Sucker move

The headline at Marketwatch.com this evening read "Starbucks Catches Steam" (link to frontpage at 7:30pm eastern on 7/30/08)  The article (read article here) goes on to be very bullish sounding about Starbucks. "Shares turned higher" "up 4%" "reversing course".  Uh huh.  A quick look at the chart shows Starbucks has lost half its equity value in the last year (see chart here).  So, a 4% uptick from the now lower value means its still down, let’s see, that would be 48%.  Now I see why it’s time to rejoice!

I don’t agree with people who say that the stock market is good at valuing companies.  In reality, investors tend to overvalue high growth, and overvalue potential turnarounds.  Investors, generally, tend to be overly optimistic.  So any time a company is down 50%, it’s worth being very careful before waving the victory flags and claiming the corner is turned.

There’s a comedian named Lewis Black who has recorded an entire comedy routine about how he knew he was seeing the end of the world when he walked out of a Starbucks, and immediately saw another Starbucks across the street.  Lewis Black isn’t a business strategist, but he makes a valid point.  If Starbucks is just a set of coffee emporiums, when do you reach saturation?  At some point, there simply is no need to build any more.  To continue growing, Starbucks would have to be more than just coffee emporiums.

The previous CEO recognized this, and undertook a wave of projects to grow the company.  He pushed the brand into grocery aisles, licquor store aisles and even into restaurants and onto airplanes.  He moved Starbucks into publishing music, and even becoming a recording agency.  Starbucks produced a movie – which made money even if it wasn’t a smash hit.  And as CEO he started expanding the stores internally to carry more products and more food – expanding why you would go to a Starbucks.  There was a lot going to to try preparing for the "saturation day" (how’s that for the name of the next Will Smith move?).

But he got sacked.  And on the high steed came riding in the "founding CEO" (although I don’t think he really was the very first CEO, he gets the credit).  And his mission became – Back To Basics.  He stopped all the White Space activity to "refocus" Starbucks on its "central mission" of being a coffee emporium.  Oh.  And let’s see, revenue declined.  Uh huh.  Now, he’s closing hundreds of stores and laying off thousands of employees, because revenue is down.  And revenue is down because of the recession.  It wouldn’t have anything to do with not pursuing additional revenue sources, would it?  It wouldn’t have anything to do with being overly focused on doing one thing, would it?

So what’s really ahead for Starbucks?  If you don’t think revenue will continue declining – I guess I’d ask "why not?"  Face it, Starbucks may have created the coffee emporium genre as we now know it in America.  But they have also spurred a lot of competitors that can make a pretty good cup of coffee.  And these competitors have leased some great locations, and furnished them well, and trained employees to be friendly and helpful, and installed wireless internet service so we languish over our drinks and maybe have a second.  All successful businesses breed competitors, who quickly copy what you do well.  And these competitors cause price competition as they begin oversupplying the marketplace.  Eventually, you are doomed to lower growth and lower profits — unless you find something else to do!!  (Economists call this "the law of diminishing returns.)

It’s hard to see a bright future for Starbucks right now.  Not because they originally did anything wrong.  During rapid growth they Locked-in on a Success Formula and grew it fast and profitably.  But the competitors squeezed in, and then the market shifted as customers started buying less costly product.  So Starbucks needed to be more.  To be a great company, Starbucks must avoid the foibles of Mrs. Fields’ Cookies (remember when that was all the rage?) by avoiding being a very focused competitor with a big ol’ bulls eye painted on it.  And the CEO was trying.  But this CEO – he’s likely to take Starbucks right where Mrs. Fields took her business.  By killing all the White Space, he’s killing Starbucks. 

So anybody who thinks Starbucks is possibly "turning the corner", remember that only 7% of businesses that hit a stall every grow consistently at a mere 2% ever again.  And Starbucks is not doing the things likely to put it in that 7%.  Making a great coffee will do just about as much for saving Starbucks as those big, soft, fattening cookies did to save Mrs. Fields after she opened a few hundred stores.  It’s not about what you did last year – it’s about what you’re going to do next.  And another flavor of coffee, well…….

Scenarios can breed growth

Another big loss was announced at Ford (chart here) today (read article here).  After announcing a $9billion loss, the CEO said he was looking to convert some truck plants to make hybrid cars.  And the company is considering bringing some of its high-mileage European cars to the U.S. Let’s see, after announcing a quarterly loss that was 85% of the company’s entire market value, the CEO thinks maybe it’s time to change the product line-up and manufacturing capacity configuration

How hard would hit have been over the last 8 years to expect the need for higher mileage autos to increase?  Instead of looking at what historically made the most money (which were trucks and SUVs), and trying to milk those products for profit forever, can you think of any future scenario which would not have predicted the need to switch customers to different productsOnly by focusing on the past – what used to make money – could a leadership team walk so far out on the gangplank.

Compare this with today’s announcement at Google (chart here) to launch a competitive on-line encyclopedia to Wikipedia (read article here).  This would appear to be creating a "me to" product in a market already well served.  Why should Google bother?  Such a viewpoint would be looking backward, rather than at future scenarios.

How many new users will come to the internet over the next 10 years?  How many people may want a different approach than used at Wikipedia?  What are the odds that it is possible to have a product that is possibly better than Wikipedia?  If you look at the future, and you recognize that (a) internet use is unlikely to slow for many, many years (b) products with lots of acceptance, and no competition, are easy targets because some people have to be underserved, and (c) competition always improves products — doesn’t it suddenly seem logical to offer this new product? 

Scenarios should point out not only future risks, but future opportunities.  Yes, Google is #1 in search and #1 in on-line ad placement.  And growth in both those markets looks very good.  But your future scenarios should be looking for additional markets as well.  In this case, Google sees potential to use its capabilities in both search and ad placement to better the on-line encyclopedia product market.  Thus, its a market opportunity which is very likely to do well given this future view.

We can’t wait on market confirmation to make plans.  We have to develop scenarios, and take management action based upon them.  If we do, we can identify and test markets early enough to be prepared when customers start to shift.  If we don’t, we’ll be caught "flat footed" when they shift – and as Ford is demonstrating this can be an expensive, possibly deadly, position to be in.

Who’s responsible?

Everyone knows newspaper ad revenues are down dramatically.  But this trend didn’t happen overnight.  Ad revenues started slumping way back in 2001.  At the time most management blamed the recession.  Then lack of recovery was blamed on a jobless recession.  By 2004 it was clear that advertisers were increasingly looking to targeted advertising like the internet and cable TV, moving away from traditional print.  By 2005 movie studios were telling media companies they never intended to use traditional advertising like they previously had, auto companies were shifting large portions of advertising to the web, and real estate companies (not yet into the doldrums they face today) were shifting more and more advertising to the internet instead of full page newspaper ads for which there was no evidence of value. 

Simultaneously, by 2000 eBay had become America’s permanent garage sale, making the need to buy an expensive classified ad far less necessary.  Not to mention the impact Vehix.com and Cars.com was having on used auto sales.  Meanwhile Craigslist.com was demonstrating its ability to find buyers for apartment rentals, autos and all kinds of things.  It was clear that classified ads were now facing competition like never before seen – and that competition was going to intensifiy, not lessen.

Newspapers reacted all through the decade by slashing staff and other costs.  At Chicago’s Tribune Corporation management could see it had purchases the LA Times at a market top, and by 2004 the company had already made several rounds of cuts at all its properties.  Into this declining market Sam Zell decided to buy Tribune Corporation using a little of his money and a lot of debt (OPM – or other people’s money). 

Now, after a slew of additional cuts, Zell has told employees "it was unfair to hold him to previous forecasts." (see quote in Chicago Tribune article here).  If you can’t hold the Chairman and CEO responsible for over-optimistic decisions leading the company to the brink of disaster – and causing cost slashes which jeapardize the product while leaving no money to invest in the emerging on-line media market – who do you hold responsible? 

Every management team has the requirement to do scenario development.  All businesses have to be managed to succeed in future markets against future competitors.  To meet these challenges, they have to develop scenarios that assess all market forces – both good and bad.  It may be OK to hope for the best, but for goodness sake isn’t it up to management to plan for the worst?  But Sam Zell allowed himself to listen to outgoing management, the Tribune company sellers, and use historical revenues as the basis of his projections.  As he said "his team predicted a 5 percent to 7 percent decline in 2008 revenue."  Rather than look at the forces affecting The Chicago Tribune and other newspapers (as noted earlier), he simply took the current results and said "surely things won’t be worse than a 5 – 7 percent decline".  WRONG!  As they like to say in ads for mutual funds "past results are no indication of future performance."  Or, maybe you could at least have the savvy to not believe everything you’re told by the salesman.

Chicago is one of America’s largest and greatest city.  Its citizens deserve great news reporting. But the Chicago Sun-Times has been gutted by a previous owner who embezzled billions out of the company leaving it on the brink of failure.  And now its largest newspaper, The Chicago Tribune, is getting smaller and containing less news as Mr. Zell shows his "toughness" by laying off thousands of employees and slashing the news and editorial staff. This has led to some of the best editors in the country walking out the revolving door installed in HR due to the declining quality of the product.  But, Mr. Zell claims that when he loaded the company up with more debt than it could repay he should not be held responsible. 

There was another option available to Tribune Company and Mr. Zell.  The internet started to affect how people searched for and acquired information by the mid-1990s.  Tribune reacted by doing some things right, such as its investment in Cars.com, CareerBuilder.com and Food Channel which bred FoodNetwork.com.  But it never attempted to transition news to the internet. What the company could have done by the time it sold to Mr. Zell was move its investments into building the worlds best on-line environment. Dow Jones, for example, invested in Marketwatch.com which was moving fast to displace The Wall Street Journal.  And the foresighted News Corporation moved heavily into not only cable television, but internet acquisitions such as MySpace (and now Marketwatch via its acquistion of Dow Jones). 

Mr. Zell should have recognized that Tribune Company was not a big building he could hope to fill with new tenants and milk for cash.  Overly optimistic assumptions are the result of rose-colored glasses, which no leader should wear when planning for the future.  Tribune Company was largely a group of outdated properties facing far faster growing and more successful new competitors – with a few gems that needed much more investment.  He was buying old freestanding Sears stores just when the competition was throwing up shopping malls.  He needed to move fast not to leverage this property up and out of cash, but instead to invest into internet opportunities with which he could migrate the news and other information base within Chicago Tribune and LA Times.  Mr. Zell and his management team needed to figure out how to deliver reader eyes to web sites, and thereby serve up an enticing audience for the internet ad buyers.  Not hope for a planned recovery of print media advertising in the face of the internet tsunami.

Who are the losers because of Mr. Zell’s optimistic forecasts that he now wants to say aren’t his responsibility?  Chicagoans to start wtih. We’re wondering in Chicago if Wrigley field will be bought by someone and renamed XYZ park – something Chicagoans dread.  We’re now expecting the landmark, and historically important, Tribune Tower to be converted into condos.  And we’re getting less and less news every day as the paper gets smaller and smaller – with no good replacement for the information people seek.  The same thing is happening in LA, where business leaders are frantic over the value destruction wrought at their local paper under Tribune Company control.  And of course there’s all those great researchers, writers and editors who instead of transitioning to new media are simply out of work.  And who knows what will happen to the bond holders who trusted Mr. Zell to be far better at utilizing scenario planning to keep Tribune Company a viable and successful company.

Be wary of analysts and hero CEOs

Apple Computer company (see chart here) has been rather remarkable.  After eschewing the Newton and other products it Locked-in on the Macintosh – and almost failed.  After years of declining PC market share and no new products Steve Jobs returned – and with a lot of Disruption and White Space he turned the company around.  For the last 4 years Apple has been a model Phoenix Principle company.

Today Apple announced earnings (read article here), and again they were up.  But analysts were concerned because the company indicated margins could decline in the next quarter to account for costs of launching new products.  This is exactly the kind of feedback that ended up driving Motorola (see chart here) into its bad situation.  After Ed Zander Disrupted Motorola, installed White Space and had the company acting like a high-tech power again he fell victim to the lure of margin maintenance.  Instead of following up the Razr with a new product every quarter – some hitting well and some maybe not – he let disappointing sales of Rokr and other new products push him toward D&E behavior.  He started focusing on Razr sales for market domination – and in the end he pushed the Motorola cellular handset division over the brink when competitors eclipsed him. Short-term margins looked great, longer-term Motorola is fighting to survive in cellular handsets (it’s biggest business).

Apple is showing all indications of continuing to do the right things.  After entering new markets, it shows the ability to bring out a series of sustaining product technologies to grow revenues.  Each Disruptive product opens the door for these new products which help grow revenues with new customers.  Now the CFO is telling investors that new products are planned, and since sales are never assured he has to be conservative about the margin estimate!  Good!!  No one introducing new products can be sure of their early sales and marginBut to be like a Phoenix, and continually keep rejuvenating, you must continue to launch new products in search of new opportunities.  And that is exactly what Apple indicates it is going to keep doing.  For investors, employees, customers and suppliers this is good!

The worry is Apple’s reliance on the CEO.  Marketwatch quotes an analyst who said investors are worried about Steve Jobs’ health after a recent pulbic appearance "Question’s about Steve’s health will weigh on the stock until he, at some point, looks better in a public forum" (read quote here.) 

There’s no doubt Jobs is a good manager.  His willingness to Disrupt and instill White Space has allowed him to do well for all the constituencies benefitting from Apple’s turnaround and ongoing success.  But for Apple to be a truly great, evergreen, Phoenix company it must build into its architecture the ability to renew itself.  Rather than rely on its leader, it needs the systems to seek out the low-return businesses to exit, and to create Disruptions that self-develop White Space which can be monitored and guide growth.  Otherwise, the company will stumble when Jobs inevitably leaves.  And that would be unfortunate.  Businesses can become evergreen, but not if their longevity relies on the leader – the hero CEO. 

At Cisco Systems (see chart here) the company mission includes obsoleting its own products.  This credo promotes Disruption as it keeps managers from becoming too Locked-in and staying with a product too long in an effort to avoid "cannibalization."  As a result, Cisco is not too dependent upon its CEO to keep moving it into new markets, using new technologies and launching all new products.  Until Apple develops a system for Disrupting itself its reliance on Jobs will be too high – just as was true at Microsoft – and investors have reason to be wary of the long-term results. 

Staying in the Rapids

Yesterday IBM (chart here) announced it’s most recent quarterly results (read here).  The good news was revenue climbed 13% and income from continuing operations rose 22%.  This ability to stay in the Rapids is pretty amazing, given that a 10% growth at IBM means adding more than $10B per year.  And despite being in myriad markets, the company produces about $260,000 revenue per employee.

A colleague said to me that he wasn’t surprised IBM had this nice growth.  After all, they’re in high-tech.  I had to tell him I was surprised at his naivete.  IBM’s growth was not automatic, nor in any way assured, because of the general industry in which they compete.

Quite to the contrary, many high-tech companies struggle and fail.  Remember WangDEC? Silicon Graphics?  Compaq?  Coopers&Lybrand consulting"High Tech" is full of cutthroat competitors willing to drive you out of business in a heartbeat with suicide pricing and over-exuberant product claims.  Don’t forget that IBM itself was on the brink of failure in 1993.

IBM, which walked away from the PC business after inventing it, became committed to mainframes – and to a lesser extent mini-computers – in the 1980s.  This worked great until data centers started downsizing due to new techologies – and the floor fell out of revenues.  With a change in it’s leader, and a lot of Disruptions inside IBM, the company lessened its dependence on hardware sales as it grew services sales in the latter 1990s.  Since then, IBM has deployed an aggressive innovation program that promotes the development of new products and services across the panoply of high-tech.  Now, in the face of terrible economic conditions IBM is demonstrating it can maintain growth, even though it is huge, by reaping the benefits from maintaining Disruptions and White Space in many technology, geographic and product markets.

Keeping your organization in the Rapids is not the result of where you’re located (like India or China), or your size (small versus big) or your age (young versus old) or the markets you sell to, or the technology you use, or how much you spend on R&D, or how much you outsource, or "general market conditions", etc., etc.  Staying in the Rapids is the result of ongoing management attention to scenario planning, keeping your eyes on competitors, maintaining a willingness to Disrupt and keeping White Space alive and viable.  And any organization can do those things – allowing you to grow even when competitors and customers feel the pinch of recession.

Other side of the coin

I regularly beat the stuffing out of organizations for Defending & Extending their Lock-in.  Low growth and poor results have demonstrated for these companies that market shifts are pushing their Success Formula toward obsolescence.  They need to Disrupt and use White Space if they are to survive and grow again.

There is another side to this.  Some companies are in the Rapids, and they have a different set of requirements.  Take for example IT services provider Infosys.  Their quarter ended 30 June, 2008 saw revenues increase by 24.5% versus a year ago!  The company also added over 7,000 employees during the quarter.  Tata Consultancy Services (TCS – also an the IT services provider) for the same period saw revenues grow 21% as they added nearly 9,000 new employees.  These companies are clearly in the Rapids, seeing revenues grow in double digits and they are profitable.  They have a very different Lock-in problem.

When businesses are in the Rapids, their objective is to define the Lock-in which will guide improving results from the Success FormulaWithout Lock-in, they cannot keep growing revenues and, even more importantly, improve on the Success Formula to grow profits and maintain above-average returns as new competitors enter.  These businesses need to make sure they have a clear hierarchy that can guide the recruiting, hiring and new employee indoctrination process.  They need clear processes for adding new large clients – Infosys added 49 clients in the latest quarter and TCS added 35.  Without Locked-in processes to rapidly sell, onboard and deliver services to new clients they cannot maintain this rapid growth.  Without clear IT structures, they cannot measure employee performance against client goals, and effectively implement billing and cash receipts.  They need Locked-in decision-making processes that allow leaders to quickly review business issues and make quick decisions so the company can keep growing.  And they need to develop experts inside the company who can oversee operations and be sure each silo maintains its performance.

When a business enters the Rapids Lock-in is GOOD!  We forget about that because so often we are talking about problematic businesses.  But when GM was growing fast, it needed to create Lock-in that helped it become the #1 auto company offering more styles and features than previous leader Ford.  When Microsoft was growing fast it needed Lock-in to help it dominate the desktop market amongst fierce competitors threatening to fragment the PC software market.  It was Wal-Mart’s Lock-in to supply chain leadership that allowed it to go from a small group of stores in backwater rural towns to the world’s largest retailer in just 2 decades.  (Of course, all of them are now Challenged looking forward because eventually the let Lock-in overcome their need to change due to market shifts – but that’s a different story.)

When businesses don’t create Lock-in they can’t grow.  They can’t compete effectively in a way that meets market expectations.  They are chronically short capacity.  They cannot onboard clients effectively, so potential buyers grow weary of the wait.  They lose track of their record keeping and miss customer expectations – as well as struggle with cash management.  They make erratic decisions that confuse customers, investors and employees, slowing the ability to maintain growth. 

Today, Infosys and TCS are very profitable at the gross margin line – but not so on the bottom line.  Their revenue per employee is a mere $51,000.  Accenture produces revenue of $240,000 per employee!  In the Rapids, these high growth companies that are Disrupting the marketplace need to manage their Lock-ins so they not only grow, but earn above average rates of return as well.  Eventually, all Success Formulas hit the wall of diminishing returns.  Market shifts allow competitors to strip out value from old Success Formulas.  But first, before they stall, successful companies have to implement Lock-in to make their Success Formula valuable!  Those that don’t just churn through lots of investor cash, employee turnover, beaten up suppliers and in the end fail. 

In the Rapids, Lock-in is good!  If you’re evaluating a growing company, you want to see that it has a clear Success Formula and knows how to Lock it in.  Only after that has happened, and proof of above average returns are demonstrated, does it become critical to manage Lock-in for evergreen, long-lived results. 

Using symbols instead of results

The headline in today’s Chicago Tribune trumpeted the headquarters move of MillerCoors to Chicago.  In exchange for $20million in aid, about 300-400 headquarters jobs will move to Chicago.  The article goes on to wax eloquently about how Chicago is a "winner" city because of its great quality of life (read article here).  Unfortunately, the article is a whitewash of the economic reality in Chicago and Illinois.  Chicago’s mayor and governor are trying to focus on symbols, like acquiring a new company headquarters, rather than look at the results.  Because the reality is that Chicago and Illinois have been on a long-term job decline.

The brutal reality can be found by downloading the PDF located here.  What you’ll see is that from 1990 through 2007 Illinois, and Chicago as by far its largest job hub, has trailed not only the nation in job creation, but even the rest of the midwest (Indiana, Iowa, Michigan [yes, even auto-dependent Michigan], Missouri and Wisconsin).  Chart after chart details how every sector of employment has been significantly trailing the national growth rate – and even far behind the region.  Chicago may be a great city to live in, but it’s not a great city to be employed – or look for a job.  Especially if your talents are on the leading edge of growth businesses.

What matters in business is results.  And competitively, Chicago and Illinois have not met the challenge for almost 2 decades.  Year after year Chicago becomes more of a "fly over" for people working on both coasts.  Even though the University of Illinois is one of the top 5 engineering schools on the planet, most graduates leave to work on a coast (think Marc Andreeson and Netscape and you’ve got he message).  When innovators create a new product as a result of working at Kraft or Motorola, they have to go to a coast to find funding, employees to grow the business and talented service people that can aid their growth.  Large companies in Chicago are shrinking as competition steals competitors to the coast, or offshore. 

In the midwest it’s common for people to relate their life to a family farm which exists today, or is a mere one generation away.  But just like these midwestern urbanites migrated to the largest midwestern city, Chicago, because there were no jobs in the rural hinterlands, we now see midwesterners are forced to migrate coastal in order to maintain employment or find funding for new ventures.

By focusing on something as trivial as a headquarters win the city and state do a disservice to its citizens.  This symbol overlooks the need for a much higher growth rate.  Housing did not crash in Chicago like it has in LA, but it never went up nearly as much either.  With few jobs, there was less demand and the boom never set in like it did elsewhere.  People in Chicago cannot hope to see their city flourish if it cannot win the competition for jobs by developing more opportunities.  Yes Boeing moved its HQ to Chicago, but we all know the planes are made in Seattle, and that’s where the jobs are.  MillerCoors may be in Chicago, but the beer is made in Milwaukee and Denver.  Neither "win" comes close to offsetting the losses from the closing of BankOne and operations move to New York, or the closing of Ameritech and operations move to Texas (just 2 recent examples of massive job losses).  Or the failure of Lucent and Motorola to maintain their health thus causing tens of thousands of jobs to move to both coasts and India.

Chicago and Illinois leaders still focus too much on maintaining old Lock-ins, trying to Defend & Extend what the city was when it was the manufacturing and transportation center of America 50 years ago.  For example, Chicago is no longer the city of Capone and Dillinger. By denying gambling, Chicago’s hold as the conference center of America shifted to Las Vegas while tourists flocked to Merrillville, IN or Milwaukee, WI to enjoy an evening.  Yet the paranoia about its past stops Chicago from doing the obvious and legalizing casinos like cities/states have done within 75 miles.  Or take for example the refusal to build a domed stadium in Chicago where weather which is less than ideal.  While everyone knows a domed stadium would help bring in major events from around the globe, the city refuses to consider one as it relishes in the glory of aged facilities like Soldier and Wrigley Field.  The last all-star baseball game in Chicago was delayed 8 hours due to rain, and everyone watched and wondered if the White Sox would play in the snow to win the World Series.  Great is their past, and beautiful is the architecture – but Locking-in to that past is now costing citizens tax revenue and jobs! {note to readers – yes I know the Sox play in the renamed Comiskey Park and not Wrigley – but why didn’t the city dome that when it was rebuilt?}

The situation in Chicago is not dire, but neither is it good.  Unless the IT jobs, healthcare jobs, biotech jobs and other occupations upon which the planet’s future is based make their way to Chicago, the city will some day be as well known as Dodge City – but possibly about as popular (Dodge City has under 50,000 people and is so far off the beaten path I challenge you to identify its location within 150 miles – hint, it’s in Kansas, not Arizona or California.)  To find the future which will keep Chicago vibrant its leaders must focus on scenarios for growth, and realize they must COMPETE with cities that offer many benefits.  Then the mayor and his leadership team must Disrupt Lock-ins to tradition, and use White Space to discover a new Success Formula which can regain growth leadership.  If the current mayor Daily wants to have a legacy which eclipses his father, he must reset the agenda for growth by focusing on jobs – not merely symbols.

Finding the Rapids, or the Whirlpool

Readers of this blog know my lifecycle references.  We start out in the Wellspring of ideas.  To be successful we have to find the Rapids of high growth.  In the Rapids life is  beautiful as we make money and everyone wants to give us more.  When growth slows we hit the Flats – where we keep paddling like crazy trying to figure out what happened to the Rapids.  But because we’ve slipped from the Rapids to the Flats, pretty quickly we drift into the Swamp where growth is really hard to come by.  We end up spending all our energy fighting the ferociously competitive alligators and mosquitos, often forgetting our real objective.  In the end something happens the business isn’t planning for, and like pulling the drain on a sink the Swamp becomes a final Whirlpool sucking the organization away.

The most important time for management to make the right decisions is in the Flats.  It’s the Flats where leaders have to steer the company back into the Rapids, or else drift into the Swamp.  So let’s compare General Motors and Honda

GM saw it’s growth start slipping almost 30 years ago.  Roger Smith tried to steer the company back into the Rapids by creating a stand-alone company called Saturn that would learn to act like a "Japanese" car company.  He also bought Hughes Electronics and EDS to diversify GM into very high growth markets (electronics, avionics, aircraft and IT).  But Smith was often maligned by analysts and fellow executives who wanted GM to remain a "car company."  Eventually GM sold Hughes and EDS to raise money to shore up its declining auto business where it was mired in the Swamp.  GM leadership even abandoned the idea of an independent Saturn, and eventually forced the White Space project to start using common components with other GM autos, common functions like procurement, common systems and even common dealers.  Now Saturn is just anther GM nameplate

Today, GM is starting to hear the sucking sound of the Whirlpool.  The company is constantly trying to stave off rumors of an impending bankruptcy.  Meanwhile, the company equity value today is less than it was 50 years ago – meaning an investor would have nothing to show for a lifetime of ownership except dividends.  And today those were halted – a key indicator that GM is heading into the Whirlpool.  Cost cuts now are center stage as the company closes capacity and is even whacking salaried employment 20%.  Management keeps saying it has enough liquidity to survive 2008 – whoopee! – which is only another 6 months.  So it is looking to shut down nameplates (like Hummer), more plants and sell as many remaining assets as possible.  It’s hard to see how anything good will happen for GM’s investors, employees, suppliers or customers as the business keeps churning faster toward the Whirlpool of failure.  (Read more about current actions being taken at GM here.) GM is claiming it could not predict the auto market changes being created by higher priced oil – even though this "crisis" has been emerging for 3  years and is unerringly similar to the market shift which happened during the oil price shock of the 1970s.

Meanwhile, Honda sales have grown 4.5% this year.  Right, while we keep hearing about the total market declining, Honda sales are growing (read article here).  Management at GM, and many analysts, like to portray this as luck.  Hardly.  Honda and GM compete in the same markets.  They just took very different management actions.

Honda never tried to develop a plan to do one thing and dominate the market.  Market domination was never its goal. Instead, growth in sales and value has remained #1.  In it’s quest to grow, Honda did not merely remain an automobile company.  Rather than eschewing other businesses as diversions, Honda successfully developed profitable growing businesses in everything from lawn mowers to lawn tractors to electic generators to boat motors to motorcycles to quadrunners to snowmobiles to snowblowers to robots and jet airplanes – and cars.  Of course, in cars they make small cars, luxury cars, all-purpose vehicles and even a full size pick-up.  They sell products directly from Honda to end users in some markets, they sell through dealers in other markets to distributors who wholesale products to retailers in other markets and even to large mega-retailers like Home Depot in other markets.  No single distribution system.  And they sell products in almost every country on earth – including being the #1 motorcycle supplier in India with it’s Hero-Honda joint venture.  (Unlike GM which has long maintained an overt focus on North America blinding its opportunities elsewhere.)

As markets shift, Honda is preparing for those shifts.  It doesn’t let "focus" make it overly dependent on any one market – or any one sub-market within a single market.  In motorcycles, for example, it offers everything from a small scooter for the urbanite to dirt bikes for leisure use to cross-over bikes that can be used on trails and roads to small motorcycles for short-riding to large motorcycles for long riding to crotch rockets for testosterone driven young men to huge, oversized Gold Wing bikes for 50 year old highway touring riders.  It does the same in autos, where it offers everything from a hybrid to the high-mileage traditional Civic small car to multi-person mini-vans to full size pickups and even luxury cars under the Acura brand.  While GM is trying to be big, Honda has mastered the art of growing and making money by constantly bringing out new products in new markets and learning from those experiences so it can migrate its Success Formula.

Far too many management teams think their job is to "focus" and be #1 in some defined market.  Of course, all those definitions are arbitrary, and being #1 doesn’t mean anything if you can’t make money.  GM has been huge, but it has been unable to generate enough profit to replace its capital for decades.  Now Honda, who is #1 in some markets, but not in most, is showing that by being agile and nimble, by avoiding Lock-in to old-fashioned notions of market share, it can be more competitive.  As individual markets struggle, from product markets to geographic markets, Honda keeps using its White Space to bring new technologies and products to customers.  It evolves its older businesses toward what works, selling big trucks when people want them where they want them and small motorcycles where demand for them is growing.  It’s this ability to look to the future rather than the past, keep a sharp eye on competitors and always be at the front of new products, maintain Disruption to get into new markets and keep White Space alive so new Success Formulas develop which allows Honda’s leaders to keep the company steering toward the Rapids rather than finding itself being driven right into the Whirlpool of disaster like GM

A gale force wind

Yesterday I blogged about reading telltales.  Catching small bits of information that can help you predict a company’s behavior and longevity.  But sometimes we don’t need a telltale – because the signs are as obvious as a gale force wind.  That happened yesterday in my email inbox, when I received a letter from the heads of the major airlines telling me to write my legislator’s to implement and enforce greater regulation on oil traders (read about the letter and see a copy of the text here).

I’ve long been a detractor of the leaders at United, American, Delta, US Airways, Northwest, Continental and the other "major" airlines.  These companies were founded by former military officers who created airlines in a regulated environmentSubsequent management has never varied far from the original Success Formula, nor the Lock-ins, choosing to believe they will somehow make money if they just do more, better, faster, cheaper.  In reality, the only person who created an airline that made money was an attorney, Herb Kelleher, by founding Southwest.

Now their Success Formulas are on the brink of collapse.  So they are pointing the finger at someone else.  Simply put, these leaders have never been willing to Disrupt their ineffective Success Formulas and use White Space to try doing anything else.  They have remained Locked-in to the hub-and-spoke systems that are highly inefficient and thus reliant on low fuel prices.  They have never challenged their complex pricing formulas, nor their antagonistic relationships with employees, nor their indifference toward customers.  Even when they decided to open alternative businesses (Song, Ted, Eagle) they remained Locked in to their historical strategies and tactics, requiring these services give out frequent flier miles on the programs, use the existing gates, work with existing employee work rules and maintain the historical reservation systems.  These leaders never tried to do anything really different.  Despite strikes, government interventions and even bankruptcies they have maintained commitment to their Lock-ins and been unwilling to implement White Space.

They of course could have done many things differently.  They could have migrated to a point-to-point airline.  They could have improved employee relations.  They could have allowed subsidiaries to use different technologies (different planes, different reservation systems) and try different practices (like Southwest’s extensive use of fuel hedging which has kept it profitable during this fuel price spike).  But that would have required some Disruptions and establishing real White Space with permission to do new things.  Which never happened.

What can we now expect?  One or more of these airlines will fail.  This letter from the CEOs is a signal as strong as a gale force wind that they have no idea how to deal with their company problems.  Lacking any viable solution, they want the government to regulate their suppliers (something they’ve tried for years with their employee unions by the way) so costs will be controlled for them.  This letter is an admission they expect to fail unless someone else saves them.  Of course they aren’t taking responsibility for being in this position – but they are willing to admit failure is just around the corner and likely without help from a higher power.

What will be the impact on us?  A major airline failure (say United) will be a national security issue.  Several cities will become isolated islands unable to physically connect with the rest of the country.  100 years ago if the railroad bypassed your town you had to move the town – and many did.  What will happen to cities that no longer have air service?  How about the thousands of people that use these airlines for international travel?  How many Americans will be stranded abroad?  How many will be unable to reach facilities in remote countries?  Without internal transportation system bogged down, we would be a sitting duck for terrorists wishing to create havoc with people stuck in locations they don’t want to be. 

As these airlines fail, are we ready to outsource air traffic?  Like we’ve outsourced the production of steel and other products to foreign companies?  Are we ready for Lufthansa to step in and take over United’s routes (and some assets) between Chicago and New York, LA, San Francisco and the other thousand cities United services?  Or Swiss Air?  Or Virgin?  If we use foreign carriers for domestic travel, what happens to our safety systems on what has historically required domestic companies for national security?

It’s not hard to recognize the kind of Lock-in to outdated solutions this letter signed by a dozen CEOs indicates.  It’s not hard to see that failure is a likely outcome.  When Lee Iacocca told Congress "Guarantee my loans or all these Chrysler employees will be unemployed" he made it clear that his company would fail without help.  These CEOs are saying the same thing.  And it’s really unfortunate, because Southwest has never been secretive about any part of its Success Formula, and it makes money to this very day.  So for the major airlines, failure is obviously more acceptable than change.  And everyone will lose with that kind of thinking dominating the executive suite.

Reading the Telltale Signs

I’m a land-bound midwesterner, and know next to nothing about sailing.  But someone once explained to me that sailors tie ribbons to their sails and ropes.  They call these "telltales".  And then good sailors pay attention to the behavior of these ribbons so they can interpret the wind and achieve their destination more quickly.  Good sailors learn to read these whisps of cloth to be more successful.  As customers, employees, suppliers and investors we need to do the same.  It is important we pay attention to small bits of information for the early signs they give of shifts in the business weather so we can be more successful.

Yesterday, buried deeply in my local newspaper was a small article about Google (see chart here) launching a new virtual reality site called Lively (read article here.)  It was very small article (only 155 words), barely explaining what the site was, and offering no clue as to its potential impact.  An article easily ignored.  Ahhh, but this is a telltale.

Google is in the Rapids of growth.  It is in a market growing at over 100%/quarter!  Even bad operations in the markets of search and online ad placement are growing at over 30%/year and making money (see Yahoo! and MSN search for examples.)  Because it’s in the Rapids, Google can make a lot of money and grow very fast while doing nothing more than establishing its Success Formula and continuing historical Lock-ins.  There is no reason to expect Google to do poorly any time soon.  But the interesting question is — when the growth slows will Google keep growing (like Cisco) or be another Sun Microsystems, Dell, or Microsoft?  Will it be Locked in to its old business, and start to shrink, or will it have new businesses to keep it growing as market shifts develop?

We know Google acquired YouTube months back, and has left it independent.  That looks like White Space – but we don’t yet know if it will be able to affect the Google Success Formula or if it will just be a content site for Google ad placement.  So that’s maybe White Space, and we need to keep watching.  We can’t yet determine if it’s White Space that will develop a new Success Formulas to keep Google evergreen.

This article on Lively therefore deserves more investigation.  What’s the first step?  Why a Google search on Google Lively of course!  There we can find an India Times article on Lively (see here).  Where better than in the land of information technology domination could you find an article that clearly explains the site and how it works.  We also can go view the site (here).  A bit more investigation into the IT world (see here) and we learn that these 3D virtual people and rooms are things you can add to a blog or web site (think software to juice up your home page, etc.) and it is a rich medium for gaming technology!  On-line gaming is one of the few markets growing even faster than on-line advertising – and this opens new doors for growth beyond search and ads! 

Additionally, one attack on Google has been its sparse search pages. Lively starts bringing forward much more robust interactivity with many different elements which could potentially expand how we would interact/use search (think less linearly and more dynamically about how an avatar could search in 3D kinds of ways) and social websites (like Facebook or MySpace).  Potentially, we could use these Google Avatars or rooms to even manage our social networks across multiple sites – creating a sort of "layered" set of interactions between multiple "partners" with which we want to talk, play games, or share information in multiple environments simultaneously.  Think about a wiki on steroids which can duplicate real-life meeting-style interactions.  We could conduct various business sessions with these avatars, such as on-line training applications, simulations (for business negotiations, or planning [think real-time interactive SimCity]), or real negotiations for office leasing or acquiring office supplies or even parts for a factory (read more here about applications).  Avatars could behave like interactive bots searching the web for new sources and deals.  These environments could be sponsored by a vendor, with ads, or created as user environments (like TypePad on which this blog is created) for businesspeople to use.

What we can determine is Google is definitely setting up White Space here.  It may not look like much right now – but then again how excited were you by most web sites when they first popped up?  It’s important to note that these White Space projects appear to have permission to do things otherwise not done in traditional Google, and are quite well funded.  Both hugely important factors.  They also operate with independence to see what sorts of Success Formulas they can develop – and thus be the next generation toward which Google may head.  All told, these Telltales indicate very good things for Google to maintain its rapid growth.

Of course, the hard part that lies ahead will be seeing if Google actually uses these projects to change its Success Formula (today built on Search and ad placement).  Google’s growth has allowed it to eschew Disrupting itself.  Why bother to Disrupt with growth exceeding everyone’s expectations?  But for these White Spaces to make a difference, it will be necessary for Google to eventually demonstrate it can Disrupt it’s Lock-ins and transition its Success Formula into new businesses that maintain growth and profits. 

For now, all looks good for Google.  They are managing the Rapids well, and we can see the signs of White Space being implemented.  We’ll have to keep watching to see if leadership can Disrupt to take advantage of these projects when the weather shifts to less rapid sailing – but for now it’s a very good thing to see this White Space being implemented.  Something far too few high growth companies do enough of.