The source of dysfunctional Lock-in — GM

In 1993 Pulitzer Prize winning author David Halberstam wrote a book about the 1950s – called appropriately "The Fifties".  He takes time in this book to talk about GM – a company today that has seen its leadership embarrassed, and its value for investors disintegrate in the face of mounting competition.  It's humiliated executives have asked Congress for a bailout to save the employees and customers from total failure – because they seem unable to figure out a solution themselves.  Read what Mr. Halberstam, a New York Times reporter, had to say about GM's rise to prominence:

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"No one at GM could ever have dared forecast so much prosperity over such a long period of time.  It was a brilliant moment, unparalleled in American corporate history.  Success begat success… The postware economic boom may have benefited many Americans, but no one benefited more than General Motors.  The average car, which had cost $1,270 at the beginning of the decade, had risen to $1,822 by the end of it…twice as fast as the rest of the wholesale cost index.

There was in all of this success for General Motors a certain arrogance of power.  This was not only an institution apart; it was so big, so rich, and so powerful that it was regarded in the collective psyche of the nation as something more than a mere corporation:  It was like a nation unto itself, a seperate entity, with laws and a culture all its own.

The men who ran the corporation, almost without exception, came from small towns in America… Everything about them reflected their confidence tht they had achieved virtually all there was to achieve in life.  Others, critics, outside Detroit, might believe that these men were not such giants and might believe that they did not so much create that vast postwar economic wave as they had the good fortune to ride it… As for the intellectuals, if they wanted to drive small foreign cars, live in small houses, and make small salaries, why even bother to argue with them?

As success of the company grew, its informal rules gradually became codified.  The culture was first and foremost hierarchical:  An enterprising young executive tended to take all signals, share all attitudes and prejudices of the men above him, as his wife tended to play the sports and card games favored by the boss's wife, to emulate how she dressed and even to serve the same foods for dinner.

The essential goodness of the corporation was never questioned.  It as regarded as, of all the many places to work, the best, because it was the biggest, the most respected, made the most money and, very quietly, through bonuses and stock, rewarded its top people the most handsomely."

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If this was the world of GM, codified as Mr. Halberstam explains, it becomes easier to understand the behavior of GM in the 1960s, 1970s, 1980s and 1990s - as competitors kept chipping away at market share and power.  From 50% share of all automobiles sold in the 1950s, GM's share is now only half that.  Executives, managers and even union employees quickly came to believe (in the late 40's and 50's)the future would always be like the past.  But Toyota, Honda, Nissan, Subaru, Kia and others didn't accept GM's claim to a monarchy.  And now, everyone is paying for it.

Lock-in is built when companies are doing well.  And Lock-in keeps the organization from changing.  It is easy to belittle challenges, and blame poor performance on others.  As competitors evolve, at times making big improvements, the Locked-in organization will explain away poor performance – but resist accepting the need to change.  In the end, if we don't learn how to Disrupt the Lock-in and use White Space to become more competitive we all end up in the Whirlpool.  Even GM.

Get out of the foxhole and Win – Tractor Supply and Papa John’s

We keep hearing about all the bad news in this recession (Tribune Company, GM, Circuit City for example).  You could easily believe there is no good news.  But if we look a little harder we can see that there are businesses which are looking forward and taking actions to build market share – winning against competitors that are reacting by retrenching and hiding in a foxhole.  There is a better way to manage when times are tough than cutting costs and "waiting for times to get better."

Ever heard of Tractor Supply Company (see chart here)?  If you live in a big city, probably not.  As the name implies, this retailer has largely supplied products to farmers and competitors in the agrarian economy.  Of course, the number of individual farms has been declining for decades as the economy shifted from agrarian to industrial – and now to information.  So you would expect Tractor Supply to be disappearing from the retail landscape, especially during times so difficult that much better known retailers are disappearing and filing for bankruptcy.

But that is not the case.  Tractor Supply realized that while "production" farms are fewer and becoming a less attractive market, on the periphery of more and more cities there were people with unsupplied needs.  And as cities expanded, and corporations moved headquarters to the suburbs, these ex-urban and suburban families were increasing the number of pets – and in some cases picking up pets like horses and other animals traditionally considered livestock.  "Gentleman farms" of only 5 or 10 acres were increasing, where families escaped urban lifestyles to enjoy a connection with gardens, small crops and a few animals.  They also needed tools, and hardware for fences and buildings – in short a panoply of products not readily available at Home Depot.  And with that insight to the changing market, Tractor Supply has been expanding.  The chain has 834 stores (and you never heard of them?).  The company opened 20 new stores last quarter, compared to 21 a year ago and 70 this year compared to 63 last year.  They are now opening 2 stores in outlying Chicago.  The company is growing more today than last year, and moving into new markets where even Wal-Mart has chosen to leave. (Read article about Tractor Supply growth moves here.)

Another great example is Papa John's pizza restaurant chain (see chart here).  We keep hearing about how people are eating out less now than before.  The marketplace is struggling, as chains such as Bennigan's have shut their doors, unable to draw enough customers.  So analysts keep talking about more failures in restaurants.  Yet, Papa John's ignored the analysts and figured out a way to grow.

Instead of restricting itself to the "tried and true" revenue growth approaches used by most chains – such as television advertising and newspaper coupons – Papa John's studied how people were using the internet, and created White Space to develop new marketing approaches.  They created a one-day campaign, flooding websites such as MySpace.com, NHL.com and others with display ads, via Google ad placement.  The result was a 20% revenue jump.  By driving people to order on-line, rather than old-fashioned telephone orders, they saw average ticket sizes increase 10-15% due to increased ordering.  And they have connected many more customers to Papa John's email marketing.  For example, on Facebook the number of Papa John's fans increased from 10,300 to almost 187,000 – an 18X increase in just 3 weeks!  Now Papa John's is adding more on-line opportunities for customers, such as advance ordering (up to 21 days – say for a party) and "repeat last order" capability to make transactions fast and easy.  As the world moves to the web, Papa John's is learning to use the web to connect with customers and grow!  (Read about Papa John's on-line marketing programs here.)

It's easy to bemoan a recession, say there's little you can do, and start whacking at costs.  It's easy to get down in the dumps, and lose interest in trying to do better.  Tough market news can breed discontent and worry and inaction.  In the cost-cutting process you well might lose some of your most valuable employees – and leave yourself quite unprepared for future competition (read here at Harvard Business Press about how traditional recessionary cost cutting reduces competitiveness).  Even worse, while you tread water, you greatly increase your vulnerability to competitors who focus on market shifts, analyze competitors to upend them, Disrupt their old behaviors to create future focus, and use White Space to try new things which can create a much better returning Success Formula in the changed marketplaceThese Phoenix Principle companies are the ones that will lead future growth in revenue and profits by not running for foxholes today, instead concentrating on how they can Disrupt and use White Space to become a far more successful competitor.

$15 billion for leftovers? Force a fix at GM, Ford and Chrysler

So we now hear that Congress will loan $15billion to GM, Ford and Chrysler intended to keep them going concerns until at least March.  We've been told that there are requirements on the loans that will better the industry.  But honestly, there's nothing new being proposed that makes any difference, nor the proper teeth in Congress's proposed bill.  (Read about the bill here.)

The bill limits executive bonuses and severance packages.  But why does it let management (and the Boards of Directors) keep their jobs?  It is clear that these leaders, and their management teams, led these companies into desperate circumstances.  They put their bondholders, equity investors and employees all at risk.  They passed the "brink" and got to the point of requiring government assistance to stop a cataclysmic disaster.  So why are these people left in their jobs?  How can anyone expect a really changed industry if the people who sold off assets for 2 decades trying to Defend & Extend a thoroughly out of date and broken Success Formula are given the money to invest?

Oh, we can expect a "car czar" who is supposed to oversee these loans and assure a the industry invests appropriately for change.  Who's the right guy for this job (don't forget – I applied!)?  We now read that the lawyer who oversaw the handout of money to survivors of 9/11/01 victims.  This is, of course, the right qualifications to evaluate business plans, investment rates and innnovation programs for an industry.  He's shown he can hand out money – but where has he shown he knows anything about re-engineering a very broken, large company?  Where does he have credentials for un-knotting the Lock-in that keeps these companies dysfunctional?  And how is he supposed to stand up to management teams that claim to have superior knowledge about auto company management – despite driving these companies into the proverbial financial ground.

The union leadership apparently wants Board seats in exchange for concessions.  What difference will that make?  Do union leaders know how to turn around companies where they encouraged Lock-in that cost them thousands of jobs?  Are they trying to reach back to the kind of union practices that kept coal stokers on trains long after electric automotives were introduced?  Defending & Extending out of date union practices won't fix these companies either.  What these union leaders need to be asking for is government promises to secure the unfunded pension obligations, and creating a government program to preserve heath care costs that are likely to be stripped in an effort to lower variable costs.  There is no bailout that can cover these costs indefinitely – and that is where labor restructuring needs to focus.

As investors, Americans deserve better than leftover thinking for their investment.  More of the old management won't fix the problems.  What's required is White Space to make significant changes:

  • Auto design has to change from backward integration and standardization for manufacturing to forward-thinking which brings customers
  • Distribution has to allow customers more opportunites to buy than the old-fashioned, and tedious, dealer structure which puts off almost all customers (and makes buying an unpleasant event).  Customers deserve the right to buy direct if they like, and from dealers if they enjoy what dealers offer.
  • Manufacturing has to change from "scale" to "build to order".  Flexibility has to overtake 80 year old industrial design practices which have made the products inflexible and too expensive.
  • Pension reform is essential.  The overhead costs of pensions makes these companies unviable.  This will require government intervention.
  • Health care reform is essential.  Perhaps Michigan should follow the Oregon example (and Massachusetts), and be a leader in developing programs to have state-assisted insurance coverage for everyone.  Perhaps this should be an experiment in changing from employer paid health coverage, which offshore competitors do not have to shoulder, to self-paid coverage with guaranteed protection.

These are complex problems.  They defy simple solutions.  They require White Space.  Cut Saturn free (again, like when it was founded) to experiment with new solutions.  Give other nameplates the indepence to experiment with other possibilities.  Monitor performance, see what works, and migrate toward what succeeds.

Now is the time to implement Disruptions and try something new.  When the airline industry was grounded in 2001 there was a tremendous opportunity to restructure from unprofitable hub-and-spoke systems with outdated practices to new approaches using White Space.  But neither government, nor the industry, took advantage of the stoppage to really try something new.  Everyone was in a rush to start operating again, with practically no change.  A huge opportunity was lost.  And that sounds like the direction we're headed with the desperately uncompetitive auto industry.

We should not make that mistake again.  Now is the time to Disrupt these companies.  Fire the executive teams and the Boards.  They've never been shy about firing employees or vendors.  Put new management in place that understands how to manage innovation – rather than Lock-in.  Get people in the jobs who don't want to Defend & Extend what's broken – but instead want to make changes and learn what will make these companies world class once again.  And put in place competent oversight that can make sure change happens.

What will you cost us Sam Zell – Tribune bankruptcy

A year ago Sam Zell was telling Chicago that he knew how to make money in newspapers.  He was certain, absolutely certain, that Tribune Company newspapers – including The Chicago Tribune and The Los Angeles Times – would soon be returned to higher readership, higher ad rates and greater profits.   Now, Tribune Company is preparing for bankruptcy (read article here.)

Sam Zell did a horrible job of scenario planning.  He didn't look into the future and develop scenarios about what was likely to happen in news.  Instead, he simply assumed that readers would return if he made a few format and editorial changes, the economy would strengthen and he could depend on advertisers returning as well.  He expected a fast, big payback for his investment.  Just like he'd done in real estate all those years.

Sam Zell had a very Locked-in Success Formula.  He had spent a lifetime buying property, usually properties already in locations demanded.  All he had to do was fix up the property and let growing demand for the scarce resource – his building in a demanded location – drive up the value.  He didn't stick around to make money off rent.  He didn't run a business that made a product and sold it.  He bought properties, dressed them up and sold them at a profit.  To him, Tribune Company was a property that was being ignored.  All he had to do was fix it up a bit, wait a bit, and sell it to someone for more than he paid.

Oops.  That Success Formula doesn't work when customers are walking away from the property to pursue a better one.  News seekers in droves are going to the internet for their news.  They no longer want to browse a newspaper – understanding that takes time, and it gives only a single source.  The internet gives them fast answers to their queries from multiple sources.  And advertisers are going where the readers are going – to the internet as well.  The cost for a printed medium is high, and the results are hard to prove.  Whereas internet ads can be tracked for number of page views, number of click-throughs and even sales.  The readers are more, and the follow-up is superior.  Advertisers have found it easy to forget about newspaper ads, especially in a soft marketplace.

Meanwhile, the Tribune Company Success Formula was firmly stuck in the 1990s.  From sales people to editors, denial about shifting reader needs was everywhere.  Even though each news company – from newspaper to radio and TV – had great access to reporters and first touch at many news stories, they did not realize that readers were looking for that news on the web first.  Each newspaper and station was Locked-in to pushing the news through its format, ignoring the enormous audience opportunity they had in their local markets by using cross-media approaches, including the web.  There was no one approaching customers with multi-format advertising opportunities.  Nor was the company investing heavily into web sites or portals that could attract large numbers of on-line readers.  The on-line environments were under-invested, and selling ads was completely fractured.  There was limited, at best, sales efforts to get advertisers onto the weak websites running news from each individual business unit.

What Tribune Company needed was not only scenario planning that identified the range of opportunities for ad sales – but a sincerely intense analysis of on-line competitors.  Instead of bragging that the company had leading newspapers in major cities, the leadership should have recognized its fast declining share of total news coverage – due to shifts in how people acquire their news.  By focusing internally, cutting costs and trying techniques like new formats, Sam Zell missed the opportunity to really study competitors and figure out how to transform Tribune into a competitive news company – like, say, News Corp. 

And while he was busy firing people and making changes on the periphery, Sam Zell was unwilling to really Disrupt Tribune Corporation He didn't change the business model – the Success Formula.  He whacked the chicken coop, scaring employees, readers and advertisers alike as he talked about firing people until he made money.  But he never caused his leadership team to really stop and talk about the future of news.  They were too busy looking for people to lay off or protecting their own jobs — while Sam was trying to find buyers for the Cubs, Wrigley Field and the Tribune Tower as a potential condo project.

And Sam's Success Formula had no space for White Space.  Sam didn't see any reason to try new things – like having salespeople sell internet ads as well as print ads.  Or trying to drive traffic to the Tribune or L.A. Times web sites.  As a property "flipper" extra-ordinary, Mr. Zell was not interested in developing a new business model.  So none was developed – nor any energy spent trying to create one.

Now, America's second and third largest cities are at risk of losing their primary local newspapers.  The suppliers are seeing their customer shrink, and possibly their accounts receivable jeopardizedAdvertisers are wondering how they reach their local customers.  And employees are looking for new jobs.  Meanwhile, citizens are wondering who will be out interviewing the mayors, governors and congresspeople of their fine states.  Who will be supplying the news? 

The cost to Sam Zell Defending & Extending both his Success Formula and that at Tribune Company is enormous.  The bond holders – most certainly pension funds and bond mutual funds - will take a horrible hit.  The employees and employees of suppliers pay as well.  And the citizens, dependent upon a robust news community will also suffer.  It's too bad Mr. Zell didn't talk less, and listen more – implementing White Space to make a leading news company that would impress his customers across the U.S.A.  I guess he'll have a lot of time to read Mr. Murdoch's newspapers (like the Wall Street Journal), watch Mr. Murdoch's Fox television stations and look at Fox's web site (have a MySpace page yet Sam?)  after Mr. Zell's equity value gets wiped out in bankruptcy.  Surely the creditors will ask for a new leader – who faces a much more difficult challenge now that the resources have been gutted by Mr. Zell.

I’ll take that job, GM/Ford and Congress

Well the heads of GM, Ford and Chrysler are back in Washington asking Congress for cash.  According to Senator Dodd it's a sure thing they'll get it (read article here).  And accordinto the the Government Accountability Office even if Congress doesn't approve bailout money, Treasury or the Federal Reserve can provide assistance from the TARP fund (read article here).  So, it looks like something will happen.

This time the auto companies are saying they intend to "reinvent" themselves with the money.  Uh-huh.  And exactly who's going to lead this re-invention?  Why the same leaders that got into this problem.  Now, do we believe that?  A lot of people in Congress have their doubts – seeing as how the bankers didn't seem to change much after being told they would get bailed out.  So these Congressional folks are saying they want the auto leaders to report back on their plans to change – and of course GM's head said he'd be happy for the oversight.  "It would be very helpful for us, whether it's a board or an individual, to have someone to work with on this, to submit our proposals and then for that person to say,'OK, don't agree with that.  You've got to change this," said GM CEO Richard Wagoner. (Read quote and more here.)

So Senator Dodd and Speaker Pelosi – for the good of America – I volunteer for the job I'll review GM, Ford and Chrysler's plans for innovation and report back on the likelihood of them revitalizing the industry.  Now that I've put that on the table – I'll just wait for your phone call or email – you can reach me right here through this blog if you like (see the "contact me" area).

Oh, you don't think I'm the guy Mr. Wagoner had in mind?  Why not?  Do you suppose he was looking for some "industry guru" who is already sympathetic to his claims that the problems are not of management's making – but rather due to economic circumstantces?  Do you think Mr. Wagoner prefers someone who is more traditional, on corporate boards that have been agreeable to CEOs for years – accepting of their tough jobs and approving their extreme paychecks?  Do you suppose he doesn't want somebody who has expertise in innovation at all, but rather someone who wants to slowly seek change via one small, incremental step at a time, because that's the way big companies do things?  Perhaps someone with government experience, used to the pace of change in government agencies?  Or perhaps a lawyer who will be sure all actions are within current legal boundaries – whether they actually create benefit or not? 

I do think GM and Ford can be saved.  But I don't think current management will do it.  They are so Locked-in, so used to the "boundaries" of convention, that there is no way they can create companies competitive with Honda, Toyota and Kia.  The first thing any oversight agency should do is change the leadership teams, attack the industry Lock-ins and establish White Space to build a new company.  Maybe look at Tessla – the electric car company auto execs love to laugh at — but that hasn't asked for any money from Congress as it's built its sold-out sports car using laptop batteries – for some new management.  Or ask John DeLorean to quit dealing drugs long enough give up a few ideas (Ok, that is going to far).  But surely, with all those talented graduates at the University of Michigan and Northwestern there has to be some people ready to actually do things differently.

GM needs more than oversight.  It needs change.  Big change.  Let's hope Congress takes Mr. Wagoner's words to heart and finds somebody who knows something about innovation to watch over the billions they give these companies.   

Forget about “Focus”

For years business books have preached "focus".  Getting the business to understand its "core", and then focusing on that "core" has been the theme of books from "Competing for the Future" to "Good to Great."  It's almost become a foregone conclusion that the best business practice is to focus.

But when markets shift, it's the focused competitor that hurts the most.  Just look at the auto companies.  Things have turned badly for auto manufacturers.  In November, sales were down some 30% + to levels not seen since October 1982 (26 years ago) (read article here). 

But a closer look is revealing.  GM sales down over 41%, with revenues at its most recent acquisition - Hummer - purchased to increase revenues in the auto business down over 62%.  Ford was down 31%, helped by a less decline in its pick-ups.  Chrysler down a whopping 47%.  Toyota down almost 34%, Nissan over 42% and Honda more than 31%.  With numbers like that, you have to be concerned for all auto companies.

And that is where you can smile and be glad that one of these companies chose not to "focus."  Unlike all those other companies, Honda doesn't just make and sell cars.  It sells manufactures and sells motorcycles, boat motors, snowmobiles, lawn mowers, electric generators, snowblowers, leaf blowers, robots and jet airplanes.  It sells directly to customers, sells through traditional retailers, has distributors and dealers.  This distribution of business provides Honda multiple opportunities to grow, rather than constantly trying to Defend & Extend its car business.  Can you imagine any of the U.S. car manufacturers saying it has that many different products, or multiple sales channels?

In the early 1980s GM started down this future-oriented road.  It once owned EDS, and was the largest supplier of IT services globally.  GM once owned Hughes Aircraft, making it the largest manufacturer of aircraft avionics.  These businesses offered GM the opportunity to grow beyond autos and the struggles the company had with unions and dealers.  But, in order to "focus" GM sold both EDS and Hughes – and used the money to Defend & Extend its focus on cars.  Just look how that turned out for investors and employees.

"Focus" is highly overratedEarly in a business's life cycle focus is necessary in order to create a Success Formula that helps the company grow.  But, as time passes the Success Formula becomes increasingly at risk of market shifts which jeapardizes returns.  The best way to avoid getting trapped in low returns is to keep your eyes on the future, and make sure you keep White Space alive building new opportunities to exploit future market opportunities.  It would have been easy for critics to attack Honda for being in so many businesses – but in times like these having multiple businesses pushing into future growing markets reduces the problems from severe market shifts.   

Looking for an enemy – inside News Corp.

You don't have to agree with Rupert Murdoch's politics to recognize his business savvy (in fact, ignore them if you want to understand his business acumen).  A new book is coming out today on his life, and according to reviews and interviews with the author, it continues to reinforce how Mr. Murdoch followed The Phoenix Principle for building News Corp. into a major, industry leading, corporation. (read about the book here)

Don't forget that News Corp. began as a small Australian newspaper company.  As large as Australia is physically, it is sparsely populated.  While you may recognize an Australian accent, I bet you struggle to name an Australian corporation.  It's relatively small population, abundant natural resources and remote geography (don't forget, it's an island continent) means it is easy for Australia to be missed on the global business landscape.  But it is from these humble roots that Rupert Murdoch saw great opportunities for growth if he first moved into newspapers around the globe - eventually becoming what is now America's largest media empire.

Not only does Mr. Murdoch plan for the future, rather than fixating ont he past, but that Mr. Murdoch obsesses about competitors is made clear in his biography.  His fixation on CNN helped move Fox News from a fledgling idea to the #1 rated news channel.  He fixated on CNBC when deciding to recently launch Fox Business Network.  Obsessing about competitors, especially when in a different field, is a trademark of Phoenix Princicple companies that make long-term higher rates of return.  They let competitors lead them into new businesses – where they learn and grow.

Mr. Murdoch is certainly Disruptive, and his biographer describes him as "the least corporate person I've ever met in corporate life."  And this sort of willingness to Disrupt is what made it possible for News Corp. to win the bidding for MySpace.com.  News Corp. is not just a newspaper company – it has vast interests in fim, broadcast television, cable television, direct broadcast satellite, magazines, inserts, books and the internet.  Such widespread White Space keeps News Corp. out front of its competitors. (See News Corp holdings and business interests here.)

Contrast this with Ted Turner's empire, for example.  Like Rupert Murdoch, Mr. Turner started with a company that was almost exclusively a billboard enterprise – and almost exclusively in the south.  Yet, he was able to see that the future of broadcast media was much stronger than billboards, leading him to move forward with projects in radio, broadcast TV and eventually cable television.  Launching CNN as the world's first global news network put his company in the forefront of the media industry.

But, eventually Mr. Turner sold his company to another television, film and magazine company – Time/WarnerRather than continuing to branch out with White Space onto the internet, Mr. Turner agreed to a "grand play" by merging with AOL.  Instead of White Space where Turner could learn to expand and grow, with multiple investments in the new media environment, Turner/Time/Warner became trapped in a very costly, and over-committed, situation with AOLToo early in the lifecycle, and with insufficient learning opportunities, this became a grand disaster leaving Time/Warner a far weakened competitor – and making it possible for Google to emerge as the leading American on-line media company.

I don't ask that you like Rupert Murdoch.  Nor that you like News Corporation.  Nor that you agree with the heavy political overtones of Mr. Murdoch and those on his executive team.  In fact, feel free to disagree with their politics vehemently.  But if you look at their business results you see an organization that followed The Phoenix Principle to great success.  And, as the media business keeps changing, we will see many competitors disappear – especially those too closely aligned with print and broadcast news.  But I would not expect News Corporation to be one of those struggling to survive.  Its practices have positioned the company well to continue growing, despite dramatic industry dynamism.  And that's what being a Phoenix Principle company is all about.

Thanksgiving Travel- Airlines Struggle to Profit

Thanksgiving is tomorrow, so the crush of people flying through O’Hare airport has started.  It’s natural to think about the largest airline in Chicago – United.

United was on the brink of failure last summer as jet fuel prices skyrocketed.  In response, United started charging people for baggage.  Take a couple of bags along and your baggage costs could be 50% or more of your ticket price for a round trip.  United also raised prices, and cut flights.  None of these actions were likely to make United a more competitive airline – and weren’t designed to.  United leadership was using “foxhole management” – trying to survive.  Of course the problem is that it doesn’t take long sitting in a foxhole to get blown up.

Last week I had a business trip from Chicago to south Florida.  Imagine my surprise to learn that United no longer services 2 of the 3 airports in south Florida, and for the remaining destination it has one flight each direction daily.  The result?  To get to south Florida from Chicago (something done by many people in the winter), I had to fly U.S. Airways connecting through Charlotte.  Not supporting any loyalty to United.  And the latest word is that United intends to further cut flights (read article here).  United is the example of a company that is slowly killing itself in its effort to save its old Success Formula.

Meanwhile, Southwest Airlines keeps growing.  After United left South Florida, Southwest raised its fares on those flights, from its lower-cost Midway airport, to over $800!  It has been a profit boon for Southwest that United is cutting flights – and allowing Southwest to keep on growing.

When oil prices took their dramatic rise last summer, United was already a very weak competitor.  Although it was large, it had never addressed the market changes making its hub-and-spoke system and militaristic operating practices less viable.  Not the shutdown on 9/11/01, nor the bankruptcy filing, caused United to alter its business practices established 3 decades ago.  Thus the oil run-up put a weak competitor on the edge of viability – with a nudge over the other side.  United’s reaction demonstrates how, when confronted with the non-viability of its outdated Success Formula, an organization can remain entrenched – and uwilling to take actions that would save it.  Locked-in, without White Space, United was unprepared to deal with yet another market shift.  Intead, United chose to take minimal actions short term, HOPING somehow things would change back to the good old days, long ago, when the company was less unprofitable (keep in mind that over its lifetime since deregulation United has never consistently been profitable.)

Trying to save a troubled business, in rough economic waters, during a period of market change, cannot be done by doing more of the same – “better, faster, cheaper.”  Market Challenges pile up, until a punctuated equilibrium changes the market for all competitors – and rendering some no longer viable.  To be viable long-term takes a willingness to recognize the future must be different from the past, that competitors are more successfully growing and are worthy of intense study, that Disrupting old patterns which keep the status quo in place makes it possible to leverage White Space to create a new Success Formula.  Unfortunately for all those travelers out there this holiday – that’s not what United has done.

Invest in the future, not the past

Are you encouraged by the Federal Reserve's actions to purchase $100B debt from Freddie Mac, Fannie Mae and Ginnie Mae?  Government leaders say this is necessary to "get the markets moving again" (read article here). 

Unfortunately, this action is really no different than if the government purchased $100B of SUVs from GM, Ford and Chrysler to "get the auto market moving again."  Or, if they purchased $100B of coffee from struggling Starbucks, whose per store sales are predicted to fall all through 2009 (read article here) to "get the coffee shop market moving again."  Or if they purchased $100B of homes, now that prices have fallen over 17% in the last year and sales are down at least that much (read article here) in order to "get the real estate market moving again".  None of these actions will help the banks, or the auto companies, or Starbucks or homebuilders be more competitive.  At best, any of these (including the Fed's planned action) is a stop-gap effort attempting to protect the status quo – in the middle of dramatic market change. 

When markets shift, the impact is often delayed by ongoing efforts to Defend & Extend the status quoEventually, however, the market shift is unavoidable – and in what seems a very sudden shift change is very dramatic.  The market moves from one equilibrium to another.  And it is at this shift point (what's called a punctuated equilibrium) that the weaknesses in old competitors become highly visible.  Like Citigroup, GM, etc.  At the same time, the opportunities for new solutions become visible as well.

When violent market shifts happen, efforts to return to the old status quo never work.  Look no further than Japan's economy in the 1990s – which suffered a recession for more than a decade as the country's leaders refused to adjust to the changed competitiveness of Japan in the global economy.  Today, 15 years after Japan's recession began, that economy has still not recovered on a consistent growth plan because the leaders keep spending resources trying to protect old business practices which do not work in today's global economy.  Consequently, Japan keeps falling further behind China, India and other more competitive economies - and the companies in those economies.  Is this the direction we should lead America today?

Future success depends upon changing to meet dynamic market requirementsSo far, none of the TARP activities, or the spending by the Treasury or Federal Reserve, are meeting this need.  While Congress denies aid to everyone else, a situation likely to change, the spending on financial assets is not creating any new jobs, nor helping the advancement of any innovations in technology, or business practices.  Increasingly, however, people are beginning to realize that attempts to shore up these old industry practices are not preparing the American economy, and its companies, for global competition.

What's needed is leadership that will use funding to improve competitiveness – not attempt to preserve the past.  Spending funds on unnecessary business trips, unnecessary perquisites, bonuses and dividends does not increase the likelihood of having a vibrant competitive set of industry players in 2010.  What does work is installing leaders willing to develop new Success Formulas which are more competitive – by intensely focusing on competitors, Disrupting current practices and using White Space to innovate.  If Congress is going to make citizens stakeholders in these businesses, it is within their purview to demand Disruptions – or create them – so the recipients move forward rather than waste money in a vainglorious effort to find the past.

Where’s the next Lee Iacocca when you need him?

The auto execs have not made their case in Washington D.C.  Speaker Nancy Pelosi is saying Congress has not yet seen a plan in which they can invest taxpayer moneyAlmost half of Americans don't think a bailout should be undertaken (read article here).  

For those of us who've been around a while, reflections on the last time an auto company asked for help are inevitable.   It was 29 years ago, from September into December of 1979, that Lee Iacocca (former Ford executive) and the UAW asked Congress to provide $1.5billion in loan guarantees (not a loan – not cash – just a government guarantee) in order to save Chrysler from bankruptcy.  The economy was bad, but nothing like the banking crisis we're in now, and a recalcitrant Congress was not happy.  Nonetheless, they prevailed and Democrat Jimmy Carter signed guarantee approval in January, 1978. (Read about the Chrysler loan guarantee here.)

By all accounts then, and certainly later, Lee Iacocca was nothing like Rick Waggoner (GM CEO) or Alan Mulally (Ford CEO).  Iacocca had been fired from Ford because he told management they were going the wrong direction.  He was a person willing to dissent, to Disrupt, and he'd shown it at Ford before ever coming to Chrysler.  Additionally, as a new leader at Chrysler, he was willing to demonstrate changes were afoot by proposing from the beginning to place the head of the UAW on the Chrysler Board of Directors.  After decades of labor wrangling, this was a significantly Disruptive act never before considered – and showed a leader willing to do things very differently.  Mr. Iacocca even promised to take no salary his first year – he'd only get paid if his plan worked allowing him to earn a bonus according to predefined metrics. (Imagine that – an executive with real skin in the game.)

Iacocca was never a fellow to do what was "easy" or "natural".  A feisty fellow with Italian roots, he spoke his mind.  When Ford was making boring cars, and considered the Edsel "every man's car" (the Edsel was an enormous failure), Mr. Iacocca conceived of the Mustang — a car that was small, sporty and affordable.  Something otherwise not on the American market scene.  That car, more than anything else, saved Ford in the 1960s.  Even today, Ford is hanging its future and much of its brand image on the 45 year old Mustang.

When he got to Chrysler, Iacocca kept that focus on the future.  At a time when automakers were struggling to figure out a profitable way to develop cars that fit American needs he brought out the mini-van – a practical vehicle never before seen.  As the economy improved he felt a convertible would be a good idea.  He asked his head of engineering how long it would take to make a convertible for him to test – and the exec told Mr. Iacocca 3 years.  CEO Iacocca told his engineer he didn't understand – Iacocca wanted him to pull a car off the line, take a saw and cut the top off.  That should take about 4 hours.  The action was taken, and Mr. Iacocca took the topless sedan for a ride around the block.  In less than an hour he was convinced bringing back convertibles would be a huge boost to Chrysler profits.

Mr. Iacocca didn't look to his customers for ideas, he looked at future needs and competitors.  Mr. Iacocca studied the cars, and manufacturing processes, from Europe and Japan.  By obsessing on everything they did he found ways to make better cars that were more desirable and less costly.  At a time when the Japanese Yen was a screaming buy compared to the dollar he changed processes to permenantly lower car costs – not relying on layoffs or more traditional cost cutting – making his company much more competitive than Ford or GM.

Mr. Iacocca never was slow to Disrupt those around him, or the market.  As discussed, he was ready to launch new car concepts quickly, and go to the union with changes in work rules and compensation schemes.  He created White Space everywhere from car design to manufacturing process groups to union discussions in order to find ways to make his company competitive with offshore players – and the most preferred of the American auto companies.

Ledership makes a difference.  Congress has asked Messrs. Waggoner and Mulally to sell off the private jets, cut executive pay and produce a plan that shows the future will not be like the past.  And that's fair.  But it's not at all clear these leaders are of the Iacocca (or Jobs) way of thinking.  If they keep trying to preserve what used to be normal, things aren't likely break their way from those in charge of giving a bailout.  Mr. Iacocca is now retired, and far removed from the demands and dilemmas of the current auto manufacturers.  But there are other managers out there – other leaders with the ability to focus on the future, obsess about competitors, Disrupt and implement White Space to turn around these troubled companies.  I sure hope someone puts them in the right place to persuade Congress fast – before a couple million people lose their jobs and this recession turns into a Depression!