by Adam Hartung | Sep 16, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Openness
There has been a lot of press recently about the terrible situation for retailers. With house prices plunging, incomes stagnating for 6 years, and credit tight we’ve entered a consumer-led receission in the USA. Analysts are giving plenty of reasons for retail companies to do poorly. About all the big boys are seeing declining revenues – and even the behemoth Wal-Mart is barely growing and it’s doing all the price-chopping it can. Walgreens, the nation’s fastest growing retailer, has slowed its store openings. Jewelers are going bankrupt. A single stumble seems to have led clothier Steve & Barry’s into bankruptcy despite a great reputation with college students. In the middle of this, one company is going into the retail business, opening new stores in hotly contested markets like Chicago. L.L. Bean (read story here).
L.L. Bean has been around a long time, selling product via catalogs. Of course as the internet blossomed and web pages replaced catalogs, their sales on–line grew as well. They’ve long made money as a catalog-based retailer. Their distinctive product line of outdoor-oriented gear, coupled with their catalog distribution, has been the L.L. Bean Success Formula. Yet, now in one of the worst retail markets in recent history the company is moving into traditional brick-and-mortar retail. To traditional analysts, this seems nuts. But L.L. Bean is showing all the strengths of a Phoenix Principle organization. Like Virgin, that launched a profitable airline when everyone said airlines were impossible to make money, L.L. Bean is moving now when the traditional retailer’s Success Formulas are most at risk.
- Traditional retailers are suffering. This shows that the industry Success Formula is producing diminishing returns. The industry is primed for change, because Locked-in existing players are trying to "hunker down" and do "more of the same." This provides a great opportunity for a new player with game-changing ideas to enter the market.
- L.L. Bean’s stores are not targeted at existing retailers. They are targeted at what will make retail stores successful in future years. The plan is all around what people will want in the future to shop at retail, not what has worked in the past.
- L.L. Bean is focused on competitors, and how it can beat them. This move is not about trying to Defend & Extend the old L.L. Bean business, it is about taking advantage of weakened competitors at a time of market shift. L.L. Bean isn’t opening these stores in Chicago (and other places far removed from its traditional market of Maine and the Northeastern U.S.) because customers told them to – they are doing it as a way to be more competitive. For a long time the midwest was a difficult competitive market because of Lands End based in Dodgeville, WI. But since being acquired by Sears Lands End has grown considerably weaker, creating an opportunity for L.L. Bean.
- L.L. Bean is disrupting it’s old Success Formula. These stores have nothing to do with the old centralized catalogue sales and distribution tactics. And the stores are industry Disruptive environments that are as different from a Sears, Wal-Mart, Eddie Bauer or Aeropostale as they can be. L.L. Bean isn’t just trying to sell more stuff in new markets, it is creating an entirely new approach to how it sells.
- L.L. Bean is not trying to extend its old Success Formula. It is using White Space to develop a new Success Formula that will allow the company to be far more successful in 2015 than it was in 2005 or 1995 or 1985. By using White Space since launching its first stores, L.L. Bean is experimenting – trying new things – and learning how to be more successful in a shifting retail marketplace.
When markets shift the existing leaders often stumble. By trying to Defend & Extend their old Lock-ins they hope to regain past results. But shifting markets make old approaches create declining returns. The result is an opening for new competitors, with new Success Formulas, to take advantage of the shift. These new competitors, whether brand new, or a company willing to retool like L.L. Bean, use White Space to figure out what works in the new marketplace. So even when you hear how bad things are in any market, and the existing players are talking about cutting back, there’s always room for a winner. If they are willing to undertake Disruptions, and use White Space to learn what creates the new Success Formula.
by Adam Hartung | Sep 11, 2008 | In the Swamp, In the Whirlpool, Leadership, Lock-in
Leaders of organizations, especially those with lots of employees and/or big revenues, have a leveraged impact when making decisions. If a manager with 8 people in a group makes an error, it’s felt by those 8, plus those all 9 work with. If the CEO of a business with over $1B of revenue, or more than 1,000 employees makes a bad decision think about the leverage that creates. Lots of people suffer. Not only the employees, but customers, investors and suppliers.
This is very apparent now at Tribune Company and especially the newspapers it controls – including the Los Angeles Times and the Chicago Tribune. These aren’t the only 2 businesses owned by Tribune Corp., but their success, or lack therof, has a serious impact on the 35-50 million people that are tightly connected to the markets where they report the news. Yes, it is true that newspapers no longer have the power they once did. But there’s no doubt that lots of our news is still dependent upon writers and editors working at these two newspapers. If we’re to root out political corruption at the state or local level, or report on energy crises, or agricultural concerns we depend significantly on reporters at big city newspapers. As reported in BusinessWeek recently (read article here), these newspapers are now at significant risk of failure due to the leadership of Sam Zell.
Back at the end of 2006 Tribune’s equity value was down 65% from its high in 1999. Revenues had been declining since 2004. Cash flow was being propped up with draconian cuts across the organization. Pink slips littered the hallways, and long-term employees were being handed early retirement plans. It was clear that management was doing everything possible to dress up the corporation for a higher valuation to some potential suitor – which was proving hard to find. Most people were very wary of the proposed pricing, recognizing that changing market dynamics in media were pushing advertising more toward the web, and coming right out of newspapers. Meanwhile, in cable targeted channels were fragmenting the market leavng variety channels running reruns or second-rate programs (like CW) with precious few eyeballs and struggling ad revenues. This was all bad news for Tribune Corporation. Something needed to be done that would help Tribune find a new way to compete and grow against the ever-more-popular internet and ad-placement behemoth Google.
Enter Sam Zell, who had a Success Formula he was ready to apply. Throughout his history he had bought beaten up real estate, borrowed a gob of money against it, done some fixing up, leased it out and then sold it for a big gain. In real estate, this had always worked. So he was ready to apply his Success Formula to newspapers. He had no plans to change the operating Success Formula at Tribune Corporation, believing the revenue problems would self-correct. He read 3 papers every day, so he figured people would be like him and return to reading newspapers soon enough. And advertisers would follow. He was going to own the Cubs and Wrigley field, but he didn’t much like baseball, so to him this was just another asset to leverage and sell. Same for those 25 second-tier television stations around the country. He didn’t intend to change the Tribune’s operating Success Formula, just tweak it a bit. And overlay his own Success Formula based on lots of debt, waiting for recovery, doing some simple sprucing, and being overbearing with employees.
Of course, as I predicted in my several blogs at the time, this was a recipe for disaster. The Tribune Corp needed a big dose of internal Disruption, and plenty of White Space to figure out where advertisers were going and how to appeal to them. Tribune needed to move hard and fast to more web understanding, and dramatically rethink how to manage its independent television stations in a world where they were the weakest of weakening broadcast stations – as well as the most generic of cable stations. Revenues were going to continue to decline – and facing a predictable economic weakening they would decline a lot and very fast. The last thing Tribune Corporation needed was more debt. It needed to conserve its assets to pay for a transformation of the company – after it could figure out what that transformation needed to be!
After adding an additional $8billion debt, growing it to $13.5billion,, and investing only $350million of his money, Sam Zell set off on a path of value destruction. And who holds the bag? The bondholders of course. Someone once told me that debt was not supposed to carry risk – that’s what equity was for. But Zell convinced investment bankers to sell his extremely risky bonds to various holders (mostly pension funds) so he could finance an overpriced deal. Now those bondholders have seen as much as a 65% reduction in the value of their investments. Were the pensioners to know they wold be so glad! Mr. Zell’s Success Formula, so tied to real estate during boom times, was the worst thing that could be applied to the struggling newspapers at Tribune. But he was able to apply it using other people’s money – so he has little to lose and much to gain while the bondholders have much to lose and almost nothing to gain.
Meanwhile, employees across Tribune are falling like flies exposed to DDT. And the news products in L.A. and Chicago are getting weaker with each passing month as journalists aren’t there to write. The people of these great cities are simply left knowing less about what’s happening in their metropolises. Everyone in both cities is getting a cold slap from this folly.
Mr. Zell keeps saying he’ll do whatever he has to do to make money with Tribune Corporation. But that’s not true. What he means is he’ll do whatever his old Success Formula recommends he do. So now, as his own newspaper boss says, they are chewing off a leg to try and get out of the falling revenue trap. This is not an approach that will make for a strong Tribune Corporation. It is a path toward a corporation with no resources, weak products and customers left without a solution. What Tribune needs is White Space to figure out how to compete as a 21st century media company. But instead all energy is being diverted toward paying off the bonds Mr. Zell sold to fund his all-too-risky bet on debt.
We all have a responsibility to understand our Success Formulas. And to understand those of the people who would lead our organization. If we see that Success Formula Locked-in, we can bet on more of the same – regardless of the outcome. Mr. Zell would rather fail as a cost-cutter than lead Tribune Corporation to its next legacy of success. But unfortunately, it is all the people dependent on Mr. Zell who will suffer most – the vendors, customers, investors and employees. They will suffer from his outdated Success Formula even more than he will – as he jets each weekend to between his home in Malibu and his home in Chicago. Leaders have the greatest responsibility to recognize their Success Formula Lock-ins, and be open to Disrupt and use White Space to find solutions which can succeed. Because when they fail, everyone around them fails as well.
by Adam Hartung | Sep 10, 2008 | General, In the Swamp, Leadership, Lock-in
CEOs and investment bankers love to talk about, and do, mergers. So do journalists. A big combination of two companies gets people all excited. There is always a lot of talk about how "synergy" will allow the two companies to be worth more combined than they were worth independently. Yet, there are no academic studies that prove this point. Quite to the contrary, academicians will tell you over and over that the synergies don’t appear, and the combined companies are worth less than they were worth independently. Usually quite quickly. So, if CEOs like to make these deals – why don’t they work? Why does Mercedez Benz buy Chrysler, only to see the value plummet and eventually sell the company off to a private equity firm?
Let’s take a look at AOL/Time Warner (see chart here). In the 1990s these two companies were leaders in their markets. AOL had pioneered internet access to the home, and was clearly #1. Time Warner had become the dominant player in cable television, also #1. Both were growing at double digit rates. To the CEOs, investment bankers, and most onlookers putting these two entities together brought together the best of both markets – creating a no-lose media company destined to be pre-eminent in the next decade. But the cost of the merger ended up far outweighing any benefits. The value of the combined company plummeted. Worth almost $100/share in 2000, today the equity trades for about $15/share (an 85% value decline.) Billions of dollars in investor equity was wiped out. And today as AOL tries to revive itself as an internet player it is derisively referred to as "AO Hell" or "Albatross OnLine" (read about AOLs newest move here.) Why didn’t the great media company that was predicted develop?
All businesses have Success Formulas. Whether profitable or not, whether growing or not, all businesses have Success Formulas. These Success Formulas are a nested, tighly integrated combination of the business’s very Identity, it’s Strategy for growth and the Tactics which support the Identity and the Strategy. All behaviors, internal sacred cows, hierarchy and organization, decision making systems, IT system, hiring procedures, asset utilization programs, metrics and costs are organized to support that Success Formula. The business isn’t an ideological being as often described by executives or journalists – it is a very tightly-knitted Success Formula operated day in and day out, every day, in pursuit of doing those things that made the business grow.
In a merger, the two business Success Formulas collide. As sensible as a combination may be, as powerfullly as they share customers, as efficiently as they may use the same infrastructure, as aligned as their strategies appear, they have two different Success Formulas. And when it comes time to merge – neither simply disappears. Suddenly, to achieve the great projected value, it is expected that some kind of new Success Formula will appear that achieves the lofty future goals. But how will that happen? These Success Formulas grew out of years of development during the businesses’ growth. This sudden combination is no substitute for the evolutionary development of a Success Formula. At the time of merger, regardless of the size or success of either business, they two suddently confront themselves as two gladiators in the colliseum. Which will reign?
And that is when things go wrong. The only way the desired value can be achieved is if a new entity is created that actually develops an entirely new, third Success Formula. But given the high stakes, who wants to take the time to develop this? Who believes they can afford to define a new Identity, to craft a new Strategy out of market success, and to build a whole new set of Tactics that support the new Strategy? Who will set up White Space to start bringing together pieces, testing the development of anything new and putting plans against the rigor of market acceptance? The CEO and investors want results – and now!!! So what happens? Inevitably, one of the Success Formulas gets picked as the winner (usually by the new CEO), and that one sets about to convert the other entity into the "designated winning" Success Formula. At this point, many of the value creators of the losing Success Formula disappear. People leave. Products are dropped. Customers, or whole markes, are dropped. Manufacturing and service systems are eliminated. Very rapidly, the exercise becomes a cost-cutting frenzy as two of everything is converted to one. And the "winner" becomes a subset of what the two starters brought to the merger.
At AOL, Time Warner bought AOL. The Time Warner guys remained in charge. Pretty quickly, they set about converting AOL into a Time Warner Success Formula. And in the fast-changing internet world, AOL quickly started losing value. Time Warner froze AOL into place as a dial-up service with specific extras. They flooded mailboxes with CDs begging people to sign up for a free 3 month service. But as bandwidth expanded, and Comcast along with the phone companies installed broadband to more and more homes and businesses, the value simply evaporated out of AOL. Time Warner remained Time Warner, but AOL soon became an out-of-date internet dinosaur.
Creating value via merger is a very tough thing. One company, ITW, does it very well (see chart here). But ITW doesn’t try to put its acquisitions onto common systems, or bring them into one operating unit. ITW is quite unique in allowing its acquisitions to create value out of their markets as they see fit. Most CEOs can’t stand this sort of independence, and they move quickly to convert the merged company into the Success Formula of the acquirer. And within months, much of the value originally sought is gone. Just like at Time Warner and AOL.
by Adam Hartung | Sep 8, 2008 | General, In the Rapids, Leadership, Openness
Google (see chart here) is 10 years old. That’s right, it was just 1998 that $100,000 was invested to start up Google (read article here). Today the company is worth almost $150billion, and its two 35 year old founders have stakes valued at approximately $19billion each.
Now that Google is so successful, it’s easy to say "of course." But think about it. In 1998 the leaders in internet search were Microsoft, Lycos and Yahoo! At that time would you have taken the bet that this start-up company would succeed against the much larger and enormously better financed competitors? What’s more, would you have bet that the start-up could build a fortune by placing ads on the internet?
Now let’s put the shoe on the other foot. Imagine you were offered a job in 1998 to work at Google. Would you have been able to project the company could be a $10billion revenue company in 10 years? Would you have been able to look into the future, analyze weaknesses in competitors, and say "this could be the most influential company in technology in 10 years?" Or, would you have been more likely to say "given our humble beginnings, if we can achieve $10million revenue in 5 years we will be extremely successful. After that, if we can grow at 12% per year we will exceed industry average growth and be very pleased"?
There’s an old saying, "it’s not where you start the race, it’s where you finish that counts." Most of us are leary of looking into the future, seeking out competitive weakness and undertaking Disruption to do new things. We are more comfortable doing what we’ve done in the past, setting low expectations we can likely meet and doing all planning based upon our past history. And that approach means that even if you have all the technology, skill, market opportunity and resources of Google you still won’t be Google – because you’ll never achieve that success. You’ll be bounded by your past Success Formula to do no better than you did in the past, and therefore the opportunity will go to someone else.
Now Google is not only selling internet ads, it’s selling TV ads to NBC, CNBC, MSNBC, Oxygen and Dish network (read article here.) Last week Google launched a new internet browser (Chrome) in direct competition with Firefox and Internet Explorer. Just 10 years old, Google isn’t just a search engine company, it’s in several businesses with White Space flourishing in several markets. But this is only possible because
- Google is totally focused on the future. It doesn’t plan from the past. It isn’t focused on its "core" markets, or how to maintain its share in historical businesses. Google plans for a future using scenarios about what is likely to happen – and what "can be."
- Google is obsessed about competitors. It doesn’t just look to defend its old business, but rather stuides all competitors to see what opportunities are created. It doesn’t hesitate to buy companies like DoubleClick and YouTube. And it doesn’t hesitate to take on Locked-in competitors like Microsoft.
- Google is ready to Disrupt itself, and the markets it enters. Google embraces Disruption, rather than avoiding it. Rather than "stick to its knitting" in search it jumps into markets like browsers where it can be Disruptive.
- Google is loaded with White Space. That White Space allows Google to constantly develop new Success Formulas that grow the company at a stratospheric rate.
Every executive in every company has the opportunity to run a Google. The trick is to get out of Lock-in. To move from thinking that the future has to be about old markets, old ways of competing, and about doing more of the same but faster, better and cheaper. To be a Google means getting the business into the Rapids of growth, wherever those Rapids may be. Creating a Google means shedding old notions about "core focus" and using future scenarios to lead you into high growth opportunities – the willingness to Disrupt old patterns to consider new things – and keeping White Space very active to grow into new markets.
After all, that’s what the leaders did at Virgin and Nike – a couple of other companies that have grown beyond everyone’s expectation. So, would you do it if you had the chance? Or would you remain Locked-in to Defending & Extending your past even if it means results are suboptimal?
by Adam Hartung | Sep 4, 2008 | Defend & Extend, General, In the Swamp, Leadership, Lifecycle, Lock-in
WalMart (see chart here) has announced recent earnings, and they were better than Wall Street anticipated (read Marketwatch article here). Same store sales were up 3% compared to last year. As a result, the stock is worth today almost what it was worth 5 years ago (yet still more than 10% shy of all time highs from a decade ago.) Here we are in a terrible economy for retailers, with department stores, specialty stores and luxury stores all seeing double digit revenue declines. Yet WalMart comes in with a good quarterly result. Does this show WalMart is back on track to recapture past greatness?
WalMart has done nothing to make itself a better, more competitive company over the last year. It’s just done exactly what it has always done – but with a bit more price chopping than usual in some areas – and expansion of low-margin grocery sales in others. More of the same. For example, in the 30,000 person town of Minocqua, Wisconsin Wal-Mart opened a new store that was 5 times the previous store size and included a Wal-Mart grocery – offering the first competition to local grocers ever in that town. In other words, Wal-Mart kept being Wal-Mart.
Of course what happened was a recession. Certainly a recession in consumer spending. The decade of declining incomes in real terms met with the credit contraction of 2008, as well as declining home and auto values, reducing available cash for consumers. The immediate reaction was to simply buy less stuff – and become price sensitive. The first means people quit buying new diamonds and going to Aeropastale for sweatshirts, and the latter meant they started looking for where they could save dimes – not just dollars – on everything from sweatshirts to green beans. So where would you expect people to turn? Why to the retailer that has always been focused on saving dimes.
But this doesn’t mean Wal-Mart is the company you should invest in. Low-price is not the exclusive domain of Wal-Mart. I recently blogged about Aldi, a company that is even lower priced than Wal-Mart on groceries and is itself in an even bigger growth boom right now. And it’s doing new things (like its first-ever television advertising) to help itself grow. So Wal-Mart isn’t the only game in town for low-price. Competition to be the low-cost retailer will remain constant as other companies search out ways to be even lower cost than Wal-Mart – with strategies such as Aldi’s to carry a limited product line and use less labor (rather than just use cheap labor.)
More importantly, consumers don’t remain focused on price long-term. Recessions are characterized by job losses, hours worked reductions, bonus retractions and other income bashers. But things do move on. People don’t remain in a "recessionary mindset" forever. They change expenditure patterns and household budgets to get back into more comfortable lifestyles. And jobs, hours and bonuses come back. When that happens, the desire to shop WalMart will remain where it is now "only if I have to." Not a lot of high-schoolers want to show up in the sweatshirt everyone knows came from Wal-Mart, nor do many men want to purchase their work slacks at Wal-Mart. Now people feel they have to – it doesn’t mean they want to – nor that they’ll do it long term.
When short-term market shifts happen even a bad Success Formula can look good for a short while. Like the old phrase "even a stopped clock is right twice a day." Wal-Mart is extremely Locked-in to its one-horse strategy. Wal-Mart has not developed a culture which can adapt to the needs of modern consumers. It has not made its merchandizing modern, nor its store layouts, nor has it figured out how to adapt in-store selections to fit local market differences. Wal-Mart is still the company that controls the temperature in every store via thermostats in Fayetteville, Arkansas. The recent quarterly results are good news for the short-term, but do not reflect the out-of-date nature nor Lock-in of Wal-Mart’s Success Formula. By next year Wal-Mart will again be struggling to compete with more fashionable companies like Target, while fighting an even tougher batte on the price side with emerging competitors like Aldi.
If you bought Wal-Mart 5 years ago, you’ve been sitting on a paper loss (with almost no dividend return) for this whole period. Now’s the time to get out.
by Adam Hartung | Sep 3, 2008 | Defend & Extend, General, In the Swamp, Innovation, Leadership, Openness
Today Coca-Cola (see chart here) announced it was planning to acquire the largest juice company in China (read Marketwatch article here.) At a cost of $2.4 billion Coke is hoping to expand its footprint in the most populous country on earth. Are you excited? Most people aren’t – and there’s no reason to be.
What’s the innovation in this move by Coca-Cola? What are they doing that’s new? Nothing, of course. This is a simple extension of the same soft-drink business Coca-Cola has been in for decades. More of the same. Yes it’s good that they would want to do more business in the very large and growing Chinese market – but this is more Defend & Extend behavior trying to support existing Lock-ins. At first it may sound obviously good, but what’s not discussed is how much local competition Coke will face. Nor how much competition from European and other competitors. Without innovation, this kind of extend tactic will face all the traditional market competition and is unlikely to produce exciting (above-average) results. Just look at how little difference offshore acquisitions and expansion have made to Wal-Mart or GM – because as D&E plays they allow competitors to keep banging away at the company’s declining Success Formula. Just because a company announces it is entering a new market does not mean they will sell more stuff, nor make more money.
We can see that Coke is struggling to innovate when the same announcement says that the company is planning to spend $1billion in a stock buyback this year. This is an admission that without anything innovative to invest in the company is going to use its cash to prop up the stock price (which will benefit the bonus of the top execs.) Coke cannot regain its great growth glory if it’s spending all its money to do more of the same and buy its own stock. That’s the cycle of doing only what the company knows, which is why the business has been suffering from declining marginal returns for almost 20 years (Coke is down almost 50% from its highs reached in the mid-90s, see long-term chart here). Even the recently published memoirs of the ex-COO at Coke is a study in how to try avoiding failure – rather than seeking success (The Ten Commandments for Business Failure is currently paired with Create Marketplace Disruption on Amazon – a distinct contrast in approach to business management.)
This is the flip side of the discussion in yesterday’s blog about Google’s Chrome release (see video about Chrome’s launch on Marketwatch here). Chrome is significant innovation by Google trying to move beyond its traditional markets. Chrome is not about Defending & Extending Google Lock-ins to traditional markets and products. Chrome is using White Space to implement Disruptions taking Google into new markets with much higher growth, which will allow Google to remain in the Rapids. Coke’s planned acquisition is a yawner because it supports historical Lock-ins and keeps the company in the slow-growth, unexciting, non-innovative mode that has made its returns lackluster for several years. No White Space in the Coke move – just more of the same – which makes life much easier for its competitors, whether traditional or new.
by Adam Hartung | Sep 2, 2008 | Disruptions, In the Rapids, Innovation, Leadership, Openness
Today Google (see chart here) announced the launch of its new web browser – called Chrome (see Marketwatch article here). At first blush this may seem quite techie, thus uninteresting to most of us. But it is big news for some very important companies – and well worth watching.
Is Chrome better than Internet Explorer from Microsoft (see chart here)? I don’t know, but I don’t really care right now. There can be a lot of technical debate about what browser is best – but we all know that with IT products being a great product isn’t what’s important. If the market were dominated by great products we sure wouldn’t be using applications from Microsoft – nor databases from Oracle – or software packages from SAP. As Geoffrey Moore has written about extensively in his books (Crossing the Chasm, The Gorilla Game, and Dealing with Darwin to name just 3), success in high tech products – like success in most products – has more to do with your ability to manage the product lifecycle and attract customers than how good the product is.
What we should care about is that Google, a company known for its search engine and its ad placement machine just launched a new product into a very large market against the world’s largest software supplier (based on number of individual users). With a product that’s ostensibly free. This is a clear action by Google demonstrating its ability to follow The Phoenix Principle:
- Google is taking a product to market based upon their scenario of the future – not the market today. They see how a better browser makes getting your work done easier and faster.
- Google is focused on the competition, not currenct customers or their own internal machinations. They see a Locked-in, moribund competitor that is unable to move into new solutions.
- Google is willing to be internally Disruptive by entering entirely new markets, using entirely new metrics and with entirely different requirements for success.
- Google is using White Space to figure out how to grow revenue in the application market that everyone who uses the internet needs – a connection page/application we call a browser.
This is a very big deal. It means Google is not at all willing to rest on its laurels. Yes, it pretty much owns the "search" business and it is hugely in front with on-line ad placement. But it’s not just Locked-in to those markets and focused on Defending & Extending them. It’s ready to go into a very different market with a very different requirement for Success. It’s willing to use White Space to learn how to maintain its extra-ordinary growth rate. This is a very big deal. Google has shown it will give its people permission to do very different things, in very different markets, and authorize the resources to push into those markets aggressively. This is a very, very important step for Google that portends quite good things.
Now to the company with 75% market share – Microsoft. You might laugh and think Microsoft has little to fear. That would be like laughing when Alfred Sloan started selling all those different kinds of cars at General Motors when Ford had 75% share with the Model T. Or laughing at Honda when it first brought the Civic to American and GM + Ford + Chrysler had almost 90% of the U.S. auto market. Microsoft is big, but it’s not invulnerable. Microsoft has sat on its laurels. It’s efforts at "search" were a dismal failure. It completely missed the ad placement market. Microsoft has not offered customers an exciting advance they are willing to buy in desktop applications for years. And its last effort to excite customers with a new operating system was so ignored it had to force distributors to take Vistage by refusing to ship its old product – to howls of complaints. Microsoft is big and has lots of money – but so did Ford, GM, Woolworth’s, Xerox and a long list of other companies that once dominated a market only to fall prey to Disruptive competitors while they practiced Defend & Extend management.
What’s worse is the likely impact on Yahoo! (see chart here). Yahoo! was first to make "search" into a business (not the first search engine, but the first to make it a profitable business). But it’s share has consistently eroded as Yahoo! kept trying to do more of what it always did – while Google went out and used White Space to develop Disruptive solutions. While Yahoo! clung to its ad agency roots, Google developed the world’s largest data center to house servers for those billions of searches we all do. Google developed its own servers, and its own facilities located near rivers to cool them all. And Google kept doing things on the cutting edge of internet use to find out what would create more and better on-line advertising generating new revenue for itself. Yahoo! is trying to find a way to survive – while Google is going into whole new business initiatives with White Space Yahoo! hasn’t even considered.
Today’s announcement wasn’t just a product release by Google. Chrome shows us that Google is a company doing all the right things to stay in the Rapids of fast growth. Unlike Microsoft and Dell that Locked-in early and built a business on Defend & Extend tactics which eventually left them without innovation – Google is using White Space to get into markets that attack the heart of its biggest —- and most Locked-in —- competitor. We can expect Microsoft will do nothing – nothing but try to argue that it is biggest so best. Meanwhile, Google is taking advantage of Microsoft’s Lock-in to take customers into new solutions. This is very good news for Google investors, and very bad news for Microsoft and Yahoo! investors. Not because Chrome is a great product, but because it shows Google is a Phoenix Principle company while Microsoft and Yahoo! are Locked-in to D&E practices that are sending them to declining returns and marginal performance.
by Adam Hartung | Aug 27, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership, Lock-in
The U.S. credit crisis has a lot of people very concerned about the economy. (Read LATimes article on the high stakes of this problem here.) As well it should. It was a credit crisis in the 1930s which created a rash of loan failures lead to bank failures, deflation and the worst economy in American history. While we keep being assured there will not be another Great Depression, there is still reason for serious concern. Three major financial institutions have failed in the last year (Countrywide, Bear Sterns and IndyMac), and one of the world’s leading economists has predicted the worst is yet to come with at least one additional major financial institution collapsing. So, isn’t it worth asking "how did we get into this mess?"
It wasn’t long ago the big controversy was about how much the heads of Freddie Mac and Fannie Mae were getting paid. The argument was whether these institutions were independent banks, or government agencies. After all, they were guaranteeing FHA and similar loans, so they were using government backing as they regulated the mortgage market as well as underwrote its activities. So the question was whether the leaders should be paid like regulators – say a Federal Reserve Board member – or like executives of an independent bank. As the mortgage markets ballooned these institutions were booking more and more paper profits, and the CEO pay had gone up dramatically. Many people were questioning whether this was appropriate.
Now we can see that both institutions were allowing ever riskier loans to be made by mortgage providers. And both are near insolvency. Equity holders have been nearly wiped out as Freddie Mac’s value has dropped from $70/share to under $5 (see chart here) and Fannie Mae has dropped from $80 to $6.50 (see chart here.) Privatizing these formerly government agencies hasn’t worked out too well for investors lately.
Freddie and Fannie didn’t have bad leaders, they just kept trying to make it possible for their primary customers – the banks and mortgage companies – to keep making more and larger loans. They didn’t come out and say "we’re going to take more risk", they just slowly inched their way forward allowing loans to have less down payment, allowing the buildings to have higher valuations as collateral, allowing higher debt-to-income ratios. They didn’t start out in 1995 with the idea they would eventually be making loans for $300,000 to people who never before owned a house, had no down payment, could provide no proof of income and on an asset valuation that was 25% higher than the most recent sale. That loan would never have been approved by any bank in 1995. Or 1996. Or 2001.
But the banks and mortgage companies wanted to grow. They had a well known Success Formula. They could advertise a good rate, implement the loan application process, then sell off the loan in the secondary market with a Fannie Mae or Freddie Mac guarantee. As real estate values took off, they simply needed more leniency on some of these items so they could do more loans faster and cheaper – extend their business (the back half of Defend & Extend Management). They wanted to Defend & Extend what they knew how to do. So Freddie Mac and Fannie Mae went along. And they got the big financial houses involved as well as they packaged up what were becoming increasingly risky loans.
And that’s what happens in D&E management. In order to keep growing, it is tempting to push just a little harder by trying to extend the old Success Formula. Cut a cost corner here. Take a little more risk there. Just do a little bit more of what was previously done. Everyone can see that these actions are taking them downstream. But, so far so good! Nobody has drowned yet. We might be able to see the waterfall ahead, and hear the water crashing down below a little clearer, but so far we haven’t seen any problems. So let’s try to do just a little bit more.
Of course, inevitably, D&E managers go over the waterfall – and take their customers, investors, employees, suppliers and this time the U.S. citizenry along with them. They reach just a little farther than they should have, and then it’s a free-for-all as the business gets sucked into the Whirlpool from which there will be no return.
We saw this before, when the Savings & Loan industry melted down and went away because of the ever increasing risk its leaders took. Equity holders were wiped out, and many lenders were significantly damaged despite the unprecedented government bailout at the time. In the end, we suffered a recession and a big loss of faith in real estate as the Keating 5 were tried and the S&L industry collapsed. All by trying to maintain the Lock-in, then Extend the business just a little more into some new area. And by getting the regulators to go along, the entire country and its economy end up at risk.
D&E managers don’t like risk, and intend to take risk. But because there isn’t any White Space to develop a new Success Formula they keep extending the old one. They claim they aren’t taking risk, but in fact they are. Each risk may be small, but as we’ve seen they quickly add up. These leaders start turning a blind eye to the risk as they remain Locked-in and see no other way to grow. They have to grow, and they have to remain Locked-in, so they take risks that to outsiders might look crazy. (Think about how Enron started guaranteeing its own derivatives so it could keep growing.) But Lock-in allows them to pretend the risk isn’t as great as it is. These extensions keep the Success Formula in place, and make it appear to be producing better results. But these extensions are moving closer and closer to the waterfall, and the inevitable fall into the Whirlpool. Eventually, we all must have White Space to evolve a new Success Formula, or the trip over the waterfall is inevitable.
by Adam Hartung | Aug 26, 2008 | Defend & Extend, Ethics, General, In the Swamp, Leadership, Lock-in
Sometimes management behavior can cause outsiders to think the industry and company leaders fear growth. Take for example a new book about innovation in the movie business Inventing the Movies by Scott Kirsner (see at Amazon here or read a review in Forbes here.) As the author points out, after Edison invented the first Kinetiscope movies – which were small viewer-based single person devices – he saw no reason to move forward with a projection system. Why advance the innovation when multiple audience members appeared to risk the revenue? To Edison, he could assure each and every viewing created a payment with his single-viewer technology, but the audience viewership meant he would lose control and possibly see revenue cannibalized. Fear of cannibalization caused him to avoid new innovations which would grow total demand, and considerably grow the revenues of his fledgling movie business.
But we all know this didn’t happen. Projection systems only caused more people to want to go to the movies. Then when talking movies came about again the industry feared that investing in sound equipment would be a cost not recovered and they delayed and delayed. But talking films again increased the audience. And this cycle played out again with color movies. And lest we not forget the wars that were fought over video tapes of movies, which all industry leaders feared would kill the business. Yet, videos (and now CDs) have only increased the audience, and demand more.
All businesses develop a Success Formula early in their life cycle. That Success Formula ties the Identity of the business to its strategy and tactics. So a tactic as simple as having a single-viewer kinetiscope becomes almost impossible to change because it gets linked to the identity of the business (and often its founder – in this case Edison). Thus it takes a new entrant, often from outside the industry, to parlay the new technology into the market. This new entrant, not afraid of controlling the business through administration of an old Success Formula, is able to bring forward the new technology/solution and build the new audience/demand. And often we see the old industry leader far too late to change – stumbling, fumbling and failing.
Businesses need not follow this course, however. If they are willing to invest in White Space they can test new solutions. They can figure out new Success Formulas. They can evolve, and they can grow. Doing so isn’t really hard, it just takes a willingness to accept the requirement for White Space to take advantage of market shifts. White Space allows you to migrate forward, rather than constantly fall back into Defending & Extending what you’ve always done.
As we all know, each innovation in the movies has grown the industry, not been its doom. And that’s true in all industries. Yet, the largest players are rarely the ones who lead these shifts. Look at how it took Apple to bring about the revolution in digital music, rather than Sony. Lock-in gets in their way. If we want to avoid being pummeled by market shifts that create great growth opportunities for the new competitor we have to be vigilant about implementing and maintaining White Space that can provide our beacon for growth.
Where’s your organization’s White Space?
by Adam Hartung | Aug 25, 2008 | Defend & Extend, General, In the Swamp, In the Whirlpool, Leadership
Most managers want to move up. It is characteristic to have ambition in organizations. To want to do more, to accomplish more, and to receive more compensation. So we look for opportunities to do more, inside our organizations and outside. Usually we move positions because we don’t have upward mobility internally, so we find the opportunity externally. But, not all upward moves are worth the risk.
Look at the revolving door installed by Mr. Lampert at the executive suite of Chicago headquarted Sears (see chart here). (Read more about another round of Sears executive changes here.) Mr. Lampert has convinced some very talented people to take top positions at Sears. He has hired people away from companies as well known as Yum Brands, Motorola, Proctor & Gamble, Now he’s hoping that a new crop of execs will save the company from its perilous slide which has cut equity value more than 50% in the last year. But, rather than becoming business saviors, these new executives will probably be limiting their careers when Sears continues to falter.
It’s the nature of leaders to be optimistic. To think they can accomplish what previous managers couldn’t. And some are better than others. But we should eschew the "hero" complex entirely when looking at a new position. Success will have more to do with circumstances than us as individuals. And when a business is struggling, like Sears, it’s only hope to turn around requires it give up looking in the rear view mirror at old advantages and focus completely on the future. It must be clear about competitor strengths, and ignore the temptation to think of customers as an asset. It must Disrupt the old Lock-ins, and nullify the Status Quo Police. And it must implement White Space where the manager has permission to do whatever it takes to succeed – unbounded by old Lock-ins – as well as the resources committed in advance to accomplish the goals. Without those 4 things, success is not going to happen. No matter how good you are.
Looking at Sears and Mr. Lampert we know a few things. He keeps talking about the old Sears advantages, and trying to find a way to recapture them. He’s trying to plan for the past, not the future. Meanwhile, he isn’t looking for new customers by being a cutting edge competitor, instead he’s trying to hang onto old customers and Defend them from better competitors. Thirdly, he likes to "whack the chicken coop" by making lots of noise and firing people, but he’s not willing to Disrupt old processes, practices and behaviors in order to nullify the Status Quo. And Fourthly, he absolutely doesn’t have any White Space as he keeps trying to fiddle with the old Sears to improve it. Rather than create White Space he shuts it down in cost cutting actions while trying to "fix" a hopelessly out of date Success Formula.
Those who left good jobs to go to Sears for Mr. Lampert have not escalated their careers. And the new batch of managers he’s hired will fare no better. Sears under Mr. Lampert is not following The Phoenix Principle to turn itself around, but rather keeps trying to find some way that it can be cheaper, faster, better and thus Defend & Extend what worked 30 years ago.
If you want to make a career move, do not listen to the Siren’s song about how everything can be different if the right person is in the job. Circumstances make more difference than the person. We work in organizations that have powerful Lock-in to behaviors, structural systems and cost. Unless the primary pieces of successful change are there, no individual will make much difference. Yes, it’s good to want to get ahead. But make sure you don’t take a job where your head will be handed to you.
