by Adam Hartung | Mar 24, 2009 | Current Affairs, Defend & Extend, In the Swamp, In the Whirlpool, Leadership, Weblogs
"Senator proposes nonprofit status for newspapers" was the headline at Marketwatch.com today. Senator Benjami Cardin, a democrate from Maryland, has proposed allowing newspapers to convert to 501(c)(3) status so their subscription and advertising revenue woujld be tax exempt, while contributions to run the papers would be tax deductible. This would allow some newspapers to stay afloat.
Let me share with you a response I received from a fellow reader of this blog:
"I watched Chris Mathews and had the same feeling. As they spoke I had visions of chiefs of Bethlehem, U.S. Steel, etc. sitting around a table in the 60s going 'continuous casting, those Japanese, that's not going anywhere.'
How can they say investigative reporting is going to be dead – there are a million reporters out there working for passion and curiosity. As a matter of fact, if I was going to be paid for a year to chase a story, seems to me a strong incentive to create a story when there really wasn't one.
I loved the way they were holding the paper and saying how people will miss the periphery articles. People will be limited to their feeds and be exposed to the rest of what's going on. I look at it as if I read an article in a newspaper that is just one take of the situation. With the internet I can drill down to get additional information and opinions. Plus get immediate commentary from experts."
Lots of people are getting "subsidy happy" these days. Money to banks, money to car companies, money to newspapers. What we must realize is that these short-term subsidies should be targeted at stopping a worse calamity. Nothing more. Sort of trading off company subsidies against even higher costs for unemployment, uninsured health care, and the costs of letting companies fail short-term. The reality is that none of these subsidized companies are sustainable as they are. The market has shifted, and their Success Formulas no longer produce positive results. They will burn up the subsidy money, as we've already seen happen at GM, and soon ask for more.
When markets shift, new competitors emerge to thrive. Provided we don't get in their way by propping up bad competitors too long with subsidies. In banking, we saw the unregulated institutions on a global scale start doing all sorts of financial services. While some of these are reverting back to regulated banks in the U.S. today so they can receive subsidies, globally we have seen the emergence of immense banks that are outside U.S. regulation. These institutions can borrow and lend globally, and are creating a new approach to financial services. We can't prop up an uncompetitive Citigroup against giant global banks making profits offshore. Likewise, globalization of manufacturing now means that good, low cost cars can be produced in Korea, China and India – making rates of return on higher cost labor in the USA, Germany and Japan harder to obtain. Additionally, many of these offshore competitors (in particular Japanese and Korean) have demonstrated they can deliver proifts on far lower volumes, thus requiring faster launch cycles and more niche products to succeed. GM lacks the manufacturing cost structure (in short-term line costs as well as labor) and the new product introduction processes to survive against these competitors. In newspapers consolidating the reporting into a daily made sense when you needed vast and costly infrastructure to print and deliver the news – no longer requirements in a web-enabled news marketplace.
Economists can make strong arguments for subsidies to help short-term dislocations. Such as helping companies in New Orleans to get back up and running due to a hurricane. That is a short-term problem not related to a market shift. But arguments for subsidies offered during market shifts are strictly "public policy" efforts trading off one policy cost for another. They cannot "save" a business. The company and its employees must use the subsidy to change their Success Formula as fast as possible, so they can compete with some product in some market where they can grow — without need for a subsidy
TARP and its other stimulus products are intended to keep some air in some parts of the boat so it doesn't sink entirely. But they aren't fixing the ship. That requires new competitors emerge that are attuned to current market needs, and have Success Formulas that produce profits based upon future markets. As the economist Schumpeter said 70 years ago, we rely upon these new entrepreneurs to give us the creative new solutions that create growth in the wake of the destruction of old businesses unable to keep up with shifting markets. Let's hope we don't spend all our money trying to keep the old battleship afloat, because we'll need some to help the newer, faster, more agile competitors grow with solutions that meet current and future needs.
by Adam Hartung | Mar 23, 2009 | Current Affairs, General, Leadership, Lock-in, Television
Jon Friedman's Media Web Blog got it right today in it's article "How Fox Business and Bloomberg Can Gain Ground." Business news coverage was in the spotlight when Jon Stewart's The Daily Show on Comedy Central started attacking CNBC for being too business/executive friendly (see the running debate clips in the "on the Tape" section of the Daily Show homepage.) Whether Stewart was right or not, it didn't help CNBC to have some of it's spotlight personnel being trashed daily by a popular comentator, especially using their own tapes.
One would expect that financial news viewership is down, just because the recession has lessened interest in investing. But that doesn't mean CNBC is losing position. For that to happen, it's competitors – which are much smaller in share of market – have to do something to take advantage of the Stewart attacks. If everyone keeps doing what they always did, CNBC probably won't suffer much damage when the investing marketplace recovers.
So Mr. Friedman recommends that Fox Business News and Bloomberg news need to be the "anti-CNBC." I'm not sure what he means by that. But the idea is right. CNBC has been the market leader for several years, and it's Success Formula is Locked-in. It's viewer surveys have been with people who already watched CNBC, so its coverage has remained almost the same. And as more and more corporations and investment firms put CNBC on those flat-screen TVs in their lobbies, CNBC kept touting the market pitch that seemed to win them over as viewers and advertisers. As CNBC became apologists for these big advertisers, they reinforced their Lock-in to the Success Formula, and even as they Defended corporate titans and executive pay they extended their Success Formula onto the web with information that largely copied the television.
Suddenly, CNBC has been Challenged by a market shift. Like most market shifts, it didn't surface where CNBC expected, or how CNBC would have expected. CNBC was blindsided by the appeal of Stewart's attacks to mainstream television viewers, and many reporters who don't cover "the business beat." Like any good Locked-in organization, the CNBC reaction was to Defend itself, and do even more of what it always did claiming to be better and faster than the competition at reporting from Wall Street and the executive suites.
But right now CNBC is vulnerable. If Fox Business News and Bloomberg have been obsessing about the competition, now is the time to take advantage of its weakness. But to do that means attacking the Lock-in on which CNBC is built – it's very pro-Wall Street, pro-big company, pro-deregulation, pro-executive (and often pro-Republican party) positioning on practically every issue. Being a similar CNBC won't help the competition – even when CNBC is under attack. Because the attack is from a market shift, and the competition will win by moving to where the market moved.
So, what outlet reports on business news that isn't pro-Wall Street, pro-big company, pro-deregulation, pro-executive, pro-Republican? See what I mean – you can't really think of one. But are there people who invest in a 401K account, or a Roth IRA, or any IRA, or in their employer, or in their own home, who might be interested in a more "main street" and less "Wall Street" sort of positioning? Or a more balanced coverage of the pros and cons of America's biggest companies? Or those big company (and bank) executives? Or the issues related to debt, getting it and repaying it? Is there a market for business news that's been ignored, but Stewart has tapped into? Maybe call it the Suzie Orman approach to business news rather than the Larry Kudlow or "Fast Money" approach.
When companies obsess about competitors, they understand the competitors' Success Formulas and Lock-ins. And they prepare competitive actions that attack those Lock-ins. Entering a gladiator battle where everyone competes the same way just creates a lot of blood for spectators to watch, with no gain for the competitors. Phoenix Principle competitors don't attack where the competition is strong, but rather where the competitor is weak. Attack their Lock-in, so they can't react because they are stuck doing what they always did (and believe in it.). Right now is a good time for someone to attack CNBC and start stealing away viewers. To position themselves as a different kind of financial network that more people want to watch – especially when business news becomes less toxic and more interesting.
by Adam Hartung | Mar 20, 2009 | Current Affairs, General, In the Swamp, In the Whirlpool, Innovation, Leadership, Lock-in, Travel, Web/Tech
"Xerox chops earnings outlook as sales slide" is the headline on Marketwatch.com. Do you remember when Xerox was considered the most powerful sales company on earth? In the 1970s and into the 1980s corporations marveled at the sales processes at Xerox – because those processes brought in quarter after quarter of increasing profitable revenue. Xerox practically wiped out competitors – the small printing press manufacturers – during this period, and "carbon paper" was quickly becoming a museum relic (if you are under 30 you'll have to ask someone older what carbon paper is – because it requires an explanation of something called a typewriter as well [lol]).
But today, do you care about Xerox? If you have a copier, you don't care who made it. It could be from Sharp, or Canon, or anybody. You don't care if it's Xerox unless you work in a "copy store" like Kinko's or run the copy center for the corporation – and possibly not even in those jobs. And because desktop printers have practically made copiers obsolete, you may not care about copiers at all. In short, even though Xerox invented the marketplace for widespread duplicating, because the company stayed in its old market of big copiers it has seen revenue declines and has largely become irrelevant.
"U.S. airline revenue plunges for another month" is another Marketwatch.com headline. And I ask again, do you care? The airlines were deregulated 30 years ago, and since then as a group they've never consistently made money (only 1 airline – Southwest – is the exception to this discussion.) The big players in the early days included TWA, Eastern, Braniff, PanAm – names long gone from the skies. They've been replaced by Delta, American and United – as we've watched the near collapse of US Airways, Northwest and Continental. But we've grown so used to the big airlines losing money, and going bankrupt, and screaming about unions and fuel costs, that we've pretty much quit caring. The only thing frequent travelers care about now is their "frequent flier miles" and how they can use them. The airline itself is irrelevant – just so long as I get those miles and get my status and they let me board early.
When you don't grow, you lose relevance. In the mid-1980s the battle raged between Apple's Macintosh and the PC (generically, from all manufacturers) as to which was going to be the dominant desktop computer. By the 1990s that question had been answered, and as Macintosh sales lagged Apple lost relevance. But then when the iPod, iTunes, iTouch and iPhone came along suddenly Apple gained a LOT of relevance. When companies grow, they demonstrate the ability to serve markets. They are relevant. When they don't grow, like GM and Citibank, they lose relevance. It's not about cash flow or even profitability. When you grow, like Amazon with its Kindle launch, you get attention because you demonstrate you are connected to where markets are headed.
Is your business obsessing about costs to the point it is hurting revenue? If so, you are at risk of losing relevance. Like Sara Lee in consumer goods, or Sears in retailing, even if the companies are able to make a profit – possibly even grow profits after some bad years – if you can't grow the top line you just aren't relevant. And if you aren't relevant, you can't get more customers interested in your products/services, and you can't encourage investors. People want to be part of Google, not Kodak.
To maintain (or regain) relevance today, you have to focus on growth. Cutting costs is not enough. If you lose relevance, you lose your customer base and financing, and you make it a whole lot easier for competitors to grow. While you're looking internally, or managing the bottom line, competitors are figuring out the market direction, and proving it by demonstrating growth. And that's why today, even more than before, it is so critical you focus planning on future markets for growth, obsess about competitors, use Disruptions to change behavior and implement White Space to experiment with new business opportunities. Because if you don't do those things you are far, far too likely to simply become irrelevant.
[note: Thanks for feedback that my spelling and grammar have gotten pretty sloppy lately. I'm going to allocate more time to review, as well as writing. And hopefully pick up some proofreading to see if this can improve. Sorry for the recent problems, and I appreciate your feedback on errors.]
by Adam Hartung | Mar 19, 2009 | Current Affairs, Defend & Extend, Food and Drink, In the Swamp, In the Whirlpool, Leadership, Lock-in
"Nobody doesn't like Sara Lee." That was the jingle I still remember from my youth. For years we heard this on the TV, as we were coaxed to buy the delictable productss, frozen, refrigerated and fresh, offered by Sara Lee. But today, unfortunately, almost nobody likes Sara Lee anymore. Oh – the products are great – it's the company, primarily its leadership, that's a disaster.
It's tough to make money on food. After all, everyone has the same cost for the ingredients. And in the developed world, there's more than enough food to go around. For the last 50 years, to make money on food required adding to the product so it had more value. Such as freezing frozen potatoe slices rather than selling whole potatoes so french fries are more convenient - raising price and margin. Or adding preservatives and vitamins so the bread lasts longer than the other guy's, and may be a touch better for you. Or the biggest addition, advertising so you imbue the food with all kinds of personality elements urging customers to identify with the product. If you want to make money selling food, you have to taste better, prepare faster, sell cheaper and hopefully give me more value in myself — or else I'll by the generic product and kill your margin. And for a number of years, Sara Lee knew how to do this fairly well.
But then, Sara Lee stumbled. It quit launching new products and new brands. It's quality and branding was matched by competitors from Entenmann's to Little Debbie. Without innovation, the frozen, refrigerated and fresh pies, sausage and other products saw margins shrink. So Sara Lee hired a bright exec from PepsiCo to fix up the company named Brenda Barnes. Since then, the story has really gone downhill.
Ms. Barnes focused on her "problem," a low stock price, rather the market challenges Sara Lee faced. She built a 5 year plan to turn around Sara Lee. But his plan had no innovation involved. No plans for growth. Just the opposite, she intended to sell many assets to raise cash. And then use that cash to buy shares. And through this process, she would "prop up" the company stock to the benefit of shareholders. The company would be smaller – but she said it would be worth more – in some kind of weird economics. But, this stock ploy had worked for other industrial companies, she said, so it would work for Sara Lee. Since then, according to the chart at Marketwatch.com, Sara Lee stock has gone from 21 to 7! While the CEO wants to blame the tough economy for her performance, the chart shows that this "strategy" has been a dead loser since the day it was announced. Things have been downhill since long before banks trimmed their lending.
Now, in her latest move, the CEO wants to sell some more businesses. But in an FT.com article "Sara Lee Searches for Sell-off Suitor" there aren't any buyers for remaining businesses. As one analyst commented "it's a rather tired portfolio." That's a polite way of saying "when you don't innovate your business, why would someone want to buy it?" As another analyst said "it's not a very good business." Increasingly, instead of buying these product lines competitors realize they would prefer to compete against them, growing sales organically and profitably — without the headaches and cost of acquisition.
So, because the sale side of the strategy isn't working, we read in Crains ChicagoBusiness.com "Sara Lee to put stock repurchases on hold." After buying shares at $20, $18, $15, the CEO has decided not to buy shares when they are $7 – in order to conserve cash! Maybe if she had spent money on growing the business, expanding products and new business lines, using White Space to innovate new profitable opportunities the stock wouldn't be down to $7 with little interest on the part of any buyers.
Ms. Barnes tried to implement an industrial strategy when it can no longer work. Sara Lee brands aren't some kind of asset that will always go up in value. You can't just expect sales and profits to rise because you do more of the same, and cut costs. The world is highly competitive, and you have to prove the value of your business every day. Customers are demanding, and competitors are ready to steal them away in a heartbeat. You can't prop up the stock by trying to reduce the number of shares, unless you're ready to get down to $1 of revenue and 1 share left valued at $1. What good is that?
Sara Lee could have behaved very differently in 2005 – and CAN behave very differently now. The company clearly needs a new CEO that is ready to develop scenarios of the future which indicate what innovations could have high value. Instead of talking about what Sara Lee used to be, the CEO and management team needs to define what Sara Lee will be in 2015. And by obsessing about competitors, describe how Sara Lee can be a big winner. Then there needs to be Disruption in order to allow the company to consider the new business opportunities, and White Space with permission and resources to rebuild the Success Formula into one that can make above-average rates of return and grow! If Sara Lee will take these actions the company still has time to meet market challenges. But if it doesn't act fast, after 4 years of decline and a very shifted market, nobody's going to have any Sara Lee to nibble on sooner than Ms. Barnes is admitting.
by Adam Hartung | Mar 18, 2009 | Current Affairs, Defend & Extend, In the Rapids, In the Swamp, Innovation, Leadership, Web/Tech
We hear people say that eventually there will be no PC. Did you ever wonder what "the next thing" will look like that makes the PC obsolete? For most of us, working away day-to-day on our PC, and talking on our mobile phone, we hear the chatter, but it doesn't ring for us. As customers, all we can imagine is the PC a little cheaper, or a little smaller, or doing a few new things. And same for our phone. But, for those who are making the technology real, imagining that next way of getting things done – of improving our personal productivity the way the PC did back in the early '80s – it is an obsession.
I think we're getting really close, however. In what Forbes magazine headlined "Apple's Explosive iPhone Update" we learn that Apple is dramatically enhancing what it's little hand held device can do. USAToday hit upon all the new capabilities of the iPhone in its article "Apple iPhone software prices may rise," but these are just the capabilities us mere users can see. On top of these, Apple has provided 1,000 new Application Programming Interfaces (APIs). These allow programmers all kinds of opportunities to do new things with the iPhone (or iTouch). We all know that the netbook direction has small devices doing spreadsheets, presentations and documents – and that is, well, child's play and not the next move to personal productivity. You have to go beyond what's already been done on these machines if you want to get new users – those that will make your product supercede and obsolete the old product. And these APIs open that world for programmers to do new things on the iPhone and iTouch.
So go beyond your PC and phone with your thinking. With just one of the new offerings, Push, your iPhone could recognize your location (via GPS), know you are walking in front of a Pizza Hut (example) and ring you that this store will give you $2.00 off on a lunch pizza. Right now. And it'll create that magical bar code so the minimum wage employee at the register can scan your phone to get the price right when you check out. Or link your phone via bluetooth to your heart rate monitor in your running watch and automatically email the result to your cardiologist for the hourly profile she's building to determine your next round of pills – with a quick ring and reminder to you that you best slow that walk down a little if you want to get positive, rather than negative, impact. Or you get an alert that UBS just posted on the web a new review of GE (in your stock portfolio) and your phone automatically forwarded it to your broker at Merrill asking him for a comment and executed a stop-sell order at $.30 below the current market price via the on-line ML order application. By the way, you were supposed to turn at the last corner, but you were so busy listening to your alert that you missed the intersection so the GPS is re-orienting you to the destination – especially since there is construction on the next street and the sidewalk is closed – as per the notice posted by Chicago Streets and Sanitation this morning.
What makes this interesting is that it's the device, plus the open APIs, that make this stuff real and not just fairy dreams. That makes you wonder if you really want to lug around that 7 pound laptop, now that you get the newspaper, magazines and your books from Amazon all on the iPhone as well. And when you're delayed at O'Hare you can download last night's episode of Two-and-a-half Men and watch it on the screen while you wait to board. The laptop can't do everything this new device can do – and the new thing is smaller, and cheaper, and easier. This is all getting very real now. And with Google and Palm close on Apple's heals, it's now a big race to see who delivers these applications.
Does your scenario of the future have all this in mind? Are you planning for this level of productivity? Of information access? Of real-time knowledge? Are you thinking about how to use this capability to improve returns so you can explode out of this recession in 2010? Do you think you better take some time now to check?
In the meantime, IBM wants to buy Sun Microsystems according to the Marketwatch.com article "IBM May get Burnt." Talk about "other side of the coin." Why would anybody want to buy a company with declining sales? In IBM's case, probably to eliminate a competitor. Now that is typical 1980s industrial thinking. "So last century" as the young people say. The financial services and telecom industries are "soft" – to say the least. IT purchases are lowered. IBM and Sun are big suppliers. So IBM can buy Sun and hope that it will get rid of a competitor, and then raise prices. And that is typical industrial era – circa Michael Porter and his book Competitive Strategy – thinking. Lots of people are probably saying "why not, sounds like a good way to make money."
At least one problem is that this is no cheap acquisition. Ignoring integration problems, even though Sun is down – a huge amount down – the acquisitions is still over $6billion. Sure, IBM has that in cash. But what happens in information businesses is that competition never goes away. With budgets low, what sorts of PC servers (maybe from HP) running Linux are coming out that the customers will compare with Unix servers – and push down prices even if IBM has no Unix server competition? What opportunities for outsourcing applications to offshore server farms, running Chinese or Korean-made boxes with Linux, taking the business away from IBM exist? Or what applications will be eliminated by banks and telcos that need to axe costs for survival now that markets have shifted? You don't get to "own" an information-based business, and you don't get to control the pricing or behavior of customers. IBM needs to wake up and realize that it's investment in Sun within 2 years will be washed away.
We should be heading forward, not backward. Especially during this recession. Those companies that deliver new products that exceed old capabilities will be winners. Those that seize this opportunity to Disrupt markets – like Apple is doing – will create platforms for growth. Those that try applying industrial practices will find themselves looking in the rear view mirror, but never find that lost "glory land" that disappeared in the big recession of 2008/09. As investors, we need to keep our eyes on the growing companies building new applications, rather than the ones trying to regain yesterday.
by Adam Hartung | Mar 17, 2009 | Current Affairs, General, Leadership, Web/Tech, Weblogs
Today the Seattle Post Intelligencer printed its last newspaper. "Seattle Paper Shifts Entirely to the Web," reports The New York Times. There was no buyer for the paper, so Hearst Corp. shut down the print edition. In the process it laid off 145 of its 165 news staff. This leaves the Seattle Times alone printing in the market, but it is struggling financially. As people lament the closing, is this a good or a bad day?
The on-line paper already achieves about 4million hits/month, and it hasn't really started trying to be competitive on-line. The site (www.seattlepi.com) already has 150 bloggers – so you could make a case it has more reporters than were let go from the old newsroom. And it has made agreements to pick up content from Hearst Magazines, xconomy and TV Guide amongst other partners. In an article "Executive Producer Michelle Nicolosi talks about the new SeattlePI.com" at the site she says "We're going to focus on what readers are telling us they want and on what makes SeattlePI.com essential and unique….My staff and I are thrilled to have the chance to prove that an online-only news operation can make money and do a great job serving readers….Our strategy moving forward is to experiment a lot and fail fast…We have to reinvent how things are done on many fronts…We have a 'survival of the fittest' attitude about content that isn't working." Sounds a lot like White Space to me — White Space no longer encumbered by trying to keep open a printed edition that wasn't meeting customer needs at a profit.
You could make a case that this is a GREAT DAY for the organization, and its marketplace. Firstly, this organization is taking seriously the task of building a profitable on-line newspaper. Unlike most on-line news organizations that are backwater extensions of a print paper which doesn't care about the on-line market, this is an organization that must "sink or swim" – with leaders that are establishing new metrics and show every indication of using them to run a viable business. When you enter White Space, you prefer to be an early participant, so you gain understanding fast. Like the on-line www.HuffingtonPost.com which is blowing the doors off readership with its national coverage of news and politics (and mentioned frequently by the editor – another good sign, learning from the competition).
As an early participant, with a real commitment to succeed (no transfers back to the old organization here), it's not just about "the product" but the business model as well. Not discussed was how many ad salespeople were being kept on-board to push ad sales for the new organiztion. Hopefully as much energy will be placed on learning how to craft ad products that customers want and will pay for as is being placed in creating compelling content that attracts readers. We can't expect SeattlePI.com to rely on Google to sell all their ads – and I doubt the editors do either. Building a new Success Formula requires being open to revenue generation as well as production and delivery (don't forget that figuring out how to sell "clicks" was as successful to Xerox as inventing the copier.) My worry right now is that as good as the home page is – and it's good – I didn't see a button at the top, or bottom, or anywhere to "place an ad" – something I hope they address quickly. But for now I'll let it slide in the hopes that compulsive, obsessive competitiveness caused this slip (for if it did, that demonstrates the commitment to White Space that makes it work.)
What we all know is that the old days of newspapers is gone, and won't come back. (Hear that Sam Zell and folks at The Chicago Tribune and Los Angeles Times?) iPhones and Kindles are just the start of making newspapers completely obsolete – even for those who don't fancy news via computer. The faster organizations get out there to build a new Success Formula, the more likely they'll find a way to survive. And the faster they jettison old notions about what makes for "good news" and "good ad sales" the faster they'll get to that model. Those who are the first to get out there and learn have the greatest odds of becoming a winner, because they have the longest time to experiment, fail and succeed.
Here's wishing all the best to the re-energized www.SeattlePI.com. May the editors, reporters, bloggers and salespeople give us new insight to the future of news in the ubiquitously connected world.
by Adam Hartung | Mar 12, 2009 | Current Affairs, General, Leadership, Lock-in
What do you think of when someone says "The Dow"? Most people think of the Dow Jones Industrial Average – a mix of some roughly 30 companies (the number isn't fixed and does change). But very few people know the names on the list, or why those companies are selected. As time has passed, most people think of "The Dow" as "blue chip" companies that are supposed to be the largest, strongest and safest companies on the New York Stock Exchange. For this last reason, it's probably time to think about killing "The Dow." It's certainly clear that what the selection committee thought were "blue chip" a year ago was off by about 50% – with many names gone or nearly gone (like AIG, GM, Citibank) and many struggling to convince people about their longevity (like Pfizer).
Quick history: "The Dow" is named afrer the first editor of the Wall Street Journal Charles Dow (co-founder of Dow Jones, owner of the Journal) who wrote in the late 1800s. Building on his early thoughts about markets, something called "Dow Theory" was developed in the early part of the 1900s. Simply put, this said to get a selection of manufacturing companies, and average their prices (the Dow Jones Industrials). Then, get a selection of transportation companies and average their prices (the Dow Jones Transportations [see, you forgot their were 2 "Dows" didn't you]). Then, watch these averages. If only one moves, you can't be predictive, but if both moves it means that businesses are both making and shipping more (or less) so you can bet the overall market will go the direction of the two averages. So it was a theory trying to predict business trends in an industrial economy by following two rough gages – production and transportation – using stock prices. [note: the first study of Dow Theory in 1934 said it didn't work – and it's never been shown to work predicatably.]
Don't forget, in this most quoted of all market averages the third word is "Industrial." The reason for creating the average was to measure the performance of industrial companies. And across the years, the names on the list were all kinds of industrials. Only in the most recent years was the definition expanded to include banks. But that was considered OK, because above all else "the Dow" was a measure of leading companies in an "industrial" economy and the banks had become key components in extending the industrial economy by providing leverage for "hard assets".
Marketwatch.com today asked the headline question "Is the Dow doing its job?" The article's concern was whether "the Dow" effectively tracked the economy because so many of its components have recently traded at remarkably low prices per share - 5 below $10 – and even 1 below $1! Historically these would have been swapped out for better performing companies in the economy. Faltering companies were dropped (like how AIG was dropped in the last year) – which meant that "the Dow" would always go up; because the owners could manipulate the components! [the owners are still the editors at The Wall Street Journal now owned by News Corp.] But even the editor of the Dow Jones Indexes said "While we wouldn't pick stocks that trade under $10 to be in the Dow [Citi and GM] are still representative of the industries they're in, and their decline in the recent past is part of the story of the market recently."
Recently, "the Dow" has taken a shellacking. And the reasons given are varied. But one thing we HAVE to keep in mind is that any measure of "industrial" companies deserves to get whacked, and we should not expect those industrial companies to dramatically improve. In the 1950s when the thinking was "what's good for GM is good for America" we were in the heyday of an industrial economy. And that phrase, even if never really used by anyone famous, made so much sense it became part of our lexicon. But we aren't in an industrial economy any more. And the failure of GM (as well as the struggles at Ford, Chrysler and Toyota) shows us that fact. If "the Dow" is a measure of industrial companies - or even more broadly, companies that operate an industrial business model – it is doing exactly what one should expect. And to expect it to ever recover to old highs is simply impossible.
The industrial era has been displaced, and in the future high returns will be captured by businesses that operate with information-intensive business models. Google should not be placed on the DJIA. We need a new basket – a new index. We need to put together a collection of companies that represent the strength of the economy – where new jobs will be created. Companies that use information to create competitive advantage and high rates of return — like how in an industrial economy businesses used "scale" and "manufacturing intensity" and "supply chain efficiency" to create superior returns. If we want to talk about "blue chip" companies that are more likely to show economic leadership, gauge the capability to succeed and the ability to drive improved economic output, we need a list of companies that are the big winners and demonstrate the ability to remain so by their superior understanding of the value in information and how to capture that value for investors, employees and vendors.
This index is not the NASDAQ. It would include Google, currently leading this new era as Ford did the last one 100 years ago. But other likley participants would be Amazon for demonstrating that the value of books is in the content, not the paper and that the value of retailing is not the building and store. Apple has shown how music can eclipse physical devices, and is leading the merger of computer/phone/PDA/wireless connectivity. Infosys is a leader in delivering information systems in 24×7 global delivery models. Comcast is leading us to see that computers, televisions, gaming systems, telephones and all sorts of communications/media will be delivered (and used) entirely differently. News Corp. is blurring the lines of media spanning all forms of content development as well as delivery in a rapidly shifting customer marketplace. Nike, or maybe Virgin, is showing us that branding is not about making the product – but instead about connecting products with customers. Roche for its ownership of Genentech and its deep pool of information on human genetics? What's common about these companies is that they are not about making STUFF. They are about using information to make a business, and capturing the value from that information.
RIP to the Dow Jones Industrial Average. It's future value looks, at best, unclear. What we need to do now is redefine what is a "blue chip" in this new economy. What are your ideas? Who should represent the soon to be exploding marketplace for biotech solutions based on genetics? Who will lead the nanotech wave? Who would you put on this new "blue chip information index"? Send me your ideas. And in the meantime, we can recognize that even those who created and manage the venerable "Dow" aren't really sure what to do with it.
by Adam Hartung | Mar 11, 2009 | Current Affairs, General, Leadership, Lifecycle, Lock-in
All businesses hurting in today's economy must significantly change if they want to improve their performance. In the early 1900s the world saw the advent of several new machines ushering in the industrial era. But, the economy was based on agriculture – and largely the "family farm." As the industrial era expanded landowners tried to Defend & Extend their old business models by leveraging up the family farms – borrowing more and more money to plant "fencerow-to-fencerow" as it was called. Borrowers overworked the land, and with all the debt piled on when a glitch happened (a combination of drought and falling commodity prices from expansion) the mountain of debt collapsed. The beginnings of the Great Depression hit the farmers in the 1920s. The coming of the industrial revolution made old Success Formulas based on land ownership and agriculture obsolete – and no amount of debt could defer the shift forever. It took 10 years (into the 1940s) to fully transition to the new economy, and when we did Ford, GM and other industrial giants overtook the land barrons of the earlier era.
I was reminded of this today when discussing scenario planning with Diane Meister, Managing Director of Meridian Associates in Chicago. Today she sees the deteriorating Success Formulas in her clients. Companies that keep trying to apply Industrial era Success Formulas in what is now an information economy. When they aren't prepared for big shifts – it can be devastating. But those who do prepare can improve position quickly. She told me how one of her clients had an excellent business selling toys to FAO Schwartz and other top toy chains. But Meridian could see that the growth of Target created a viable scenario for a big shift in how toys would be distributed. She implored her client to prepare for possibly the failure (note – failure – not just weakness) of several big toy chains. Good thing she did, within 2 years most of her client's retail distribution was bankrupt. Only by using scenarios to prepare for a big market shift were they able to survive – in fact come out a leader – due to the big shifts happening in retail as a result of the change in markets. (Don't hesitate to contact her firm at the link – good stuff!)
As we transition into the information economy, big changes are going to happen to all businesses. The source of value, and competitiveness, has changed. Today the Allstate Insurance's CEO was quoted in Crain's "Insurer's Should Have Federal Regulator." And in an article at Marketwatch.com, "Dimon Backs Regulation", the CEO of J.P. Morgan Chase told the U.S. Chamber of Commerce he backs additional mortgage regulation. Both of these leaders are looking forward, and recognize that markets have shifted. New regulations will be critical to success. Their future scenarios show it will take a different approach to be a global competitor in 2015 – to be a winner in the global information economy that won't support industrial era Success Formulas.
Not everyone gets it. Also at Marketwatch.com in "AT&T Chief Sounds Alarm", the AT&T CEO decries rising health care costs and worries system changes will hurt his competitiveness. Wake up! What sort of scenario is he using that expects America to keep the current health care system – and the current employer-paid insurance? Even insurance companies now recognize the system is broken and needs change. In no other country are health care costs "baked in" to the cost of a company's P&L. Think about it – even where there is national health care (Britain, France, Canada, Germany, etc.) the companies don't carry the cost as a line item they must recoup via sales and margin. Elsewhere, the cost of health care is born by society through taxes. The reality is that any American company trying to compete has a whole host of incremental costs on its shoulders because we ask employers to pay in order to keep personal income taxes low. Until we change the whole basis of how America chooses to insure its population, employers are being forced to carry costs not seen by offshore competitors. In a global marketplace – this sort of "yesterday thinking" will not survive. Employers should be leading the charge for national health care – just so they can get the issue out of their plethora of problems and off the backs of their P&Ls!
Those that don't change will end up out of the game. Because they didn't do effective scenario planning, that considered the rise of "upscale discounters," FAO Schwartz (mentioned earlier) and Zany Brainy's failed — not even a Tom Hanks movie could keep customers coming in the doors. Markets are merciless in taking down companies that can't globally compete on what's important. We can prop up GM for a short time, but no country can afford to try to keep its people working (avoid unemployment costs) and insured by pumping money into a dysfunctional car company that isn't competitive. Sears has ignored the trends, and is one of the "walking dead." Once the world's greatest retailer, it built what was for years the world's tallest building (now 2nd). But now Crain's has reported in "Willis will get Sears Tower naming rights" that soon the great building the great retailer built in its home town of Chicago will likely be renamed for a London insurance company. Of course, Sears sold the building years ago in its effort to subsidize its failiing retail business – and hasn't even been a tenant in the building for decades. It won't be long before no one even remembers Sears. Sears remained Locked-in to what it once was, and ignored scenarios about a different future that would require change.
The world has shifted. If your scenarios for the future expect a return to old practices – well, that isn't going to happen. If you want to be a leader in the next economy, you better start building new scenarios TODAY!
error correction - in yesterday's blog I inadvertently said I was "not" twittering. Talk about a badly mistaken typo! I meant the opposite. I am twittering and hope you all hook up so we can tweek each other.
by Adam Hartung | Mar 10, 2009 | Current Affairs, Disruptions, General, Innovation, Leadership, Lock-in
Those of you who follow my blog should have noticed a new look and feel today! If you receive this missive in your email box via an RSS feed, I encourage you to stop by www.ThePhoenixPrinciple.com to see the new look.
As most of you know, I'm quite serious about helping organizations realize that they all can rejuvenate. It's a mission I started in 2004, and devoted my life to in 2007 when I started writing Create Marketplace Disruption. And now, in the midst of this terrible recession, it is clearer than ever that we need to realize that different phases of the lifecycle take different management approaches. And for most companies today, old fashioned notions of "focus" and "hard work" simply won't pull them out of this recession and toward better returns.
So I've rededicated myself to this mission. And part of that rededication is hiring some professional help with this website! Thanks to Public Words for the new design – and this is just a small part of what they will be doing to help me over the next year to increase the awareness of this mission and expand the base of people who want to help their organizations recharge, reignite and regrow! I'm also spending more time public speaking to companies, leadership teams, industry events and multi-company conferences about what we need to do so we can get back to growing! (If you know of groups, please let them know how The Phoenix Principle and Adam Hartung can help them get growing again.)
So, let me know what you think of the new look and feel! Your comments can help the site be more productive for us all. If you want things added, speak up! I read all comments, whether here or emailed my way, and my new team will consider them all. In addition to the look and feel, please offer your ideas for how I can drive more links, and attract more readers to our mission. Some of you offered great ideas recently (special kudo to reader Bob Morris for his insightful recommendations) about how to better use tags, technoroti tags and trackbacks. Please keep telling me places I need to link, and other things which can help grow readership. Your help in spreading the word is greatly appreciated.
Also, if you haven't noticed I'm not twittering. So you all are invited to reach out to me on Twitter – there's even a link to twitter me on the blog now! I'll be getting my facebook page up soon as well.
I read a fascinating report published today you can dowload from Bank of America claiming that this recession actually began in 2000 – and we're somewhere between 60% and 70% of the way through. Real estate could decline another 15%, and the big equity averages may drop another 20-40%! Whether that's true, or maybe we're closer to "the bottom", for most of our organizations to be prosperous again will take a different approach to management. One that overcomes Lock-in to outdated Success Formulas (often created in a previous industrial era) by obsessing about competitors to learn about market trends, never fearing disruption – internal or in the marketplace – and utilizing White Space to test new business ideas which can create better, higher return Success Formulas that fit newly evolved markets.
"Hiring Plans or Firing Plans" is the headline on Marketwatch.com. Previously, the lowest number achieved for "net hiring plans" was in 1982 when a net 1% of firms were planning to hire. But in the entire 47 years of the Manpower hiring survey (since 1962) never was the index a negative – where more firms plan to lay off than hire!!! That was until now, with the index at -1%. Just one year ago the number was +17%! (Find the complete Manpower Employment Outlook Survey at this link to their site.) More of the same "ain't going to cut it". Instead of looking for reasons to lay off workers, we have to realize that there are a lot of reasons to hire more! If we follow the right management principles – The Phoenix Principle – we can get going again! If we encourage Disruption and keep White Space alive we can continue to grow!
A past client of mine recently discovered a way to introduce a new line of products with 80% less development cost. But the new product is being delayed because the CEO feels he must lay off workers and slow down product launches – due to what he's reading about the economy. The CEO is afraid that a new product launch, which would cement the company's #1 position ahead of competitors gnawing at their position the last 4 years, would be a tough sell to the Board of Directors. The CEO is clearly focusing on the wrong thing – because his Board would be happier with growing sales and profits, and a reinforced #1 market position, than anything else! Especially now! But this company is almost afraid to grow, locked in fear of what to do next. Instead of reallocating resources to growth projects, and jettisoning "sacred cow" products that are low-profit and declining in sales volume, management prefers to follow today's popular wisdom of cutting costs, cutting new product introductions, even cutting revenues by sticking with historical products nobody is buying - so that's what they will do!!!
So, please be a part of this journey. Participate, don't just be a spectator. Provide your feedback and comments. And share the word! Nothing is more valuable than debate. Great ideas are developed in the marketplace, not in someone's head! Pass along the message, and get others involved.
This blog can now be reached directly via:
by Adam Hartung | Mar 6, 2009 | Current Affairs, Defend & Extend, In the Swamp, Leadership, Lock-in
"U.S. Unemployment Rate Jumps to 25 Year High" is Crain's headline today (see article here). "Payrolls sink 651,000; jobless rate soars to 8.1%" headlines MarketWatch (see article here). It's the fourth consecutive month job losses exceeded 600,000 we are reminded, as 4.4 million becomes the latest tally of those losing jobs in this recession. Those unemployed plus those with part-time-only work has risen to 14.8% of the population – a number that the labor department says may reach 1930s proportions. There are fewer people working full time in the USA today than in 2000 – a combination of the "jobless recovery" followed by a whopping recession.
I remember 25 years ago when the unemployement numbers were this high. I was graduating business school, and there was a real fear that not all graduates would find a job (a horrible situation at a place like HBS). The economy was in terrible shape after several years of economy micro-rule under President Carter. A stickler for detail, and a workaholic, Carter had implemented complex regulations to control prices of oil and other energy products, as well as most agricultural products and commodities. The oil price shocks, combined with runaway printing of money by a highly accomodative Federal Reserve during the 1970s, had sent the American economy into "stag-flation" where growth was abysmal and inflation had skyrocketed.
In 1982, things didn't look good. And the Reagan-led republicans introduced an amazing set of recommendations to break out of the rut America's economy was in. A bold experiment was set up, to test whether "supply siders" were right and if we put our resources into creating supply (capacity) would demand follow and drive up the economy. The big test was a combination of historical tax cuts combined with increased federal spending on defense projects run by industry (in other words, changing from giving money directly to people through welfare or government jobs and instead giving money to businesses to build things – infrastructure and military.)
No one knew if it would work. Smaller government and lower taxes had been a political mantra for various political parties since the days of Benjamin Franklin. But what most Americans believed when they elected Ronald Reagan was that what had recently been tried was not working – it was time to try some new things.
Today is 2009, and while unemployment rates may look similar – not much else is like 1982. Then, marginal federal income tax rates were 80%, and most states relied heavily on "revenue sharing" money from the feds back into states to pay for many progroms – like roads and schools. Today, top rates are in the low 30s, and states have jacked up (from 2x to 10x) sales taxes, property taxes and even state income taxes to cover the loss of federal dollars. Interest rates on home mortgages were 14% to 18% in 1982 – and that was on a variable rate loan with 20% down – because you couldn't get a bank to offer a 30 year mortgage (for fear of inflaction wiping out the loan's value) and no one offered low-downpayment loans. There was a housing shortage, but people struggled to afford a home with interest rates that high! And materials cost (due to inflation) was driving up construction costs more than 12-15%/year. Today mortgages are available at 5% fixed for 30 years, and the prices of homes are dropping more than 10% annually while empty properties seem to be everywhere begging for buyers at discounted prices.
The signs of an impending collapse have been pretty clear for the last few years. First, there was the "jobless recovery." While the economists kept saying the economy was doing well, the fact that there were no new jobs was quite obvious to a lot of people. There was even considerable surprise at how robust the economy was, given that it had no job creation. But it didn't take long for several economists to recognize that the source of growth was largely a considerably more indebted consumer. From the government (federal, state or municipality) to the individual. Those who did have jobs were taking advantage of low interest rates to purchase. On metrics debt/person, debt/GDP, debt/earnings dollars, debt/payroll dollars were all hitting record high numbers as lower quality debt (lower quality because there was increasingly less earnings behind each loan) provided the economic fuel. The economic research team at no less a conservative stalwart than Merrill Lynch was predicting as early as 2006 big problems – and a revisting of 650 on the S&P 500.
Although the economy in 2005-2007 looked nothing like that of the late 1970s, it was pretty clear that a declining economy and high unemployment were soon to come. The 1980s solution, which unleashed the longest running bull market in history, dealt with the problems of the 1970s. But, as the decades passed increasingly the 1980 tools had less and less impact on sustaining growth. Cutting marginal tax rates on dividends when marginal rates on income is already at 30% has far less impact than halving tax rates on everyone! Lowering SEC regulations on capital market access for new hedge funds has less impact than deregulating pricing and labor costs for whole industries like airlines and trucking! What worked well in the past, and became Locked-in to the American economy, simply had lower marginal impact. Year after year of Lock-in produced weaker and weaker results. And opened the doors for aggressive competitors to copy those practices unleashing prodiguous competition for American companies – in places like Asia, India and South America.
All Locked-in systems become victim to these declining results. It's not that the ideas are bad, they just get copied and executed by aggressive competitors who catch up. Markets shift and needs change. People that once focused on buying a new car start focusing on how to retire. People that once wanted great schools want better parking. People that wanted cheaper and better restaurants want cheaper and better health care. The old approaches aren't bad, but trying to do more, better, faster, cheaper of the same thing simply has declining marginal benefit. Results slowly start declining, until eventually they fail to respond to old efforts at all.
Comparing our unemployment rate today to that in 1982 is an interesting historical exercise. We can see similar outcomes. And what's similar about the cause is that Lock-in to outdated practices led to declining performance. That the practices were about 180 degrees apart isn't the issue. Debating the merits of the practices in a vacuum – as if only one set of practices can ever work – simply ignores the pasasage of time and the fact that different times create different problems and require different solutions. The successful practices that fired a tremendously successful business community and stock market in the 1960s ran out of gas by the 1980s. Now, the practices of the 1980s have run out of gas in the competitive global economy of 2009. In both instances, those leading the economy – the companies, economists, banks, regulators – stayed too long with a set of Locked-in practices.
Today we need new ideas. To overcome rising unemployment requires we look to the future, not the past for our recommendations. We must start obsessing about competitors in China, Hong Kong, Singapore, Brazil, Argentina, Sri Lanka, Thailand and India – competitors we belittled and ignored for too long. We must be willing to Disrupt old practices to try new things – and use White Space to experiment. The Missile Defense Shield (mid-80s) turned out to be a project that wasn't appropriate for its time – but that we tried it gave a shot in the arm to all kinds of imaging and computing technologies which helped improve business. Those kinds of experiments are critical to figuring out how we will create jobs and economic growth in a fiercely competitive global economy where value is increasingly based on information (and neither land nor fixed assets - which dominated the last 2 long waves of growth for America).
