the departing chairman of GM, or the CEO who quit launching new products at Motorola to maximize Razr sales. Clearly, they were not paid for performance. And it's unimaginable how paying someone to die makes any sense. When compensation on the downside is guaranteed, and on the upside is maximized by short-term actions or market events not even tied to management decisions, the whole discussion of pay for performance becomes fairly absurd.
I was always struck that the founders of Ben & Jerry's Ice Cream came up with a formula that paid everyone based upon rank – and there was a set ratio between ranks. As a result, the CEO's pay could not go up unless the pay of a worker on the line went up. The inherent fairness was extremely hard to argue with. And it meant everyone did better, or worse, as markets shifted and they either shifted with them – or not. It would seem like the time has long come when we should reconsider exactly what we base pay upon. And when measuring performance is as complex, or time lagged, as management we need to rethink the entire concept. Maybe we should go back to compensating people for doing the right things, with most pay in salary, and tying people together for the long-term company interest.
by Adam Hartung | May 18, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle, Lock-in, Web/Tech
"Newspapers face pressure in selling online advertising" is today's headline about newspapers. Seems even when the papers realize they must sell more online ads they can't do it. Instead of selling what people want, the way they want it, the newspapers are trying to sell online ads the way they sold paper ads – with poor results.
We all know that newspaper ad spending is down some 20-30%. But even in this soft economy internet ad spending is up 13% versus a year ago. Except for newspaper sites. At Gannett, NYT and McClatchy internet ad sales are down versus a year ago!
People don't treat internet news like they do a newspaper. The whole process of looking for news, retrieving it, reading it, and going to the next thing is nothing like a newspaper. Yet, daily newspapers keep trying to think of internet publishing like it's as simple as putting a paper on the web! What works much better, we know, are sites focused on specific issues – like Marketwatch.com for financial info, or FoodNetwork.com. Also, nobody wants to hunt for an on-line classified ad at a newspaper site – not when it's easier to go to cars.com or vehix.com to look for cars, or monster.com to look for jobs. Web searching means that you aren't looking to browse across whatever a newspaper editor wants to feed you. Instead you want to look into a topic, often bouncing across sites for relevant or newer information. But a look at ChicagoTribune.com or USAToday.com quickly shows these sites are still trying to be a newspaper.
Likewise, online advertisers have far different expectations than print advertisers. Newspapers simply said "we have xxxx subscribers" and expected buyers to pay. But on the web advertisers know they can pay for placement against specific topics, and they can expect a specific number of page views for their money. As the article says "if newspapers want to get their online revenue growing again, once the economy recovers, they have to tie ad rates more closely to results, charge less for ads and provide web content that readers can't get at every news aggregation site."
When markets shift, it's not enough to try applying your old Success Formula to the new market. That kind of Defend & Extend practice won't work. You're trying to put a square (or at least oblong) peg into a round hole. Shifted markets require new solutions that meet the new needs. You have to study those needs, and project what customers will pay for. And you have to give them product that's superior to competitors in some key way. Old customers aren't trying to buy from you. Loyalty doesn't go far in a well greased internet enabled world. You have to substantiate the reason customers need to remain loyal. You have to offer them solutions that meet their emerging needs, not the old ones.
Years ago IBM almost went bust trying to be a mainframe company when people found hardware prices plummeting and off-the-shelf software good enough for their needs. IBM had to develop new scenarios, which showed customers needed services to implement technology. Then IBM had to demonstrate they could deliver those services competitively. Only by Disrupting their old Success Formula, tied to very large hardware sales, and implementing White Space where they developed an entirely new Success Formula were they able to migrate forward and save the company from failure.
Unfortunately, most newspaper companies haven't figured this out yet. They don't realize that bloggers and other on-line content generators are frequently scooping their news bureaus, getting to news fans faster and with more insight. They don't realize that on-line delivery is not about a centralized aggregation of news, but rather the freshness and insight. And they haven't figured out that advertisers take advantage of enhanced metrics to demand better results from their spending. The New York Times, Gannett and other big newspaper companies better study the IBM turnaround before it's too late.
by Adam Hartung | May 17, 2009 | Current Affairs, Defend & Extend, General, In the Whirlpool, Leadership, Lock-in
"Gannett to shut down print version of Tucson newspaper" is the latest headline. Yet another newspaper either cutting staff, cutting content, cutting print days, or stopping printing altogether. That this would happen isn't really surprising. Even Warren Buffett recently said he didn't see any way newspapers could make money. (Yet, according to Marketwatch Berkshire Hathaway still owns shares in Gannett – primarily a newspaper company.)
What's surprising is that Gannett isn't doing anything to change the company. A quick visit to www.Gannett.com and you'll learn that the company has almost no on-line business. They company's profile says that it's online business consists of a 50% ownership in CareerBuilder.com and Shoplocal. That's it. No financial news site, no social networking site, no food site, no sites dedicated to the TV stations owned by Gannett, or the newspapers owned by Gannett. A visit to the page dedicated to the Gannett online network is actually a page where you can ask for a salesperson to call you for placing an ad on USAToday.com.
Everyone today has to deal with market shifts. Everyone. The newspapers are in a position where their very survival depends upon making a shift. This isn't new. It's been clear for several months – and for those in the media actually well known for a few years. So why hasn't Gannett done anything to reposition its business? Over the last year equity value has declined 85% – some $6Billion of lost value. Since June, 2007 the equity value has dropped from $60/share to $4/share (a loss of some $10Billion in value) [see chart here].
Leadership should not be allowed to behave like the lonely deer, caught on a rural road in the evening. The proverbial animal caught staring into the headlights of the car speeding directly at it – and sudden death. Leadership's job is to react to market changes in order to keep the business viable. Gannett has succumbed to Lock-in – unwilling to take actions necessary to keep its customers (advertisers and readers) engaged. Unwilling to help employees mobilize toward a new future, and help vendors identify growth opportunities. By simply doing more of what the company has always done, leadership is dooming the investors to lose their money, and their employees their jobs and pensions.
Everybody knows that the future for newspapers is bleak. All of us will face these sorts of market shifts in our careers. Doing nothing is not an option. Leadership must engage the workforce in open dialogue about what the future holds, taking great pains to discuss competitors and how they are changing the market. And leadership is responsible to Disrupt the Lock-ins, attacking them, so that new ideas can be brought forward and new investments can be made in White Space where the company can grow and migrate to a new Success Formula.
If somebody steals $100 that's a crime. But if you lose $10Billion in market value that's not. When market shifts are as obvious as those in newspapers, and management doesn't take action to reposition the company and engage employees in transition, not taking action seems criminal. No wonder shareholders file class action lawsuits.
by Adam Hartung | May 15, 2009 | Current Affairs, Defend & Extend, In the Whirlpool, Leadership, Lifecycle
"Chrysler delivers the bad news to 789 dealers" was yesterday's headline. Today the headline read "GM notifies dealers of shutdowns" as the company sent 1,100 dealers the notice they would no longer be allowed to stay in business. Thousands are losing jobs. Chrysler is bankrupt, and GM looks destined to file shortly. But wait a minute, GM was the market share leader for the last 50 years!! These big companies, in manufacturing, were supposed to be able to protect their business and become "cash cows." They weren't supposed to get beaten up, see their cash sucked away and end up with nothing!
About 30 years ago a fairly small management consultancy that was started as a group to advise a bank's clients hit upon an idea that skyrcketed its popularity. The fledgling firm was The Boston Consulting Group, and its idea was the Growth/Share matrix. It created many millions of dollars in fees over the years, and is now a staple in textbooks on strategic planning. Unfortunately, like a lot of business ideas from that era, we're learning from companies like GM and Chrysler that it doesn't work so well.
The idea was simple. Growth markets are easier to compete in because people throw money at the companies – either via sales or investment. So it's easier to make money in growing businesses. Market share was considered a metric for market power. If you have high share, you supposedly could pretty much dictate prices. High share meant you were the biggest, which supposedly meant you had the biggest assets (plant, etc.) and thus you had the lowest cost. So, low growth and low share meant your business was a dog. High growth and low share was a question mark – maybe you'd make money if you eventually get high share. High growth and high share was a star. And low growth but high share is a cash cow because you could dominate a business using your market clout to print money – or in the venacular of the matix – milk the money from this cow into which you put very little feed.
In the 1970s/80s, looking at the industrial era, this wasn't a bad chart. Especially in asset intensive businesses that had what were then called "scale advantages." In the industrial world, having big plants with lots of volume was interpreted as the way to being a low-cost company. Of course, this assumed most cost was tied up in plant and equipment – rather than inventory, people, computers, advertising, PR, viral marketing, etc. The first part of the matrix has held up pretty well; the last part hasn't. We now know that it's easier to make money in growth. But it doesn't turn out that share really gives you all that much power nor does it have a big determination in profitability.
We know that having share is no defense of profits. The assumption about entry barriers keeping competitors at bay, and thus creating a "defensive moat" around profits, is simply not true. Today, companies build "scale" facilities overnight. They obtain operating knowledge by hiring competitor employees, or simply obtaining the "best practices" from the internet. Distribution systems are copied with third party vendors and web sites. Even advertising scale can be obtained with aggressive web marketing at low cost. And so many facilities are "scale" in size that overcapacity abounds – meaning the competitor with no capacity (using outsourced manufacturing) can be the "low cost" competitor (like Dell.).
Thus, all markets are overrun with competitors that drive down profits any time growth slows. As GM learned, even with more than 50% share (which they once had) they could not stop competitors from differentiating and effectively competing. Not even Chrysler, with the backing of Mercedes, could maintain its share and profits against far less well healed competitors. When growth slows, the cash disappears into the competitive battles of the remaining players. Unfortunately, even new players enter the market just when you'd think everyone would run for the hills (look at Tata Motors launching itself these days wtih the Nano). Competitors never run out of new ideas for trying to compete – even when there's no growth – so they keep hammering away at the declining returns of once dominant players until they can no longer survive.
Competition exists in all businesses except monopolies, and threatens returns of even those with highest share. Today it might be easy to say that Google cannot be challenged. That is short-sighted. People said that about Microsoft 20 years ago – and today between Apple, Linux and Google Microsoft's revenue growth is plummeting and the company is unable to produce historical results. People once said Sears could not be challenged in retailing. Kodak in amateur photography. And GM in cars. Competitors don't quit when growth slows – until they go bankrupt – and even then they don't quit (again, look at Chrysler). High share is no protection against competition.
And thus, there is no "easy cash in the cow" to be milked. It all gets spent fighting to stay alive. Trying to protect share by cutting price, paying for distribution, advertising. And if you don't spend it, you simply vanish. Really fast. Like Lehman Brothers. Or Bennigans.
The only way to make money, long term, is to keep growing. To keep growing you have to move into new markets, new technologies, new services – in other words you have to keep moving with the marketplace. And that produces success more than anything else. It's all about growth. Forget about trying to have the "cash cow" – it's like the unicorn – it never existed and it never will.
by Adam Hartung | May 13, 2009 | Current Affairs, General, In the Whirlpool, Leadership, Lifecycle
"Invest in America – but Savings Bonds." I grew up seeing those signs. Of course, I'm over 50. They came from the World War era, when America asked people to buy "war bonds" to pay for involvement. At the time, pre-Bretton Woods, America was still on a gold standard. The country couldn't tust print all the money it wanted. To pay for war goods, Americans were asked to buy bonds. Not for the rate of return – nor even for the eventual gain on principle. It was pure patriotism. Buy bonds to pay for the war. As the clock turned, this patriotic thinking migrated to buying government bonds to help pay for highways, bridges, dams and other projects to help grow America.
I was reminded of this when I saw the Marketwatch.com headline "Ford raises $1.4billion in stock offering". I thought to myself, why would anyone on earth buy newly issued shares in Ford? It's hard to conceive of buying shares in the company as it exists, what with its very long history of weak profits, tepid product lines, limited innovation and lack of attachment to market trends. But to give the company new money, in form of equity with guarantee of a return on or of your principle…. Why that is simply befuddling. This money is not intended to go for new products or improving the company's links to customers. Rather, it all is intended to pay for part of a health care trust that might assuage growing total labor costs. Sort of like paying for part of a clean up on a previous toxic spill. Not something that makes money.
Ford is a company in the Whirlpool. It's odds of surviving are low. It's odds of making high rates of return and being globally competitive are almost nonexistent. Ford wants people to help management defend its past actions – which won't even extend past horrible perfornce – much less improve it. None of this mone is for White Space to do anything new. There is nothing in this offering to make you think Ford will ever be able to repay your investment – or even ever pay a dividend on it.
So I was left thinking that I guess you could buy this offering because you are patriotic. Sort of "Defend America by Defending Ford" and it's management ability to keep running a company that doesn't meet customer, investor or employee expectations. Henry Ford advanced civilization with his ideas for automation and how he applied them at his company – so we need to keep his namesake company alive, I guess (and conveniently forget he was opposed to civil rights, opposed to women's rights and opposed to all forms of organized labor.) And perhaps you want to invest in defending & extending America's involvement in auto production – even though we have a long history of being #1 in making something before exiting it - like shipbuilding, steelmaking and television set production. And maybe you just feel like its your duty to give money to Ford because it represents a great American brand – like RCA, Woolworth's, Studebaker and Hotpoint once did.
Or we can realize this is simply an investment intended to keep Ford alive for another year or two. A form of corporate life support hoping something new comes along to save the patient. For most of us, we're better off with the mattress. There are pension funds out there that receive cash quarter after quarter. They are always looking for investments. Some have billions of newly arrived dollars to invest. And for many, investing that money is done by "rules" rather than analysis. They have to invest x% in equities, and that's allocated Y% and Z% and A% into specific categories. And they will probably buy these shares, after their fund managers have some greatly expensive steak dinnbrs courtesy of the underwriters. Unfortunately, that doesn't make our pensions funds any healthier – but we have little or nothing we can do to affect those decisions.
Keep your money in companies that have White Space. Companies that don't fear Disruption in order to keep themselves aligned with market shifts. Invest in companies that talk about the future, and how their new products will open new opportunities for their customers to accomplish new things. Pay attention to those with long track records of above-average performance – like Google, Apple, Cisco – or Nike, GE and Johnson & Johnson. Invest in the Disruptors that are going to grow the new economy, not those hoping to suck off its benefits with no innovation or other contribution. That will more likely get your 401K back where you want it.
PS – for regular readers – I opologize for being offline without comments for a few days. Computer gremlins attacked me and it's been a struggle to regain control of the machine. Hopefully I'm back on track.
by Adam Hartung | May 8, 2009 | Current Affairs, Defend & Extend, Disruptions, Food and Drink, General, Innovation, Leadership, Lock-in, Openness, Television, Web/Tech, Weblogs
Where the people go, advertisers will follow. Why pay for an ad at the end of a never traveled dead-end street? The purpose of advertising is to reach people with your message. And now "Forrester: Interactive Marketing to grow 11% to $25.6 Billion in 2009" reports MediaPost.com. When print advertising is dropping (direct mail down 40%, newspaper down 35% and magazines down 28%), the on-line market is growing and expected to reach over $50billion by 2014. Search ads is the biggest, with over half the market, but social media is expected to grow the fastest at over 34%/year.
Such a market shift indicates that those who buy ads need to be very savvy about what works. Like I said, you don't want to be the fool who jumps into billboards, only to get placed on the one at the end of a dead-end road. Success means Disrupting your assumptions about advertising, and learning what work by entering White Space with tests and measurements.
In "Mobile Marketing Won't Work Here" Bret Berhoft explains why GenY simply won't tolerate intrusive ads – especially on their mobile devices. Social media are different conduits, with different users and different behaviors. Where older folks (and our parents) were content to be interrupted by ads – such as on TV – the avid users of new media aren't. And they've been known to create counter-movements attacking advertisers that don't adhere to their on-line behavior requirements.
What won't work is trying to do what Sears has done. Instead of learning how people use social media, and how you can connect with them to meet their needs, "Sears to Launch Social Networking Sites" we learn. Where everybody is using Facebook, MySpace, Twitter, Linked-in, etc., Sears decided to open two new sites called MySears.com and MyKmart.com. They hope people will go to these sites, register, and tell stories about their experiences in both retail chains. Then Sears intends to flow through good comments to Sears.com and KMart.com sites.
The horribly Locked-in Sears management keeps trying to Defend & Extend its outdated model. As people have left Sears and KMart in droves for competitors, they aren't looking for a site to "connect" with other people who are Sears centric. People use social networks to learn, grow, exchange ideas, keep up with trends. They don't register for a site because their parents used to shop there.
Sears has missed the basics of Disrupting its old Success Formula, so it keeps trying to apply it in ways that don't work. It keeps doing what it always did, only trying to do it in new places. These sites aren't White Space projects trying to participate in the social networks that are growing (like everything from illness questions to home how-tos). Rather, they are still trying to take the position that Sears is at the center of the world, and people want to be part of Sears.
Exactly how advertisers will capture the attention of participants still isn't clear. Some ideas have gone "viral" producing mega-returns for minimal investments. Other ideas have flopped despite big spending. The market is shifting, and variables keep changing (Marketers Search for Social Media Metric.) But for those who Disrupt their old Lock-ins, those who attack their assumptions, they can use White Space to learn what does work.
"Pizza Hut 'Twintern' to Guide Twitter Presence" is a great example of creating White Space to study social media advertising by participating. The new position will interact with Twitter users, and be a leader in how to interact with Facebook and other sites – even the notorious YouTube! where user content can include the very bizarre. By participating where the customers are, these leaders can develop insights to how you can consistently advertise effectively. Already Sony and Dell have demonstrated they can achieve high recall (Word of Mouth goes Far Beyond Social Media) beyond Social Media with their on-line efforts. These participants, who Disrupt their assumptions and bring in others to work in White Space will be the winners because they aren't trying to Defend & Extend the old Success Formula. They are trying to create a new one to which they can migrate the old business.
by Adam Hartung | May 7, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
Good public policy and good management don't always align. And the banking crisis is a good example. We now hear "Banks must raise $75billion" if they are to be prepared for ongoing write-downs in a struggling economy. This is after all the billions already loaned to keep them afloat the last year.
But the bankers are claiming they will have no problem raising this money as reported in "The rush to raise Capital." "AIG narrows loss" tells how one of the primary contributors to the banking crisis now thinks it will survive. And as a result of this news, "Bank shares largely higher" is another headline reporting how financial stocks surged today post-announcements.
So regulators are feeling better. They won't have to pony up as much money as they might have. And politicians feel better, hoping that the bank crisis is over. And a lot of businesses feel better, hearing that the banks which they've long worked with, and are important to their operations, won't be going under. Generally, this is all considered good news. Especially for those worried about how a soft economy was teetering on the brink of getting even worse.
But the problem is we've just extended the life of some pretty seriously ill patients that will probably continue their bad practices. The bail out probably saved America, and the world, from an economic calamity that would have pushed millions more into unemployment and exacerbated falling asset values. A global "Great Depression II" would have plunged millions of working poor into horrible circumstances, and dramatically damaged the ability of many blue and white collar workers in developed countries to maintain their homes. It would have been a calamity.
But this all happened because of bad practices on the part of most of these financial institutions. They pushed their Success Formulas beyond their capabilities, causing failure. Only because of the bailout were these organizations, and their unhealthy Success Formulas saved. And that sows the seeds of the next problem. In evolution, when your Success Formula fails due to an environomental shift you are wiped out. To be replaced by a stronger, more adaptable and better suited competitor. Thus, evolution allows those who are best suited to thrive while weeding out the less well suited. But, the bailout just kept a set of very weak competitors alive – disallowing a change to stronger and better competitors.
These bailed out banks will continue forward mostly as they behaved in the past. And thus we can expect them to continue to do poorly at servicing "main street" while trying to create risk pass through products that largely create fees rather than economic growth. These banks that led the economic plunge are now repositioned to be ongoing leaders. Which almost assures a continuing weak economy. Newly "saved" from failure, they will Defend & Extend their old Success Formula in the name of "conservative management" when in fact they will perpetuate the behavior that put money into the wrong places and kept money from where it would be most productive.
Free market economists have long discussed how markets have no "brakes". They move to excess before violently reacting. Like a swing that goes all one direction until violently turning the opposite direction. Leaving those at the top and bottom with very upset stomachs and dramatic vertigo. The only way to avert the excessive tops is market intervention – which is what the government bail-out was. It intervened in a process that would have wiped out most of the largest U.S. banks. But, in the wake of that intervention we're left with, well, those same U.S. banks. And mostly the same leaders.
What's needed now are Disruptions inside these banks which will force a change in their Success Formula. This includes leadership changes, like the ousting of Bank of America's Chairman/CEO. But it takes more than changing one man, and more than one bank. It takes Disruption across the industry which will force it to change. Force it to open White Space in which it redefines the Success Formula to meet the needs of a shifted market – which almost pushed them over the edge – before those same shifts do crush the banks and the economy.
And that is now going to be up to the regulators. The poor Secretary of Treasury is already eyeball deep in complaints about his policies and practices. I'm sure he'd love to stand back and avoid more controversy. But, unless the regulatory apparatus now pushes those leading these banks to behave differently, to Disrupt and implement White Space to redefine their value for a changed marketplace, we can expect a protracted period of bickering and very weak returns for these banks. We can expect them to walk a line of ups and downs, but with returns that overall are neutral to declining. And that they will stand in the way of newer competitors who have a better approach to global banking from taking the lead.
So, if you didn't like government intervention to save the banks – you're really going to hate the government intervention intended to change how they operate. If you are glad the government intervened, then you'll find yourself arguing about why the regulators are just doing what they must do in order to get the banks, and the economy, operating the way it needs to in a shifted, information age.
by Adam Hartung | May 4, 2009 | Current Affairs, Defend & Extend, General, In the Swamp, Innovation, Leadership, Openness
Today Yahoo.com picked up on Mr. Buffett's recent comments, with the home page lead saying "Buffett's Gloomy Advice." The article quotes Buffett as saying newspapers are one business he wouldn't buy at any price. Even though he's a reader, and he owns a big chunk of the Washington Post Company (in addition to the Buffalo, NY daily), he now agrees there are plenty of other places to acquire news – and for advertisers to promote.
I guess the topic is very timely given the Marketwatch.com headline "N.Y. Times hold off on threat to close Boston Globe". Once again, in what might remind us of an airline negotiation, the owner felt it was up to concessions by the workers, via their union, if the newspaper was to remain in business. After squeezing $20million out of the workers, the owners agreed not to proceed with a shutdown – today. But they still have not addressed how a newspaper that is losing $85million/year intends to survive. With ad revenue plunging over 30% in the first quarter, and readership down another 7% in newspapers nationally, union concessions won't save The Boston Globe. It takes something that will generate growth.
And perhaps that innovation was also prominent in today's news. "Amazon expected to lift wraps on large-screen Kindle" was another Marketwatch headline. Figuring some people will only read a magazine or newspaper in a large format, the new Kindle will allow for easier full page browsing. According to the article, the New York Times company has said it will be a partner in providing content for the new Kindle.
Let's hope the New York Times does become a full partner in this project. People want news. And the only way The Boston Globe and New York Times will survive is if they find an alternative go-to-market approach. Printing newspapers, with its obvious costs in paper and distribution, is simply no longer viable. Trying to defend & extend an old business model dedicated to that approach will only bankrupt the company, as it already has bankrupted Tribune Company and several other "media companies." The market has shifted, and D&E practices like cost cutting will not make the organizations viable.
It's pretty obvious that the future is about on-line media distribution. We've already crossed the threshold, and competitors (like Marketwatch.com and HuffingtonPost.com) that live in the on-line world are growing fast plus making profits. What NYT now needs to do is Disrupt its Lock-ins to that old model, and plunge itself into White Space. I'm not sure that an oversized Kindle is the answer; there are a lot of other products that can deliver news digitally. But if that's what it takes to get a major journalistic organization to consider switching from analog, physical product to digital on-line distribution as its primary business I'm all for the advancement. Those who compete in White Space are the ones who learn, adapt, and grow. Being late can be a major disadvantage, because the laggard doesn't have the market knowledge about what works, and why.
This late in the market evolution, the major print media players are all at risk of survival. While no one expects The Chicago Tribune or Los Angeles Times to disappear, the odds are much higher than expected. These businesses are losing a tenuous hold on viability as debt costs eat up cash. Declining readership and ad dollars makes failure an equally plausible outcome for The Washington Post, New York Times and Boston Globe. Instead of Disrupting and using White Space, as News Corp started doing a decade ago (News Corp owns The Wall Street Journal and Marketwatch.com, as well as MySpace.com for example), they have remained stuck in the past. Now if they don't move rapidly to learn how to make digital, on-line profitable they will disappear to competitors already blazing the new market.
